-----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, LYeSa26tC/u8hlu2X1mGI81jpuEE0V0J7pGaWOKCv5/WEaBI0J9wXFdhS3+pNTNb klCIcC6zS0ZIpmllvTD1Ww== /in/edgar/work/20001103/0000950124-00-006423/0000950124-00-006423.txt : 20001106 0000950124-00-006423.hdr.sgml : 20001106 ACCESSION NUMBER: 0000950124-00-006423 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 13 FILED AS OF DATE: 20001103 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ILX LIGHTWAVE CORP CENTRAL INDEX KEY: 0001121602 STANDARD INDUSTRIAL CLASSIFICATION: [3825 ] IRS NUMBER: 810438752 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-45120 FILM NUMBER: 752491 BUSINESS ADDRESS: STREET 1: 31950 E FRONTAGE RD STREET 2: PO BOX 6310 CITY: BOZEMAN STATE: MT ZIP: 59771 BUSINESS PHONE: 4065861244 MAIL ADDRESS: STREET 1: 31950 E FRONTAGE ROAD STREET 2: PO BOX 6310 CITY: BOZEMAN STATE: MT ZIP: 59771 S-1/A 1 c57156a2s-1a.txt AMENDMENT NO. 2 TO FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 3, 2000 REGISTRATION NO. 333-45120 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ ILX LIGHTWAVE CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MINNESOTA (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) 3825 (PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE NUMBER) 81-0438752 (I.R.S. EMPLOYER IDENTIFICATION NUMBER) 31950 EAST FRONTAGE ROAD BOZEMAN, MONTANA 59715 (406) 586-1244 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ LAWRENCE A. JOHNSON CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER ILX LIGHTWAVE CORPORATION 31950 EAST FRONTAGE ROAD BOZEMAN, MONTANA 59715 (406) 586-1244 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: JOHN W. MANNING LAWRENCE T. MARTINEZ MOLLY E. JOSEPH DORSEY & WHITNEY LLP 507 DAVIDSON BUILDING 8 THIRD STREET NORTH GREAT FALLS, MONTANA 59401 (406) 727-3632 CRAIG E. SHERMAN MEGAN L. MUIR MICHAEL J. BROWN VENTURE LAW GROUP A PROFESSIONAL CORPORATION 4750 CARILLON POINT KIRKLAND, WASHINGTON 98033 (425) 739-8700 ------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this registration statement. ------------------------ If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, 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, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL 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, DATED NOVEMBER 3, 2000 PROSPECTUS 5,000,000 SHARES [ILX LIGHTWAVE LOGO] COMMON STOCK This is an initial public offering of common stock by ILX Lightwave Corporation. ILX Lightwave is selling 4,500,000 shares of common stock. The selling shareholders identified in this prospectus are offering an additional 500,000 shares of common stock. ILX Lightwave will not receive any of the proceeds from the sale of common stock held by the selling shareholders. We anticipate that the estimated initial public offering price will be between $15.00 and $17.00 per share. ------------------ No public market currently exists for our common stock. We have applied for quotation of our common stock on the Nasdaq National Market under the symbol ILXL. ------------------
PER SHARE TOTAL --------- ----- Initial public offering price............................... $ $ Underwriting discounts and commissions...................... $ $ Proceeds to ILX Lightwave, before expenses.................. $ $ Proceeds to the selling shareholders, before expenses....... $ $
ILX Lightwave and certain of the selling shareholders have granted the underwriters an option for a period of 30 days to purchase up to 396,680 and 353,320 additional shares of common stock, respectively. ------------------ INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 4. ------------------ NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. CHASE H&Q U.S. BANCORP PIPER JAFFRAY WIT SOUNDVIEW , 2000 3 [The inside front cover of the prospectus contains pictures of certain of our products and will include our logo and the text "Innovative Optical Test and Measurement Solutions; Flexible and Upgradeable Product Design; and Advanced Technology and Features."] 4 TABLE OF CONTENTS
PAGE ---- Prospectus Summary.......................................... 1 Risk Factors................................................ 4 Forward-Looking Statements.................................. 12 Use of Proceeds............................................. 13 Dividend Policy............................................. 13 Capitalization.............................................. 14 Dilution.................................................... 15 Selected Financial Data..................................... 16 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 17 Business.................................................... 26 Management.................................................. 37 Principal and Selling Shareholders.......................... 45 Certain Transactions........................................ 47 Description of Capital Stock................................ 48 Shares Eligible for Future Sale............................. 50 Underwriting................................................ 52 Legal Matters............................................... 55 Experts..................................................... 55 Where You Can Find More Information......................... 55 Index to Financial Statements............................... F-1
5 PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before making an investment decision. You should read the entire prospectus carefully, including "Risk Factors" and our financial statements and related notes, before making an investment decision. ILX LIGHTWAVE CORPORATION We develop, manufacture and market optical test and measurement equipment designed to enable optical component vendors to increase unit production, improve manufacturing yields, accelerate the development of innovative products and reduce manufacturing costs. Our products are designed to test and measure various optical component characteristics throughout the product development and manufacturing processes. We introduced our first product in 1986 and currently offer test and measurement equipment in 12 product families. We sell our products to over 300 customers and distributors, including Corning Incorporated, JDS Uniphase Corporation and Lucent Technologies, Inc. The volume of traffic on telecommunications networks has increased dramatically, largely due to the growth of the Internet. As a result, network service providers are rapidly deploying optical networking systems to significantly increase transmission capacity and provide greater network functionality at a relatively lower cost. Optical networks transmit data using pulses of light transmitted through glass fibers while traditional digital networks are based on electrical signals transmitted over copper wires. The increasing deployment of optical networking systems has in turn fueled demand for optical components. Optical components are devices that produce, send, re- direct and receive signals in optical networks. Ryan Hankin Kent, a telecommunications industry research firm, estimates that the worldwide market for optical components will grow to over $22.5 billion by 2003 from approximately $6.6 billion in 1999. The growing demand for optical components has placed an increased focus on optical component vendors' manufacturing processes and capacity. To address competitive pressures and to meet the requirements of next generation optical networking systems, component vendors must develop and manufacture innovative optical components and subsystems. In response to the challenges facing them, optical component vendors are increasingly turning to sophisticated test and measurement equipment to develop innovative products, improve manufacturing operations and ensure the quality of finished products. We believe the rapid growth of the optical components market will create a significant opportunity for manufacturers of optical test and measurement equipment. Our products are designed to allow our customers to make quick, accurate and reliable measurements to assess component functionality and diagnose manufacturing faults. The modular design of many of our products allows our customers to add functionality as their test needs grow and optical technology advances. Because our products are designed for specific sub-segments of the optical components market, they offer our customers a focused solution that tests specific component characteristics and is closely aligned with their manufacturing and product design needs. Our sales, customer service and marketing engineers frequently solicit feedback from our customers to help focus and direct our new development activities in order to keep pace with technological advances in our industry. Our objective is to be the leading provider of optical test and measurement equipment for the optical components market. We leverage our 14 years of experience in developing advanced optical test and measurement equipment to provide our customers with innovative solutions designed to meet their complex and rapidly changing requirements. We will continue to focus on high-growth areas in the optical components market and to collaborate with leading optical component vendors. In addition, we plan to expand our sales, marketing and customer service resources, enhance our product development process and pursue strategic acquisitions. We believe that this strategy will enable us to continue to develop and introduce innovative optical test and measurement equipment that will broaden our product lines and further establish our products as strategic tools for the optical components market. We were founded in 1986. Our principal executive offices are located at 31950 East Frontage Road, Bozeman, Montana 59715 and our telephone number is (406) 586-1244. 6 THE OFFERING Common stock offered by ILX Lightwave Corporation........... 4,500,000 shares Common stock offered by the selling shareholders............ 500,000 shares Common stock to be outstanding after this offering.......... 36,280,348 shares Use of proceeds............................................. To repay approximately $1.2 million of indebtedness and for working capital and general corporate purposes, including expansion of our manufacturing facilities and potential acquisitions. See "Use of Proceeds." Proposed Nasdaq National Market symbol...................... ILXL
------------------------- Unless otherwise noted, the information in this prospectus: - assumes 31,780,348 shares of common stock outstanding at September 30, 2000, which reflects a three-for-one stock split on July 13, 2000 and a four-for-one stock split on August 24, 2000; - excludes approximately 7,535,600 shares of common stock reserved for issuance under our stock option plans, 4,326,200 of which were covered by outstanding options at September 30, 2000 with a weighted average exercise price of $1.40 per share and 3,209,400 of which were available for future grants; - excludes 600,000 shares of common stock reserved for issuance under our employee stock purchase plan; and - assumes that the underwriters' over-allotment option will not be exercised. 2 7 SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The table below sets forth summary financial information for the periods indicated. It is important that you read this information together with the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and the related notes included elsewhere in this prospectus.
NINE MONTHS YEAR ENDED ENDED DECEMBER 31, SEPTEMBER 30, ----------------------------- ------------------ 1997 1998 1999 1999 2000 ------- ------- ------- ------- ------- INCOME STATEMENT DATA: Sales........................................ $ 7,566 $11,848 $17,404 $12,335 $28,708 Cost of sales................................ 3,079 5,091 7,754 5,255 12,193 ------- ------- ------- ------- ------- Gross margin.............................. 4,487 6,757 9,650 7,080 16,515 Total operating expenses..................... 3,149 4,668 6,174 4,308 8,723 ------- ------- ------- ------- ------- Operating income............................. 1,338 2,089 3,476 2,772 7,792 Other income (expense), net.................. 49 111 53 48 (73) ------- ------- ------- ------- ------- Income before income taxes................... 1,387 2,200 3,529 2,820 7,719 Income tax expense........................... 483 772 1,269 1,015 3,038 ------- ------- ------- ------- ------- Net income................................... $ 904 $ 1,428 $ 2,260 $ 1,805 $ 4,681 ======= ======= ======= ======= ======= Net income per share(1): Basic..................................... $ 0.02 $ 0.03 $ 0.06 $ 0.04 $ 0.14 ======= ======= ======= ======= ======= Diluted................................... $ 0.02 $ 0.03 $ 0.05 $ 0.04 $ 0.13 ======= ======= ======= ======= ======= Shares used in computing net income per share(1): Basic..................................... 44,052 42,345 39,933 40,899 33,502 ======= ======= ======= ======= ======= Diluted................................... 44,390 43,168 41,313 42,254 36,544 ======= ======= ======= ======= =======
SEPTEMBER 30, 2000 ------------------------- ACTUAL AS ADJUSTED(2) ------- -------------- BALANCE SHEET DATA: Cash and cash equivalents.............................. $ 1,252 $66,131 Working capital........................................ 8,782 73,194 Total assets........................................... 16,438 81,317 Long-term debt, less current portion................... 739 -- Shareholders' equity................................... 9,743 75,828
- ------------------------------ (1) See note 1 of the notes to our financial statements for an explanation of the determination of the number of weighted average shares used to compute basic and diluted net income per share. (2) The as adjusted information in the above balance sheet data table is adjusted to reflect the sale of 4,500,000 shares of common stock offered by us in this offering at an assumed initial public offering price of $16.00 per share, after deducting the estimated underwriting discounts and commissions and the estimated offering expenses. 3 8 RISK FACTORS Before investing in our common stock, you should be aware that various risks are involved, including those described below. The occurrence of any of the following risks could have a material adverse effect on our business, financial condition and results of operations. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment. Before making a decision to buy our common stock, you should carefully consider the risks described below as well as the other information in this prospectus, including our financial statements and the related notes. RISKS RELATING TO OUR BUSINESS WE FACE INTENSE COMPETITION IN OUR MARKETS, AND IF WE FAIL TO COMPETE SUCCESSFULLY, OUR OPERATING RESULTS WILL SUFFER. The markets for our products are intensely competitive. We expect the intensity of competition to increase in the future from both existing and new competitors. We compete in specialized market segments against a relatively limited number of companies. We also face competition in some of our markets from our existing and potential customers who have developed or may develop products that are competitive to ours. Many of our current and potential competitors, such as Agilent Technologies, Inc., Ando Electric Co., Ltd., EXFO Electro-Optical Engineering Inc. and Newport Corporation, may have longer operating histories, greater name recognition and substantially greater financial, technical, marketing, management, service, support and other resources than we do. In addition, many of our competitors have well-established relationships with our current or potential customers and have an extensive knowledge of our industry. Therefore, they may be able to respond more quickly than we can to new or changing opportunities, technologies, standards or customer requirements. Other competitors are smaller and highly specialized companies that focus on only one aspect of our markets or in selected geographic regions. We may not be able to compete successfully in the future against existing or new competitors. Competitive pressures may force us to reduce our prices, which could negatively affect our operating results. Consolidation in the optical test and measurement or in the optical component industries could also intensify the competitive pressures that we face. If we do not respond adequately to competitive challenges, our business and results of operations would be harmed. WE ARE DEPENDENT ON A FEW KEY CUSTOMERS FOR A SIGNIFICANT AMOUNT OF OUR SALES AND THE LOSS OF ONE OR MORE OF THESE CUSTOMERS, OR A SIGNIFICANT REDUCTION IN ORDERS BY ANY OF THESE CUSTOMERS, COULD SIGNIFICANTLY REDUCE OUR SALES. In the nine months ended September 30, 2000, Corning Incorporated and Lucent Technologies, Inc. accounted for approximately 22% and 10% of our sales, respectively. In the year ended December 31, 1999, Corning Incorporated and Lucent Technologies, Inc. accounted for approximately 26% and 11% of our sales, respectively. None of our customers are presently obligated to purchase a specific amount of our products or to provide us with binding forecasts of purchases for any period. We anticipate that a significant amount of our sales will continue to come from a relatively small number of customers. The loss of any of these customers or a significant reduction in sales to these customers could adversely affect our sales and operating results. In addition, if our customers consolidate, they may reduce purchases of our products. 4 9 WE RELY ON A LIMITED NUMBER OF SUPPLIERS FOR, AND MAY EXPERIENCE DIFFICULTY IN OBTAINING, CERTAIN KEY COMPONENTS AND MATERIALS USED TO MANUFACTURE OUR PRODUCTS. We depend on a limited number of suppliers for some of the key components and materials used to manufacture our products. In the year ended December 31, 1999, two of our suppliers accounted for approximately 47% of our total inventory purchases. Substantially all our orders are placed through individual purchase orders and, therefore, our suppliers may stop supplying materials to us at any time. We have experienced shortages and delays in obtaining key components in the past and we may continue to experience shortages and delays in the future. We are unable to predict the length of any shortages or delays. In the case of some materials in short supply, suppliers have imposed strict allocations that limit the number of components and materials that they will supply to a given customer in a specific time period. In the past, suppliers have made selective allocations that adversely affected us and these suppliers may choose, in the future, to increase allocations to larger, more established companies. Our inability to obtain from current or alternative suppliers sufficient quantities of the materials used in our products in a timely manner could interrupt or slow the manufacture of our products and could result in the cancellation of orders for our products. We may not be able to identify, qualify and integrate alternative sources of supply in a timely fashion, or at all. Any transition to alternative suppliers may result in delays in shipment and increased costs and may limit our ability to deliver products to our customers in a timely manner. THE CURRENT WORLDWIDE SHORTAGE OF LASERS MAY ADVERSELY AFFECT OUR ABILITY TO OBTAIN AN ADEQUATE SUPPLY OF LASERS, WHICH COULD ADVERSELY IMPACT OUR MANUFACTURING OPERATIONS, SALES AND OPERATING RESULTS. The recent rapid growth in demand for optical networking products has caused a worldwide shortage of lasers, which are the key component in a number of our products. We have experienced shortages and delays in obtaining lasers in the past and we may continue to experience shortages and delays in the future. We may be unable to predict the length of any shortages or delays in the future. Our inability to obtain an adequate and timely supply of lasers or other key components from our existing suppliers or any future suppliers could interrupt or slow our manufacturing process and increase our manufacturing costs, which would harm our business and adversely affect our operating results. OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS AND YOU SHOULD NOT RELY ON THEM AS AN INDICATION OF OUR FUTURE PERFORMANCE. From time to time, we have experienced significant fluctuations in our operating results. Our quarterly operating results may fluctuate as a result of a variety of factors, including those listed below, many of which are outside of our control. If our quarterly results fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially. Factors that could cause fluctuations in our quarterly operating results include the following: - demand in the optical networking industry; - market acceptance of any new or enhanced versions of our products; - changes in our pricing policies or in the pricing policies of our competitors or suppliers; - the availability and cost of key components and materials we use to manufacture our products; - the size and timing of customer and distributor orders within a given quarter and our ability to fulfill these orders on a timely basis; - the degree to which our customers have allocated and spent their yearly budgets; - variations in the mix of products we sell; 5 10 - the timing of our new product introductions or those of our competitors; - the relative percentages of our products sold domestically and internationally; - the relative percentages of our products sold by our direct sales force and our distributors; and - the length of our product sales cycle. Most of our operating expenses are relatively fixed in the short term and our expense levels are based in part on our expectations regarding future sales. As a result, if sales for a particular quarter were below our expectations, we would not be able to proportionally reduce operating expenses for that quarter. This revenue shortfall would have a disproportionate effect on our expected operating results for that quarter. IF WE FAIL TO RESPOND EFFECTIVELY TO RAPIDLY CHANGING TECHNOLOGY AND EVOLVING INDUSTRY STANDARDS, OUR BUSINESS AND OPERATING RESULTS WILL SUFFER. The markets for our products are characterized by rapid technological change, evolving industry standards, changes in customer requirements and new product introductions and enhancements. Competing products based on new technologies or emerging industry standards may perform better or cost less than our products and could render our products obsolete or unmarketable. If we are unable to develop new and enhanced products on a timely basis that respond to changing technology and standards and satisfy the needs of our customers, our business and operating results will suffer. We depend to a significant extent upon our ability to enhance our existing products and introduce new products, to address the demands of the marketplace and to be price competitive. We cannot be certain that we will be successful in developing, manufacturing and marketing product enhancements or new products on a timely or cost-effective basis, or that these products, if developed, will achieve market acceptance. WE ARE HIGHLY DEPENDENT ON THE GROWTH OF THE OPTICAL NETWORKING MARKET AND OUR CUSTOMERS WHO SERVE THIS MARKET. Most of our current and expected future business comes from sales to companies that manufacture components for optical networking systems. The majority of the remainder comes from sales to companies that manufacture optical networking systems. The rapid deployment of optical networking systems is causing increased demand for optical components, which has led to increased demand for optical test and measurement equipment. Because our customers face uncertainties with regard to the rate of growth and changing requirements of the optical networking market, their products and components may not achieve, or continue to achieve, anticipated levels of market acceptance. If our customers are unable to deliver products that gain market acceptance, it is likely that these customers will not purchase our products or will purchase smaller quantities of our products. A failure of our customers' products to gain market acceptance, or a failure of the optical networking market as a whole to grow significantly, would have a negative effect on our business and results of operations. IF WE FAIL TO PROPERLY MANAGE AND SUPPORT OUR EXPANDING OPERATIONS, WE MAY NOT BE ABLE TO SUCCESSFULLY EXECUTE OUR BUSINESS STRATEGY AND TAKE ADVANTAGE OF MARKET OPPORTUNITIES. Our ability to successfully offer our products and implement our business plan in a rapidly evolving market requires effective management and business planning. We have substantially expanded our business and operations since June 30, 1999. We have increased our number of employees from 99 at June 30, 1999 to 217 at September 30, 2000. We also plan to significantly expand our manufacturing and office facilities in Bozeman, Montana and Boulder, Colorado by the middle of 2001. Our business expansion has placed, and is expected to continue to place, a 6 11 significant strain on our managerial, administrative, operational, financial and other resources. Our executive officers have limited experience operating a public company. To manage our anticipated growth and execute our business strategy effectively, we will need to expand and improve our financial, operational and information systems, procedures and controls; and to hire, train and integrate new personnel. Our failure to effectively manage our growth could adversely impact our ability to take advantage of market opportunities. IF WE ARE UNABLE TO ATTRACT AND RETAIN QUALIFIED PERSONNEL, OUR BUSINESS AND OPERATING RESULTS WILL SUFFER. Our success depends largely upon our ability to attract, train, motivate and retain highly skilled employees. Competition for engineers, sales and other personnel in the technology industry is intense, particularly for employees with expertise in optical networking and manufacturing. If we fail to retain and recruit sufficient numbers of employees with the experience and skills we need, our business and operating results will suffer. Because our headquarters and primary manufacturing facility are located in Bozeman, Montana, we must often recruit qualified employees from outside the vicinity of our headquarters, which may also put us at a competitive disadvantage. In addition, we must provide significant training for our growing employee base due to the highly specialized nature of our products. Our current engineering personnel may be inadequate and we may fail to integrate and train new employees. Highly skilled employees with the education and training that we require, especially employees with significant experience in optical networking, are in high demand. Once trained, our employees may be hired by our competitors. IF WE LOSE MEMBERS OF OUR MANAGEMENT TEAM, PARTICULARLY LAWRENCE A. JOHNSON, OUR FOUNDER, CHAIRMAN, CHIEF EXECUTIVE OFFICER AND PRESIDENT, OUR BUSINESS OPERATIONS COULD BE SEVERELY DISRUPTED. Our success depends to a significant degree upon the skills, experience and performance of our senior management, engineering, sales, marketing, service, support and other key personnel. Specifically, we believe that our future success is highly dependent on Lawrence A. Johnson, our founder, Chairman, Chief Executive Officer and President. If we lose the services of Dr. Johnson or other key personnel, our business would be severely disrupted and seriously harmed. We do not have employment agreements with any of our employees. We do not maintain "key person" life insurance policies on any of our employees except Dr. Johnson. This life insurance policy is not sufficient to compensate us for the loss of his services. THE GROSS MARGINS OF OUR EXISTING PRODUCTS COULD DECLINE. Our industry is intensely competitive and prices for optical test and measurement equipment will likely decline in the future. These price declines will result from factors such as: - increased competition for business; - a limited number of potential customers; - competition from companies with lower labor and production costs; - introduction of new products by competitors; and - greater economies of scale for higher-volume manufacturers. We may have to increase our manufacturing capacity and our unit volume sold in order to maintain our existing margins. If we add capacity, our fixed costs will increase the level of sales 7 12 necessary to maintain operating margins. If we are unable to continuously reduce our manufacturing costs or introduce new products with higher margins, our gross margins could decline. FUTURE ACQUISITIONS COULD DISRUPT OUR BUSINESS AND HARM OUR FINANCIAL CONDITION. In order to remain competitive, we may find it necessary to acquire additional businesses, products and technologies. In the event that we do complete an acquisition, we could be required to do one or more of the following: - issue equity securities, which would dilute current shareholders; - incur substantial debt; - assume contingent liabilities; - incur a one-time charge; or - amortize goodwill and other intangible assets. We may not be able to successfully integrate the technologies, products, personnel or operations of companies that we acquire. These difficulties could disrupt our business, divert management resources and increase our expenses. OUR PRODUCTS HAVE IN THE PAST AND MAY IN THE FUTURE HAVE UNFORESEEN DEFECTS THAT COULD HARM OUR OPERATING RESULTS. As a result of their complexity, our products have in the past and may in the future contain undetected errors or compatibility problems. Despite our internal testing and quality assurance procedures, errors may exist in our products and may not be found until they have been fully deployed and operated under peak stress conditions. As a result, we could incur substantial expenses in repairing any defects or undetected errors. In addition, any errors or defects in our products could harm our reputation, divert management and other resources, impede market acceptance of our products and adversely affect our operating results. WE COULD INCUR SUBSTANTIAL COSTS AS A RESULT OF WARRANTY OR PRODUCT LIABILITY CLAIMS. Our products are designed to help optical component vendors and network system providers ensure product functionality and network reliability. The failure of our products to perform to customer expectations could give rise to warranty or product liability claims. We generally provide a limited one-year warranty on all of our products. We carry product liability insurance that we consider adequate. However, a successful claim against us for an amount exceeding our policy limit would force us to use our own resources to pay the claim, which could harm our reputation, result in a reduction of our working capital available for other uses, increase our expenses and have a negative effect on our operating results. IF WE FAIL TO PREDICT OUR MATERIAL REQUIREMENTS ACCURATELY, WE COULD HAVE EITHER INSUFFICIENT INVENTORY OR EXCESS INVENTORY, BOTH OF WHICH COULD CAUSE US TO INCUR ADDITIONAL COSTS OR EXPERIENCE MANUFACTURING DELAYS. We generally provide forecasts of our requirements to some of our major suppliers up to six months prior to scheduled delivery of products to our customers. It is very important that we accurately predict both the demand for our products and the lead times required to obtain the necessary components and materials. Lead time for some components and materials that we procure can vary significantly and may depend on factors such as the procedures of, or our supply terms with, a specific supplier, as well as industry-wide demand for each component at a given 8 13 time. If we underestimate our requirements, we may have an inadequate inventory of materials. Inadequate inventory could interrupt the manufacture of our products and result in delays in shipments. If we overestimate our requirements, we may have excess inventory, which could increase our costs, harm our relationships with our suppliers due to reduced future orders and, in our rapidly changing market, leave us with inventory that is obsolete. WE FACE SIGNIFICANT RISKS FROM DOING BUSINESS IN FOREIGN COUNTRIES. Our business is subject to risks inherent in conducting business internationally. In the nine months ended September 30, 2000, and the years ended December 31, 1999, 1998 and 1997, our international sales accounted for approximately 30%, 29%, 22% and 33%, respectively, of our sales. We expect that our international sales will continue to account for a significant percentage of our sales for the foreseeable future. Our international sales will be limited if we cannot maintain and establish relationships with international distributors and expand and manage our international sales channels. As a result of our international operations, we face various risks, which include: - adverse currency fluctuations; - challenges of administering our business globally, including difficulties in staffing and managing our offices in the United Kingdom and Japan; - reliance on third party distributors; - compliance with multiple and potentially conflicting regulatory requirements, including export requirements, tariffs and other trade barriers; - adverse changes in the economic or political conditions in countries or regions where we sell our products; - longer accounts receivable cycles; - overlapping or differing tax structures; and - differing protection of intellectual property. As a result of our international operations, fluctuations in currency exchange rates could affect the sales price in local currencies of our products in international markets, potentially making our products less competitive. In addition, exchange rate fluctuations could increase the costs and expenses of our international operations or require us to modify our current business practices. Our failure to manage any of these risks could significantly harm our business and results of operations. OUR PRODUCTS MAY BE REQUIRED TO CONFORM TO NEW AND UNFORESEEN REGULATORY OR CUSTOMER REQUIREMENTS, WHICH COULD INCREASE OUR COSTS AND CAUSE OUR OPERATING RESULTS TO SUFFER. Our products are designed to conform to the regulatory requirements of the countries in which they are marketed. For example, all of our products shipped to Europe must bear the CE mark, which indicates that our products have complied with the obligations required to distribute our products in the European market. In the event that the technical regulations applicable in a given country are in any way changed, we may be required to modify, redesign or recall some of our products in order to continue participating in that market. In addition, our products must meet our customers' requirements which, given the rapid pace of technological change in our industry, may change frequently. These changes could increase manufacturing costs and could create technical advantages for products marketed by our competitors. 9 14 OUR INABILITY TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS COULD HARM OUR BUSINESS. We rely on trade secrets and confidentiality agreements with employees and third parties to protect our intellectual property, both of which offer only limited protection. In the past, we have not devoted resources to obtain patent, copyright or trademark protection of our technologies. Consequently, none of our technology is currently patented and we hold no copyrights or trademarks. In addition, the laws of other countries in which we market our products may afford little or no effective protection of our proprietary technology. Third parties may infringe our intellectual property rights or devise designs that circumvent our intellectual property. We may not be able to detect unauthorized use of our intellectual property or effectively enforce our rights. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Such litigation could result in substantial costs and diversion of management resources, either of which could harm our business. IF ANY THIRD PARTIES CLAIM THAT WE INFRINGE UPON THEIR INTELLECTUAL PROPERTY RIGHTS, WE COULD FACE SUBSTANTIAL LICENSING OR LITIGATION COSTS, OR COULD BE FORCED TO STOP SELLING SOME OF OUR PRODUCTS. Our products are complex and include substantial amounts of technology. Third parties who believe that our products infringe upon their intellectual property may assert such rights, which could result in litigation. Any litigation over intellectual property rights, whether with or without merit, would be time consuming, expensive and distracting to our management. Litigation could also subject us to extensive liabilities, including monetary damages and injunctions preventing us from selling some of our products. Moreover, we could be forced to enter into licensing agreements or sell the rights to our products or technology on unfavorable terms, in order to avoid claims of infringement. Unfavorable outcomes regarding claims of infringement of the intellectual property rights of third parties could harm our business. RISKS RELATED TO THIS OFFERING THE SIGNIFICANT CONTROL OVER SHAREHOLDER VOTING MATTERS THAT MAY BE EXERCISED BY OUR EXECUTIVE OFFICERS AND DIRECTORS WILL DEPRIVE YOU OF THE ABILITY TO INFLUENCE CORPORATE ACTIONS. After this offering, our executive officers and directors and their family members will control approximately 83.3% of the outstanding common stock. Lawrence A. Johnson, our founder, Chairman, Chief Executive Officer and President, and members of his family, will control approximately 71.6% of the outstanding common stock after this offering. This concentration of ownership may have the effect of delaying, preventing or deterring a change in our control, could deprive our shareholders of an opportunity to receive a premium for their common stock as part of a sale of our company and might affect the market price of shares of our common stock. OUR SHARE PRICE MAY BE HIGHLY VOLATILE AND COULD DECLINE UNEXPECTEDLY. Following this offering, the price for shares of our common stock could be highly volatile and subject to wide fluctuations in response to the following factors: - quarterly variations in our operating results; - announcements of new product introductions by us or our competitors; - changes in investor perception of us or the market for our products; - changes in financial estimates by securities analysts; and - changes in general economic and market conditions. 10 15 The stocks of many technology companies have experienced significant fluctuations in trading price and volume. Often these fluctuations have been unrelated to the operating performance of these companies. In particular, following initial public offerings, the market prices for stocks of technology companies often reach unsustainable levels that bear no established relationship to the operating performance of these companies. These broad market and industry factors may significantly affect the market price of our common stock, regardless of our actual operating performance. Declines in the market price of our common stock could also harm employee morale and retention, limit our access to capital and affect other aspects of our business. ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND MINNESOTA LAW COULD PREVENT OR DELAY A CHANGE IN CONTROL OF OUR COMPANY. Provisions of our articles of incorporation and bylaws and Minnesota law may discourage, delay or prevent a merger or acquisition that a shareholder may consider favorable and may limit the market price of our common stock. These provisions include the following: - establishing a classified board in which only a portion of the total board members will be elected at each annual meeting; - authorizing the board to issue preferred stock; - prohibiting cumulative voting in the election of directors; and - limiting the persons who may call special meetings of shareholders. In addition, the Minnesota Control Share Acquisition Act and the Minnesota Business Corporation Act may make it more difficult for third parties to secure control of the company or to complete an acquisition. These acts may discourage unsolicited takeover offers, which could deprive our shareholders of opportunities to sell their shares of common stock at prices higher than prevailing market prices. FUTURE SALES BY EXISTING SHAREHOLDERS COULD DEPRESS THE MARKET PRICE OF OUR COMMON STOCK. If our existing shareholders sell a large number of shares of our common stock, the market price of the common stock could decline significantly. Moreover, the perception in the public market that our existing shareholders might sell shares of common stock could depress the market price of our common stock. Immediately after this offering, our existing shareholders will hold approximately 31,280,348 shares. All of these shares are subject to lock-up agreements restricting their sale for 180 days after the effective date of the registration statement, of which this prospectus is a part. Thereafter, virtually all of these shares will be available for resale in the public market subject to volume restrictions. After this offering, we intend to register approximately 8,885,600 shares of our common stock that we have issued or may issue under our stock plans. Once we register these shares, they can be freely sold in the public market upon issuance, subject to the lock-up agreements restricting their sale for 180 days after the effective date of the registration statement, of which this prospectus is a part. 11 16 FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements in "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and elsewhere. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential" or "continue" or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks outlined under "Risk Factors," that may cause our or our industry's actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assume responsibility for the accuracy and completeness of these statements. We are under no duty to update any of the forward-looking statements after the date of this prospectus to conform these statements to actual results. 12 17 USE OF PROCEEDS We will receive net proceeds of approximately $66.1 million from the sale of shares of common stock by us in this offering at the assumed initial public offering price of $16.00 per share after deducting underwriting commissions and discounts and estimated offering expenses. We will not receive any of the proceeds from the sale of shares by the selling shareholders. The principal purposes of this offering are to obtain additional working capital for the expansion of our manufacturing capacity and the pursuit of other growth opportunities, to create a public market for our common stock and to facilitate future access to public markets. We will use approximately $1.2 million of the net proceeds of this offering to repay a note issued to finance the repurchase of shares of our common stock from a third party in April 2000. The note matures in April 2003 and bears interest at a rate equal to prime plus 1.5%, or 11% at September 30, 2000. In addition, we may use a portion of the net proceeds to acquire complementary products, technologies or businesses. We currently have no commitments or agreements and are not involved in any negotiations to make any such acquisitions. Pending use of the net proceeds of this offering, we intend to invest the net proceeds in interest-bearing, investment-grade securities. DIVIDEND POLICY We currently intend to retain any future earnings to finance the growth and development of our business and therefore do not anticipate paying any cash dividends in the foreseeable future. Our current loan agreement limits the payment of cash dividends on our common stock. 13 18 CAPITALIZATION The following table sets forth our capitalization as of September 30, 2000: - on an actual basis; and - on a pro forma as adjusted basis to give effect to our receipt of the net proceeds from the sale of 4,500,000 shares of common stock in this offering by us at an assumed initial public offering price of $16.00 per share. This table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and the related notes that appear elsewhere in this prospectus.
SEPTEMBER 30, 2000 -------------------------- ACTUAL AS ADJUSTED --------- ------------- (IN THOUSANDS EXCEPT SHARE DATA, UNAUDITED) Long-term debt, less current portion........................ $ 739 $ -- Shareholders' equity: Common stock, $.01 par value, 50,000,000 shares authorized, 31,780,348 shares issued and outstanding actual, 36,280,348 shares issued and outstanding as adjusted.............................................. 318 363 Additional paid-in capital............................. 5,257 71,297 Deferred compensation.................................. (4,601) (4,601) Retained earnings...................................... 8,846 8,846 Notes receivable secured by common stock............... (77) (77) ------- ------- Total shareholders' equity........................ $ 9,743 $75,828 ------- ------- Total capitalization............................ $10,482 $75,828 ======= =======
This table excludes the following shares: - 4,326,200 shares of common stock issuable upon the exercise of outstanding stock options at a weighted average exercise price of $1.40 per share; - 3,209,400 shares of common stock available for future grant under our stock option plans; and - 600,000 shares of common stock available for issuance under our employee stock purchase plan. 14 19 DILUTION If you invest in our common stock, your interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock after this offering. Net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by the number of shares of common stock outstanding. Our net tangible book value as of September 30, 2000 was $9.7 million, or approximately $0.31 per share. After giving effect to our sale of the 4,500,000 shares by us of common stock in this offering at an assumed initial public offering price of $16.00 per share, less estimated underwriting discounts and commissions and estimated offering expenses, our pro forma net tangible book value as of September 30, 2000 would have been approximately $75.8 million, or $2.09 per share. This represents an immediate increase in pro forma net tangible book value of $1.78 per share to existing shareholders and an immediate dilution in pro forma net tangible book value of $13.91 per share to purchasers of common stock in this offering. The following table illustrates this dilution: Assumed initial public offering price per share............. $16.00 Net tangible book value per share as of September 30, 2000........................................ $0.31 Increase per share attributable to new investors....................................... 1.78 ----- Pro forma as adjusted net tangible book value per share after the offering........................................ 2.09 ------ Dilution per share to new investors......................... $13.91 ======
The following table sets forth, on a pro forma as adjusted basis as of September 30, 2000 the differences between the number of shares of common stock purchased, the total consideration paid and the average price per share paid by the existing shareholders and the new investors purchasing shares of common stock in this offering:
SHARES PURCHASED TOTAL CONSIDERATION --------------------- ---------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ----------- ------- ----------------- Existing shareholders..... 31,780,348 87.6% $ 734,768 1.0% $ 0.02 New public investors...... 4,500,000 12.4 72,000,000 99.0 16.00 ---------- ---- ----------- ---- Total........... 36,280,348 100% $72,734,768 100% ========== ==== =========== ====
The above tables exclude the following shares: - 4,362,000 shares issuable upon exercise of outstanding options at a weighted average exercise price of $1.40 per share; - 3,209,400 shares of common stock available for future grant under our stock option plans; and - 600,000 shares of common stock available for issuance under our employee stock purchase plan. If exercisable options to purchase 4,362,000 shares of common stock had been exercised as of September 30, 2000, our pro forma net tangible book value per share as of that date would have been $2.02 and dilution to new investors would have been $13.98 per share. See "Capitalization" and "Management -- Employee Benefit Plans." 15 20 SELECTED FINANCIAL DATA The following selected financial data for the years ended December 31, 1997, 1998, and 1999 and the balance sheet data as of December 31, 1998 and 1999, are derived from our audited financial statements included elsewhere in this prospectus. The statements of income data for the years ended December 31, 1995 and 1996, and the balance sheet data as of December 31, 1995, 1996, and 1997 are derived from our audited financial statements, which are not included in this prospectus. The selected financial data as of September 30, 2000, and for the nine months ended September 30, 1999 and 2000 are derived from unaudited financial statements which, in the opinion of our management, reflect all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of our financial position and results of operations for these periods.
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, -------------------------------------------------- ------------------ 1995 1996 1997 1998 1999 1999 2000 ------- ------- ------ ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME STATEMENT DATA: Sales.............................. $ 5,131 $ 5,104 $7,566 $11,848 $17,404 $12,335 $28,708 Cost of sales(1)................... 2,057 2,283 3,079 5,091 7,754 5,255 12,193 ------- ------- ------ ------- ------- ------- ------- Gross margin.................. 3,074 2,821 4,487 6,757 9,650 7,080 16,515 ------- ------- ------ ------- ------- ------- ------- Operating expenses: Marketing and sales(2)........ 1,165 1,107 1,452 1,934 2,474 1,779 3,280 Research and development(3)... 804 1,012 1,057 1,888 2,322 1,649 3,472 General and administrative(4)........... 450 510 640 846 1,378 880 1,971 ------- ------- ------ ------- ------- ------- ------- Total operating expenses............... 2,419 2,629 3,149 4,668 6,174 4,308 8,723 ------- ------- ------ ------- ------- ------- ------- Operating income................... 655 192 1,338 2,089 3,476 2,772 7,792 Other income (expense), net........ 18 11 49 111 53 48 (73) ------- ------- ------ ------- ------- ------- ------- Income before income taxes......... 673 203 1,387 2,200 3,529 2,820 7,719 Income tax expense................. 250 65 483 772 1,269 1,015 3,038 ------- ------- ------ ------- ------- ------- ------- Net income......................... $ 423 $ 138 $ 904 $ 1,428 $ 2,260 $ 1,805 $ 4,681 ======= ======= ====== ======= ======= ======= ======= Net income per share:(5) Basic......................... $ 0.01 $ -- $ 0.02 $ 0.03 $ 0.06 $ 0.04 $ 0.14 ======= ======= ====== ======= ======= ======= ======= Diluted....................... $ 0.01 $ -- $ 0.02 $ 0.03 $ 0.05 $ 0.04 $ 0.13 ======= ======= ====== ======= ======= ======= ======= Dividends per common share......... $ -- $ -- $ .002 $ -- $ -- $ -- $ -- ======= ======= ====== ======= ======= ======= ======= Shares used in computing net income per share:(5) Basic......................... 44,462 44,178 44,052 42,345 39,933 40,899 33,502 ======= ======= ====== ======= ======= ======= ======= Diluted....................... 44,462 44,178 44,390 43,168 41,313 42,254 36,544 ======= ======= ====== ======= ======= ======= =======
DECEMBER 31, ---------------------------------------------------- SEPTEMBER 30, 1995 1996 1997 1998 1999 2000 ------ ------ ------ ------ ------ ------------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents.............. $1,116 $ 842 $2,000 $1,889 $1,041 $ 1,252 Working capital........................ 2,591 2,583 3,348 3,714 4,689 8,782 Total assets........................... 3,786 3,611 5,299 6,200 7,228 16,438 Long-term debt, less current portion... 99 56 12 -- -- 739 Shareholders' equity................... 3,106 3,148 3,971 4,614 5,835 9,743
- ------------------------------ (1)Includes $93 of amortization of deferred stock compensation for the nine months ended September 30, 2000. (2)Includes $318 of amortization of deferred stock compensation for the nine months ended September 30, 2000. (3)Includes $55 of amortization of deferred stock compensation for the nine months ended September 30, 2000. (4)Includes $12 of amortization of deferred stock compensation and $151 of expense related to nondeferred stock options for the nine months ended September 30, 2000. (5) See note 1 of the notes to our financial statements for an explanation of the determination of the number of weighted average shares used to compute basic and diluted net income per share. 16 21 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 Financial Data" and our financial statements and related notes appearing elsewhere in this document. OVERVIEW We develop, manufacture and market optical test and measurement equipment designed to enable optical component vendors to increase unit production, improve manufacturing yields, accelerate the development of innovative products and reduce manufacturing costs. We introduced our first product in 1986 and currently offer test and measurement equipment in 12 product families. We are able to leverage our 14 years of experience in developing advanced optical test and measurement equipment to provide our customers with innovative solutions designed to meet their complex and rapidly changing requirements. We sell our products primarily to optical component vendors in the telecommunications market and also to optical systems vendors as well as other companies. We sell our products to over 300 customers and distributors, including Agilent Technologies, Inc., Corning Incorporated, Corvis Corporation, JDS Uniphase Corporation, Lucent Technologies, Inc. and Nortel Networks Corporation. In the nine months ended September 30, 2000, Corning Incorporated and Lucent Technologies, Inc. accounted for approximately 22% and 10% of our sales, respectively. In the year ended December 31, 1999, Corning Incorporated and Lucent Technologies accounted for approximately 26% and 11% of our sales, respectively. We market and sell our products through our direct sales force in North America and primarily through distributors in international markets. For the nine months ended September 30, 2000 and the year ended December 31, 1999, 70% and 71%, respectively, of our sales were in North America, with the remainder primarily in Europe and Japan. Substantially all of our sales are made on the basis of purchase orders rather than long-term agreements or requirements contracts. As a result, we commit resources to development and production of products without receiving advance or long-term purchase commitments from customers. We recognize revenue from the sale of our products at the time title passes to the customer, which is typically when products are shipped to domestic customers and when received by international customers. We generally provide a limited one-year warranty on all of our products and accrue estimated warranty costs at the time of sale. Most of our executive, finance and administrative personnel are located at our headquarters in Bozeman, Montana. We opened our Boulder, Colorado facility in August 1998. We operate manufacturing facilities in Bozeman and in Boulder and continue to expand our research and development and manufacturing capacities in both locations. As of September 30, 2000, we had 173 employees in Bozeman, 38 employees in Boulder and 6 employees in our international sales offices. Our cost of sales consists primarily of raw materials, wages and related expenses of production personnel and other manufacturing overhead. Costs of materials and lead times may increase in future periods due to limited supply or shortages of key materials in our industry, including lasers. To address these long lead times and material shortages, we are beginning to purchase larger quantities of some materials. We believe that expanding our manufacturing facilities is critical to our success, and we expect fixed manufacturing costs to increase in absolute dollars as we operate expanded facilities. Marketing and sales expenses consist primarily of salaries and related expenses for personnel, sales commissions, travel expenses, advertising, trade shows, marketing materials and sales support. We intend to significantly expand our field sales force with an emphasis on placing additional sales 17 22 engineers near our key customers throughout North America, Europe and Japan and to open additional sales and service centers. We also intend to expand our marketing and sales capabilities with additional personnel and training. We anticipate that our marketing and sales expenses will continue to increase in absolute dollars in the future. Research and development expenses consist primarily of salaries and related expenses for engineers and other technical personnel, fees paid to third party consultants and the cost of materials related to new product development. We expense our research and development costs as they are incurred. We believe that continued investment in research and development is an important part of our business strategy and we expect that research and development expenses will continue to increase in absolute dollars in the future. General and administrative expenses consist primarily of salaries, wages and related expenses for personnel, travel expenses, professional services, management information systems, human resources and other corporate expenses. We expect general and administrative expenses to increase in absolute dollars as we continue to expand our business operations. In connection with the grant of stock options to our employees, we recorded deferred stock compensation of approximately $5.1 million through September 30, 2000, representing the difference between the deemed fair market value of the common stock for accounting purposes and the option exercise price of these options at the date of grant. These amounts are being amortized using the attribution vesting method over the vesting period of the options, which for us is generally four or five years from the date of grant. RESULTS OF OPERATIONS The following table sets forth certain operating data as a percentage of sales for the periods indicated:
NINE MONTHS YEAR ENDED ENDED DECEMBER 31, SEPTEMBER 30, --------------------------- ---------------- 1997 1998 1999 1999 2000 ----- ----- ----- ----- ----- AS A PERCENTAGE OF SALES: Sales........................................ 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales................................ 40.7 43.0 44.6 42.6 42.5 ----- ----- ----- ----- ----- Gross margin............................ 59.3 57.0 55.4 57.4 57.5 ----- ----- ----- ----- ----- Operating expenses: Marketing and sales..................... 19.2 16.3 14.2 14.4 11.4 Research and development................ 14.0 15.9 13.3 13.4 12.1 General and administrative.............. 8.4 7.1 7.9 7.1 6.9 ----- ----- ----- ----- ----- Total operating expenses................ 41.6 39.3 35.4 34.9 30.4 ----- ----- ----- ----- ----- Operating income............................. 17.7 17.7 20.0 22.5 27.1 Other income (expense), net.................. 0.6 0.9 0.3 0.4 (0.2) ----- ----- ----- ----- ----- Income before income taxes................... 18.3 18.6 20.3 22.9 26.9 Income tax expense........................... 6.4 6.5 7.3 8.3 10.6 ----- ----- ----- ----- ----- Net income.............................. 11.9% 12.1% 13.0% 14.6% 16.3% ===== ===== ===== ===== =====
18 23 COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000 Sales. Sales increased 132.7% from $12.3 million for the nine months ended September 30, 1999 to $28.7 million for the nine months ended September 30, 2000. Our increased sales were due primarily to the overall growth in demand for optical test and measurement products, introduction of new products, an increase in international sales and the implementation of our key account sales process, which resulted in increased sales to our key account customers. Gross Margin. Our gross margin remained constant at 57.4% for the nine months ended September 30, 1999 and 57.5% for the nine months ended September 30, 2000. Manufacturing overhead expenses for the nine months ended September 30, 2000 included approximately $93,000 of amortization of deferred stock based compensation. Marketing and Sales. Marketing and sales expenses increased 84.3% from $1.8 million, or 14.4% of sales, for the nine months ended September 30, 1999 to $3.3 million, or 11.4% of sales, for the nine months ended September 30, 2000. Increases in marketing and sales expenses were related to the hiring and training of additional direct sales personnel to manage and expand our customer base. We increased the number of our sales and marketing personnel from 17 as of September 30, 1999 to 33 as of September 30, 2000. Marketing and sales expenses for the nine months ended September 30, 2000 included approximately $318,000 of amortization of deferred stock based compensation. Research and Development. Research and development expenses increased 110.6% from $1.6 million, or 13.4% of sales, for the nine months ended September 30, 1999 to $3.5 million, or 12.1% of sales, for the nine months ended September 30, 2000. While research and development expenses decreased as a percentage of sales, research and development spending increased in absolute dollars as we added personnel and incurred other expenses and as we continued to invest in new product development. We increased the number of our research and development personnel from 20 as of September 30, 1999 to 41 as of September 30, 2000. Research and development expenses for the nine months ended September 30, 2000 included approximately $55,000 of amortization of deferred stock based compensation. General and Administrative. General and administrative expenses increased 124.0% from $880,000, or 6.9% of sales, for the nine months ended September 30, 1999 to $2.0 million, or 7.2% of sales, for the nine months ended September 30, 2000. The increase in general and administrative expenses was due primarily to additional staffing, increased professional services, administration of our Boulder facility and other expenses necessary to manage and support our increased business operations. General and administrative expenses for the nine months ended September 30, 2000 included approximately $222,000 of expenses related to an employee separation agreement and the amortization of deferred stock based compensation. Other Income (Expense), Net. Interest income and expense and other income and expense, netted to $48,000 income for the nine months ended September 30, 1999 compared with a net expense of $73,000 for the nine months ended September 30, 2000. The change was primarily due to interest expense on debt. Income Tax Expense. Provision for income taxes of $1.0 million for the nine months ended September 30, 1999 and $3.0 million for the nine months ended September 30, 2000 consisted of estimated federal and state income taxes. The effective tax rates were 36.0% and 39.4%, respectively. The effective rates differ from our expected tax rate of 38.5% as a result of research and development tax credits and, for the nine months ended September 30, 2000, the impact of non-deductible amounts related to incentive stock options. 19 24 COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1999 Sales. Sales increased 46.9% from $11.8 million in 1998 to $17.4 million in 1999. This increase was due primarily to the overall growth in demand for optical test and measurement products, our focus on key accounts and sales from the introduction of our new modular products. In addition, our international sales increased 93.5% from $2.6 million in 1998 to $5.0 million in 1999 as we focused efforts on key account opportunities in Europe. Gross Margin. Gross margin decreased from 57.0% in 1998 to 55.4% in 1999. The decrease in gross margin of 1.6% was due to pricing adjustments made to meet competitive pressures, increased sales of products with relatively higher material costs and increased costs related to the opening of our manufacturing facility in Boulder, Colorado. Marketing and Sales. Marketing and sales expenses increased 27.9% from $1.9 million, or 16.3% of sales, in 1998 to $2.5 million, or 14.2% of sales, in 1999. The increase in absolute dollars was related to the expansion of our marketing and sales efforts, including the hiring of additional marketing and sales personnel, increased travel, the establishment of our key account management process and our continued expansion into international markets. Research and Development. Research and development expenses increased 23.0% from $1.9 million, or 15.9% of sales, in 1998 to $2.3 million, or 13.3% of sales, in 1999. While research and development expenses declined as a percentage of sales, our research and development spending increased in absolute dollars as we hired additional personnel to support new product development efforts. General and Administrative. General and administrative expenses increased 62.9% from $846,000, or 7.1% of sales, in 1998 to $1.4 million, or 7.9% of sales, in 1999. The increase was due to additional staffing, professional services and other expenses associated with the expansion of our business. Other Income (Expense), Net. Interest income and expense and other income and expense, netted to $111,000 of income in 1998, compared with $53,000 of income in 1999. The difference was due primarily to foreign exchange gains of $50,000 in 1998 compared with foreign exchange gains of $8,000 in 1999. Income Tax Expense. Our provision for income taxes of $772,000 for 1998 and $1.3 million for 1999 consisted of estimated federal and state income taxes. The effective tax rates were 35.1% and 36.0%, respectively. The effective tax rates differ from our expected tax rate of 38.5% as a result of research and development tax credits. COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1998 Sales. Sales increased 56.6% from $7.6 million in 1997 to $11.8 million in 1998. The increase was due primarily to the growth in sales resulting from an increased focus on optical manufacturing market opportunities. Gross Margin. Gross margin decreased from 59.3% in 1997 to 57.0% in 1998. The decrease in gross margin of 2.3% was due primarily to a change in our product mix with an increase in sales of products with a higher material cost. Marketing and Sales. Marketing and sales expenses increased 33.2% from $1.5 million, or 19.2% of sales, in 1997 to $1.9 million, or 16.3% of sales, in 1998. The increase in absolute dollars was related to additional staff hired in 1998 to respond to the overall growth in demand for optical test and measurement products. 20 25 Research and Development. Research and development expenses increased 78.7% from $1.1 million, or 14.0% of sales, in 1997 to $1.9 million, or 15.9% of sales, in 1998 as we continued to increase our new product development efforts. General and Administrative. General and administrative expenses increased 32.2% from $640,000, or 8.4% of sales, in 1997 to $846,000 or 7.1% of sales in 1998. The increase was due primarily to increased administrative costs related to the opening of our Boulder facility. Other Income (Expense), Net. Interest income and expense and other income and expense, netted to $49,000 of income for 1997, compared to $111,000 of income in 1998. The increase was due primarily to foreign exchange losses in 1997 of $28,000 compared to foreign exchange gains of $50,000 in 1998. Income Tax Expense. The provision for income taxes of $483,000 for 1997 and $772,000 for 1998 consisted of estimated federal and state income taxes. The effective tax rates were 34.8% and 35.1%, respectively. The effective rates differ from our expected tax rate of 38.5% as a result of research and development tax credits. 21 26 SELECTED QUARTERLY RESULTS OF OPERATIONS The following table sets forth certain unaudited statement of operations data for the eight quarters ended September 30, 2000 as well as this data expressed as a percentage of our sales for the periods indicated. Our quarterly results have varied in the past and may significantly vary in the future. We believe that quarter-to-quarter comparisons will not be meaningful and should not be used as an indication of our future performance. This data has been derived from unaudited financial statements that, in our opinion, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial information for periods presented. This information should be read in conjunction with our financial statements and the related notes included in this prospectus.
THREE MONTHS ENDED ----------------------------------------------------------------------------------------- DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, 1998 1999 1999 1999 1999 2000 2000 2000 -------- --------- -------- --------- -------- --------- -------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Sales................................ $3,390 $3,200 $4,986 $4,148 $5,070 $6,624 $9,977 $12,107 Cost of sales(1)..................... 1,474 1,339 2,042 1,874 2,499 2,897 4,253 5,043 ------ ------ ------ ------ ------ ------ ------ ------- Gross margin..................... 1,916 1,861 2,944 2,274 2,571 3,727 5,724 7,064 ------ ------ ------ ------ ------ ------ ------ ------- Operating expenses: Marketing and sales(2)............. 585 544 682 552 696 772 882 1,626 Research and development(3)........ 618 562 514 573 673 872 1,285 1,315 General and administrative(4)...... 330 269 289 324 496 443 621 907 ------ ------ ------ ------ ------ ------ ------ ------- Total operating expenses......... 1,533 1,375 1,485 1,449 1,865 2,087 2,788 3,848 ------ ------ ------ ------ ------ ------ ------ ------- Operating income..................... 383 486 1,459 825 706 1,640 2,936 3,216 Other income (expense), net.......... 90 (7) (24) 80 4 15 (25) (63) ------ ------ ------ ------ ------ ------ ------ ------- Income before income taxes........... 473 479 1,435 905 710 1,655 2,911 3,153 Income tax expense................... 133 172 518 324 255 607 1,054 1,377 ------ ------ ------ ------ ------ ------ ------ ------- Net income....................... $ 340 $ 307 $ 917 $ 581 $ 455 $1,048 $1,857 $ 1,776 ====== ====== ====== ====== ====== ====== ====== ======= Basic earnings per share......... $ .01 $ .01 $ .02 $ .01 $ .01 $ .03 $ .06 $ .06 ====== ====== ====== ====== ====== ====== ====== ======= Diluted earnings per share....... $ .01 $ .01 $ .02 $ .01 $ .01 $ .03 $ .05 $ .05 ====== ====== ====== ====== ====== ====== ====== ======= AS A PERCENTAGE OF SALES: Sales................................ 100% 100% 100% 100% 100% 100% 100% 100% Cost of sales........................ 43 42 41 45 49 44 43 42 ------ ------ ------ ------ ------ ------ ------ ------- Gross margin..................... 57 58 59 55 51 56 57 58 ------ ------ ------ ------ ------ ------ ------ ------- Operating expenses:.................. Marketing and sales................ 17 17 14 13 14 12 9 13 Research and development........... 18 18 10 14 13 13 13 11 General and administrative......... 10 8 6 8 10 6 6 7 ------ ------ ------ ------ ------ ------ ------ ------- Total operating expenses......... 45 43 30 35 37 31 28 31 ------ ------ ------ ------ ------ ------ ------ ------- Operating income..................... 12 15 29 20 14 25 29 27 Other income, (expense) net.......... 2 -- -- 2 -- -- -- (1) ------ ------ ------ ------ ------ ------ ------ ------- Income before taxes.................. 14 15 29 22 14 25 29 26 Income tax expense................... 4 5 11 8 5 9 10 11 ------ ------ ------ ------ ------ ------ ------ ------- Net income....................... 10% 10% 18% 14% 9% 16% 19% 15% ====== ====== ====== ====== ====== ====== ====== =======
- ------------------------- (1)Includes $93 of amortization of deferred stock compensation for the three months ended September 30, 2000. (2)Includes $318 of amortization of deferred stock compensation for the three months ended September 30, 2000. (3)Includes $55 of amortization of deferred stock compensation for the three months ended September 30, 2000. (4)Includes $12 of amortization of deferred stock compensation and $151 of expense related to nondeferred stock options for the three months ended September 30, 2000. 22 27 Sales increased in each of the previous eight quarters with the exception of the three months ended March 31, 1999 and September 30, 1999. We experience fluctuations in sales as a result of the timing of large volume customer orders. This occurred in both the three months ended March 31, 1999 and September 30, 1999. In addition, the decrease in sales in the three months ended September 30, 1999 was partially due to competitive pricing pressures. Gross margins were negatively affected in the second half of 1999 due primarily to reductions in the price of certain products, including greater price reductions for sales to high volume customers, to meet competitive pressures. Manufacturing overhead expenses for the three months ended September 30, 2000 included approximately $93,000 of amortization of deferred stock based compensation. Marketing and sales expenses have generally increased in each of the past eight quarters. In the three months ended December 31, 1998, marketing and sales expense included a one-time charge of approximately $80,000 in connection with a marketing decision related to a product that did not perform to our or our customers' expectations. We established a reserve of $80,000 to account for our materials and labor associated with the repair and upgrade of the product to meet the original product specifications and customer expectations. As products were returned to us for repair and upgrade, we charged the reserve account for labor and materials. All products were returned and accounted for by December 31, 1999. The increase in the three months ended June 30, 1999 was due primarily to increases in travel, hiring and relocation costs, salaries and catalog expenses. Marketing and sales expenses for the three months ended September 30, 2000 included approximately $318,000 of amortization of deferred stock based compensation. Research and development expenses increased in each of the past eight quarters with the exception of a decrease in the three months ended June 30, 1999. Research and development expenses increased in the three months ended December 31, 1998 due primarily to increased salaries, third party consulting fees and materials related to a major initiative to release an upgrade of one of our modular products. Research and developments expenses decreased in the three months ended June 30, 1999 due to temporary decreases in project materials and use of third party consultants. Research and development expenses for the three months ended September 30, 2000 included approximately $55,000 of amortization of deferred stock based compensation. General and administrative expenses have generally increased in each of the eight previous quarters. In the three months ended December 31, 1998 the increase in our expenses primarily related to the opening of our Boulder facility. General and administrative expenses in the three months ended December 31, 1999 were impacted by a charge related to separation agreements entered into with two of our former employees. General and administrative expenses for the three months ended September 30, 2000 included a total of approximately $222,000 of expenses related to an employee separation agreement and amortization of deferred stock based compensation. LIQUIDITY AND CAPITAL RESOURCES Since our inception, we have financed our operations and met our capital expenditure requirements primarily through cash flows from operations and private sales of our common stock. Cash flows from operating activities were $1.5 million in 1997, $1.1 million in 1998, $709,000 in 1999 and $1.3 million for the nine months ended September 30, 2000. The increase in cash from operating activities for the nine months ended September 30, 2000 was due primarily to cash generated from profits. As of September 30, 2000, we had cash and cash equivalents of $1.3 million and working capital of $8.8 million. Net cash used in investing activities was $259,000 in 1997, $338,000 in 1998, $490,000 in 1999 and $873,000 for the nine months ended September 30, 2000. Substantially all of the cash used in 23 28 investing activities has been for the purchase of capital equipment used to support the expansion of our business. Net cash used in financing activities was $125,000 in 1997, $829,000 in 1998, $1.1 million in 1999 and $195,000 for the nine months ended September 30, 2000. The cash was used in 1997 for debt repayments and the payment of a dividend in the amount of $92,000. In 1998, 1999 and the nine months ended September 30, 2000, $720,000, $1.1 million and $1.4 million, respectively, were used to repurchase stock from a former shareholder. In conjunction with the stock repurchase in the nine months ended September 30, 2000, we entered into a loan agreement for $1.4 million, maturing in April 2003. This term loan requires monthly payments of principal of $39,000 plus interest. Interest is paid at a rate equal to one and a half percent above prime rate, or 11% at September 30, 2000. As of September 30, 2000, approximately $1.2 million was outstanding on this loan. The loan agreement has placed certain restrictions on us, including the payment of cash dividends. We also have a $2.0 million revolving working capital line of credit that expires in March 2001. As of September 30, 2000, we did not have any advances under the line of credit. Advances under the line of credit are limited to a percentage of outstanding accounts receivable. The line of credit bears interest, payable monthly, at a rate equal to three-quarters of a percent above prime rate, or 10.25% as of September 30, 2000. In October 2000, the line of credit was increased to $5.0 million, the interest rate was changed to a rate equal to one quarter of a percent above prime, and its term was extended to October 2002. We believe that the net proceeds from this offering, together with our current cash and cash equivalents, will be sufficient to fund our operations for at least the next 18 months. We could, however, need or choose to raise additional funds or seek additional financing prior to or after the end of this period. Our future financing needs will depend on many factors, including potential strategic acquisitions of complementary businesses, products or technology, the rate of our sales growth and our need to invest in personnel and infrastructure to facilitate growth. We cannot assure you that such additional financing would be available on acceptable terms, if at all. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK Exchange Rate Sensitivity Our products are sold internationally. As a result, volatile movements in currency exchange rates may affect financial results. Most of our overseas sales are made in U.S. dollars except for sales in Japan, which are denominated in Yen. In the year ended December 31, 1999 and the nine months ended September 30, 2000, approximately 7% and 12%, respectively, of our total sales were denominated in Yen. A strengthening of the U.S. dollar could result in our products being less competitive in foreign markets. Interest Rate Risk Our exposure to interest rate risk is limited to our term loan, which bears interest at one and half percent above the prime rate and our line of credit, which bears interest at three quarters of a percent above the prime rate. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standard, or SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as amended, will be required to be implemented on January 1, 2001. SFAS No. 133 requires that derivatives be reported on the balance sheet at fair value and, if the derivative is not designated as a hedging instrument, changes in fair value must be recognized 24 29 in earnings in the period of change. Currently, we do not hold any derivative instruments, so we expect that the adoption of SFAS No. 133 will not have a material impact on our financial position. In December 1999, the Securities and Exchange Commission released Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." SAB No. 101 provides guidance on revenue recognition issues in the absence of authoritative literature addressing a specific arrangement or a specific industry. SAB 101 has been amended by SAB 101A and SAB 101B, which delays the implementation date of SAB 101 until no later than the fourth fiscal quarter of 2000. We are currently assessing the impact of SAB 101. It is not expected to have a material impact 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 provides guidance for issues that have arisen in applying APB Opinion No. 25, "Accounting for Stock Issued to Employees." FIN 44 applies prospectively to new awards, exchanges of awards in a business combination, modifications to outstanding awards, and changes in grantee status that occur on or after July 1, 2000, except for the provisions related to repricings and the definition of an employee which apply to awards issued after December 15, 1998. We do not expect FIN 44 to have an impact on our financial position or results of operations. In May 2000, the FASB Emerging Issues Task Force, or EITF, reached a consensus on Issue No. 00-14, "Accounting for Certain Sales Incentives," or the sales incentive consensus. The consensus requires the reduction in or refund of the selling price of the product or service resulting from any cash sales incentive to be classified as a reduction of revenue. The sales incentive consensus, which requires reclassification of prior period amounts, is effective upon the adoption of SAB 101. We currently classify sales discounts as a reduction of sales. Accordingly, our application of this consensus will not have an impact on our reported sales, reported earnings or financial position. In July 2000, the EITF reached a consensus on Issue 00-10, "Accounting for Shipping and Handling Fees and Costs," or the shipping consensus. The shipping consensus requires that amounts billed to a customer in a sale transaction related to shipping and handling be classified as revenue. The shipping consensus, which requires reclassification of prior period amounts, is effective upon the adoption of SAB 101. We currently classify shipping revenues as a reduction of shipping costs. We do not expect the application of this consensus to have a material impact on our reported sales, cost of sales or operating expenses. The application of this consensus will not have an impact on our reported earnings or financial position. 25 30 BUSINESS OVERVIEW We develop, manufacture and market optical test and measurement equipment designed to enable optical component vendors to increase unit production, improve manufacturing yields, accelerate the development of innovative products and reduce manufacturing costs. We introduced our first product in 1986 and currently offer test and measurement equipment in 12 product families. We sell our products directly to customers in North America and we primarily use a network of distributors to sell our products internationally. Our customers include some of the largest companies in the optical industry, including Corning Incorporated, JDS Uniphase Corporation and Lucent Technologies, Inc. Our objective is to be the leading provider of optical test and measurement equipment for the optical components market. INDUSTRY BACKGROUND Increased Demand for Network Capacity In recent years the volume of traffic on communications networks has increased dramatically due to the growth of the Internet and related bandwidth-intensive applications. Ryan Hankin Kent, Inc., or RHK, a telecommunications industry research firm, estimates that Internet traffic, which was 350,000 terabytes per month in 1999, will increase to more than 15 million terabytes per month in 2003. This growth in traffic has created significant demand for increased capacity in communications networks and has driven network service providers to rapidly deploy optical networking systems to significantly increase network transmission capacity and provide greater network functionality at a lower cost. Rapid Deployment of Optical Networks Optical networks transmit data using pulses of light transmitted through glass fibers while traditional digital networks are based on electrical signals transmitted over copper wires. Optical networking technology has greater network capacity and higher transmission speed than traditional digital technologies. The first generation of optical networking systems were Synchronous Optical NETworking, or SONET, systems and were designed to carry only voice traffic. These systems have become bandwidth constrained due to the rise in data traffic. Dense wavelength division multiplexing, or DWDM, the second generation of optical technologies, was developed and deployed to address the capacity constraints of SONET systems. SONET and DWDM are complementary technologies because DWDM can split signals into different wavelengths of light and transmit multiple signals through a single fiber, which multiplies fiber capacity. Recently introduced DWDM systems can carry as many as 160 wavelength channels per optical fiber. As a result of these significant advances in optical networking technology and the related increases in transmission capacity, optical networks are being rapidly deployed worldwide. According to RHK, the global DWDM and optical networking market is expected to increase from $14.6 billion in 2000 to $41 billion in 2003. The proliferation of optical networks has led to a growth in demand for the optical networking systems that manage them. In addition, the need for optical networking systems with enhanced features and capabilities has placed increased pressure on established and emerging optical system vendors to develop innovative products while also increasing their production volumes. In order to meet these competitive pressures, system vendors are concentrating on their core areas of expertise such as system integration and network management software design. To maintain this focus, system vendors are requiring optical component vendors to innovate and develop new components with greater functionality. 26 31 Optical Components and Subsystems The rapid deployment of optical networking systems has increased demand for optical components. Optical components are the building blocks of optical networking systems and include active and passive components. Active components require electricity and are used to generate, control or amplify optical signals. Passive components do not require electricity and are used to guide, filter, isolate, combine or split optical signals. Subsystems consist of several components integrated into a single package and offer the advantage of a more complete solution from a single supplier rather than a combination of several components from multiple suppliers. In addition, subsystems often also provide better performance at a lower total cost. DWDM optical networking systems are comprised of a number of components and subsystems, including transmitters, multiplexers, optical amplifiers, demultiplexers and receivers. Transmitters incorporate source lasers that generate the optical signal, which has been converted from electronic digital data. Multiplexers combine signals from multiple source lasers onto a single fiber. Optical amplifiers are inserted in DWDM systems at periodic intervals to boost signal strength, which becomes weaker and more dispersed as it travels through the fiber. Optical amplifiers are capable of boosting the signal strength of all wavelength channels simultaneously without converting them into electrical signals and without splitting the signal into its separate wavelength channels. The receiving end of the system uses a demultiplexer to split the optical signal into its constituent wavelength channels and a receiver to convert the optical signal into its underlying electronic digital data. More advanced DWDM systems include additional optical components, such as optical add/drop multiplexers, or OADMs, that add flexibility and functionality to the network by allowing optical signals to be added to or dropped from the fiber. [The description in the preceding paragraph is illustrated using a diagram showing components of a DWDM system. The diagram shows multiple optical signals being combined using a multiplexer, the optical signal passing through an optical amplifier and an optical add/drop multiplexer and the optical signal being separated into its separate wavelength channels by a demultiplexer.] [GRAPHIC] The diagram above depicts the components in a typical optical networking system. The advances in transmission speed that optical networking systems and components offer over traditional digital networking systems help to alleviate network congestion and make Internet communications faster and easier. RHK estimates that the worldwide market for optical components will grow to over $22.5 billion by 2003 from approximately $6.6 billion in 1999. To meet this growing demand, optical component vendors are being required to supply greater volumes of their components and subsystems, which places an increased emphasis on their manufacturing processes and capacity. In addition, competitive pressures are forcing optical component vendors to improve their manufacturing yields and reduce their costs of manufacturing. Finally, in order to meet the requirements of next generation DWDM systems, which are moving to higher channel counts, higher speeds, longer transmission distances and increased functionality, component vendors must develop and manufacture innovative optical components and subsystems. 27 32 Challenges Facing Optical Component Vendors Optical component vendors seeking to keep pace with rapidly growing demand and to develop and introduce innovative components face significant challenges, which include: Improving Yield and Increasing Production Volume. Optical component vendors must significantly increase their yields and production volume to meet market demand and remain competitive. Current optical component manufacturing is time-consuming and is characterized by low yields due to the precision required by, and the largely manual nature of, the manufacturing process. These low manufacturing yields result in a higher total costs of manufacturing. Optical component vendors need to invest in processes and equipment that will improve yields, help manage capital equipment expenditures and reduce their overall manufacturing costs. Conforming to Complex Component Specifications. Optical components must conform to stringent performance and functionality specifications established by system vendors. As optical components become more complex, the number of individual tests that must be performed and the required level and difficulty of conformity increases. Achieving High Rate of Innovation. Optical component technology is changing rapidly as component vendors introduce innovative products such as DWDM source lasers with higher power and the ability to tune to different wavelengths, multiplexers and demultiplexers that can accommodate more wavelength channels and wider bandwidth optical amplifiers. In addition, there is a growing demand for subsystems that integrate several of these components. To research and develop innovative components and subsystems and to verify their functionality, optical component vendors require increasingly complex and evolving test methodologies. Accelerating Product and Manufacturing Process Qualification. Once optical component vendors have completed the design of a new product and implemented a manufacturing process, system vendors must qualify both the product and the manufacturing process before they will purchase the product. This qualification process ensures that components meet product specifications either established or required by optical system vendors. As part of this process, system vendors may also require that component vendors demonstrate that their products can be manufactured in volume. Increasing component complexity and integration is making this qualification process more difficult and time-consuming. Optical component vendors are increasingly seeking solutions to help expedite their product qualification process and improve time to market. Optical test and measurement products are designed to precisely test and measure the operating parameters of components to assist component vendors in meeting product performance and manufacturing requirements required by system vendors. OPTICAL TEST AND MEASUREMENT EQUIPMENT MARKET OPPORTUNITY Optical component vendors must measure and control their components and subsystems throughout the manufacturing process. Optical test and measurement equipment is used to precisely measure, verify and optimize component and subsystem performance. Additionally, optical test and measurement equipment is used to precisely generate and control optical signals during the test operations that component vendors perform to assess their manufacturing processes and to develop new products. Key requirements of test and measurement equipment include high levels of stability, repeatability, accuracy, measurement speed and ease of use. Optical component vendors use optical test and measurement equipment during their manufacture, assembly and performance verification processes and to conduct advanced experiments and develop prototypes of next generation products. In response to the challenges facing them, optical component vendors are increasingly turning to sophisticated test and measurement equipment in order to improve their manufacturing processes, improve quality and develop innovative products. To meet these challenges, established and emerging optical component vendors are rapidly increasing their investment in capital equipment. We believe this trend will cause the optical test and measurement equipment market to 28 33 grow along with the market for optical components and evolve rapidly as innovative optical components and subsystems are introduced. The continuing growth of the optical networking market combined with the increasing demand for sophisticated test and measurement solutions has created a significant opportunity for manufacturers of optical test and measurement equipment. THE ILX LIGHTWAVE SOLUTION We develop, manufacture and market optical test and measurement equipment designed to enable optical component vendors to increase unit production, improve manufacturing yields, accelerate the development of innovative products and, reduce manufacturing costs. We are able to leverage our 14 years of experience in developing advanced optical test and measurement equipment to provide our customers with innovative solutions designed to meet their complex and rapidly changing requirements. We believe our products provide our customers the following key benefits: Improved Manufacturing Process. Our products are designed to allow our customers to make fewer, more accurate measurements to assess component functionality, diagnose manufacturing faults and identify inefficiencies. Greater test speed, reliability and accuracy reduce the calibration time of production equipment and optimize the manufacturing process to improve yields and increase production volume. By supporting increasingly complex product tests and by expediting testing times, our solutions enable optical component vendors to shorten optical system vendors' qualification processes. Flexible and Upgradeable Product Design. The modular design of many of our products enables component vendors to extend their test capabilities by adding new test and measurement functionality in a pay-as-you-grow fashion as production demands increase and test requirements change. This modular design enables component vendors to manage their capital expenditures, protect their initial capital equipment investments and conserve manufacturing floor space. Application-Focused Solutions. Because our products are designed for specific sub-segments of the optical components market, they offer our customers a focused solution that tests specific component characteristics and is closely aligned with their manufacturing and product design needs. In addition, many of our products integrate multiple test and measurement functions, allowing our customers to avoid combining multiple test products from different vendors. For example, the verification testing of laser diodes, which are the light sources in optical networking systems, requires the control or measurement of current, voltage, temperature, optical power and wavelength. Our Laser Diode Parameter Analyzers family of products, which measure the operating characteristics of laser diodes, integrates these functions into a single product. Advanced Technology and Features. Our products are designed to offer our customers advanced technology and features that provide enhanced test functionality and enable the acceleration of the development and manufacture of innovative optical components. For example, our multi-channel fiber optic source product family is designed to offer the highest levels of wavelength stability available in the manufacturing process, which lengthens the time between test system calibrations and provides a controlled environment to facilitate new product development. Responsive Customer Service. We support our customers with a technically qualified sales and service staff trained to quickly understand our customers' technical requirements and recommend optimum test and measurement solutions. In order to minimize our customers' production downtime, we offer repair and calibration services at out customers' sites or at our service centers. Through frequent interaction with our key customers, our sales and customer service engineers are also able to help focus and direct our new product development activities to keep pace with rapidly changing customer requirements. 29 34 STRATEGY Our objective is to be the leading provider of optical test and measurement equipment for the optical components market. We intend to continue to develop and introduce innovative optical test and measurement solutions that will broaden our product lines and offer optical component vendors increased manufacturing yields, improved quality and reduced overall cost of ownership of their test and measurement equipment. Key elements of our strategy include: Continue to Focus on High-Growth Segments of the Optical Components Market. We plan to continue to focus on selected, high-growth market segments such as optical amplifier test, passive component test and DWDM laser test. We believe that by focusing on these application-specific segments, we will be able to offer highly differentiated test and measurement products and enhance our position as a market and technology leader. As these market segments mature and common test methodologies become widely accepted, we intend to incorporate new functionality into our products. Collaborate with Leading Optical Component Vendors. We intend to expand our existing relationships with leading optical component vendors. We believe that by expanding these relationships and developing relationships with emerging optical component vendors, we will gain market and technology insights, maintain our customer responsiveness and establish ourselves as the preferred provider of optical test and measurement equipment. Expand Sales, Marketing and Customer Service Capabilities. We believe that the highly technical nature and rapid evolution of our market requires a customer-focused, technically knowledgeable sales, marketing and customer service staff. By December 31, 2001, we intend to significantly expand our field sales force to 16 from nine as of September 30, 2000, with an emphasis on placing sales engineers near our key customers throughout North America, Europe and Japan. We also intend to expand our marketing and product management capabilities with additional staff and training. In order to meet our customers' service needs, we also plan to expand our on-site calibration and repair services in North America, Europe and Japan. Decrease Product Development Cycle Time. We believe our fast product development cycle times have provided us with a competitive advantage by allowing us to be first to market with innovative products and features. We intend to continue to invest in, improve and refine our new product development process by hiring additional engineering and support personnel, increasing training and implementing advanced development tools. Pursue Strategic Acquisitions. We believe that market fragmentation in the test and measurement industry creates opportunities for consolidation. We intend to pursue acquisitions that allow us to gain access to key technologies, expanded channels of distribution, skilled personnel, complementary products and additional market segments. PRODUCTS We believe that the history of our products has been characterized by innovation. In 1986, shortly after our founding, we introduced our LDX-3207, which we believe was the industry's first precision, low noise current source, an instrument capable of providing a highly stable source of electrical power for controlling laser diodes. Since then, we have leveraged our extensive experience to develop many advanced test and measurement solutions. In February 2000 we introduced our SSB-9200, which we believe is the industry's first high-density fiber optic source with an integrated wavelength division multiplexer for optical amplifier test. Our products are also designed to be reliable, accurate and easy-to-use. In addition, most of our products may be controlled by a computer, which facilitates fast manipulation of our products for automated test in manufacturing environments. Our products may be divided into the following product families: Fiber Optic Sources. Our fiber optic sources generate laser signals that mimic the optical signals in optical networking systems. Our fiber optic source instruments precisely control the optical power and wavelength of the signals they generate. We offer our fiber optic sources in both single channel and modular multi-channel versions. The modular versions of our products are designed to 30 35 allow our customers to easily add functionality or additional wavelength channels as their test requirements evolve. - ----------------------------------------------------------------------------------------------- PRODUCT FAMILY DESCRIPTION PRIMARY APPLICATIONS - ----------------------------------------------------------------------------------------------- Multi-Channel Fiber Optic Modular instruments capable - Test of optical network Sources of generating precisely systems, optical amplifiers controlled optical signals and passive components with up to 48 wavelength channels. A greater number of wavelength channels can be accommodated by linking several instruments together - ----------------------------------------------------------------------------------------------- Single Channel Fiber Optic Instruments capable of - Passive component test Sources generating precisely - Research and development controlled optical signals based on a variety of laser types - -----------------------------------------------------------------------------------------------
Laser Diode Instruments. Laser diodes used in optical networking systems are typically complex devices that incorporate several sub-components including a semiconductor laser chip, thermoelectric cooler and output monitoring photodiode. Our laser diode instruments are designed to precisely measure and control the operating parameters of these devices during test procedures. Parameters that can be measured and controlled include current, voltage and temperature for lasers, and current and voltage for thermoelectric coolers. In addition, our laser diode instruments also monitor photodiode output current. Our laser diode instruments offer low-noise, high stability outputs and multiple laser protection features. In order to meet a variety of application requirements, we offer our laser diode instruments in several versions including single-output and modular, multi-channel output versions. The modular versions of our instruments are designed to allow our customers to easily add functionality or additional laser diode control outputs as their test requirements evolve. - ----------------------------------------------------------------------------------------------- PRODUCT FAMILY DESCRIPTION PRIMARY APPLICATIONS - ----------------------------------------------------------------------------------------------- Modular Laser Diode Modular instruments capable - Optical amplifier test Controllers of precisely controlling up to 16 laser diodes simultaneously - ----------------------------------------------------------------------------------------------- Single Output Laser Diode Instruments that combine both - Controlling laser diodes Controllers current source and during assembly temperature control functions - Research and development for a single laser diode - ----------------------------------------------------------------------------------------------- Single Output Current Instruments capable of - Controlling laser diodes Sources precisely measuring and during assembly controlling the current, - Research and development voltage and monitoring photodiode output of a laser diode - ----------------------------------------------------------------------------------------------- Single Output Temperature Instruments capable of - Controlling component Controllers precisely measuring and temperature during assembly controlling the temperature - Research and development of a laser diode or other optical components - ----------------------------------------------------------------------------------------------- Pulsed Current Sources Instruments capable of - Testing unpackaged laser generating short pulses of diodes during the current to power laser diodes manufacturing process - Research and development - -----------------------------------------------------------------------------------------------
31 36 Laser Diode Parameter Analyzers. Our family of laser diode parameter analyzers and associated software tools are designed to quickly and accurately measure the operating characteristics of laser diodes. - ----------------------------------------------------------------------------------------------- PRODUCT FAMILY DESCRIPTION PRIMARY APPLICATIONS - ----------------------------------------------------------------------------------------------- Laser Diode Parameter Integrated instrument that - Testing laser diodes during Analyzer and Software combines laser diode control the manufacturing process and optical power measurement - Optical amplifier test functions. PC based software - Incoming inspection of used for instrument control laser diodes and allows fast, accurate - Research and development compilation of data - -----------------------------------------------------------------------------------------------
Power/Wavelength Meters. Our optical power/wavelength meters are designed to accurately measure the power and/or wavelength of an optical signal from a variety of sources. Some meters couple to our family of optical measurement heads in order to accommodate a wide variety of test applications. Our recently introduced Fiber Optic Power Meter, FPM-8210, is designed to allow operators to quickly make accurate optical power measurements with the unterminated, or bare, optical fiber that is commonly used during optical component assembly.
- ------------------------------------------------------------------------------------------------- PRODUCT FAMILY DESCRIPTION PRIMARY APPLICATIONS - ------------------------------------------------------------------------------------------------- Optical Power Meter Instrument capable of - Optical amplifier test accurately measuring power - Passive component test of an optical signal - Testing laser diodes during the manufacturing process - Incoming inspection of laser diodes - Research and development - ------------------------------------------------------------------------------------------------- Optical Power/Wavelength Instrument capable of - Passive component test Meter and Measurement simultaneously measuring the - Testing laser diodes Heads power and wavelength of an during manufacture optical signal - Incoming inspection of laser diodes - Research and development - -------------------------------------------------------------------------------------------------
Component Mounting Fixtures. We offer a line of laser diode mounting fixtures designed to meet the demands of a wide range of test and measurement applications. These fixtures incorporate both mechanical and electrical connections and can accommodate many different laser diode package styles. Some of our mounting fixtures also incorporate built-in temperature control capability.
- ------------------------------------------------------------------------------------------------- PRODUCT FAMILY DESCRIPTION PRIMARY APPLICATIONS - ------------------------------------------------------------------------------------------------- Multiple Device Mounting Component mounting fixtures - Optical amplifier test Fixtures that can accommodate up to - Passive component test 16 laser diodes - Research and development - ------------------------------------------------------------------------------------------------- Single Device Mounting Component mounting fixtures - Laser diode test Fixtures that accommodate a single - Research and development laser diode - -------------------------------------------------------------------------------------------------
32 37 CUSTOMERS We sell our products to more than 300 customers and distributors around the world. We market and sell our products primarily to optical component vendors. The majority of our remaining sales are made to optical networking system vendors who purchase our products to test optical components. We work closely with our key customers to determine their needs and to focus and direct our new development activities to keep pace with their rapidly changing requirements. We consider both our relationships with our customers and our ability to respond to emerging industry trends to be critical to our success. The following is a list of our 20 largest customers and distributors, in terms of sales, in the nine months ended September 30, 2000: Customers AFC Technologies, Inc. Alcatel Agilent Technologies, Inc. Corning Incorporated Corvis Corporation Hitachi Telecom, Inc. JDS Uniphase (includes E-TEK) Lucent Technologies, Inc. (includes Ortel) Marconi Communications Nortel Networks Corporation (includes Qtera Corporation) Onetta Technologies, Inc. SDL, Inc. (includes Photonic Integration Research Incorporated (PIRI)) Sycamore Networks, Inc. Tyco Submarine Systems Distributors AG Electro-Optics BFI Optilas SA Laser 2000 GmbH Meisho Corporation Opto Science Suruga Seiki Co. In the nine months ended September 30, 2000, Corning Incorporated and Lucent Technologies, Inc. accounted for approximately 22% and 10% of our sales, respectively. In the year ended December 31, 1999, Corning Incorporated and Lucent Technologies, Inc. accounted for approximately 26% and 11% of our sales, respectively. No other customer represented more than 10% of our sales in either the nine months ended September 30, 2000 or the year ended December 31, 1999. RESEARCH AND DEVELOPMENT We continually seek to improve our competitive technological position and our product breadth and performance through research and product development. We believe that continued investment in this area will be very important to our success. We have assembled a team of physicists and engineers with significant experience in the optical industry. As of September 30, 2000, we had 41 employees engaged in research and development, including 10 with advanced degrees. Our engineers are located in our research and development facilities located in Bozeman, Montana and Boulder, Colorado. We maintain a long-term cooperative research effort with the Optical Technology Center at Montana State University. Our research and development expenses for the nine months ended September 30, 2000 were $3.5 million and for the years ended December 31, 1999, 1998 and 1997 were $2.3 million, $1.9 million and $1.1 million, respectively. We believe our development process has been and will continue to be a key contributor to our ability to continuously offer new product introductions. Our product development teams follow an established product development process. We have used this process for approximately 10 years and we continuously review and seek to improve it. Our new product development process allows for a systematic progress review at each of the market and research feasibility, design optimization, prototype design, product development, pilot manufacturing and market launch stages. At each stage, our management reviews the technical progress of the product, its schedule and cost, and 33 38 reassesses market conditions to determine how to continue the development process. We believe that by following an established product development process, we can accelerate product development, ensure high quality new product introductions and control our development costs. SALES, MARKETING AND CUSTOMER SERVICE We sell our products in North America through a direct sales force consisting of nine field sales people as of September 30, 2000. We sell internationally primarily through distributors as well as through direct sales personnel. As of September 30, 2000, we had one sales manager in the United Kingdom and one sales manager, one sales assistant and one sales engineer in Japan. Our international sales efforts also include approximately 24 independent distributors located in several countries in Europe and the Pacific Rim where we do not have a direct presence. In Europe and the Pacific Rim, we currently have distributors located in Australia, China, France, Germany, Greece, Korea, Malaysia, Poland, Singapore, Spain, Sweden, Switzerland and The Netherlands. We also have distributors in Brazil and Israel, which serve the South American and Middle Eastern markets, respectively. Our direct sales account managers address our markets on an assigned and target account basis. Our sales force includes our technical sales engineers who provide customers and prospective customers with answers to technical and product related questions as well as application support relating to the use of our products in customers' applications. These engineers also help to monitor changing customer requirements and to define the features that are required for our products to be successful in specific applications. As of September 30, 2000, our marketing group consisted of 11 market managers, product managers and communications specialists. In order to build awareness of our products and enhance our reputation as one of the technology leaders in our industry, we employ a vertically focused marketing strategy. The three market segments that we focus on are optical amplifier test, laser diode test and passive component test. Our marketing teams are responsible for strategic planning, new product launches and promotional activities. In addition, our marketing teams frequently interact with clients to incorporate their feedback into our product development cycle and to provide technical support. As of September 30, 2000, our customer service group consisted of eight employees in Bozeman, Montana, and two employees in Japan. We currently have service facilities in Bozeman, Montana, Boulder, Colorado, Japan and, through a third party, the United Kingdom. We believe our ability to provide customer service and technical support is essential to our business. Our technical support personnel are trained in the use of the hardware and software incorporated in our products, as well as the components manufactured by our customers. Our customer service group also assists our distributors in providing customer support services for products sold through our distributors. The level of assistance we provide varies by expertise of the individual distributor selling our products. We generally offer a one-year limited warranty on our products. MANUFACTURING Our manufacturing group is responsible for material planning and procurement, manufacturing engineering, validation testing, production, assembly, test and calibration, and shipping to customers. As of September 30, 2000, we had 108 employees involved in our manufacturing operations, 88 in our Bozeman, Montana facility and 20 in our Boulder, Colorado facility. We currently have approximately 14,000 square feet for manufacturing purposes and we plan to expand to approximately 30,000 square feet in the first half of 2001. Quality. Our quality system is based on the ISO 9001 standard. We use a quality manual and 15 documented procedures. 34 39 Production. Our production areas are primarily organized by cells, which build families of products. Each cell is led by an experienced technician. Activities in our production areas include all aspects of assembly, testing and calibration. Manufacturing Engineering. Our manufacturing engineers are responsible for production technical support, test systems, integration of new products into manufacturing and validation of new products prior to their release. Materials. Our materials groups are responsible for our supply-chain management activities. We currently purchase certain key components, such as lasers, from limited sources. Lead times can vary widely. The inability of our suppliers to deliver components in a timely manner could have an adverse effect on our ability to manufacture and ship our products. We seek to manage the risk associated with industry-wide supply shortages or long lead times through established relationships with most of our suppliers. In general, there are multiple suppliers for the types of materials we purchase. Although there are several suppliers for the materials we require, there are industry-wide shortages of some items such as lasers. We have not entered into long-term supply agreements. If we are unable to procure supplies at acceptable prices and within a reasonable time frame, our business and results of operations would suffer. We forecast product demand on a monthly basis, based on anticipated product sales and generally order materials and components based on these forecasts. We have experienced in the past, and expect to continue to experience, significant fluctuations in the size of orders we receive. It is sometimes difficult for us to predict the timing of these orders. Large or unexpected orders may impact our ability to satisfy all customers. If we overestimate forecasted sales, we may have excess inventory. COMPETITION We believe the principal competitive factors in our industry include: - product performance; - price; - our ability to manufacture and deliver our products on a timely basis; - our ability to introduce new products with improved features; and - customer support and service. The markets for our products are intensely competitive. We expect the intensity of competition to increase in the future from both existing and new competitors. We compete in specialized market segments against a relatively limited number of companies. We also face competition in some of our markets from our existing and potential customers who have developed or may develop products that are competitive to ours. Many of our current and potential competitors, such as Agilent Technologies, Inc., Ando Electric Co., Ltd., EXFO Electro-Optical Engineering Inc. and Newport Corporation, may have longer operating histories, greater name recognition and substantially greater financial, technical, marketing, management, service, support and other resources than we do. In addition, many of our competitors have well-established relationships with our current or potential customers and have an extensive knowledge of our industry. Therefore, they may be able to respond more quickly than we can to new or changing opportunities, technologies, standards or customer requirements. 35 40 Other competitors are small and highly specialized companies that focus on only one aspect of our markets or in selected geographic regions. We may not be able to compete successfully in the future against existing or new competitors. Competitive pressures may force us to reduce our prices, which could negatively affect our operating results. Consolidation in the optical test and measurement or in the optical component industry could also intensify the competitive pressures that we face. If we do not respond adequately to competitive challenges, our business and results of operations would be harmed. INTELLECTUAL PROPERTY We rely on trade secrets and confidentiality agreements with employees and third parties, all of which offer only limited protection. We are currently evaluating our intellectual property review processes. In those cases where we believe pursuing patent or other protection of our intellectual property is justified, we intend to seek such protection. In the past, we have not devoted resources to obtain patent, copyright or trademark protection of our technologies. Consequently, none of our technology is currently patented and we hold no copyrights or trademarks. In addition, the laws of other countries in which we market our products may afford little or no effective protection of our proprietary technology. Third parties may infringe our intellectual property rights or devise designs that circumvent our intellectual property, and we may not be able to detect this unauthorized use or effectively enforce our rights. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Such litigation could result in substantial costs and diversion of management resources, either of which could harm our business. EMPLOYEES As of September 30, 2000, we had 217 employees, 173 in our Bozeman, Montana facility and 38 in our Boulder, Colorado office. We also had one employee in our London, England office and five in our Saitama, Japan office. Of the total employees, 108 were in manufacturing, 41 were in research and development, 33 were in sales and marketing, 10 were in customer service and 25 were in finance and administration. None of our employees is represented by a union. We believe that our relations with our employees are good. FACILITIES Our corporate headquarters, together with one of our manufacturing facilities, is located in Bozeman, Montana. At this location, we lease approximately 21,500 square feet under a lease that expires in April 2004. We have contracted to lease a new 21,500 square foot facility adjoining our current Bozeman facility to accommodate our need for an increase in manufacturing capacity and employees. The new facility is scheduled for completion in the first half of 2001. We also lease approximately 10,600 square feet of office and manufacturing space in Boulder, Colorado under a lease that expires in September 2001. In September 2000, we leased approximately 36,500 square feet of office and manufacturing space in Boulder to accommodate our need for an increase in manufacturing capacity and employees in our Boulder facility. We plan to move to this facility in the first quarter of 2001. We also lease approximately 900 square feet of office space in London, England and approximately 900 square feet in Saitama, Japan. We believe that these existing and planned facilities are adequate to meet our current, foreseeable requirements or that suitable additional or substitute space will be available on commercially reasonable terms. LEGAL PROCEEDINGS We currently are not subject to any material legal proceedings. However, we may from time to time become a party to various legal proceedings arising in the ordinary course of our business. 36 41 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS Our executive officers and directors and their ages as of October 31, 2000, are as follows:
NAME AGE POSITION ---- --- -------- Lawrence A. Johnson.................. 48 Chairman, President and Chief Executive Officer Randall T. Dugger.................... 51 Vice President of Finance and Administration and Chief Financial Officer James A. Schreiner................... 38 Vice President and General Manager of Boulder Division Robin A. Bequet-Sharber.............. 40 Vice President of Worldwide Sales Nancy L. Quist....................... 45 Vice President of Marketing and Business Development Glenden F. Johnson................... 74 Director James C. Wyant(1)(2)................. 57 Director Steven M. Quist...................... 54 Director Frederick R. Hume(1)(2).............. 57 Director William R. Walker(1)(2).............. 59 Director David I. Polinsky(1)................. 38 Director
- ------------------------------ (1) Member of audit committee. (2) Member of compensation committee. Lawrence A. Johnson is the Founder of ILX Lightwave and has served as President, Chief Executive Officer and Chairman of the Board since our inception in 1986. From 1983 to 1986, Dr. Johnson was an engineering group supervisor at Rosemount Inc. where he was responsible for the development of new technology related to fiber optic sensors for industrial applications. From 1981 to 1983, he worked as a Member of Technical Staff at Ball Aerospace Systems Division in the development of advanced electro-optical systems and technology for military aerospace applications. From 1978 to 1981, Dr. Johnson worked for the National Oceanic and Atmospheric Administration as a Staff Scientist in the development of laser remote sensing technology. Dr. Johnson holds a PhD and MS in Optical Sciences from the University of Arizona and a BS in Engineering Physics from the Colorado School of Mines. Dr. Lawrence Johnson is the son of Mr. Glenden Johnson, a director of our company Randall T. Dugger has been our Vice President of Finance and Administration and Chief Financial Officer since July 2000. From 1998 to 2000, Mr. Dugger was an independent consultant and worked with us on a project by project basis. Prior to that, Mr. Dugger served as our Chief Financial Officer from 1990 to 1998 and was a member of our board of directors from 1991 to 1998. Mr. Dugger was Chief Financial Officer of Prime Cable Corp., a multi-system cable television operator, from 1979 to 1985 and was with Coopers & Lybrand from 1973 to 1979. Mr. Dugger holds a BBA degree from the University of Texas. James A. Schreiner joined ILX Lightwave in June 1989 and was appointed Vice President and General Manager of the Boulder Division in September 1999. Prior to this appointment, Mr. Schreiner held positions as Product Line Director, Director of Manufacturing, Manufacturing Manager and Manufacturing Engineer. From 1988 to 1989, Mr. Schreiner worked as a Manufacturing Engineer for Liquipak, Inc. supporting the production of automated packaging equipment. From 1984 to 1988, Mr. Schreiner worked as an Instrumentation Design engineer for Minnesota Mining and Manufacturing Co. He holds a BS in Electrical Engineering from Montana State University and is a Registered Professional Engineer in the state of Minnesota. Robin A. Bequet-Sharber joined ILX Lightwave in July 1998 as Marketing and Sales Manager and was promoted to her current position as Vice President of Worldwide Sales in June 2000. From 1982 to 1997, Ms. Bequet-Sharber worked with the Medical Products Division of W.L. Gore & 37 42 Associates, a developer and manufacturer of GORE-TEX(R) Medical Products and surgically implantable devices. In her tenure at Gore, Ms. Bequet-Sharber worked as a Product Manager, International Sales & Marketing Manager, Sales Trainer and Technical Field Sales Associate. Ms. Bequet-Sharber holds a BS in Biology from the State University of New York at StonyBrook. Nancy L. Quist joined ILX Lightwave in July 2000 as Vice President of Marketing and Business Development. Prior to joining ILX Lightwave, she worked as Vice President and General Manager for MTS Systems Corp., a manufacturer of material testing systems, from 1999 to July 2000. From 1997 to 1999, Ms. Quist worked as vice president of marketing and strategic planning at Detector Electronics, Inc., a manufacturer of industrial optical detection equipment. From 1990 to 1997, Ms. Quist held various sales and marketing positions at Fisher-Rosemount, a process controls equipment supplier. Ms. Quist holds a BS in Chemistry and Biology from Davidson College in North Carolina. Ms. Quist is the wife of Steven M. Quist, a director of our company. Glenden F. Johnson has served on our board of directors since our inception in 1986. Prior to retiring in 1981 as Mobil Oil Corporation Senior Exploration Operations Advisor and Coordinator, Worldwide. Mr. G. Johnson held various exploration, supervisory and management assignments for Mobil Oil Corp. in the United States and Canada from 1948 to 1981. Mr. G. Johnson is the father of Dr. L. Johnson, the President, Chief Executive Officer and Chairman of our company. Mr. G. Johnson has notified the board that he will retire from the board prior to the closing of our initial public offering. James C. Wyant has served on our board of directors since April 1989. Dr. Wyant has been the Director of the Optical Sciences at the University of Arizona since 1999. From 1984 to 1997, Dr. Wyant was the founder and President of Wyko Corporation, a manufacturer of precision optical based measurement instrumentation. Steven M. Quist has served on our board of directors since July 1989. He has been Chief Executive Officer of CyberOptics Corporation, a designer and manufacturer of laser sensors and systems for high precision, non-contact dimensional measurement, since 2000, President since February 1998 and a director since 1991. Prior to that, Mr. Quist held various positions at Rosemount Inc. from 1970 to 1998, including President of the Rosemount Measurement Division of Emerson Electric Co. Mr. Quist is a director of Rimage Corporation, a manufacturer of CD recordable and computer disc duplication and production equipment. Mr. Quist is the husband of Nancy L. Quist, our Vice President of Marketing and Business Development. Frederick R. Hume has served on our board of directors since March 1999. Mr. Hume has been the President and Chief Executive Officer of Data I/O Corporation, a provider of programming solutions for programmable semiconductor devices, since February 1999. Mr. Hume has also served on Data I/O Corporation's board of directors since January 1999. Prior to joining Data I/O, Mr. Hume was Vice President and General Manager of Keithley Instruments, a maker of precision instrumentation, from 1988 to 1998. Mr. Hume was retired from 1998 until joining Data I/O. Mr. Hume is a director of IFR Systems, Inc. a manufacturer of communications, test and measurement and avionics test instruments. William R. Walker has served on our board of directors since September 2000. He has been Vice President, Secretary and Chief Financial Officer of Hi/fn, a developer and marketer of both integrated circuits and software for manufacturers of computer networking products, since November 1997. He was Hi/fn's Acting Chief Executive Officer and Acting President from July 1998 through October 1998. From 1996 to 1997, Mr. Walker was Vice President, Chief Financial Officer and Secretary at MMC Networks, Inc., a networking company. From 1984 to 1996, Mr. Walker was Senior Vice President and Chief Financial Officer at Zilog, Inc., a semiconductor supplier. David I. Polinsky has served on our board of directors since October 2000. He has been Vice President of Business Development of DiCon Fiberoptics, inc., a global manufacturer of passive 38 43 optical components and instruments since 1998. Prior to assuming his current position, Dr. Polinsky was DiCon's Vice President of Sales, Marketing and Commercial Relations from 1992 to 1998 and Director of Sales and Marketing from 1986 to 1992. BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD Prior to the closing of our initial public offering, we will amend our articles of incorporation to provide for a classified board of directors consisting of three classes of directors, each serving staggered three-year terms. As a result, a portion of our board of directors will be elected each year. To implement the classified structure, prior to the consummation of the offering, Mr. Walker, Dr. Polinsky and Mr. G. Johnson will be designated Class I directors whose terms expire at the 2001 annual meeting of shareholders, Mr. Hume and Dr. Wyant will be designated Class II directors whose terms expire at the 2002 annual meeting of stockholders and Dr. L. Johnson and Mr. Quist will be designated Class III directors whose terms expire at the 2003 annual meeting of stockholders. Mr. G. Johnson has notified the board that he will retire from the board prior to the closing of our initial public offering. For more information on the classified board, see "Description of Capital Stock -- Anti-Takeover Effects of Our Articles of Incorporation and Bylaws and Minnesota Law." Our board of directors has established an audit committee and a compensation committee. The audit committee consists of Messrs. Hume and Walker and Drs. Polinsky and Wyant. The audit committee makes recommendations to the board of directors regarding the selection of independent auditors, reviews the results and scope of audit and other services provided by our independent auditors and reviews and evaluates our audit and control functions. The compensation committee consists of Messrs. Hume and Walker and Dr. Wyant. The compensation committee administers our stock plans and makes recommendations to the board of directors regarding executive compensation matters. DIRECTOR COMPENSATION We currently pay our directors $1,000 for each board meeting they attend as compensation for their time. We do not pay any other compensation to our directors for serving in that capacity. We reimburse directors for out-of-pocket expenses incurred in attending board meetings. Our board of directors has the discretion to grant options to non-employee directors pursuant to our stock option plan. Our board has approved a plan to grant options to our outside directors. Under the plan, outside directors will be granted an option to purchase 10,000 shares of our common stock upon appointment to our board of directors. These options will vest in equal installments of 50% on the one and two year anniversaries of the date of grant. At each annual shareholders' meeting, each non-employee director will receive an automatic option grant to purchase 1,250 shares of our common stock for each board meeting attended up to a maximum annual grant of options to purchase 5,000 shares. These options will be fully vested at the time they are granted. Messrs. Hume and G. Johnson each currently hold options to purchase 120,000 shares of our common stock. Mr. Quist currently holds options to purchase 140,000 shares of our common stock. All of the options held by Messrs. Hume, G. Johnson and Quist are currently exercisable. In addition, Mr. Walker and Dr. Polinsky each hold options to purchase 10,000 shares of our common stock. 39 44 EXECUTIVE COMPENSATION The following table provides information regarding compensation paid or earned for services rendered to us in all capacities during the year ended December 31, 1999, by our Chief Executive Officer and the other executive officer who earned more than $100,000 in 1999. These individuals are referred to in this prospectus as the "named executive officers." SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS ANNUAL COMPENSATION ------------ --------------------------------------- SECURITIES OTHER ANNUAL UNDERLYING NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION(2) OPTIONS --------------------------- ---- -------- -------- --------------- ------------ Lawrence A. Johnson............ 1999 $132,038 $74,758 $2,927 -- Chairman, President and Chief Executive Officer James A. Schreiner............. 1999 76,126 25,195 2,109 252,000 Vice President and General Manager of Boulder Division(3)
- ------------------------- (1) Includes the 1999 management bonus and the 1999 employee incentive bonus. (2) Reflects amounts contributed to our 401(k) Plan. (3) Mr. Schreiner served as our Product Line Director before being appointed to the position of Vice President and General Manager of Boulder Division in September 1999. In the year ended December 31, 1999, we granted options to purchase up to an aggregate of 1,218,000 shares to employees, directors and consultants. No stock appreciation rights were granted during this period. All options were granted under our 1998 Long-Term Incentive and Stock Option Plan, or "1998 Option Plan," at exercise prices no less than the fair market value of our common stock on the date of grant, as determined in good faith by the board of directors. Incentive options granted under the 1998 Option Plan generally have a term of 10 years. Nonincentive options granted under the 1998 Option Plan generally have a term of seven years. However, in the event of the optionee's death or disability, the option will terminate one year after the optionee's death or disability. In the event of the optionee's termination of employment with us, with or without cause, the option will terminate immediately upon the optionee's termination. Optionees may pay the exercise price by cash, check, or, with the approval of the committee, delivery of already owned shares of our common stock. 40 45 The following table provides information concerning the stock option grants we made in 1999 to each of the named executive officers, including the potential realizable value over the 10-year term of the options, based on assumed rates of stock appreciation of 5% and 10%, compounded annually. These assumed rates of appreciation comply with the rules of the Securities and Exchange Commission and do not represent our estimate of future stock price. Actual gains, if any, on stock option exercises will be dependent on the future performance of our common stock. OPTION GRANTS IN 1999
POTENTIAL INDIVIDUAL GRANTS REALIZABLE --------------------------------------------------- VALUE AT ASSUMED PERCENT OF ANNUAL RATES OF NUMBER OF TOTAL STOCK PRICE SECURITIES OPTIONS EXERCISE APPRECIATION FOR UNDERLYING GRANTED TO PRICE PER OPTION TERM OPTIONS EMPLOYEES IN SHARE EXPIRATION ------------------- GRANTED (#) 1999 ($) DATE 5% 10% ----------- ------------ --------- ---------- -------- -------- Lawrence A. Johnson...... -- -- -- -- -- -- James A. Schreiner....... 252,000 24.6% $.27 10/11/09 $110,830 $176,478
The following table provides information concerning shares of common stock represented by the number and value of unexercised stock options held by the named executive officers as of December 31, 1999. The value of unexercised in-the-money options is based on the value of our common stock as of December 31, 1999 of $0.67 per share minus the actual exercise prices. No options have been exercised by the named executive officers. AGGREGATED 1999 YEAR-END OPTION VALUES
VALUE OF UNEXERCISED NUMBER OF SECURITIES IN-THE-MONEY UNDERLYING UNEXERCISED OPTIONS AT OPTIONS AT DECEMBER 31, 1999 DECEMBER 31, 1999 ------------------------------- ------------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- ------------- ----------- ------------- Lawrence A. Johnson......... -- -- -- -- James A. Schreiner.......... 878,400 201,600 $467,280 $80,640
EMPLOYEE BENEFIT PLANS 1988 Stock Option Plan Our 1988 Long-Term Incentive and Stock Option Plan, or "1988 Option Plan," was adopted by the board of directors in October 1988 and received shareholder approval in December 1988. The 1988 Option Plan expired in September 1998 and no further options were granted after that date. Under the 1988 Option Plan, we were authorized to grant to officers and other employees options to purchase shares of common stock intended to qualify as incentive stock options, as defined under Section 422 of the Internal Revenue Code of 1986, and options not intended to qualify as incentive stock options. Stock options granted under the 1988 Option Plan are generally exercisable for seven years. Options granted under the 1988 Option Plan are not transferable by the recipient except by will or by the laws of descent and distribution. Options to purchase 2,027,600 shares of our common stock remain outstanding as of September 30, 2000, exercisable at prices ranging from $0.13 per share to $0.23 per share. Of that amount, options to purchase 1,543,040 shares of our common stock were exercisable as of September 30, 2000. 41 46 1998 Long-Term Incentive and Stock Option Plan Our 1998 Option Plan was adopted by the board of directors in September 1998 and received shareholder approval in March 1999. The 1998 Option Plan was amended in May 2000. A total of 5,556,000 shares of common stock have been reserved for issuance under the 1998 Option Plan. Under the 1998 Option Plan, we are authorized to grant to officers and other employees options to purchase shares of common stock intended to qualify as incentive stock options, as defined under Section 422 of the Internal Revenue Code of 1986, and options that do not qualify as incentive stock options under the Internal Revenue Code. Options granted prior to July 15, 2000 generally vest over five years from the date of grant with 40% vesting two years from the date of the grant and 20% in each of the subsequent three years. Options granted after July 15, 2000 generally vest over four years from the date of grant in equal annual installments of 25%. Options granted under the 1998 Option Plan are not transferable by the recipient except by will or by the laws of descent and distribution. As of September 30, 2000, options to purchase 2,298,600 shares of our common stock remain outstanding and are exercisable at prices ranging from $.27 per share to $10.29 per share. Of that amount, options to purchase 214,400 shares of our common stock were exercisable as of September 30, 2000. 2000 Stock Incentive Plan Our 2000 Stock Incentive Plan, or "2000 Stock Incentive Plan," has been approved by our board of directors and will be approved by our shareholders prior to the completion of the offering contemplated by this prospectus. Our employees, officers, non-employee directors, consultants and independent contractors will be eligible to receive grants under the 2000 Stock Incentive Plan. The 2000 Stock Incentive Plan provides for the granting of: - stock options, including incentive stock options and non-qualified stock options; - stock appreciation rights, or "SARs"; - restricted stock and restricted stock units; - performance awards; and - other stock-based awards. We will reserve shares of common stock for issuance under the 2000 Stock Incentive Plan equal to the number of shares available for future grant under our 1998 Option Plan immediately prior to the closing of our initial public offering plus an additional 750,000 shares. The 2000 Stock Incentive Plan is administered by our compensation committee. The compensation committee has the authority: - to establish rules for the administration of the 2000 Incentive Plan; - to select the persons to whom awards are granted; - to determine the types of awards to be granted and the number of shares of common stock covered by awards; and - to set the terms and conditions of awards. The compensation committee also may determine whether the payment of any amounts received under any award shall be deferred. Awards may provide that upon grant or exercise, the holder will receive shares of common stock, cash or any combination, as the compensation committee shall determine. In order to meet the requirements of Section 162(m) of the Internal Revenue Code, the 2000 Stock Incentive Plan limits the number of options that may be granted to any single person in any one calendar year. 42 47 The exercise price per share under any incentive stock option or the grant price of any SAR cannot be less than 100% of the fair market value of our common stock on the date of grant of that incentive stock option or SAR. In the event that a proposed optionee owns more than 10% of our common stock, any incentive stock option granted to that optionee must have an exercise price not less than 110% of the fair market value of our common stock on the grant date and may not have a term longer than five years. Options may be exercised by payment in full of the exercise price, either in cash or, at the discretion of the compensation committee, in whole or in part by the tendering of shares of common stock or other consideration having a fair market value on the date the option is exercised equal to the exercise price. Determinations of fair market value under the 2000 Stock Incentive Plan are made in accordance with methods and procedures established by the compensation committee. The holder of an SAR is entitled to receive the excess of the fair market value on the date of exercise of a specified number of shares over the grant price of the SAR. The holder of restricted stock may have all of the rights of a shareholder of our company, including the right to vote the shares subject to the restricted stock award and to receive any dividends, or these rights may be restricted. Restricted stock may not be transferred by the holder until the restrictions established by the compensation committee lapse. Holders of restricted stock units have the right, subject to any restrictions imposed by the compensation committee, to receive shares of common stock, or a cash payment equal to the fair market value of such shares, at some future date. Upon termination of the holder's employment during the restriction period, restricted stock and restricted stock units will be forfeited, unless the compensation committee determines otherwise. If any shares of common stock subject to any award or to which an award relates are not purchased or are forfeited, or if any award terminates without the delivery of shares or other consideration, the shares previously used for these awards become available for future awards under the 2000 Stock Incentive Plan. Except as otherwise provided under the procedures adopted by the compensation committee to avoid double counting with respect to awards granted in tandem with or in substitution for other awards, all shares relating to awards granted are counted against the aggregate number of shares available for granting awards under the 2000 Stock Incentive Plan. Our board of directors may amend, alter or discontinue the 2000 Stock Incentive Plan at any time, except that shareholder approval must be obtained for any change that, absent shareholder approval: - would cause Rule 16b-3 of the Exchange Act or Section 162(m) of the Internal Revenue Code to become unavailable with respect to the 2000 Stock Incentive Plan; - would violate any rules or regulations of the National Association of Securities Dealers, Inc., The Nasdaq National Market or any securities exchange applicable to us; or - would cause us to be unable under the Internal Revenue Code to grant incentive stock options under the 2000 Stock Incentive Plan. Under the 2000 Stock Incentive Plan, the compensation committee may permit participants receiving or exercising awards to surrender shares of common stock to us to satisfy federal and state withholding tax obligations. In addition, the compensation committee may grant a bonus to a participant in order to provide funds to pay all or a portion of federal and state taxes due as a result of the receipt, exercise or lapse of restrictions relating to an award. Employee Stock Purchase Plan Our board of directors and shareholders adopted our Employee Stock Purchase Plan, or the "Stock Purchase Plan," in 2000. The Stock Purchase Plan became effective September 1, 2000 and is 43 48 intended to qualify as an employee stock purchase plan within the meaning of Section 423 of the Internal Revenue Code of 1986. The Stock Purchase Plan covers an aggregate of 600,000 shares of common stock. In order to participate in the Stock Purchase Plan, employees must meet certain eligibility requirements. Participating employees will be able to direct the company to make payroll deductions of up to 10% of their compensation during a purchase period for the purchase of shares of common stock. The maximum amount that an employee may deduct during any purchase period is $2,500. Each purchase period, with the exception of the initial offering period, will be six months. The Stock Purchase Plan will provide participating employees with the right, subject to certain limitations, to purchase our common stock at a price not less than 85% of the lesser of the fair market value of our common stock on the first day or the last day of the applicable purchase period. The Stock Purchase Plan will terminate on a date that our board of directors may determine, or automatically as of the date on which all of the shares of common stock reserved for purchase under the Stock Purchase Plan have been sold. 401(k) Plan We have established a tax-qualified employee savings and retirement plan, or "401(k) Plan," for all of our employees who satisfy eligibility requirements, including requirements relating to age and length of service. Pursuant to the 401(k) Plan, employees may elect to reduce their current compensation by up to the lower of 1% or the statutorily prescribed limit and have the amount of such reduction contributed to the 401(k) Plan. The 401(k) Plan permits us to make additional discretionary matching contributions, and we currently match 100% of employees' contributions up to a maximum of 2% of their annual compensation. The employer contribution vests annually over a six-year period in four equal installments beginning two years after employment commences. The 401(k) Plan is intended to qualify under Section 401 of the Internal Revenue Code so that contributions by employees or by us to the 401(k) Plan, and income earned on plan contributions, are not taxable to employees until withdrawn from the 401(k) Plan, and so that our contributions, if any, will be deductible by us when made. INDEMNIFICATION MATTERS AND LIMITATION OF LIABILITY Minnesota law and our bylaws provide that we will, subject to limitations, indemnify any person made or threatened to be made a party to a proceeding by reason of that persons' former or present official capacity with us. We will indemnify that person against judgments, penalties, fines, settlements and reasonable expenses, and, subject to limitations, we will pay or reimburse reasonable expenses before the final disposition of the proceeding. As permitted by Minnesota law, our articles of incorporation provide that our directors will not be personally liable to us or our shareholders for monetary damages for a breach of fiduciary duty as a director, subject to the following exceptions: - any breach of the director's duty of loyalty to us or our shareholders; - acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; - liability for illegal distributions under section 302A.559 of the Minnesota Business Corporation Act or for civil liabilities for state securities law violations under section 80A.23 of the Minnesota statutes; - any transaction from which the director derived an improper personal benefit; and - any act or omission occurring prior to the effective date of Article 7 of our articles of incorporation. 44 49 PRINCIPAL AND SELLING SHAREHOLDERS The following table provides information concerning beneficial ownership of our common stock as of September 30, 2000, by: - each shareholder that we know owns more than 5% of our outstanding common stock; - each of our named executive officers; - each of our directors; - all of our directors and executive officers as a group; and - each of the selling shareholders. The following table lists the applicable percentage of beneficial ownership based on 31,780,348 shares of common stock outstanding as of September 30, 2000. The table also lists the applicable percentage beneficial ownership based on 36,280,348 shares of common stock outstanding upon completion of this offering, assuming no exercise of the underwriters' over-allotment option. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission, and generally includes voting power and/or investment power with respect to the securities held. Shares of common stock subject to options currently exercisable or exercisable within 60 days of September 30, 2000, are deemed outstanding for purposes of computing the percentage beneficially owned by the person holding the options but are not deemed outstanding for purposes of computing the percentage beneficially owned by any other person. Except as otherwise noted, the persons or entities named have sole voting and investment power with respect to all shares shown as beneficially owned by them. Unless otherwise indicated, the principal address of each of the shareholders below is c/o ILX Lightwave Corporation, 31950 East Frontage Road, Bozeman, Montana 59715.
NUMBER OF SHARES SHARES BENEFICIALLY BENEFICIALLY OWNED AFTER OWNED(1) NUMBER OF OFFERING(1) NAME AND ADDRESS OF BENEFICIAL -------------------- SHARES ---------------------- OWNER NUMBER PERCENT OFFERED NUMBER PERCENT - ------------------------------ ---------- ------- --------------- ------------ ------- Lawrence A. Johnson(2).......... 15,599,916 49.1% --(3)(10) 15,599,916 43.0% Glenden F. Johnson(4)........... 10,329,384 32.4 406,250 9,923,134 27.3 5355 Turney Groce Road Byrdstown, TN 38549 Mary I. Johnson(5).............. 10,329,384 32.4 -- 10,329,384 28.4 5355 Turney Groce Road Byrdstown, TN 38549 James C. Wyant and Louise A. Wyant......................... 2,945,240 9.3 -- 2,945,240 8.1 1630 East University Boulevard Tucson, AZ 85721 Randall T. Dugger............... 1,188,000 3.7 --(6)(10) 1,188,000 3.3 David L. Morrow................. 1,080,000 3.4 93,750 986,250 2.7 Route 3 Cisco, TX 76439 James A. Schreiner.............. 878,400 2.7 --(7)(10) 878,400 2.4 Steven M. Quist................. 248,000 * -- 248,000 * 5900 Golden Hills Drive Minneapolis, MN 55416
45 50
NUMBER OF SHARES SHARES BENEFICIALLY BENEFICIALLY OWNED AFTER OWNED(1) NUMBER OF OFFERING(1) NAME AND ADDRESS OF BENEFICIAL -------------------- SHARES ---------------------- OWNER NUMBER PERCENT OFFERED NUMBER PERCENT - ------------------------------ ---------- ------- --------------- ------------ ------- Fredrick R. Hume................ 120,000 * -- 120,000 * 10525 Willows Road NE Redmond, WA 98073 William R. Walker............... -- -- -- -- -- 750 University Avenue, Suite 200 Los Gatos, CA 95032 David I. Polinsky(8)............ -- -- -- -- -- 1331 Eight Street Berkeley, CA 94710 All directors and officers as a group (10 persons)(9)......... 21,080,356 63.9% -- 21,080,356(11) 56.2%
- ------------------------- * Less than 1% of the outstanding shares of common stock. (1) Includes the following shares underlying options exercisable as of or within 60 days of September 30, 2000: Mr. G. Johnson, 120,000 shares; Mr. Quist, 140,000 shares; Mr. Hume, 120,000 shares; and Mr. Schreiner, 878,400 shares. (2) Includes 711,288 shares held by Dr. L. Johnson's wife and children, as to which he has no voting or investment power and disclaims beneficial ownership. (3) Dr. Johnson has granted the underwriters an option to purchase up to 250,000 shares of our common stock to cover over-allotments, if any. If the over-allotment option is exercised in full, Dr. Johnson would own 15,349,916 shares or 42.3% of the outstanding shares. (4) Includes 5,104,692 shares held by Mr. G. Johnson's wife, as to which he has no voting or investment power and disclaims beneficial ownership. (5) Includes 5,104,692 shares and 120,000 shares underlying exercisable options held by Ms. Johnson's husband, as to which she has no voting or investment power and disclaims beneficial ownership. (6) Mr. Dugger has granted the underwriters an option to purchase up to 59,400 shares of our common stock to cover over-allotments, if any. If the over-allotment option is exercised in full, Mr. Dugger would own 1,128,600 shares or 3.1% of the outstanding shares. (7) Mr. Schreiner has granted the underwriters an option to purchase up to 43,920 shares of our common stock to cover over-allotments, if any. If the over-allotment option is exercised in full, Mr. Schreiner would own 834,480 shares or 2.4% of the outstanding shares. (8)Dr. Polinsky was appointed to our board of directors in October 2000. (9) Includes 1,229,200 shares underlying options exercisable as of or within 60 days of September 30, 2000. (10) None of our executive officers will sell more than 5% of the shares they beneficially own. (11) If the over-allotment is exercised in full, all directors and officers as a group will own 20,727,036 shares or 54.7% of the outstanding shares. Does not include shares owed by Mr. G. Johnson who will retire as a director prior to the closing of this offering. We will pay all costs and expenses of the offering, other than the underwriting discount relating to shares sold by the selling shareholders, the fees and disbursements of legal counsel to the selling shareholders and stock transfer and other taxes attributable to the sale of shares by the selling shareholders, which will be paid by the selling shareholders. 46 51 CERTAIN TRANSACTIONS As of September 30, 2000, Randall T. Dugger, our Vice President of Finance and Administration and Chief Financial Officer, owed us $76,900, in the form of promissory notes issued December 30, 1996, June 9, 1997 and January 28, 1998 and due December 30, 2003, June 9, 2004 and January 28, 2003, respectively. The notes bear interest between 5.75% and 6.25% per annum. The notes were issued in connection with loans made to Mr. Dugger to allow him to exercise stock options to purchase 648,000 shares of common stock. The notes are secured by a pledge of the shares of common stock received upon exercise of the options. In February 1991, we and several of our shareholders sold 12,855,852 shares, or approximately 29%, of our common stock to Newport Corporation at a price of $0.18. From February 1991 to December 1994, a representative of Newport served on our board of directors. In April 1998, we repurchased 3,240,000 shares of our common stock held by Newport for $720,000, or $0.22 per share. Following the April 1998 repurchase, Newport owned approximately 23% of our common stock. At that time, we also entered into an agreement with Newport granting us an option to repurchase the remaining shares owned by Newport at a purchase price of $0.22 per share, which price increased at a compounded rate of 0.72% per month for each month subsequent to March 31, 1998. In September 1999, we repurchased 4,200,000 shares of our common stock held by Newport for $1,054,397, or $0.25 per share. Following the September 1999 repurchase, Newport owned approximately 15% of our common stock. On April 4, 2000, we repurchased the remaining 5,415,852 shares of our common stock held by Newport for $1,429,656, or $0.26 per share. We currently have no significant business relationship with Newport. On September 8, 2000 we entered into a separation agreement with Mike Krzyzanowski who served as our Vice President of Finance and Administration and Chief Financial Officer from March 2000 to August 2000. Pursuant to the terms of the agreement, we paid him $59,000 in cash and granted him an option to purchase 26,000 shares of our common stock at an exercise price of $6.10 per share. The option vests on the later of the closing of our initial public offering or December 31, 2000 and terminates on September 7, 2001. 47 52 DESCRIPTION OF CAPITAL STOCK Following the closing of this offering, we expect our authorized capital stock to consist of 150,000,000 shares of common stock, par value $.01 per share, and 15,000,000 shares of preferred stock, par value $.01 per share. Unless otherwise designated by our board of directors, all issued shares shall be deemed common stock with equal rights and preferences. COMMON STOCK As of September 30, 2000, there were 31,780,348 shares of common stock outstanding, held by 16 shareholders of record. Holders of our common stock do not have cumulative voting rights and are entitled to one vote for each share held of record on all matters submitted to a vote of the shareholders, including the election of directors. Holders of our common stock are entitled to receive ratably such dividends, if any, as may be declared by the board of directors out of funds legally available therefor, subject to the prior rights of any preferred stock then outstanding. Upon a liquidation, dissolution or winding up of ILX Lightwave, the holders of our common stock will be entitled to share ratably in the net assets legally available for distribution to shareholders after the payment of all debts and other liabilities. These rights are subject to the prior rights of any preferred stock then outstanding. Holders of our common stock have no preemptive or conversion rights or other subscription rights and there are no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of common stock are, and the common stock outstanding upon completion of this offering will be, fully paid and nonassessable. PREFERRED STOCK Effective upon the closing of this offering, we expect that our board of directors will have the authority, without further action by the shareholders, to issue from time to time, 15,000,000 shares of preferred stock in one or more series and to fix for each series the number of shares, designations, preferences, powers and relative, participating, optional or other special rights and the qualifications or restrictions thereof. The preferences, powers, rights and restrictions of different series of preferred stock may differ with respect to dividend rates, amounts payable on liquidation, voting rights, conversion rights, redemption provisions, sinking fund provisions, purchase funds and other matters. The issuance of preferred stock could decrease the amount of earnings and assets available for distribution to holders of common stock or adversely affect the rights and powers, including voting rights, of the holders of common stock. It may have the effect of delaying, deferring or preventing a change in our control. We currently do not plan to issue shares of preferred stock. ANTI-TAKEOVER EFFECTS OF OUR ARTICLES OF INCORPORATION AND BYLAWS AND MINNESOTA LAW The existence of authorized but unissued preferred stock, described above, and specific provisions of Minnesota law, described below, could have an anti-takeover effect. These provisions are intended to provide management with flexibility, to enhance the likelihood of continuity and stability in the composition of our board of directors and the policies of our board and to discourage an unsolicited takeover of our company if our board of directors determines that the takeover is not in the best interests of our company and our shareholders. However, these provisions could have the effect of discouraging attempts to acquire us, which could deprive our shareholders of opportunities to sell their shares of common stock at prices higher than prevailing market prices. 48 53 Upon the closing of this offering, our board of directors will be divided into three classes serving staggered three-year terms. As a result of this division, generally at least two shareholder meetings will be required for shareholders to effect a change in control of the board of directors. In addition, our bylaws will contain provisions that establish specific procedures for calling meetings of shareholders and appointing and removing members of the board of directors. Section 302A.671 of the Minnesota Business Corporation Act applies, with exceptions, to any acquisition of our voting stock from a person other than us, and other than in connection with specific types of mergers and exchanges to which we are a party, that results in the beneficial ownership of 20% or more of the voting stock then outstanding. Section 302A.671 requires approval of these acquisitions by a majority vote of our shareholders to accord full voting rights to the acquired shares. In general, shares acquired in the absence of this approval are denied voting rights and are redeemable at their then fair market value by us within 30 days after the acquiring person has failed to give a timely information statement to us or the date the shareholders voted not to grant voting rights to the acquiring person's shares. Section 302A.673 of the Minnesota Business Corporation Act generally prohibits any business combination by us, or by any of our subsidiaries, with any shareholder that purchases 10 percent or more of our voting shares within four years following this interested shareholder's share acquisition date. The business combination may be permitted if it is approved by a committee of all of the disinterested members of our board of directors before the interested shareholder's share acquisition date. QUOTATION ON THE NASDAQ NATIONAL MARKET We have applied for quotation of our common stock on the Nasdaq National Market under the symbol "ILXL." TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for our common stock will be American Stock Transfer and Trust Company. 49 54 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no public market for our common stock, and we cannot assure you that a significant public market for our common stock will develop or be sustained after this offering. As described below, no shares currently outstanding will be available for sale immediately after this offering due to certain contractual and securities law restrictions on resale. Sales of substantial amounts of our common stock in the public market after the restrictions lapse could cause the prevailing market price to decline and limit our ability to raise equity capital in the future. Upon completion of this offering, we will have outstanding 36,280,348 shares of common stock, assuming no exercise of the underwriters' over-allotment option and no exercise of outstanding options to purchase common stock. Of these shares, the shares offered for sale through the underwriters will be freely tradable without restriction under the Securities Act unless purchased by our affiliates or covered by a separate lock-up agreement. The remaining 31,780,348 shares of common stock held by existing shareholders are restricted securities. Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration described below under Rule 144, 144(k) or 701 under the Securities Act. These provisions are described below. As a result of the lock-up agreements and the provisions of Rules 144, 144(k) and 701, these restricted shares will be available for sale in the public market as follows: - no shares may be sold prior to 180 days from the date of this prospectus; - 31,232,348 shares will have been held long enough to be sold under Rule 144 or Rule 701 beginning 181 days after the date of this prospectus; and - the remaining 48,000 shares may be sold under Rule 144 or 144(k) once they have been held for the required time. LOCK-UP AGREEMENTS Our officers, directors and shareholders have agreed not to transfer or dispose of, directly or indirectly, any shares of our common stock, or any securities convertible into or exercisable or exchangeable for shares of our common stock, for a period of 180 days after the effective date of the registration statement to which this prospectus relates. Transfers or dispositions can be made sooner with the prior written consent of Chase Securities Inc. RULE 144 In general, under Rule 144, a person who has beneficially owned restricted securities for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: - 1% of the number of shares of our common stock then outstanding, which, immediately after this offering, will equal approximately 36,280 shares; or - the average weekly trading volume of our common stock on the Nasdaq National Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale. Sales under Rule 144 also are limited by manner-of-sale provisions, notice requirements and requirements relating to the availability of current public information about us. 50 55 RULE 144(k) Under Rule 144(k), a person who is not deemed to have been one of our affiliates at any time during the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, is entitled to sell these shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144 discussed above. RULE 701 In general, under Rule 701, any of our employees, consultants or advisors who purchases or receives shares from us under a compensatory stock purchase plan or option plan or other written agreement will be eligible to resell his or her shares beginning 90 days after the date of this prospectus. Non-affiliates will be able to sell their shares subject only to the manner-of-sale provisions of Rule 144. Affiliates will be able to sell their shares without compliance with the holding period requirements of Rule 144. STOCK OPTIONS Prior to the expiration of the lock-up agreements, we intend to file a registration statement under the Securities Act covering shares of common stock reserved for issuance upon exercise of outstanding options under the 1988 Option Plan, 1998 Option Plan, the Stock Purchase Plan and the 2000 Stock Incentive Plan. See "Management -- Employee Benefit Plans." The registration statement is expected to be filed and become effective as soon as practicable after the closing of this offering. Accordingly, shares registered under that registration statement will be available for resale in the open market beginning immediately upon the effectiveness of registration, except with respect to Rule 144 volume limitations that apply to our affiliates and shares covered by a separate lock-up agreement. 51 56 UNDERWRITING Chase Securities Inc., U.S. Bancorp Piper Jaffray Inc. and Wit SoundView Corporation are the representatives of the underwriters. Subject to the terms and conditions of the underwriting agreement, the underwriters named below, through their representatives, have severally agreed to purchase from us and the selling shareholders the following respective numbers of shares of common stock:
NUMBER NAME OF SHARES - ---- --------- Chase Securities Inc. ........................... U.S. Bancorp Piper Jaffray Inc. ................. Wit SoundView Corporation........................ --------- Total............................................ 5,000,000 =========
The underwriting agreement provides that the obligations of the underwriters are subject to various conditions precedent, including the absence of any material adverse change in our business and the receipt of various certificates, opinions and letters from us, our counsel and the independent auditors. The underwriters are committed to purchase all of the shares of common stock offered by us and the selling shareholders if they purchase any shares. The following table shows the per share and total underwriting discounts and commissions we and the selling shareholders will pay to the underwriters. Such amounts are shown assuming both no exercise and full exercise of the underwriters' over-allotment option to purchase additional shares. UNDERWRITING DISCOUNTS AND COMMISSIONS
WITH WITHOUT OVER-ALLOTMENT OVER-ALLOTMENT EXERCISE EXERCISE -------------- -------------- Per Share.......................................... $ $ Total.............................................. $ $
We estimate that the total expenses of this offering, excluding underwriting discounts and commissions, will be approximately $875,000. The underwriters propose to offer the shares directly to the public at the initial public offering price set forth on the cover page of this prospectus and to various dealers at that price less a concession not in excess of $ per share. The underwriters may allow and such dealers may re-allow a concession not in excess of $ per share to various other dealers. The underwriters have informed us that they do not intend to confirm discretionary sales of more than 5% of the shares of common stock offered in this offering. We and certain of the selling shareholders have granted to the underwriters an option, exercisable no later than 30 days after the date of this prospectus, to purchase up to 750,000 additional shares of common stock at the initial public offering price, less the underwriting discount 52 57 set forth on the cover page of this prospectus. To the extent that the underwriters exercise this option, each of the underwriters will have a firm commitment to purchase approximately the same percentage of these option shares which the number of shares of common stock to be purchased by it shown in the above table bears to the total number of shares of common stock offered by this prospectus. We and certain of the selling shareholders will be obligated, pursuant to this option, to sell shares to the underwriters to the extent the option is exercised. The underwriters may exercise this option only to cover over-allotments made in connection with the sale of shares of common stock in this offering. The offering of the shares is made for delivery when, as and if accepted by the underwriters and subject to prior sale and to withdrawal, cancellation or modification of the offering without notice. The underwriters reserve the right to reject an order for the purchase of shares in whole or in part. We and the selling shareholders have each agreed to indemnify the underwriters against liabilities specified in the underwriting agreement, including liabilities under the Securities Act of 1933, as amended, and to contribute to payments the underwriters may be required to make in respect of these liabilities. Our officers and directors and all of our shareholders have agreed that they will not, without the prior written consent of Chase Securities Inc., directly or indirectly, sell, offer, contract to sell, transfer the economic risk of ownership in, make any short sale, pledge or otherwise dispose of any shares of our common stock, options or warrants to acquire shares of our common stock or securities exchangeable for or convertible into shares of our common stock owned by them or any other rights to purchase or acquire our common stock for a period of 180 days following the effective date of the registration statement that includes this prospectus. We have agreed that we will not, without the prior written consent of Chase Securities Inc., directly or indirectly, offer, sell, contract to sell, make any short sale, pledge, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of any shares of our capital stock, or any securities exchangeable or exercisable for or convertible into or any rights to purchase or acquire shares of our capital stock for a period of 180 days following the date of this prospectus, except that we may issue shares upon the exercise of options granted prior to the date of this prospectus and may grant additional options or sell additional shares under our stock option or stock purchase plans. In connection with this offering, the underwriters may effect transactions that could have the effect of raising or maintaining, or preventing or retarding a decline in, the market price of our shares. As a result, the price of our shares may be higher than the price that might otherwise exist in the open market. These transactions may be effected on the Nasdaq National Market, in the over-the-counter market or otherwise. In particular, the underwriters may make short sales of our shares and may purchase our shares on the open market to cover positions created by short sales. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering. Covered short sales are sales made in an amount not greater than the over-allotment option or purchasing shares in the open market. In determining the source of shares to close out the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. Naked short sales are sales in excess of the over-allotment option. The underwriters must close out any naked short position by purchasing shares in the open market. 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 shares in the open market after pricing that could adversely affect investors who purchase in this offering. 53 58 In addition, an underwriter may enter a stabilizing bid in connection with the offering, which is the placing of any bid or effecting of any purchase, for the purpose of pegging, fixing, or maintaining the price of the shares. The underwriters may also impose penalty bids, which permit them to reclaim the selling concessions from a syndicate member when shares sold by the syndicate member are purchased in syndicate covering transactions. Any stabilizing, if commenced, may be discontinued at any time. Prior to this offering, there has been no public market for our shares. The initial public offering price for the shares will be determined by negotiations among us and the representatives. Among the factors considered in determining the initial public offering will be prevailing market and economic conditions, our revenue, the prospects for our future earnings, market valuations of other companies engaged in activities similar to our business operations and our management. The estimated initial public offering price range set forth on the cover of this preliminary prospectus is subject to change as a result of market conditions or other factors. At our request, the underwriters have reserved up to 250,000 shares of common stock for sale at the initial public offering price to our directors, officers, employees, business associates and related persons. The number of shares of common stock available for sale to the general public will be reduced if such persons purchase the reserved shares. Any reserved shares which are not so purchased may be offered by the underwriters to the general public on the same basis as the other shares offered by this prospectus. A prospectus in electronic format is being made available on an Internet web site maintained by Wit SoundView Corporation's strategic partner, E*Trade Securities, Inc., and may be made available on web sites maintained by one or more of the other underwriters participating in this offering. The representatives may agree to allocate a number of shares to the underwriters for sale to their online brokerage account holders. 54 59 LEGAL MATTERS The legality of the shares of common stock offered hereby will be passed upon for us and the selling shareholders by Dorsey & Whitney LLP, Great Falls, Montana and Minneapolis, Minnesota. Certain legal matters will be passed upon for the underwriters by Venture Law Group, a Professional Corporation, Kirkland, Washington. EXPERTS KPMG LLP, independent certified public accountants, have audited our financial statements as of December 31, 1998 and 1999 and for each of the years in the three year period ended December 31, 1999, as set forth in their report appearing elsewhere in this prospectus. We have included our financial statements in this prospectus and elsewhere in the registration statement in reliance on the report of KPMG LLP, which was given on the authority of said firm as experts in accounting and auditing. WHERE YOU CAN FIND MORE INFORMATION We have filed with the Securities and Exchange Commission a registration statement on Form S-1 under the Securities Act of 1933 with respect to the common stock offered by this prospectus. As permitted by the rules and regulations of the Commission, this prospectus, which is a part of the registration statement, omits certain information, exhibits, schedules and undertakings set forth in the registration statement. For further information about us and the common stock offered by this prospectus, you should review the registration statement and the exhibits and schedules thereto. Statements contained in this prospectus as to the contents or provisions of any contract or other document referred to in this prospectus are not necessarily complete, and in each instance reference is made to the copy of the contract or other document filed as an exhibit to the registration statement. All statements made in this prospectus concerning these contracts or documents are qualified in all respects by this reference. A copy of the registration statement, as well as other documents we file with the Commission, may be inspected without charge in the Commission's public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices located at the Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York 10048. Please call the Commission at 1-800-SEC-0330 for further information about its public reference rooms. Copies of all or any part of the registration statement and other documents we file may be taken from the public reference rooms upon the payment of fees prescribed by the Commission. In addition, the registration statement and other documents we file with the Commission through its Electronic Data Gathering, Analysis and Retrieval, or "EDGAR," system are available to the public through the Commission's web site at http://www.sec.gov. Upon completion of this offering, we will be required to file periodic reports, proxy statements and other information with the Commission. These periodic reports, proxy statements and other information will be available for inspection and copying at the Commission's public reference rooms and through the web site of the Commission referred to above. 55 60 ILX LIGHTWAVE CORPORATION INDEX TO FINANCIAL STATEMENTS
PAGE ---- Report of Independent Auditors.............................. F-2 Balance Sheets.............................................. F-3 Statements of Income........................................ F-4 Statements of Shareholders' Equity.......................... F-5 Statements of Cash Flows.................................... F-6 Notes to Financial Statements............................... F-7
F-1 61 INDEPENDENT AUDITORS' REPORT The Board of Directors ILX Lightwave Corporation: We have audited the accompanying balance sheets of ILX Lightwave Corporation as of December 31, 1998 and 1999 and the related statements of income, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ILX Lightwave Corporation at December 31, 1998 and 1999 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1999 in conformity with generally accepted accounting principles. /s/ KPMG LLP Billings, Montana February 4, 2000 except as to the second and third paragraphs of Note 1(l), which are as of August 24, 2000 F-2 62 ILX LIGHTWAVE CORPORATION BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30, ------------------------ ------------- 1998 1999 2000 ---------- ---------- ------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents............................. $1,888,605 $1,041,393 $ 1,251,822 Accounts receivable, net of allowance for doubtful accounts of $0, $20,000 and $38,000 at December 31, 1998 and 1999 and September 30, 2000 (unaudited), respectively....................................... 1,666,941 2,851,595 8,033,378 Inventory............................................. 1,365,250 2,027,790 4,518,474 Prepaid expenses...................................... 186,404 56,232 568,668 Deferred tax assets................................... 89,816 72,786 269,510 Accrued interest receivable........................... 4,356 3,519 -- ---------- ---------- ----------- Total current assets............................. 5,201,372 6,053,315 14,641,852 Property and equipment.................................. 2,260,919 2,751,360 3,624,642 Less accumulated depreciation......................... 1,268,396 1,595,118 1,900,727 ---------- ---------- ----------- Net property and equipment......................... 992,523 1,156,242 1,723,915 Other assets............................................ 6,353 18,251 71,994 ---------- ---------- ----------- $6,200,248 $7,227,808 $16,437,761 ========== ========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses................. $ 679,974 $ 694,608 $ 3,392,235 Accrued salaries, wages and benefits.................. 392,474 562,396 913,851 Accrued warranty expense.............................. 138,450 99,696 190,785 Current installments of long-term debt................ 11,344 -- 466,667 Current taxes payable................................. 265,027 7,184 896,010 ---------- ---------- ----------- Total current liabilities........................ 1,487,269 1,363,884 5,859,548 Long-term debt.......................................... -- -- 738,889 Deferred income taxes................................... 98,525 29,394 95,942 ---------- ---------- ----------- Total liabilities................................ 1,585,794 1,393,278 6,694,379 Shareholders' equity: Common stock, $.01 par value, 50,000,000 (unaudited) authorized shares; and 41,203,800; 37,051,800 and 31,780,348 (unaudited) shares issued and outstanding at December 31, 1998 and 1999 and September 30, 2000, respectively................... 412,038 370,518 317,803 Paid-in capital....................................... 902,982 -- 5,257,764 Deferred compensation................................. -- -- (4,601,210) Retained earnings..................................... 3,376,334 5,540,912 8,845,925 Notes receivable secured by common stock.............. (76,900) (76,900) (76,900) ---------- ---------- ----------- Total shareholders' equity....................... 4,614,454 5,834,530 9,743,382 Commitments and contingencies........................... ---------- ---------- ----------- $6,200,248 $7,227,808 $16,437,761 ========== ========== ===========
See accompanying notes to financial statements. F-3 63 ILX LIGHTWAVE CORPORATION STATEMENTS OF INCOME
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, ------------------------------ ---------------------------------------- SEPTEMBER 30, SEPTEMBER 30, 1997 1998 1999 1999 2000 ---------- ----------- ----------- ------------- ------------- (UNAUDITED) Sales......................... $7,565,484 $11,848,480 $17,403,558 $12,334,645 $28,707,673 Cost of sales(1).............. 3,078,553 5,091,469 7,753,639 5,254,609 12,192,583 ---------- ----------- ----------- ----------- ----------- Gross margin................ 4,486,931 6,757,011 9,649,919 7,080,036 16,515,090 Operating expenses: Marketing and sales(2)...... 1,451,968 1,934,174 2,473,448 1,779,290 3,279,330 Research and development(3)........... 1,056,502 1,888,451 2,322,450 1,649,011 3,472,319 General and administrative(4)........ 640,088 845,933 1,378,108 879,948 1,971,150 ---------- ----------- ----------- ----------- ----------- Total operating expenses............... 3,148,558 4,668,558 6,174,006 4,308,249 8,722,799 ---------- ----------- ----------- ----------- ----------- Operating income......... 1,338,373 2,088,453 3,475,913 2,771,787 7,792,291 Other income (expense): Interest income............. 68,352 62,314 54,158 49,032 15,737 Interest expense............ (2,584) (1,224) (1,206) (88) (88,859) Foreign exchange gain (loss)................... (27,925) 49,861 7,623 1,870 (9,065) Other....................... 11,651 (23) (7,936) (2,713) 8,701 ---------- ----------- ----------- ----------- ----------- Total other income (loss)................. 49,494 110,928 52,639 48,101 (73,486) ---------- ----------- ----------- ----------- ----------- Income before income taxes.................. 1,387,867 2,199,381 3,528,552 2,819,888 7,718,805 Income tax expense............ 483,047 771,656 1,268,879 1,014,715 3,038,295 ---------- ----------- ----------- ----------- ----------- Net income............... $ 904,820 $ 1,427,725 $ 2,259,673 $ 1,805,173 $ 4,680,510 ========== =========== =========== =========== =========== Basic earnings per share...... $ 0.02 $ 0.03 $ 0.06 $ 0.04 $ 0.14 ========== =========== =========== =========== =========== Diluted earnings per share.... $ 0.02 $ 0.03 $ 0.05 $ 0.04 $ 0.13 ========== =========== =========== =========== ===========
- ------------------------------ (1)Includes $93,332 of amortization of deferred stock compensation for the nine months ended September 30, 2000. (2)Includes $318,074 of amortization of deferred stock compensation for the nine months ended September 30, 2000. (3)Includes $54,560 of amortization of deferred stock compensation for the nine months ended September 30, 2000. (4)Includes $12,105 of amortization of deferred stock compensation and $150,800 of expense related to nondeferred stock options for the nine months ended September 30, 2000. See accompanying notes to financial statements. F-4 64 ILX LIGHTWAVE CORPORATION STATEMENTS OF SHAREHOLDERS' EQUITY
NOTES RECEIVABLE TOTAL NUMBER OF PAID-IN DEFERRED RETAINED SECURED BY SHAREHOLDERS' SHARES COMMON STOCK CAPITAL COMPENSATION EARNINGS COMMON STOCK EQUITY ---------- ------------ ---------- ------------ ----------- ------------ ------------- Balances at December 31, 1996................. 44,083,800 $440,838 $1,580,261 $ -- $ 1,136,005 $ (9,200) $ 3,147,904 Exercise of stock options.............. 180,000 1,800 17,861 -- -- (9,200) 10,461 Dividends paid......... -- -- -- -- (92,216) -- (92,216) Net income............. -- -- -- -- 904,820 -- 904,820 ---------- -------- ---------- ----------- ----------- -------- ----------- Balances at December 31, 1997................. 44,263,800 442,638 1,598,122 -- 1,948,609 (18,400) 3,970,969 Exercise of stock options.............. 468,000 4,680 53,820 -- -- (58,500) -- Repurchase of common stock................ (3,528,000) (35,280) (748,960) -- -- -- (784,240) Net income............. -- -- -- -- 1,427,725 -- 1,427,725 ---------- -------- ---------- ----------- ----------- -------- ----------- Balances at December 31, 1998................. 41,203,800 412,038 902,982 -- 3,376,334 (76,900) 4,614,454 Additional shares issued............... 48,000 480 14,320 -- -- -- 14,800 Repurchase of common stock................ (4,200,000) (42,000) (917,302) -- (95,095) -- (1,054,397) Net income............. -- -- -- -- 2,259,673 -- 2,259,673 ---------- -------- ---------- ----------- ----------- -------- ----------- Balances at December 31, 1999................. 37,051,800 370,518 -- -- 5,540,912 (76,900) 5,834,530 Repurchase of common stock (unaudited).... (5,415,852) (54,159) -- -- (1,375,497) -- (1,429,656) Exercise of stock options (unaudited).......... 144,400 1,444 27,683 -- -- -- 29,127 Deferred compensation related to stock options (unaudited).......... -- -- 5,079,281 (5,079,281) -- -- -- Compensation expense related to amortization of stock options (unaudited).......... -- -- -- 478,071 -- -- 478,071 Compensation expense related to non deferred stock options (unaudited).......... -- -- 150,800 -- -- -- 150,800 Net income (unaudited).......... -- -- -- -- 4,680,510 -- 4,680,510 ---------- -------- ---------- ----------- ----------- -------- ----------- Balances at September 30, 2000 (unaudited).......... 31,780,348 $317,803 $5,257,764 $(4,601,210) $ 8,845,925 $(76,900) $ 9,743,382 ========== ======== ========== =========== =========== ======== ===========
See accompanying notes to financial statements. F-5 65 ILX LIGHTWAVE CORPORATION STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, ------------------------------ --------------------------------------- SEPTEMBER 30, SEPTEMBER 30, 1997 1998 1999 1999 2000 ---------- ---------- ----------- ------------- ------------- (UNAUDITED) Cash flows from operating activities: Net income.......................... $ 904,820 $1,427,725 $ 2,259,673 $ 1,805,173 $ 4,680,510 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation...................... 200,317 236,893 326,722 243,896 305,610 Provision for doubtful accounts... -- -- 20,000 8,000 18,000 Employee stock compensation....... -- -- -- -- 610,671 Director stock compensation....... -- -- 14,800 -- 18,200 Deferred income tax expense (benefit)....................... 7,508 (7,010) (52,101) (42,570) (130,176) Change in: Accrued interest receivable..... (3,186) 13,062 837 (2,325) 3,519 Accounts receivable............. (372,339) (464,457) (1,204,654) (926,306) (5,199,783) Inventory....................... (120,046) (261,443) (662,540) (906,667) (2,490,684) Prepaid expenses and other assets....................... 73,535 (158,538) 118,274 134,629 (566,179) Accounts payable and accrued expenses, salaries, wages and benefits..................... 415,935 349,273 184,556 159,999 3,049,082 Accrued warranty expense........ 11,370 91,690 (38,754) (26,627) 91,089 Current taxes payable........... 423,647 (171,486) (257,843) (54,869) 888,826 ---------- ---------- ----------- ----------- ----------- Net cash provided by operating activities....... 1,541,561 1,055,709 708,970 392,333 1,278,685 ---------- ---------- ----------- ----------- ----------- Cash flows from investing activities: Purchases of securities available-for-sale................ (564,439) (600,000) -- -- -- Maturities of securities available-for-sale................ 679,950 791,028 -- -- -- Purchases of property and equipment......................... (374,045) (529,400) (490,441) (312,188) (873,283) ---------- ---------- ----------- ----------- ----------- Net cash used in investing activities................. (258,534) (338,372) (490,441) (312,188) (873,283) ---------- ---------- ----------- ----------- ----------- Cash flows from financing activities: Borrowings on line of credit........ -- -- -- -- 350,000 Repayments on line of credit........ -- -- -- -- (350,000) Proceeds of long-term debt.......... -- -- -- -- 1,400,000 Payments on long-term debt.......... (43,146) (44,506) (11,344) (11,344) (194,444) Proceeds from exercise of stock options........................... 10,461 -- -- -- 29,127 Repurchase of common stock.......... -- (784,240) (1,054,397) (1,054,397) (1,429,656) Dividends paid...................... (92,216) -- -- -- -- ---------- ---------- ----------- ----------- ----------- Net cash used in financing activities................. (124,901) (828,746) (1,065,741) (1,065,741) (194,973) ---------- ---------- ----------- ----------- ----------- Net change in cash and cash equivalents......................... 1,158,126 (111,409) (847,212) (985,596) 210,429 Cash and cash equivalents, beginning of period........................... 841,888 2,000,014 1,888,605 1,888,605 1,041,393 ---------- ---------- ----------- ----------- ----------- Cash and cash equivalents, end of period.............................. $2,000,014 $1,888,605 $ 1,041,393 $ 903,009 $ 1,251,822 ========== ========== =========== =========== =========== Cash paid during the period for: Income taxes........................ 51,892 950,152 1,578,823 1,112,154 2,279,645 Interest............................ $ 2,584 $ 1,224 $ 1,206 $ 88 $ 88,859 ========== ========== =========== =========== ===========
See accompanying notes to financial statements. F-6 66 ILX LIGHTWAVE CORPORATION NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997, 1998 AND 1999 (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) NATURE OF BUSINESS ILX Lightwave Corporation (the Company) designs, manufactures and markets optical test and measurement equipment for sale in the United States and throughout the world. The Company has facilities located in Bozeman, Montana and Boulder, Colorado as well as sales and service centers located in Japan and England. (b) USE OF ESTIMATES Management of the Company has made estimates and assumptions relating to the reporting of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (C) CASH EQUIVALENTS For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments with maturities of three months or less at the date of purchase to be cash equivalents. Cash equivalents include certificates of deposit of $628,818 and $285,000 at December 31, 1998 and 1999, respectively. (d) ACCOUNTING FOR CERTAIN DEBT AND EQUITY SECURITIES Debt securities for which the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity and are stated at amortized cost. Debt and equity securities held primarily for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in income. Debt and equity securities not classified as held-to-maturity or trading are classified as available-for-sale and reported at fair value with unrealized gains and losses, net of income taxes, shown as a separate component of shareholders' equity. (e) ALLOWANCE FOR DOUBTFUL ACCOUNTS The Company assesses the need for an allowance for doubtful accounts based upon factors including past loss experience, known and inherent risks in the accounts, adverse situations that may affect a customer's ability to repay and current economic conditions. (f) INVENTORIES Inventories are stated at the lower of standard cost (which approximate the first-in, first-out method) or market value. Inventory costs include labor, materials and certain direct and indirect costs related to inventory purchasing, production and storage. F-7 67 NOTES TO FINANCIAL STATEMENTS (CONTINUED) (g) PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets, which are as follows:
ITEM EXPECTED USEFUL LIFE - ---- -------------------- Equipment................................................... 3 to 5 years Furniture and fixtures...................................... 7 years Leasehold improvements...................................... Shorter of assets' useful lives or lease term
(h) WARRANTY COSTS The Company provides a limited one year warranty on all of its products and accrues estimated warranty costs at the time of sale. (i) INCOME TAXES Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in tax expense in the period that includes the enactment date. (j) REVENUE RECOGNITION The Company recognizes revenue from the sale of its products at the time title passes to the customer, which is, typically, when the products are shipped to domestic customers and when received by international customers. (k) STOCK-BASED COMPENSATION The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations, in accounting for its fixed plan stock options. As such, compensation expense for employee stock option grants is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. Compensation expense for nonemployee stock option grants is measured at the grant date based on the fair value of the award as required by SFAS No. 123. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic value-based method of accounting for employee stock option grants described above, and has adopted the disclosure requirements of SFAS No. 123. (l) EARNINGS PER SHARE Basic earnings per share (EPS) is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or resulted in the issuance of common stock that would share in the F-8 68 NOTES TO FINANCIAL STATEMENTS (CONTINUED) earnings of the entity. Dilutive potential common shares are added to the weighted-average shares used to compute basic EPS. Effective February 5, 1999, the Company declared a three-for-one stock split (effected in the form of a two-for-one stock dividend). Effective July 13, 2000, the Company declared a three-for-one stock split (effected in the form of a two-for-one stock dividend). Effective August 24, 2000, the Company declared a four-for-one stock split (effected in the form of a three-for-one stock dividend). All share and per share data have been restated for the effect of the stock dividends, accounted for as stock splits. In conjunction with the stock splits, the Company's authorized shares were increased to 50,000,000. (m) IMPAIRMENT OF LONG-LIVED ASSETS Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An asset is deemed impaired if the sum of the expected future cash flows is less than the carrying amount of the asset. If impaired, an impairment loss is recognized to reduce the carrying value of the asset to fair value. At December 31, 1998 and 1999 there were no assets that were considered impaired. (n) FOREIGN CURRENCY TRANSACTIONS Gains and losses from foreign currency transactions are included in results of operations. (o) RESEARCH AND DEVELOPMENT EXPENSES Research and development costs related to present and future products are expensed in the period incurred. (p) FAIR VALUE OF FINANCIAL INSTRUMENTS The Company discloses the fair value for financial instruments, whether recognized or not recognized on the balance sheet. A financial instrument is defined as cash, evidence of an ownership interest in an entity, or a contract that both imposes a contractual obligation on one entity to deliver cash or another financial instrument to a second entity. Quoted market prices are used for fair value when available, but do not exist for some of the Company's financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. The following assumptions and methods were used by the Company in estimating the fair value of its financial instruments: Cash and Cash Equivalents. The carrying amounts of cash and cash equivalents approximate fair value due to the liquid short-term nature of the instruments. Accounts Receivable, Accounts Payable, Accrued Expenses and Other Liabilities. The carrying amounts approximate fair value because of the short maturity of those instruments. Long-term Debt. The carrying amounts approximate fair value due to the debt bearing interest at a variable rate. F-9 69 NOTES TO FINANCIAL STATEMENTS (CONTINUED) (q) UNAUDITED INFORMATION The financial statements include the unaudited balance sheet as of September 30, 2000 and the unaudited statements of income and cash flows for the nine months ended September 30, 1999 and 2000. In management's opinion, this information has been prepared on the same basis as the audited financial statements and reflects all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the financial information, in accordance with generally accepted accounting principles for interim financial information, for the period presented. Results for interim periods are not necessarily indicative of the results to be expected for the entire year. (2) INVENTORY Inventory consists of the following:
DECEMBER 31, ------------------------ 1998 1999 SEPTEMBER 30, 2000 ---------- ---------- ------------------ (UNAUDITED) Raw materials....................................... $ 911,694 $1,502,953 $3,737,511 Work-in-process..................................... 212,592 266,640 422,265 Finished goods...................................... 240,964 258,197 358,698 ---------- ---------- ---------- $1,365,250 $2,027,790 $4,518,474 ========== ========== ==========
(3) PROPERTY AND EQUIPMENT Property and equipment consists of the following:
DECEMBER 31, ------------------------ 1998 1999 SEPTEMBER 30, 2000 ---------- ---------- ------------------ (UNAUDITED) Equipment........................................... $1,918,394 $2,336,233 $3,209,090 Furniture and fixtures.............................. 218,154 269,714 266,267 Leasehold improvements.............................. 124,371 145,413 149,285 ---------- ---------- ---------- $2,260,919 $2,751,360 $3,624,642 ========== ========== ==========
(4) LONG-TERM DEBT AND NOTE PAYABLE The Company has a revolving line of credit in the amount of $1,500,000, which had not been drawn at December 31, 1999. The line of credit bears interest at prime plus 1%. Interest is payable monthly, with any advances due July 27, 2000. The line of credit is secured by accounts receivable, investments, intangibles, inventory, and equipment. The line of credit agreement restricts, among other things, the ability of the Company to pay dividends, incur additional debt and alter the nature or scope of the Company's business without prior consent of the lender. (Unaudited) -- In October 2000, the Company amended the line of credit to increase the amount available to $5,000,000 bearing interest at prime plus .75% with a renewal date of October 22, 2001 and maturity date of October 22, 2002. No amounts were outstanding on the line of credit at September 30, 2000. (Unaudited) -- In April 2000, the Company also entered into a term loan in the amount of $1,400,000. See note 8. F-10 70 NOTES TO FINANCIAL STATEMENTS (CONTINUED) (5) LEASE COMMITMENTS The Company leases its office and plant facilities in Bozeman under a non-cancelable operating lease with a term of ten years beginning April 1, 1994. The Company may extend the term of the lease at its option for up to three successive five-year terms. The lease agreement requires the Company to pay utilities, taxes and maintenance expenses on the property and requires monthly payments of $11,500. The Company also leases its office and plant facilities in Boulder under a non-cancelable operating lease with a term of three years beginning September 1998. The lease agreement requires the Company to pay utilities, taxes and maintenance expenses on the property and requires monthly payments of $9,203. Rent expense, included in general and administrative expenses in the statements of income, was $138,000, $171,053 and $245,285 for the years ended December 31, 1997, 1998 and 1999, respectively, and $175,452 and $239,113 for the nine months ended September 30, 1999 and 2000 (unaudited), respectively. The Company has sub-leased a portion of its office space in its Boulder facility beginning December 1998 on essentially the same terms as its operating lease. The sub-lease agreement requires the lessee to pay a pro-rata share of the utilities, tax and maintenance expense on the property and requires monthly payments of $618. Rent income, included in other income in the statements of income, was $618 and $7,416 for the years ended December 31, 1998 and 1999, respectively, and $5,562 and $5,562 for the nine months ended September 30, 1999 and 2000 (unaudited), respectively. Future minimum rental payments and sub-lease income for the next five years under these leases at December 31, 1999 are as follows:
PAYMENTS INCOME -------- ------ 2000........................................................ $237,156 $7,416 2001........................................................ 187,578 -- 2002........................................................ 138,000 -- 2003........................................................ 115,000 -- 2004........................................................ -- -- -------- ------ $677,734 $7,416 ======== ======
(Unaudited) -- During 2000 the Company has entered into three new lease agreements for office and plant facilities. The lease terms range from two to ten years. Future minimum payments under these leases at September 30, 2000 are as follows:
PAYMENTS ---------- 2000........................................................ $ 140,166 2001........................................................ 720,735 2002........................................................ 744,528 2003........................................................ 690,030 2004........................................................ 712,630 Thereafter.................................................. 4,513,491 ---------- $7,521,580 ==========
F-11 71 NOTES TO FINANCIAL STATEMENTS (CONTINUED) (6) INCOME TAX EXPENSE Income tax expense (benefit) consists of the following:
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, ------------------------------ ---------------------------------- SEPTEMBER 30, SEPTEMBER 30, 1997 1998 1999 1999 2000 -------- -------- ---------- ------------- ------------- (UNAUDITED) Current: Federal.......................... $383,430 $628,647 $1,074,190 $ 864,014 $2,602,004 State............................ 92,109 150,019 246,790 193,271 566,467 -------- -------- ---------- ---------- ---------- 475,539 778,666 1,320,980 1,057,285 3,168,471 -------- -------- ---------- ---------- ---------- Deferred: Federal.......................... 6,389 (5,780) (42,956) (37,065) (119,104) State............................ 1,119 (1,230) (9,145) (5,505) (11,072) -------- -------- ---------- ---------- ---------- 7,508 (7,010) (52,101) (42,570) (130,176) -------- -------- ---------- ---------- ---------- $483,047 $771,656 $1,268,879 $1,014,715 $3,038,295 ======== ======== ========== ========== ==========
Income tax expense differed from "expected" income tax expense (computed by applying the Federal corporate income tax rate of 34% to income before income taxes) as follows:
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, ------------------------------ ---------------------------------- SEPTEMBER 30, SEPTEMBER 30, 1997 1998 1999 1999 2000 -------- -------- ---------- ------------- ------------- (UNAUDITED) Computed "expected" tax expense.... $471,875 $747,790 $1,199,708 $ 958,762 $2,624,394 Increase (decrease) resulting from: State taxes, net of Federal income tax benefit............ 61,531 98,201 156,846 125,345 367,093 Stock compensation............... -- -- -- -- 168,732 Research tax credit.............. (50,000) (76,000) (85,000) (67,000) (121,000) Other, net....................... (359) 1,665 (2,675) (2,392) (924) -------- -------- ---------- ---------- ---------- $483,047 $771,656 $1,268,879 $1,014,715 $3,038,295 ======== ======== ========== ========== ==========
F-12 72 NOTES TO FINANCIAL STATEMENTS (CONTINUED) Differences between the financial statement carrying amounts and the tax bases of assets and liabilities that give rise to significant portions of deferred tax assets and liabilities are as follows:
DECEMBER 31, -------------------- SEPTEMBER 30, 1998 1999 2000 -------- -------- ------------- (UNAUDITED) Deferred tax assets: Compensation and employee benefits....................... $ 26,473 $ 35,490 $ 134,860 Accrued warranty expense................................. 53,240 38,338 73,366 UNICAP adjustment to inventory........................... 10,103 -- 46,671 Reserve for bad debts.................................... -- 7,691 14,613 -------- -------- --------- Deferred tax assets................................. 89,816 81,519 269,510 -------- -------- --------- Deferred tax liability: Property and equipment, principally due to differences in depreciation.......................................... (98,525) (29,394) (95,942) UNICAP adjustment to inventory........................... -- (8,733) -- -------- -------- --------- Deferred tax liabilities............................ (98,525) (38,127) (95,942) -------- -------- --------- Net deferred tax asset (liability).................. $ (8,709) $ 43,392 $ 173,568 ======== ======== =========
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the existence of, or generation of, taxable income in the periods which those temporary differences are deductible. Management considers the scheduled reversal of deferred tax liabilities, taxes paid in carryback years, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and estimates of future taxable income over the periods which the deferred tax assets are deductible, at December 31, 1998 and 1999, management believes it is more likely than not that the Company will realize the benefits of these deductible differences. F-13 73 NOTES TO FINANCIAL STATEMENTS (CONTINUED) (7) EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, ------------------------------ ----------------------------------------- SEPTEMBER 30, SEPTEMBER 30, 1997 1998 1999 1999 2000 ----------- ----------- ----------- ------------- ------------- (UNAUDITED) Average outstanding shares during the year on which basic earnings per share is calculated................. 44,051,742 42,344,628 39,932,580 40,899,456 33,501,793 Add: Incremental shares from assumed exercise of stock options........... 284,394 526,860 1,026,960 1,009,056 2,488,662 Add: Incremental shares from partially paid shares (see note 11)........... 53,943 296,100 353,952 345,096 553,177 ----------- ----------- ----------- ----------- ----------- Average outstanding shares on which diluted earnings per share is calculated........ 44,390,079 43,167,588 41,313,492 42,253,608 36,543,632 =========== =========== =========== =========== =========== Net income available to common shareholders........ $ 904,820 $ 1,427,725 $ 2,259,673 $ 1,805,173 $ 4,680,510 =========== =========== =========== =========== =========== Basic earnings per share..... $ .02 $ .03 $ .06 $ .04 $ .14 =========== =========== =========== =========== =========== Diluted earnings per share... $ .02 $ .03 $ .05 $ .04 $ .13 =========== =========== =========== =========== ===========
Stock options to purchase 153,000, 72,000 and 174,000 shares for the year ended December 31, 1997, 1998 and 1999, respectively, and 219,200 and 144,000 shares for the nine months ended September 30, 1999 were outstanding, but were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of the common shares, and therefore, the effect would be antidilutive. (8) STOCK PURCHASE AGREEMENT AND STOCK OPTIONS In connection with an earlier sale of the Company's common stock, the Company entered into a stock purchase agreement with a shareholder. The stock purchase agreement provides the shareholder with certain future stock registration rights if the Company registers stock under the Securities Act. Except for shares excluded under the terms of the stock option plan, the agreement also provides the shareholder the option to retain its existing ownership percentage of 14.62% of the Company under future sales or exchanges of stock. In April 1998 the Company repurchased 3,240,000 shares for a total price of $720,000. In conjunction with this purchase, the Company entered into another stock purchase agreement with this shareholder. The agreement grants the Company an option to purchase all or any part of the shares owned by the shareholder through November 1, 2000. In September 1999, the Company repurchased 4,200,000 shares for a total price of $1,054,397. (Unaudited) -- On April 4, 2000 the Company exercised its option to repurchase the remaining 5,415,852 shares for a total price of $1,429,656. This resulted in a termination of the agreement. The F-14 74 NOTES TO FINANCIAL STATEMENTS (CONTINUED) repurchase was financed with a term loan in the amount of $1,400,000. The term loan bears interest at prime rate plus 1.5%, with principal payable in 36 equal installments of approximately $39,000 beginning May 31, 2000. The term loan is subject to the same restrictions as the line of credit (see note 4). During 1988, the Company established a stock option plan whereby certain key employees were eligible to receive incentive stock options and non-qualified stock options and certain directors and consultants were eligible to receive non-qualified stock options. During 1998, the original stock option plan expired and a new plan, with similar terms, was approved by the board of directors. The 1998 plan provides for the award of options for a maximum of 5,556,000 shares (unaudited) (restated for stock splits and including the additional authorization of 1,956,000 shares reserved for issuance under the 1998 plan (unaudited) in May 2000) of the Company's common stock. In connection with any option granted under the plan, the Company, may at its sole discretion, grant a stock appreciation right (SAR) which may be exercised as an alternative, but not in addition to, an option granted pursuant to the stock option plan. The exercise price of incentive stock options may not be less than fair market value at the date of the grant. Options are nontransferable and expire if not exercised within seven years from the date of the grant for options granted prior to September 4, 1998 and ten years for options granted on September 4, 1998 and thereafter. Vesting periods are determined on the date of grant and generally range from four to five years. Options vesting over four years generally vest 25 percent each year. Options vesting over five years vest 40 percent at the end of the second year and 20 percent annually thereafter. All options granted as of December 31, 1999 had exercise prices equal to fair value, as determined by the board of directors in accordance with the terms of the stock option plan, at the date of grant. At December 31, 1999 and September 30, 2000 (unaudited), total shares available for option grants under the 1998 plan to employees are 2,322,000 and 3,209,400, respectively. At December 31, 1999 and September 30, 2000 (unaudited), no SAR's had been granted. Stock option activity during the periods indicated is as follows:
OPTIONS OUTSTANDING UNDER THE 1988 AND 1998 PLANS ---------------------------- WEIGHTED NUMBER AVERAGE OF SHARES EXERCISE PRICE ---------- -------------- Outstanding at December 31, 1996 (2,203,200 exercisable).... 3,276,000 $ .16 Granted..................................................... 2,592,000 .14 Canceled.................................................... (3,096,000) .17 Exercised................................................... (180,000) .11 ---------- Outstanding at December 31, 1997 (1,432,800 exercisable).... 2,592,000 .14 Granted..................................................... 1,296,000 .23 Canceled.................................................... (108,000) .13 Exercised................................................... (468,000) .13 ---------- Outstanding at December 31, 1998 (1,190,880 exercisable).... 3,312,000 .18 Granted..................................................... 1,218,000 .27 Canceled.................................................... (1,128,000) .22 ---------- Outstanding at December 31, 1999 (1,730,640 exercisable).... 3,402,000 .20 Granted (unaudited)......................................... 1,930,400 3.07 Canceled (unaudited)........................................ (861,800) .66 Exercised (unaudited)....................................... (144,400) .20 ---------- Outstanding at September 30, 2000 (1,757,440 exercisable) (unaudited)............................................... 4,326,200 1.40 ==========
F-15 75 NOTES TO FINANCIAL STATEMENTS (CONTINUED) The stock options outstanding at December 31, 1999 (adjusted for the February 1999, July 2000 and August 2000 stock splits) consist of the following:
OUTSTANDING EXERCISABLE - -------------------------------- -------------------- WEIGHTED WEIGHTED AVERAGE WEIGHTED AVERAGE REMAINING AVERAGE NUMBER EXERCISE TERM TO NUMBER EXERCISE OF SHARES PRICE EXPIRATION OF SHARES PRICE - --------- -------- ---------- --------- -------- 1,404,000.. $.13 4.27 Years 1,296,000 $.13 792,000.. .22 5.62 Years 192,240 .21 1,206,000.. .27 9.61 Years 192,000 .31 - --------- --------- 3,402,000.. .20 1,680,240 .16 ========= =========
(Unaudited) -- The stock options outstanding at September 30, 2000 consist of the following:
OUTSTANDING EXERCISABLE - -------------------------------- -------------------- WEIGHTED WEIGHTED AVERAGE WEIGHTED AVERAGE REMAINING AVERAGE NUMBER EXERCISE TERM TO NUMBER EXERCISE OF SHARES PRICE EXPIRATION OF SHARES PRICE - --------- -------- ---------- --------- -------- 2,837,600.. $ .21 5.60 Years 1,737,440 $ .16 831,000.. 1.10 9.73 Years 20,000 10.29 531,200.. 6.10 9.39 Years -- -- - --------- --------- 126,400.. 10.29 9.92 Years -- -- - --------- --------- 4,326,200.. 1.40 1,757,440 .29 ========= =========
For the purposes of computing pro forma net income, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. The assumptions used to value the option grant are as follows:
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, ------------------------------ ------------------------------------- SEPTEMBER 30, SEPTEMBER 30, 1997 1998 1999 1999 2000 ------- ----------- ----------- ------------- ------------- (UNAUDITED) Dividend yield................... 0% 0% 0% 0% 0% Expected term.................... 4 years 4 years 6 years 4 years 6 years Risk-free interest rate.......... 6.0% 5.6% - 5.8% 4.8% - 6.0% 4.6% - 5.3% 4.3% - 6.5% Volatility rate.................. 0% 0% 0% 0% 109%* Average calculated fair value.... $.03 $.06 $.07 $.05 $2.10
*Grants after September 1, 2000; grants prior to September 1, 2000 do not include a volatility factor. The Company applies the intrinsic value method in accounting for its grants of options. Option valuation models require the input of highly subjective assumptions. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. F-16 76 NOTES TO FINANCIAL STATEMENTS (CONTINUED) For purposes of the pro forma disclosures, the estimated fair value of the options is amortized to expense over the vesting period of the options. Had the Company determined compensation cost based on the fair value at the grant date for its stock options using the fair value method, the Company's net income would have been reduced to the pro forma amounts indicated below:
FOR THE NINE MONTHS ENDED FOR THE YEARS ENDED DECEMBER 31, ------------------------------ ------------------------------------ SEPTEMBER 30, SEPTEMBER 30, 1997 1998 1999 1999 2000 -------- ---------- ---------- ------------- ------------- (UNAUDITED) Net income- As reported..................... $904,820 $1,427,725 $2,259,673 $1,805,173 $4,680,510 Pro forma....................... 882,621 1,420,200 2,229,976 1,788,934 4,695,733 Basic earnings per share- As reported..................... .02 .03 .06 .04 .14 Pro forma....................... .02 .03 .06 .04 .13 Diluted earnings per share- As reported..................... .02 .03 .05 .04 .14 Pro forma....................... $ .02 $ .03 $ .05 $ .04 $ .13 ======== ========== ========== ========== ==========
During the year ended December 31, 1999, the Company recognized $14,800 of director stock compensation expense as a result of a director stock grant of 48,000 shares. The deemed fair value of the stock on the date of grant was $.31 per share determined by the board of directors. (Unaudited) -- During the nine months ended September 30, 2000 the Company recognized employee stock compensation and director stock compensation expense of $610,671 and $18,200, respectively. The stock compensation expense is related to the amortization of deferred compensation related to stock option grants for which the deemed fair value of the grants exceeded the options' exercise price on the date of grant. Stock compensation related to employee stock options is being amortized on an accelerated method. (9) RISK CONCENTRATIONS Export Sales: Export sales, as a percentage of total sales, consist of the following:
YEARS ENDED NINE MONTHS ENDED DECEMBER 31, ------------------------------ -------------------- SEPTEMBER 30, SEPTEMBER 30, 1997 1998 1999 1999 2000 ---- ---- ---- ------------- ------------- (UNAUDITED) (UNAUDITED) Europe..................................... 13% 9% 17% 19% 18% Asia/Pacific............................... 20 13 12 12 12 -- -- -- -- -- 33% 22% 29% 31% 30% == == == == ==
Major Customers: The Company had two customers that accounted for 10% or more of total sales during the year ended December 31, 1999. Revenues for these two customers were $4,449,960, or 25% of total sales, and $1,853,878, or 10%, respectively, of total sales. These two customers comprised 30% of the accounts receivable as of December 31, 1999. The loss of these customers could have a material adverse impact of the Company's financial position and results of operations. Suppliers: The Company had two suppliers that accounted for 10% or more of inventory purchases during the year ended December 31, 1999. Inventory purchases from these two suppliers were $1,962,308, or 26% of total purchases, and $1,565,177, or 21% of total purchases, in the year F-17 77 NOTES TO FINANCIAL STATEMENTS (CONTINUED) ended December 31, 1999. The interruption in the supply of inventory from these suppliers could have a material adverse impact on the Company's financial position and results of operations. (10) EMPLOYEE BENEFIT PLANS The Company has a 401(k) savings plan covering substantially all employees. Eligible employees may contribute up to 15% of their salary and the Company makes matching contributions of up to 100% of the employee contribution, limited to 2% of salary. Employees vest in Company contributions in 20% increments in service years two to six, being fully vested at the end of six years of service. The Company's contributions for the years ended December 31, 1997, 1998 and 1999 and for the nine months ended September 30, 1999 and 2000 (unaudited) were approximately $24,000, $33,000, $38,000, $26,000 and $45,000, respectively. (Unaudited) -- On May 5, 2000, the Company's Board of Directors approved the ILX Lightwave Corporation Employee Stock Purchase Plan ("Stock Purchase Plan") (subsequently amended on July 7, 2000). All employees of the Company are eligible to participate. The total number of shares available for issuance under the Stock Purchase Plan is 600,000. Under the Stock Purchase Plan, the Company will offer to sell shares of its common stock on the last business day in August 2001 and thereafter each approximate six month period beginning on September 1 and March 1 of each year ending on the last business day in February and August of each year (the "Purchase Period"). Shares will be purchased at the lesser of 85% of the fair market value of the Company's common stock on the first or last business day of that Purchase Period. The Plan includes limitations on the amount of contributions that may be made under the Plan to 10% of an employee's annual compensation, up to $2,500, each Purchase Period. Employees owning 5% or more of the Company's common stock, either directly or indirectly, are not allowed to purchase additional shares under the Plan. (11) NOTES RECEIVABLE SECURED BY COMMON STOCK During 1996, 1997 and 1998, a shareholder exercised options to purchase 90,000, 90,000 and 468,000 shares, respectively, of the Company's common stock. These purchases were financed with long-term recourse notes in the amount of $9,200, $9,200 and $58,500, respectively, from the Company. The terms of the notes require annual interest payments at a rate of 6.25%, 6.25% and 5.75%, respectively, and principal payments at maturity, December 2003, June 2004 and January 2003, respectively. The notes are secured by the shares of common stock issued. (12) SUBSEQUENT EVENT (UNAUDITED) The Company effected stock splits on July 13, 2000 and August 24, 2000. See note 1(l). On July 14, 2000, the Company's Board of Directors granted 591,000 stock options to certain employees of the Company. The exercise price of the options is $1.08. The options have a five year vesting period. On July 28, 2000 the Company's Board of Directors granted 515,000 stock options to certain employees of the Company. The exercise price of the options is $6.10. The options have a four year vesting period. On August 30, 2000, the Company's Board of Directors granted 126,400 stock options to certain employees of the Company. The exercise price of the options is $10.29. The options generally have a four year vesting period. F-18 78 [The inside back cover of the prospectus contains our logo and the phrase "Innovative Optical Test and Measurement Equipment" at the bottom of the page] 79 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 5,000,000 SHARES [ILX LIGHTWAVE LOGO] COMMON STOCK ----------------------- PROSPECTUS ---------------------- CHASE H&Q U.S. BANCORP PIPER JAFFRAY WIT SOUNDVIEW ------------------ , 2000 ------------------ YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK. WE HAVE NOT TAKEN ANY ACTION IN ANY JURISDICTION OUTSIDE THE UNITED STATES TO PERMIT A PUBLIC OFFERING OF THE COMMON STOCK OR POSSESSION AND DISTRIBUTION OF THIS PROSPECTUS IN THAT JURISDICTION. PERSONS WHO COME INTO POSSESSION OF THIS PROSPECTUS IN JURISDICTIONS OUTSIDE THE UNITED STATES ARE REQUIRED TO INFORM THEMSELVES ABOUT AND TO OBSERVE ANY RESTRICTIONS AS TO THIS OFFERING AND THE DISTRIBUTION OF THIS PROSPECTUS APPLICABLE TO THAT JURISDICTION. UNTIL , 2000, ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 80 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION Except as set forth below, the following fees and expenses will be paid by us in connection with the issuance and distribution of the securities registered hereby and do not include underwriting commissions and discounts. All expenses, except for the SEC registration, NASD filing and Nasdaq listing fees, are estimated.
AMOUNT TO BE PAID ---------- SEC registration fee........................................ $ 30,360 NASD filing fee............................................. 12,000 Nasdaq National Market listing fee.......................... 95,000 Legal fees and expenses..................................... 300,000 Accounting fees and expenses................................ 250,000 Transfer agent's and registrar's fees....................... 5,000 Printing and engraving expenses............................. 125,000 Miscellaneous............................................... 57,640 -------- Total.................................................. 875,000 ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 302A.521 of the Minnesota Statutes provides that a corporation shall indemnify any person made or threatened to be made a party to a proceeding by reason of the former or present official capacity of such person against judgments, penalties, fines (including, without limitation, excise taxes assessed against such person with respect to any employee benefit plan), settlements and reasonable expenses, including attorneys' fees and disbursements, incurred by such person in connection with the proceeding, if, with respect to the acts of omissions of such person complained of in the proceeding, such person (1) has not been indemnified therefore by another organization or employee benefit plan for the same judgments, penalties or fines; (2) acted in good faith; (3) received no improper personal benefit and Section 302A.255 (with respect to director conflicts of interest), if applicable, has been satisfied; (4) in the case of a criminal proceeding, had no reasonable cause to believe the conduct was unlawful; and (5) in the case of acts or omissions in such person's official capacity for the corporation, reasonably believed that the conduct was in the best interest of the corporation, or in the case of acts or omissions in such person's official capacity for other affiliated organizations, reasonably believed that the conduct was not opposed to the best interest of the corporation. Section 302A.521 also requires payment by a corporation, upon written request, of reasonable expenses in advance of final disposition of the proceeding in certain instances. A decision as to required indemnification is made by a disinterested majority of the Board of Directors present at a meeting at which a disinterested quorum is present, or by a designated committee of the Board, by special legal counsel, by the stockholders or by a court. Provisions regarding indemnification of our officers and directors to the extent permitted by Section 302A.521 are contained in our article of incorporation and bylaws. We intend to purchase 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, including securities law claims. II-1 81 The Underwriting Agreement contained in Exhibit 1.1 to this registration statement provides that the underwriters are obligated, under certain circumstances, to indemnify our directors and officers against certain liabilities, including liabilities under the Securities Act of 1933, as amended. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Since June 30, 1997, we have issued and sold the following securities that were not registered under the Securities Act: - On January 28, 1998, we issued 468,000 shares of our common stock to our Chief Financial Officer upon the exercise of previously granted stock options and in exchange for promissory notes totalling $58,500. The stock was issued in reliance upon the exemption contained in Section 4(2) of the Securities Act for a transaction not involving a public offering. - On February 5, 1999, we issued 2,289,100 shares of common stock to reflect our three-for-one stock split (in the form of a two-for-one stock dividend) effective on that date. - On December 7, 1999, we issued 48,000 shares of our common stock as compensation to one of our directors. The stock was issued in reliance upon the exemption contained in Section 4(2) of the Securities Act for a transaction not involving a public offering. - On July 13, 2000, we issued 5,272,658 shares of common stock to reflect our three-for-one stock split (in the form of a two-for-one stock dividend) effective on that date. - On August 24, 2000, we issued 23,726,961 shares of common stock to reflect our four-for-one stock split (in the form of a three-for-one stock dividend) effective on that date. - In September 2000, we issued 144,400 shares of our common stock to two employees and one outside director upon the exercise of previously granted stock options. - From June 30, 1997 through October 16, 2000, we granted stock options to our employees, directors and consultants under our 1988 stock option plan and 1998 stock option plan pursuant to which the optionees may purchase up to an aggregate of 5,056,400 shares of our common stock at exercise prices ranging from $0.13 to $12.46 per share. Of the options we granted during this period, options to purchase a total of 4,326,000 shares of our common stock remain outstanding as of September 30, 2000. The options were granted in reliance upon Rule 701 of the Securities Act. The sale and issuance of these securities were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act, or Rule 701 promulgated thereunder in that the securities were offered and sold either pursuant to written compensatory benefit plans or pursuant to a written contract relating to compensation. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits
NUMBER DESCRIPTION - ------ ----------- 1.1* Form of Underwriting Agreement 3.1 Amended and Restated Articles of Incorporation of the Company 3.2 Amended and Restated Bylaws of the Company 4.1 Specimen of Common Stock certificate 5.1 Opinion of Dorsey & Whitney LLP 10.1 Employee Stock Purchase Plan 10.2+ 1988 Stock Option Plan
II-2 82
NUMBER DESCRIPTION - ------ ----------- 10.3+ 1998 Long-Term Incentive and Stock Option Plan 10.4 Form of 2000 Stock Incentive Plan 10.5+ Lease Agreement dated June 29, 2000 between the Company and Anthony Wayne Oil Corporation 10.6+ Sublease Agreement dated August 10, 1998 between the Company and Exabyte, assigned to Nautilus Court II Partnership, Ltd. December 21, 1999 10.7+ Lease Agreement dated December 22, 1992 between the Company and Anthony Wayne Oil Corporation 10.8 Loan and Security Agreement dated June 28, 1999 between Silicon Valley Bank and the Company, as amended by the First Amendment to Loan and Security Agreement dated March 23, 2000 and the Second Amendment to Loan and Security Agreement dated October 23, 2000 10.9 Lease Agreement dated September 18, 2000 between the Company and DePuzzo Investment Group, LLC 10.10 Promissory Notes issued by Randall T. Dugger to the Company dated December 30, 1996, June 9, 1997 and January 28, 1998 23.1 Consent of KPMG LLP 23.2 Consent of Dorsey & Whitney LLP (included in Exhibit 5.1 to the Registration Statement) 24.1 Powers of Attorney (included on signature page and in Exhibit 24.1) 27.1 Financial Data Schedule
- ------------------------- *To be filed by amendment. + Previously filed. (b) Financial Statement Schedules None ITEM 17. UNDERTAKINGS The undersigned registrant hereby undertakes that: The registrant will provide to the underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the 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 Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, 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 Act and will be governed by the final adjudication of such issue. For purposes of determining any liability under the Securities Act of 1933, the registrant will treat 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 as part of this registration statement as of the time the Securities and Exchange Commission declared it effective. II-3 83 For the purpose of determining any liability under the Securities Act of 1933, the registrant will treat each post-effective amendment that contains a form of prospectus as a new registration statement for the securities offered in the registration statement, and will treat that offering of the securities at that time as the initial bona fide offering of those securities. II-4 84 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Amendment to the registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Bozeman, State of Montana, on November 3, 2000. ILX LIGHTWAVE CORPORATION By: /s/ LAWRENCE A. JOHNSON ------------------------------------ Lawrence A. Johnson Chairman, Chief Executive Officer and President Pursuant to the requirements of the Securities Act of 1933, this Amendment to the registration statement has been signed by the following persons in the capacities indicated on November 3, 2000.
SIGNATURE TITLE --------- ----- /s/ LAWRENCE A. JOHNSON Chairman, Chief Executive Officer and - ------------------------------------------ President (principal executive officer) Lawrence A. Johnson /s/ RANDALL T. DUGGER Vice President Finance and - ------------------------------------------ Administration and Chief Financial Randall T. Dugger Officer (principal financial officer and principal accounting officer) * Director - ------------------------------------------ Frederick R. Hume * Director - ------------------------------------------ Glenden F. Johnson * Director - ------------------------------------------ Steven M. Quist * Director - ------------------------------------------ James C. Wyant * Director - ------------------------------------------ William R. Walker * Director - ------------------------------------------ David I. Polinsky *By: /s/ RANDALL T. DUGGER - ------------------------------------------ Randall T. Dugger Attorney-in-fact
II-5 85 EXHIBIT INDEX
NUMBER DESCRIPTION - ------ ----------- 3.1 Amended and Restated Articles of Incorporation of the Company. 3.2 Amended and Restated Bylaws of the Company. 4.1 Specimen of Common Stock certificate. 5.1 Opinion of Dorsey & Whitney LLP. 10.1 Employee Stock Purchase Plan. 10.4 Form of 2000 Stock Incentive Plan. 10.8 Loan and Security Agreement dated June 28, 1999 between Silicon Valley Bank and the Company, as amended by the First Amendment to Loan and Security Agreement dated March 23, 2000 and the Second Amendment to Loan and Security Agreement dated October 23, 2000. 10.9 Lease Agreement dated September 18, 2000 between the Company and Depuzzo Investment Group, LLC. 10.10 Promissory Notes issued by Randall T. Dugger to the Company dated December 30, 1996, June 9, 1997 and January 28, 1998. 23.1 Consent of KPMG LLP. 23.2 Consent of Dorsey & Whitney LLP (included in Exhibit 5.1 to the Registration Statement). 24.1 Powers of Attorney (included on signature page and in Exhibit 24.1). 27.1 Financial Data Schedule.
II-6 EX-3.1 2 c57156a2ex3-1.txt AMENDED AND RESTATED ARTICLES OF INCORPORATION 1 EXHIBIT 3.1 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF ILX LIGHTWAVE CORPORATION ARTICLE 1 NAME The name of the corporation is "ILX Lightwave Corporation." ARTICLE 2 REGISTERED OFFICE AND REGISTERED AGENT The address of the registered office of the corporation in Minnesota is National Registered Agents, Inc., 1295 Bandana Blvd. N., Suite 300, St. Paul, Minnesota 55108-5516. ARTICLE 3 AUTHORIZED SHARES The aggregate number of shares of stock that the corporation is authorized to issue is 165,000,000, of which 150,000,000 shares are designated as common shares with a par value of $.01 per share and 15,000,000 are designated as preferred shares with a par value of $.01 per share. Authority is hereby expressly vested in the Board of Directors of the corporation, subject to the provisions of Article 3 and to limitations prescribed by law, to create and authorize the issuance from time to time of one or more series of the preferred shares and, with respect to each such series, to determine or fix, by resolution or resolutions adopted by the affirmative vote of a majority of the Board of Directors present providing for the issue of such series, the voting powers, full or limited, if any, of the shares of such series and the designations, preferences and relative, participating, optional or other special rights and the qualifications, limitations or restrictions thereof, including, without limitation, the determination or fixing of the rates of and terms and conditions upon which any dividends shall be payable on such series, any terms under or conditions on which the shares of such series may be redeemed, any provisions made for the conversion or exchange of the shares of such series for shares of any other class or classes or of any other series of the same or any other class or classes of the corporation's capital stock, and any rights of the holders of the shares of such series upon the voluntary or involuntary liquidation, dissolution or winding up of the corporation. 2 ARTICLE 4 NO CUMULATIVE VOTING There shall be no cumulative voting by the shareholders of the corporation. ARTICLE 5 NO PREEMPTIVE RIGHTS The shareholders of the corporation shall not have preemptive rights to subscribe for or acquire securities or rights to purchase securities of any kind, class, or series of the corporation. ARTICLE 6 WRITTEN ACTION BY DIRECTORS An action required or permitted to be taken at a meeting of the Board of Directors of the corporation may be taken by a written action signed, or counterparts of a written action signed by the aggregate, by all of the directors unless the action need not be approved by the shareholders of the corporation, in which case the action may be taken by a written action signed, or counterparts of a written action signed in the aggregate, by number of directors that would be required to take the same action at a meeting of the Board of Directors of the corporation at which all of the directors were present. ARTICLE 7 DIRECTOR LIABILITY A director of the corporation shall not be liable to the corporation or its shareholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the corporation or its shareholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of the law, (iii) under Section 302A.559 of the MBCA or Minnesota Statutes Section 80A.23, (iv) for any transaction from which the director derived an improper personal benefit or (v) for any act or omission occurring prior to the date when the provisions of this Article XI became effective. If the MBCA is hereafter amended to further eliminate or limit the liability of a director of a corporation, then a director of the corporation, in addition to the circumstances set forth herein, shall have no liability as a director (or such liability shall be limited) to the fullest extent permitted by the MBCA as so amended. No repeal or modification of the foregoing provisions of this Article 7, nor, to the fullest extent permitted by law, any modification of law, shall adversely affect any right or protection of a director of the corporation existing at the time of such repeal or modification. 2 3 ARTICLE 8 SUPER-MAJORITY APPROVALS Without the affirmative vote of the holders of record of 66-2/3% of all of the shares outstanding and entitled to vote on the following matters and the approval of 66-2/3% of all of the directors of the corporation (with any fractional number of directors resulting from application of such percentage rounded up to the nearest whole number): (a) The corporation shall not amend these Amended and Restated Articles of Incorporation or the amended and restated bylaws of the corporation in any manner that would permit a director to be removed from office other than for cause. (b) The corporation shall not amend or otherwise modify or repeal Articles 7, 8, 9, 10 or 11 of these Amended and Restated Articles of Incorporation. ARTICLE 9 BOARD OF DIRECTORS The number of directors to constitute the whole board of directors shall be such number (not less than three nor more than nine) as shall be fixed from time to time by resolution of the board of directors adopted by such vote as may be required in the amended and restated bylaws. The board of directors shall be divided into three classes as nearly equal in number as may be, with the term of office of one class expiring each year. The directors of the first class shall be elected to hold office for a term expiring at the annual meeting of shareholders in 2001, directors of the second class shall be elected to hold office for a term expiring at the next succeeding annual meeting in 2002, and directors of the third class shall be elected to hold office for a term expiring at the second succeeding annual meeting in 2003. Commencing in 2001, at each annual meeting of shareholders, successors to the directors whose terms shall then expire shall be elected to hold office for terms expiring at the third succeeding annual meeting of shareholders. In case of any vacancies, by reason of an increase in the number of directors or otherwise, each additional director may be elected by a majority of the directors then in office, even though less than a quorum of the board of directors, to serve until the end of the remainder of the term of the class to which such director is assigned and until his or her successor shall have been elected and qualified. Directors shall continue in office until others are chosen and qualified in their stead. When the number of directors is changed, any newly created directorships or any decrease in directorships shall be so assigned among the classes by a majority of the directors then in office, though less than a quorum, as to make all classes as nearly equal in number as may be feasible. No decrease in the number of directors shall shorten the term of any incumbent director. 3 4 ARTICLE 10 AMENDMENTS TO BYLAWS In furtherance and not in limitation of the power conferred upon the board of directors by law, the board of directors shall have power to adopt, amend, alter and repeal from time to time the bylaws of the corporation by majority vote of all directors except that any provision of the amended and restated bylaws requiring, for board action, a vote of greater than a majority of the board shall not be amended, altered or repealed except by such super-majority vote. ARTICLE 11 AMENDMENTS TO ARTICLES OF INCORPORATION Subject to Article 8 of these Amended and Restated Articles of Incorporation, the corporation reserves the right to amend these articles of incorporation in any manner provided herein or permitted by the MBCA and all rights and powers conferred herein on shareholders, directors and officers, if any, are subject to this reserved power. 4 EX-3.2 3 c57156a2ex3-2.txt AMENDED AND RESTATED BYLAWS OF THE COMPANY 1 EXHIBIT 3.2 AMENDED AND RESTATED BYLAWS OF ILX LIGHTWAVE CORPORATION ARTICLE I OFFICES 1.01. Registered Office. The registered office of ILX Lightwave Corporation, in the State of Minnesota shall be as provided in the Amended and Restated Articles of Incorporation, or resolution of the directors filed with the Minnesota Secretary of State changing the registered office. 1.02. Other Offices. The corporation may also have an office or offices at such other place or places either within or without the State of Minnesota as the board of directors may from time to time determine or the business of the corporation may require. ARTICLE II MEETINGS OF SHAREHOLDERS 2.01. Place of Meetings. Each meeting of the shareholders of the corporation shall be held at such place either within or without the State of Minnesota as shall be fixed by the board of directors and specified in the notice of said meeting. 2.02. Annual Meetings. The annual meeting of the shareholders for the transaction of such business as may properly come before the meeting shall be held at such place, date and hour as shall be determined by the board of directors. 2.03. Special Meetings. A special meeting of the shareholders for any purpose or purposes may be called at any time by the chief executive officer, the chief financial officer, two or more directors of the board or by a shareholder or shareholders holding 10% of the voting power of all entitled to vote, except that a special meeting for the purpose of considering any action to directly or indirectly facilitate or effect a business combination, including any action to change or affect the composition of the board of directors for that purpose, must be called by 25% of the voting power of all shares entitled to vote. Such shareholder request shall be made to the chief executive officer or the chief financial officer and shall state the purpose or purposes of the proposed meeting. This section 2.03 may not be altered, amended or repealed except by the affirmative vote of holders of at least 66 2/3% of the outstanding voting stock of the corporation. 2 2.04. Notice of Annual and Special Meetings. Written notice of the annual and any special meetings of the shareholders, stating the place, date and hour of the meeting, and for special meetings the purpose or purposes for which the meeting is called, shall be given to each shareholder entitled to vote at such meeting, either personally or by mail, not less than ten, nor more than 60 days before the date of the meeting. 2.05. Business at Annual and Special Meetings. The business to be transacted at any annual or special meeting of shareholders shall be limited to business which is properly brought before the meeting. For the purposes of these Bylaws, "properly brought before the meeting" shall mean (i) the business which is specified in the notice of the meeting given by the board of directors, (ii) otherwise brought before the meeting by order of the board of directors or (iii) otherwise properly brought before an annual meeting by a shareholder. In order for business to be properly brought before an annual meeting by a shareholder, the shareholder must give written notice of such shareholder's intent to bring a matter before the annual meeting, either by personal delivery or by United States mail, postage pre-paid, to the chief executive officer or secretary of the corporation no later than the date specified by Rule 14a-8 promulgated under the Securities Act of 1934, as the same may be amended from time to time and any successor rule or regulation, as the last date for receipt of shareholder proposals to be submitted under such rule (such date, the "Notice Date"). Each such notice shall set forth: (a) the name and address of the shareholder who intends to bring such matter before a meeting; (b) the number of shares of the corporation entitled to vote at such meeting held by the shareholder; (c) a representation that the shareholder is a holder of record of stock of the corporation entitled to vote at such meeting and intends to appear in person at the meeting to bring such matter before the meeting; (d) a description of the business desired to be brought before the meeting and the reasons of such shareholder in requesting that such matter be included in proxy statement pertaining to the matter; (e) such other information regarding the business proposed by such shareholder as would be required to be included in the proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission; and (f) a representation as to the shareholder's material interest in the business being proposed. The presiding officer of the meeting shall refuse to acknowledge any business proposed to be brought before an annual meeting not made in compliance with the foregoing procedure. 2.06. Quorum and Adjourned Meetings. The holders of a majority of the stock issued and outstanding and entitled to vote there at, present in person or represented by proxy, shall constitute a quorum at all meetings of the shareholders for the transaction of business, except as otherwise provided by statute or by the Amended and Restated Articles of Incorporation. If, however, such quorum shall not be present or represented at any meeting of the shareholders, the shareholders entitled to vote thereat, present in person or represented by proxy, shall have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting, at which the quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. If the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each shareholder of record entitled to vote at the meeting. 2 3 2.07. Required Vote. When a quorum is present at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which, by express provision of statute or by the Amended and Restated Articles of Incorporation, a different vote is required, in which case such express provisions shall govern and control the decision of such question. 2.08. Proxies. Every shareholder entitled to vote at a meeting may authorize another person or persons to act for such shareholder by proxy duly appointed by an instrument in writing, subscribed by such shareholder, or by transmitting or authorizing the transmission of a facsimile, telegram, cablegram or other means of electronic transmission as permitted by Section 302A.449 of the Minnesota Business Corporations Act or any successor provision thereof. The appointment of a proxy shall be made not more than eleven (11) months prior to the meeting, unless the appointment provides for a longer period. To be valid, all proxies must meet the requirements of, and shall be governed by, Section 302A.449 of the Minnesota Business Corporations Act or any successor provision thereof. The attendance at any meeting of shareholders of a shareholder who theretofore may have given a proxy shall not have the effect of revoking such proxy unless such shareholder shall in writing or by electronic transmission in accordance with Section 302A.449 of the Minnesota Business Corporations Act or any successor provision thereof so notify the secretary of the meeting prior to the voting of the proxy. 2.09. Conduct of Meetings of Shareholders. The chairman of the board of directors, or if there shall be none or in his or her absence, the highest ranking officer of the corporation, among a group consisting of the chief executive officer, president and the vice presidents, who is present at the meeting, shall call to order and act as the chair of any meeting of the shareholders of the corporation. The secretary of the corporation shall serve as the secretary of the meeting or, if there shall be none or in his or her absence, the secretary of the meeting shall be such person as the chair of the meeting appoints. The chair of the meeting shall have the right and authority to prescribe such rules, regulations and procedures and to take or refrain from taking such actions as, in the judgment of the chair of the meeting, are appropriate for the conduct of the meeting. To the extent not prohibited by applicable law, such rules, regulations and procedures may include, without limitation, establishment of (i) an agenda or order of business for the meeting, (ii) the method by which business may be proposed and procedures for determining whether business has been properly (or not properly) introduced before the meeting, (iii) procedures for casting and the form of ballots to be used by shareholders in attendance at the meeting and the procedures to be followed for counting shareholder votes, (iv) rules, regulations and procedures for maintaining order at the meeting and the safety of those present, (v) limitations on attendance at or participation in the meeting to shareholders of record of the corporation, their duly authorized proxies or such other persons as the chair of the meeting shall determine, (vi) restrictions on entry to the meeting after the time fixed for commencement thereof and (vii) limitations on the time allotted to questions or comments by participants. Unless and to the extent otherwise determined by the chair of the meeting, it shall not be necessary to follow Roberts' Rules of Order or any other rules of parliamentary procedure at the meeting of shareholders. Following completion of the business of the meeting as determined by the chair of the meeting, the chair of the meeting shall have the exclusive authority to adjourn the meeting. 3 4 2.10. Conduct of Business. No business shall be conducted at an annual meeting of shareholders of the corporation except business brought before the meeting in accordance with the procedures set forth in these Bylaws; provided, however, that once business has been properly brought before the meeting in accordance with such procedures, nothing in this Section shall be deemed to preclude discussion by any shareholder of any such business. If the introduction of any business at a annual meeting of shareholders does not comply with the procedures specified in this Section, the chair of the meeting shall declare that such business is not properly before the meeting and shall not be considered at the meeting. ARTICLE III BOARD OF DIRECTORS 3.01. General Powers. The business, property and affairs of the corporation shall be managed under the direction of the board of directors. 3.02. Nomination of Directors. Nominations for the election of directors may be made by the board of directors or a committee appointed by the board of directors or by any shareholder entitled to vote in the election of directors generally. Any shareholder entitled to vote in the election of directors generally may nominate one or more persons for election as directors at a meeting only if written notice of such shareholder's intent to make such nomination or nominations has been given, either by personal delivery or by United States mail, postage prepaid, to the chief executive officer or secretary of the corporation not later than (i), with respect to an election to be held at an annual meeting of shareholders, the Notice Date, and (ii), with respect to the election to be held at a special meeting of shareholders for the election of directors, the close of business on the tenth day following the date on which notice of such meeting is first given to shareholders. Each such notice shall set forth (a) the name and address of the shareholder who intends to make the nomination and of the person or persons to be nominated; (b) the number of shares of the corporation entitled to vote at such meeting held by the shareholder and by each nominee; (c) a representation that the shareholder is a holder of record of stock of the corporation entitled to vote at such meeting and that such shareholder and the nominee or nominees proposed by such shareholder intend to appear in person at the meeting to nominate the person or persons specified in the notice; (d) a description of all arrangements or understandings between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder; (e) such other information regarding each nominee proposed by such shareholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission; and (f) the consent of each nominee to serve as a director of the corporation if so elected. In order to be properly before the meeting at which such nominations are to be considered, the shareholder proposing the nomination or nominations and the person or persons so nominated shall be present at the meeting. The chair of the meeting shall refuse to acknowledge the nomination of any person not made in compliance with the foregoing procedure. 3.03 Quorum and Manner of Acting. One-half in number of the directors in office at the time shall constitute a quorum for the transaction of business at any meeting. If the number 4 5 of directors in office at the time is not evenly divisible by two, any resulting fraction shall be rounded upwards to the next whole number in calculation of the quorum number. Except as otherwise required by the Amended and Restated Articles of Incorporation or these Bylaws, the affirmative vote of a majority of the directors present at any meeting at which a quorum is present shall be required for the taking of any action by the board of directors. In the absence of a quorum at any meeting of the board, such meeting, need not be held, or a majority of the directors present thereat or, if no director is present, the chief executive officer or secretary, may adjourn such meeting from time to time until a quorum shall be present. Notice of any adjourned meeting need not be given. 3.04. Offices; Place of Meetings. The board of directors may hold meetings and have an office or offices at such place or places within or without the State of Minnesota and at such time, as the board of directors may from time to time determine. 3.05. Annual Meeting. The board of directors shall meet for the purpose of organization, the election of officers and the transaction of other business, as soon as practicable following each annual meeting of shareholders. Such meeting shall be called and held at the place and time specified in the notice or waiver of notice thereof as in the case of a special meeting of the board of directors. 3.06. Regular Meeting. Regular meetings of the board of directors shall be held at such places and at such times as the board of directors shall from time to time determine. Notice of regular meetings of the board of directors need not be given. 3.07. Special Meetings. Special meetings of the board of directors shall be held whenever called by the chairman of the board, the chief executive officer or any two of the directors. Notice of each such meeting shall be mailed by the chief executive officer, secretary or chairman of the board to each director, addressed to him or her at his or her residence, usual place of business or other location designated by such director as the address for receipt of such notices, at least 48 hours before the day on which the meeting is to be held, or shall be sent to him or her at his or her residence or at such place of business or other address by facsimile, electronic transmission or similar means, or be delivered personally or by telephone, not later than 48 hours before the day on which the meeting is to be held. Each such notice shall state the time and place of the meeting but need not state the purposes thereof except as otherwise herein expressly provided. Notice of any such meeting need not be given to any director, however, if waived by him or her in writing or by facsimile, electronic or similar means, or by mail, whether before or after such meeting shall be held, or if he or she shall be present at such meeting; and any meeting of the board shall be a legal meeting without any notice thereof having been given if all of the directors shall be present thereat. 5 6 3.08. Organization. At each meeting of the board of directors, the chairman of the board, or in the absence of the chairman of the board, or if they be directors, the chief executive officer, or in the absence of the chief executive officer, the president, or in the absence of the president, any director chosen by a majority of the directors present thereat, shall preside. The secretary, or in his or her absence an assistant secretary of the corporation, or in the absence of the secretary and all assistant secretaries or subject to other direction of the board of directors, a person whom the chairman of such meeting shall appoint, shall act as secretary of such meeting and keep the minutes thereof. 3.09. Order of Business. At all meetings of the board of directors business shall be transacted in the order determined by the board of directors. 3.10. Action by Written Consent. Any action which might be taken at a meeting of the board of directors, or any duly authorized committee thereof, may be taken without a meeting if done in writing and signed by all of the directors or committee members, unless the articles provide otherwise and the action need not be approved by the shareholders. 3.11. Telephone, etc. Meetings. Members of the board of directors, or any committee designated by the board of directors, may participate in a meeting of the board of directors, or committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation shall constitute the presence of such person at such meeting. 3.12. Resignation. Any director of the corporation may resign at any time by giving written notice of his or her resignation to the chairman of the board, the chief executive officer or the secretary of the corporation. Such resignation shall take effect at the time specified therein, or, if the time when it shall become effective shall not be specified therein, then it shall take effect when received. Except as aforesaid, the acceptance of such resignation shall not be necessary to make it effective. 3.13. Compensation. Each director, in consideration of his or her serving as such, shall be entitled to receive from the corporation such amount per annum or such fees for attendance at directors' and committee meetings, or both, as the board of directors shall from time to time determine. The board of directors may likewise provide that the corporation shall reimburse each director or member of a committee for any expenses incurred by him or her on account to his or her attendance at any such meeting. Nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity and receiving proper compensation therefor. 3.14. Indemnification of Directors and Officers. The corporation shall indemnify its directors and officers in the manner and to the extent provided by law. 3.15. Removal. Any director or the entire board of directors may be removed at any time but only for cause. 6 7 ARTICLE IV COMMITTEES The board of directors may, by resolution or resolutions passed by a majority of the full board of directors, designate one or more committees, each such committee to consist of one or more directors of the corporation, which to the extent provided in said resolution or resolutions shall have and may exercise the powers of the board of directors in the management of the business and affairs of the corporation. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the board of directors. A majority of all the members of any such committee may determine its actions and fix the time and place of its meetings, unless the board of directors shall otherwise provide. The board of directors shall have power to change the members of any such committee at any time, to fill vacancies and to discharge any such committee, either with or without cause, at any time. ARTICLE V OFFICERS 5.01. Number. The principal officers of the corporation shall be chosen by the board of directors and shall be a chief executive officer and chief financial officer and, if elected by the board of directors, a president, one or more vice presidents (the number thereof to be determined by the board of directors and one or more of whom may be designated as executive or senior vice presidents), a secretary, a treasurer and one or more assistant secretaries and assistant treasurers. The board of directors may also elect a chairman and a vice chairman or vice chairmen of the board whom the board may designate to be an officer or officers of the corporation. In addition, there may be such subordinate officers, agents and employees as may be appointed in accordance with the provisions of Section 5.03. Any two or more offices may be held by the same person. The offices of the corporation for which officers may be elected shall be set forth, from time to time, by resolution of the board of directors. 5.02. Election, Qualifications and Term of Office. Each officer of the corporation, except such officers as may be appointed in accordance with the provisions of Section 5.03, shall be elected by the board of directors from time to time, and shall hold office until his or her successor shall have been duly elected and qualified, or until his or her death, or until he or she shall have resigned or shall have been removed in the manner herein provided. 5.03. Other Officers. The corporation may have such other subordinate officers, agents and employees as the chief executive officer may deem necessary, including one or more vice presidents, assistant secretaries, or assistant treasurers, a controller and one or more assistant controllers, each of whom shall hold office for such period, have such authority, and perform such duties as the chief executive officer may from time to time determine. 5.04. Removal. Any officer may be removed, either with or without cause, by the vote of a majority of the full board of directors or, except in the case of the chief executive officer or chief financial officer, by any officer upon whom the power of removal may be conferred by the board of directors. Such removal from office shall not affect any rights which such removed officer may have under any employment or stockholder agreement. 7 8 5.05. Resignation. Any officer may resign at any time by giving written notice to the board of directors or to the chief executive officer. Any such resignation shall take effect at the time specified therein or, if the time when it shall become effective shall not be specified therein, then it shall take effect when accepted by action of the board of directors. Except as aforesaid, the acceptance of such resignation shall not be necessary to make it effective. 5.06. Vacancies. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled for the unexpired portion of the term in the manner prescribed in these Bylaws for regular election or appointment to such office. If there shall occur a vacancy in the office of chief executive officer or chief financial officer, such vacancy shall be filled by the board of directors as expeditiously as practicable. If there shall occur a vacancy in the position of chairman of the board of directors or in any other office of the corporation, such vacancy may, but need not, be filled by the board of directors. 5.07. Chairman of the Board. The chairman of the board, if one is elected, shall preside at all meetings of the shareholders and of the board of directors and shall perform such other duties and have such responsibilities as the board of directors may from time to time determine. 5.08. Chief Executive Officer. The chief executive officer of the corporation shall have general active management of the business and affairs of the corporation. In the absence of the chairman of the board of directors, or if one is not elected or refuses to act, the chief executive officer shall preside at all meetings of the shareholders and directors. In the absence of the secretary and assistant secretary, or if none shall be elected, the chief executive officer shall maintain records of and, whenever necessary, certify all proceedings of the board of directors and the shareholders. The chief executive officer shall have such other duties as may, from time to time, be prescribed by the board of directors. The powers and duties specified herein may be modified or limited at any time by the board of directors. 5.09. President. The president, if one is elected, shall have such power and duties regarding the management and daily conduct of the business of the corporation as shall be determined by the board of directors, and, unless otherwise provided by the board of directors, such power and duties of the chief executive officer as may be delegated to the president by the chief executive officer. Unless otherwise provided by the board of directors, in the absence of the chairman of the board of directors (or if one is not elected) and the chief executive officer, the president shall preside at all meetings of the shareholders and directors. In the absence of the chief executive officer, the president shall succeed to the chief executive officer's powers and duties unless otherwise directed by the chief executive officer or the board of directors. 5.10. Chief Financial Officer. The chief financial officer shall (i) keep accurate financial records for the corporation; (ii) deposit all moneys, drafts and checks in the name of, and to the credit of, the corporation in such banks and depositories as the board of directors shall, from time to time, designate or otherwise authorize; (iii) have the power to endorse, for deposit, all notes, checks and drafts received by the corporation; (iv) disburse the funds of the corporation, making or causing to be made proper vouchers therefor; (v) render to the chief executive officer and the board of directors, whenever requested, an account of all of his or her 8 9 transactions as chief financial officer and of the financial condition of the corporation, and (vi) perform such other duties as may, from time to time, be prescribed by the board of directors or by the chief executive officer. The powers and duties specified herein may be modified or limited at any time by the board of directors. 5.11. Vice President. Each vice president shall have such powers and duties as may be prescribed by the board of directors and, unless otherwise provided by the board of directors, such power and duties of the chief executive officer or president as may be delegated from time to time to each vice president by the chief executive officer or president, as the case may be. In the event of the absence of the president, the vice presidents shall succeed to the duties and powers of such office in the order of their election, as appears from the minutes of the meeting or meetings at which such elections shall have taken place, unless otherwise provided by the board of directors, chief executive officer or president. 5.12. Secretary. The secretary, if one shall be elected by the board of directors, shall be secretary of and shall attend all meetings of the shareholders and board of directors. The secretary shall act as clerk thereof and shall record all proceedings of such meetings in the minute book of the corporation and, whenever necessary, certify all proceedings of the board of directors and the shareholders. The secretary shall give proper notices of meetings of shareholders and directors as provided in these Bylaws. The secretary shall, with the chairman of the board of directors, president or any vice president, sign or cause to be signed by facsimile signature all certificates for shares of the corporation and shall have such other powers and shall perform such other duties as may be prescribed from time to time by the board of directors. 5.14. Treasurer. The treasurer, if one shall be elected by the board of directors, shall have such powers and duties as may be prescribed by the board of directors and, unless otherwise provided by the board of directors, such power and duties of the chief financial officer as may be delegated from time to time to the treasurer by the chief financial officer. In the absence of the chief financial officer, the treasurer shall succeed to the duties and powers of the chief financial officer unless otherwise directed by the board of directors, chief executive officer or chief financial officer. The treasurer shall have charge and custody of, and be responsible for, all funds and securities of the corporation, and shall deposit all such funds to the credit of the corporation in such banks, trust companies or other depositories as shall selected in accordance with the provisions of these Bylaws; shall disburse the funds of the corporation as may be ordered by the board of directors, making proper vouchers for such disbursements, and shall render to the board of directors, whenever the board may require him or her so to do, and shall present at the annual meeting of the stockholders a statement of all his or her transactions as treasurer; and, in general, shall perform all the duties incident to the office of treasurer and such other duties as from time to time may be assigned to him or her by the board of directors, chief executive officer or the chief financial officer. 5.13. Assistant Secretary, Assistant Secretary and Assistant Treasurer. Any assistant secretary or assistant treasurer, who may from time to time be elected by the board of directors, may perform the duties of the secretary or of the treasurer, as the case may be, under the supervision and subject to the control of the secretary or of the treasurer, respectively. Unless otherwise provided by the board of directors, the chief executive officer or the secretary, in the 9 10 event of the absence of the secretary, an assistant secretary shall have the powers and perform the duties of the office of secretary. If there shall be more than one assistant secretary, the assistant secretary appearing as first elected in the minutes of the meeting at which such elections shall have taken place shall exercise such powers and have such duties. Unless otherwise provided by the board of directors, the chief executive officer, the chief financial officer or the treasurer, in the event of the absence of the treasurer, an assistant treasurer shall have the powers and perform the duties of the office of treasurer. If there shall be more than one assistant treasurer, the assistant treasurer appearing as first elected in the minutes of the meeting or meetings at which such elections shall have taken place, shall exercise such powers and have such duties. Each assistant secretary and each assistant treasurer shall also have such powers and duties of the secretary or the treasurer as the secretary or the treasurer respectively may delegate to such assistant and shall also have such other powers and perform such other duties as may be prescribed from time to time by the board of directors. Any assistant secretary shall have authority to attest by his or her signature to the same extent as the secretary. 5.15 Compensation. The compensation of the officers shall be fixed from time to time by or in the manner prescribed by the board of directors, and none of such officers shall be prevented from receiving compensation by reason of the fact that he or she is also a director of the corporation. The application of this Section 5.15 shall not affect the right any officer may have regarding compensation under an employment agreement. ARTICLE VI AMENDMENTS Subject to the provisions of the articles of incorporation, these Bylaws may be altered, amended or repealed at any regular meeting of the shareholders (or at any special meeting thereof duly called for that purpose). Subject to the MBCA (as defined in the articles of incorporation), the board of directors may, by the approval of a majority of all directors, amend these Bylaws, or enact such other Bylaws as in their judgment may be advisable for the regulation of the conduct of the affairs of the corporation. 10 EX-4.1 4 c57156a2ex4-1.txt SPECIMEN OF COMMON STOCK CERTIFICATE 1 Exhibit 4.1 ILX LIGHTWAVE CORPORATION INCORPORATED UNDER THE LAWS OF THE STATE OF MINNESOTA COMMON STOCK SEE REVERSE FOR CERTAIN DEFINITIONS CUSIP 44966Q 10 2 THIS CERTIFIES THAT IS THE OWNER OF FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, $.01 PAR VALUE PER SHARE, OF ILX LIGHTWAVE CORPORATION transferable only on the books of the Corporation in person or by attorney upon surrender of this Certificate properly endorsed. This Certificate is not valid unless countersigned and registered by the Transfer Agent and Registrar. WITNESS the facsimile signatures of its duly authorized officers. Dated: SECRETARY PRESIDENT COUNTERSIGNED AND REGISTERED: AMERICAN STOCK TRANSFER & TRUST COMPANY (New York, NY) TRANSFER AGENT AND REGISTRAR BY AUTHORIZED SIGNATURE
2 THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH SHAREHOLDER WHO SO REQUESTS A FULL STATEMENT OF THE DESIGNATIONS, PREFERENCES, LIMITATIONS AND RELATIVE RIGHTS OF THE SHARES OF EACH CLASS OR SERIES AUTHORIZED TO BE ISSUED, SO FAR AS THEY HAVE BEEN DETERMINED, AND THE AUTHORITY OF THE BOARD TO DETERMINE THE RELATIVE RIGHTS AND PREFERENCES OF SUBSEQUENT CLASSES OR SERIES. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - TEN ENT - JT TEN - as tenants in common as tenants by the entireties as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT- Custodian -------------------- ------------------------ (Cust) (Minor) under Uniform Gifts to Minors Act ---------------------------------------------------- (State) UNIF TRF MIN ACT- Custodian (until age ) --------------- ---------- (Cust) under Uniform Transfers ---------------------- (Minor) to Minors Act ----------------------------------------- (State) Additional abbreviations may also be used though not in the above list. For value received, hereby sell, assign and transfer unto IDENTIFYING NUMBER OF ASSIGNEE (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) Shares of the Common Stock represented by the within Certificate, and do hereby irrevocably constitute and appoint Attorney to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated NOTICE: The signature to this assignment must correspond with the name as written upon the face of the certificate, in every particular, without alteration or enlargement, or any change whatever. SIGNATURE(S) GUARANTEED: THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15. KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, MUTILATED OR DESTROYED, THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE ISSUANCE OF A REPLACEMENT CERTIFICATE. EX-5.1 5 c57156a2ex5-1.txt OPINION OF DORSEY & WHITNEY LLP 1 EXHIBIT 5.1 ILX Lightwave Corporation 31950 East Frontage Road Bozeman, MT 59715 Re: Registration Statement on Form S-1 SEC File No. 333-45120 Ladies and Gentlemen: We have acted as counsel to ILX Lightwave Corporation, a Minnesota corporation (the "Company"), in connection with a Registration Statement on Form S-1 (the "Registration Statement") relating to the sale by the Company of up to 4,896,680 shares of common stock of the Company, par value $0.01 per share (including 396,680 shares subject to the Underwriters' over-allotment option) (the "Common Stock"), and the sale by certain Company shareholders of 853,320 shares of Common Stock (including 353,320 shares subject to the Underwriters' over-allotment option). We have examined such documents and have reviewed such questions of law as we have considered necessary and appropriate for the purposes of our opinions set forth below. In rendering our opinions set forth below, we have assumed the authenticity of all documents submitted to us as originals, the genuineness of all signatures and the conformity to authentic originals of all documents submitted to us as copies. We have also assumed the legal capacity for all purposes relevant hereto of all natural persons and, with respect to all parties to agreements or instruments relevant hereto other than the Company, that such parties had the requisite power and authority (corporate or otherwise) to execute, deliver and perform such agreements or instruments, that such agreements or instruments have been duly authorized by all requisite action (corporate or otherwise), executed and delivered by such parties and that such agreements or instruments are the valid, binding and enforceable obligations of such parties. As to questions of fact material to our opinions, we have relied upon certificates of officers of the Company and of public officials. We have also assumed that the shares of Common Stock to be sold by the Company will be priced by the Pricing Committee established by the authorizing resolutions adopted by the Company's Board of Directors in accordance with such resolutions and will be issued and sold as described in the Registration Statement. Based on the foregoing, we are of the opinion that the shares of Common Stock to be sold by the Company pursuant to the Registration Statement have been duly authorized by all requisite corporate action and, upon issuance, delivery and payment therefor as described in the Registration Statement, will be validly issued, fully paid and nonassessable. We are of the further opinion that the 853,320 shares of Common Stock to be sold by the shareholders pursuant to the Registration Statement are, as of the date hereof, duly authorized, validly issued, fully paid and nonassessable or, in the case of certain shares of Common Stock underlying outstanding options, such shares have been duly authorized and, upon issuance, delivery and payment 2 therefor in accordance with the terms of the Company's 1998 Long-Term Incentive and Stock Option Plan, will be validly issued, fully paid and nonassessable. Our opinions expressed above are limited to the laws of the State of Minnesota. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement, and to the reference to our firm under the heading "Legal Matters" in the Prospectus constituting part of the Registration Statement. Dated: November 2, 2000 Very truly yours, /s/ Dorsey & Whitney LLP LTM EX-10.1 6 c57156a2ex10-1.txt EMPLOYEE STOCK PURCHASE PLAN 1 Exhibit 10.1 ILX LIGHTWAVE CORPORATION EMPLOYEE STOCK PURCHASE PLAN ARTICLE I. INTRODUCTION Section 1.01 Purpose. The purpose of the Plan is to provide employees of the Company and certain related corporations with an opportunity to share in the ownership of the Company by providing them with a convenient means for regular and systematic purchases of Common Stock and, thus, to develop a stronger incentive to work for the continued success of the Company. Section 1.02 Rules of Interpretation. It is intended that the Plan be an "employee stock purchase plan" as defined in Section 423(b) of the Code and Treasury Regulations promulgated thereunder. Accordingly, the Plan shall be interpreted and administered in a manner consistent therewith if so approved. All Participants in the Plan will have the same rights and privileges consistent with the provisions of the Plan. Section 1.03 Definitions. For purposes of the Plan, the following terms will have the meanings set forth below: (a) "Acceleration Date" means the closing date of (i) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of Company common stock would be converted into cash, securities or other property, other than a merger of the Company in which shareholders of the Company immediately prior to the merger have substantially the same proportionate ownership of stock in the surviving corporation immediately after the merger; (ii) any sale, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company; or (iii) any plan of liquidation or dissolution of the Company. (b) "Affiliate" means any subsidiary corporation of the Company, as defined in Section 424(f) of the Code, whether now or hereafter acquired or established. (c) "Code" means the Internal Revenue Code of 1986, as amended. (d) "Committee" means the committee described in Section 10.01 of the Plan. (e) "Common Stock" means the Company's Common Stock, $.01 par value per share, as such stock may be adjusted for changes in the stock or the Company as contemplated by Article XI of the Plan. (f) "Company" means ILX Lightwave Corporation, a Minnesota corporation, and its successors by merger or consolidation as contemplated by Section 11.02 of the Plan. (g) "Current Compensation" means all regular wage (including overtime), salary and commission payments paid by the Company to a Participant in accordance with the terms of his or 2 her employment, but excluding annual bonus payments, quarterly incentive payments and all other forms of special compensation. (h) "Fair Market Value" as of a given date means the fair market value of the Common Stock determined by such methods or procedures as shall be established from time to time by the Committee, but shall not be less than, if the Common Stock is then quoted on the NASDAQ National Market System, the average of the high and low sales price as reported on the NASDAQ National Market System on such date or, if the NASDAQ National Market System is not open for trading on such date, on the most recent preceding date when it is open for trading. If on a given date the Common Stock is not traded on an established securities market, the Committee shall make a good faith attempt to satisfy the requirements of this Section 1.03(h) and in connection therewith shall take such action as it deems necessary or advisable. (i) "Participant" means a Regular Employee who is eligible to participate in the Plan under Section 2.01 of the Plan and who has elected to participate in the Plan. (j) "Participating Affiliate" means an Affiliate that has been designated by the Committee in advance of the Purchase Period in question as a corporation whose eligible Regular Employees may participate in the Plan. (k) "Plan" means the ILX Lightwave Corporation Employee Stock Purchase Plan, as it may be amended, the provisions of which are set forth herein. (l) "Purchase Period" means the period beginning on September 1, 2000, and ending on the last business day in August, 2001 and thereafter each approximate six-month period beginning on September 1st and March 1st of each year and ending on the last business day in February and August of each year; provided, however, that the then current Purchase Period will end upon the occurrence of an Acceleration Date. (m) "Regular Employee" means an employee of the Company or a Participating Affiliate as of the first day of a Purchase Period, including an officer or director who is also an employee. (n) "Stock Purchase Account" means the account maintained on the books and records of the Company recording the amount received from each Participant through payroll deductions made under the Plan. ARTICLE II. ELIGIBILITY AND PARTICIPATION Section 2.01 Eligible Employees. All Regular Employees shall be eligible to participate in the Plan beginning on the first day of the first Purchase Period to commence after such person becomes a Regular Employee. Subject to the provisions of Article VI of the Plan, each such employee will continue to be eligible to participate in the Plan so long as he or she remains a Regular Employee. Section 2.02 Election to Participate. An eligible Regular Employee may elect to participate in the Plan for a given Purchase Period by filing with the Company, in advance of that Purchase Period and in accordance with such terms and conditions as the Committee in its sole discretion may 3 impose, a form provided by the Company for such purpose (which authorizes regular payroll deductions from Current Compensation beginning with the first payday in that Purchase Period and continuing until the employee withdraws from the Plan or ceases to be eligible to participate in the Plan). Section 2.03 Limits on Stock Purchase. No employee shall be granted any right to purchase Common Stock hereunder if such employee, immediately after such a right to purchase is granted, would own, directly or indirectly, within the meaning of Section 423(b)(3) and Section 424(d) of the Code, Common Stock possessing 5% or more of the total combined voting power or value of all the classes of the capital stock of the Company or of all Affiliates. Section 2.04 Voluntary Participation. Participation in the Plan on the part of a Participant is voluntary and such participation is not a condition of employment nor does participation in the Plan entitle a Participant to be retained as an employee. ARTICLE III. PAYROLL DEDUCTIONS AND STOCK PURCHASE ACCOUNT Section 3.01 Deduction from Pay. The form described in Section 2.02 of the Plan will permit a Participant to elect payroll deductions of not less than 1% nor more than 10% of such Participant's Current Compensation for each pay period during such Purchase Period, but in no event more than $2,500 per Purchase Period, and subject to such other limitations as the Committee in its sole discretion may impose. A Participant may cease making payroll deductions at any time, subject to such limitations as the Committee in its sole discretion may impose. In the event that during a Purchase Period the entire credit balance in a Participant's Stock Purchase Account exceeds the product of (a) 85% of the Fair Market Value of the Common Stock on the first business day of that Purchase Period and (b) 300, then payroll deductions for such Participant shall automatically cease, and shall resume on the first pay period of the next Purchase Period. Section 3.02 Credit to Account. Payroll deductions will be credited to the Participant's Stock Purchase Account on each payday. Section 3.03 Interest. No interest will be paid on payroll deductions or on any other amount credited to, or on deposit in, a Participant's Stock Purchase Account; provided that if the Plan is discontinued as provided in Section 9.03 the Company will return all payroll deductions then credited to the Participant's Stock Purchase Account plus simple interest at the rate of 3.5% per year. Section 3.04 Nature of Account. The Stock Purchase Account is established solely for accounting purposes, and all amounts credited to the Stock Purchase Account will remain part of the general assets of the Company or the Participating Affiliate (as the case may be). Section 3.05 No Additional Contributions. A Participant may not make any payment into the Stock Purchase Account other than the payroll deductions made pursuant to the Plan. ARTICLE IV. RIGHT TO PURCHASE SHARES 4 Section 4.01 Number of Shares. Each Participant will have the right to purchase on the last business day of the Purchase Period all, but not less than all, of the number of whole and fractional shares, computed to four decimal places, of Common Stock that can be purchased at the price specified in Section 4.02 of the Plan with the entire credit balance in the Participant's Stock Purchase Account, subject to the limitations that (a) no more than 300 shares of Common Stock may be purchased under the Plan by any one Participant for a given Purchase Period, and (b) in accordance with Section 423(b)(8) of the Code, no more than $25,000 in Fair Market Value (determined at the beginning of each Purchase Period) of Common Stock and other stock may be purchased under the Plan and all other employee stock purchase plans (if any) of the Company and the Affiliates by any one Participant for any calendar year. If the purchases for all Participants for any Purchase Period would otherwise cause the aggregate number of shares of Common Stock to be sold under the Plan to exceed the number specified in Section 10.04 of the Plan, each Participant shall be allocated a pro rata portion of the Common Stock to be sold for such Purchase Period. Section 4.02 Purchase Price. The purchase price for any Purchase Period shall be that price as announced by the Committee prior to the first business day of that Purchase Period, which price may, in the discretion of the Committee, be a price which is not fixed or determinable as of the first business day of that Purchase Period; provided, however, that in no event shall the purchase price for any Purchase Period be less than the lesser of (a) 85% of the Fair Market Value of the Common Stock on the first business day of that Purchase Period or (b) 85% of the Fair Market Value of the Common Stock on the last business day of that Purchase Period, in each case rounded up to the next higher full cent. ARTICLE V. EXERCISE OF RIGHT Section 5.01 Purchase of Stock. On the last business day of a Purchase Period, the entire credit balance in each Participant's Stock Purchase Account will be used to purchase the number of whole shares and fractional shares, computed to four decimal places, of Common Stock purchasable with such amount (subject to the limitations of Section 4.01 of the Plan), unless the Participant has filed with the Company, in advance of that date and subject to such terms and conditions as the Committee in its sole discretion may impose, a form provided by the Company which requests the distribution of the entire credit balance in cash. Section 5.02 Notice of Acceleration Date. The Company shall use its best efforts to notify each Participant in writing at least ten days prior to any Acceleration Date that the then current Purchase Period will end on such Acceleration Date. ARTICLE VI. WITHDRAWAL FROM PLAN; SALE OF STOCK Section 6.01 Voluntary Withdrawal. A Participant may, in accordance with such terms and conditions as the Committee in its sole discretion may impose, withdraw from the Plan and cease making payroll deductions by filing with the Company a form provided for this purpose. In such event, the entire credit balance in the Participant's Stock Purchase Account will be paid to the Participant in cash within 30 days. A Participant who withdraws from the Plan will not be eligible to reenter the Plan until the beginning of the next Purchase Period following the date of such withdrawal. 5 Section 6.02 Death. Subject to such terms and conditions as the Committee in its sole discretion may impose, upon the death of a Participant, no further amounts shall be credited to the Participant's Stock Purchase Account. Thereafter, on the last business day of the Purchase Period during which such Participant's death occurred and in accordance with Section 5.01 of the Plan, the entire credit balance in such Participant's Stock Purchase Account will be used to purchase Common Stock, unless such Participant's estate has filed with the Company, in advance of that day and subject to such terms and conditions as the Committee in its sole discretion may impose, a form provided by the Company which elects to have the entire credit balance in such Participant's Stock Account distributed in cash within 30 days after the end of that Purchase Period or at such earlier time as the Committee in its sole discretion may decide. Each Participant, however, may designate one or more beneficiaries who, upon death, are to receive the Common Stock or the amount that otherwise would have been distributed or paid to the Participant's estate and may change or revoke any such designation from time to time. No such designation, change or revocation will be effective unless made by the Participant in writing and filed with the Company during the Participant's lifetime. Unless the Participant has otherwise specified the beneficiary designation, the beneficiary or beneficiaries so designated will become fixed as of the date of the death of the Participant so that, if a beneficiary survives the Participant but dies before the receipt of the payment due such beneficiary, the payment will be made to such beneficiary's estate. Section 6.03 Termination of Employment. Subject to such terms and conditions as the Committee in its sole discretion may impose, upon a Participant's normal or early retirement with the consent of the Company under any pension or retirement plan of the Company or Participating Affiliate, no further amounts shall be credited to the Participant's Stock Purchase Account. Thereafter, on the last business day of the Purchase Period during which such Participant's approved retirement occurred and in accordance with Section 5.01 of the Plan, the entire credit balance in such Participant's Stock Purchase Account will be used to purchase Common Stock, unless such Participant has filed with the Company, in advance of that day and subject to such terms and conditions as the Committee in its sole discretion may impose, a form provided by the Company which elects to receive the entire credit balance in such Participant's Stock Purchase Account in cash within 30 days after the end of that Purchase Period, provided that such Participant shall have no right to purchase Common Stock in the event that the last day of such a Purchase Period occurs more than three months following the termination of such Participant's employment with the Company by reason of such an approved retirement. In the event of any other termination of employment (other than death) with the Company or a Participating Affiliate, participation in the Plan will cease on the date the Participant ceases to be a Regular Employee for any reason. In such event, the entire credit balance in such Participant's Stock Purchase Account will be paid to the Participant in cash within 30 days. For purposes of this Section 6.03, a transfer of employment to any Affiliate, or a leave of absence that has been approved by the Committee, will not be deemed a termination of employment as a Regular Employee. ARTICLE VII. NONTRANSFERABILITY Section 7.01 Nontransferable Right to Purchase. The right to purchase Common Stock hereunder may not be assigned, transferred, pledged or hypothecated (whether by operation of law or otherwise), except as provided in Section 6.02 of the Plan, and will not be subject to execution, 6 attachment or similar process. Any attempted assignment, transfer, pledge, hypothecation or other disposition or levy of attachment or similar process upon the right to purchase will be null and void and without effect. Section 7.02 Nontransferable Account. Except as provided in Section 6.02 of the Plan, the amounts credited to a Stock Purchase Account may not be assigned, transferred, pledged or hypothecated in any way, and any attempted assignment, transfer, pledge, hypothecation or other disposition of such amounts will be null and void and without effect. Section 7.03 Nontransferable Shares. Except as the Committee shall otherwise permit, prior to the second anniversary of the beginning of any Purchase Period, the Common Stock purchased at the end of such Purchase Period by a Participant pursuant to Section 5.01 of the Plan together with any additional Common Stock acquired pursuant to Section 8.04 of the Plan upon the reinvestment of dividends may not be assigned, transferred, pledged, hypothecated or otherwise disposed of in any way other than by will or by the laws of descent and distribution, and any other attempted assignment, transfer, pledge, hypothecation or other disposition of such share or shares will be null and void and without effect. ARTICLE VIII. COMMON STOCK ISSUANCE AND DIVIDEND REINVESTMENT Section 8.01 Issuance of Purchased Shares. Promptly after the last day of each Purchase Period and subject to such terms and conditions as the Committee in its sole discretion may impose, the Company will cause the Common Stock then purchased pursuant to Section 5.01 of the Plan to be issued for the benefit of the Participant and held in the Plan pursuant to Section 8.03 of the Plan. Section 8.02 Completion of Issuance. A Participant shall have no interest in the Common Stock purchased pursuant to Section 5.01 of the Plan until such Common Stock is issued for the benefit of the Participant pursuant to Section 8.03 of the Plan. Section 8.03 Form of Ownership. The Common Stock issued under Section 8.01 of the Plan will be held in the Plan in the name of the Participant or jointly in the name of the Participant and another person, as the Participant may direct on a form provided by the Company, until such time as certificates for such shares of Common Stock are delivered to or for the benefit of the Participant pursuant to Section 8.05 of the Plan. Section 8.04 Automatic Dividend Reinvestment. Prior to the delivery of certificates to or for the benefit of the Participant under Section 8.05 of the Plan, any and all cash dividends paid on full and fractional shares of Common Stock issued under either Section 8.01 of the Plan or this Section 8.04 shall be reinvested to acquire either new issue Common Stock or shares of Common Stock purchased on the open market, as determined by the Committee in its sole discretion. Purchases of Common Stock under this Section 8.04 will be (a) with respect to shares newly issued by the Company, invested on the dividend payment date, or, if that date is not a trading day, the immediately preceding trading day, or (b) with respect to shares purchased on the open market, normally purchased on the open market within ten business days of the dividend payment date, depending upon market conditions. The price per share of the Common Stock issued under this Section 8.04 shall be (x) with respect to shares newly issued by the Company, the Fair Market Value of the 7 Common Stock on the applicable investment date, or (y) with respect to shares purchased on the open market, the weighted average price per share at which the Common Stock is actually purchased on the open market for the relevant period on behalf of all participants in the Plan. All shares of Common Stock acquired under this Section 8.04 will be held in the Plan in the same name as the Common Stock upon which the cash dividends were paid. Section 8.05 Delivery. At any time following the conclusion of the nontransferability period set forth in Section 7.03 of the Plan and subject to such terms and conditions as the Committee in its sole discretion may impose, by filing with the Company a form provided by the Company for such purpose, the Participant may elect to have the Company cause to be delivered to or for the benefit of the Participant a certificate for the number of whole shares and cash for the number of fractional shares representing the Common Stock purchased pursuant to Section 5.01 of the Plan together with any additional Common Stock acquired pursuant to Section 8.04 of the Plan upon the reinvestment of dividends. The election notice will be processed as soon as practicable after receipt. A certificate for whole shares normally will be mailed to the Participant within sixty business days after receipt of the election notice; provided, however, that if the notice is received between a dividend record date and a dividend payment date, a certificate will generally not be sent out until the declared dividends have been reinvested pursuant to Section 8.04 of the Plan. Any fractional shares normally will be sold on the first trading day of each month and a check for the fractional shares sent to the Participant promptly thereafter. 8 ARTICLE IX. EFFECTIVE DATE, AMENDMENT AND TERMINATION OF PLAN Section 9.01 Effective Date. The Plan was approved by the Board of Directors on May 5, 2000, and shall be approved by the shareholders of the Company within twelve (12) months thereof. Section 9.02 Plan Commencement. The initial Purchase Period under the Plan will commence September 1, 2000. Thereafter, each succeeding Purchase Period will commence and terminate in accordance with Section 1.03(l) of the Plan. Section 9.03 Powers of Board. The Board of Directors may amend or discontinue the Plan at any time, including immediately before the end of any Purchase Period and before any rights to purchase Common Stock for that Purchase Period accrue. No amendment or discontinuation of the Plan, however, shall be made without shareholder approval if shareholder approval is required under any rules or regulations of the NASDAQ National Market System or any securities exchange that are applicable to the Company. ARTICLE X. ADMINISTRATION Section 10.01 The Committee. The Plan shall be administered by a committee (the "Committee") established by the Board of Directors. The members of the Committee need not be directors of the Company and shall be appointed by and serve at the pleasure of the Board of Directors. Section 10.02 Powers of Committee. Subject to the provisions of the Plan, the Committee shall have full authority to administer the Plan, including authority to interpret and construe any provision of the Plan, to establish deadlines by which the various administrative forms must be received in order to be effective, and to adopt such other rules and regulations for administering the Plan as it may deem appropriate. The Committee shall have full and complete authority to determine whether all or any part of the Common Stock acquired pursuant to the Plan shall be subject to restrictions on the transferability thereof or any other restrictions affecting in any manner a Participant's rights with respect thereto but any such restrictions shall be contained in the form by which a Participant elects to participate in the Plan pursuant to Section 2.02 of the Plan. Decisions of the Committee will be final and binding on all parties who have an interest in the Plan. Section 10.03 Power and Authority of the Board of Directors. The Board of Directors may, at any time and from time to time, notwithstanding anything to the contrary contained herein, and without any further action of the Committee, exercises the powers and duties of the Committee under the Plan. Section 10.04 Stock to be Sold. The Common Stock to be issued and sold under the Plan may be authorized but unissued shares or shares acquired in the open market or otherwise. Except as provided in Section 11.01 of the Plan, the aggregate number of shares of Common Stock to be sold under the Plan will not exceed 150,000 shares. Section 10.05 Notices. Notices to the Committee should be addressed as follows: 9 ILX Lightwave Corporation 31950 East Frontage Road Bozeman MT 59715 Attn: ESPP ARTICLE XI. ADJUSTMENT FOR CHANGES IN STOCK OR COMPANY Section 11.01 Stock Dividend or Reclassification. If the outstanding shares of Common Stock are increased, decreased, changed into or exchanged for a different number or kind of securities of the Company, or shares of a different par value or without par value, through reorganization, recapitalization, reclassification, stock dividend, stock split, amendment to the Company's Certificate of Incorporation, reverse stock split or otherwise, an appropriate adjustment shall be made in the maximum numbers and kind of securities to be purchased under the Plan with a corresponding adjustment in the purchase price to be paid therefor. Section 11.02 Merger or Consolidation. If the Company is merged into or consolidated with one or more corporations during the term of the Plan, appropriate adjustments will be made to give effect thereto on an equitable basis in terms of issuance of shares of the corporation surviving the merger or of the consolidated corporation, as the case may be. ARTICLE XII. APPLICABLE LAW Rights to purchase Common Stock granted under the Plan shall be construed and shall take effect in accordance with the laws of the State of Montana. ILX LIGHTWAVE CORPORATION 31950 E. Frontage Road Bozeman, Montana 59715 (406) 586-1244 EX-10.4 7 c57156a2ex10-4.txt FORM OF 2000 STOCK INCENTIVE PLAN 1 EXHIBIT 10.4 ILX LIGHTWAVE CORPORATION 2000 STOCK INCENTIVE PLAN 1. Purpose. The purpose of the ILX Lightwave Corporation 2000 Stock Incentive Plan (the "Plan") is to promote the interests of ILX Lightwave Corporation (the "Company") and its shareholders by aiding the Company in attracting, retaining and providing incentives to employees, officers, directors who are not also employees ("Non-Employee Directors"), consultants and independent contractors. 2. Definitions. As used in the Plan, the following terms shall have the meanings set forth below: "Affiliate" shall mean (i) any entity that, directly or indirectly through one or more intermediaries, is controlled by the Company, and (ii) any entity in which the Company has a significant equity interest, as determined by the Committee. "Award" shall mean any Option, Stock Appreciation Right, Restricted Stock, Restricted Stock Unit, Performance Award or other Stock-Based Award granted under the Plan. "Award Agreement" shall mean any written agreement, contract or other instrument or document evidencing any Award granted under the Plan. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, and any regulations promulgated thereunder. "Committee" shall mean either the Board of Directors of the Company (the "Board") or a committee of the Board appointed by the Board to administer the Plan and composed of not less than two directors, each of whom is a "Non-Employee Director" within the meaning of Rule 16b-3 (which term "Non-Employee Director" is defined in this paragraph for purposes of the definition of "Committee" only and is not intended to define such term as used elsewhere in the Plan) and each of whom is an "outside director" within the meaning of Section 162(m) of the Code. "Eligible Person" shall mean any employee, officer, director (including any Non-Employee Director), consultant or independent contractor providing services or other benefits to the Company or any Affiliate who the Committee determines to be an Eligible Person. "Fair Market Value" shall mean, with respect to any property (including, without limitation, any Shares or other securities), the fair market value of such property determined by such methods or procedures as shall be established from time to time by the Committee. Notwithstanding the foregoing, unless otherwise determined by the 2 Committee, the Fair Market Value of Shares on a given date for purposes of the Plan shall not be less than: (i) the closing price as reported for composite transactions, if the Shares are then listed on a national securities exchange; (ii) the last sale price, if the Shares are then quoted on the Nasdaq National Market; or (iii) in all other cases, the average of the closing representative bid and asked prices of the Shares, all on the date as of which Fair Market Value is being determined. If on a given date the Shares are not traded in an established securities market, the Committee shall make a good faith attempt to satisfy the requirements of this clause and in connection therewith shall take such action as it deems necessary or advisable. "Incentive Stock Option" shall mean an option granted under Section 6(a) of the Plan that is intended to meet the requirements of Section 422 of the Code or any successor provision. "Non-Qualified Stock Option" shall mean an option granted under Section 6(a) of the Plan that is not intended to be an Incentive Stock Option. "Option" shall mean an Incentive Stock Option or a Non-Qualified Stock Option, and shall include Reload Options. "Other Stock-Based Award" shall mean any right granted under Section 6(e) of the Plan. "Participant" shall mean an Eligible Person designated to be granted an Award under the Plan. "Performance Award" shall mean any right granted under Section 6(d) of the Plan. "Person" shall mean any individual, corporation, partnership, association or trust. "Reload Option" shall mean any Option granted under Section 6(a)(iv) of the Plan. "Restricted Stock" shall mean any Share granted under Section 6(c) of the Plan. "Restricted Stock Unit" shall mean any unit granted under Section 6(c) of the Plan evidencing the right to receive a Share (or a cash payment equal to the Fair Market Value of a Share) at some future date. "Rule 16b-3" shall mean Rule 16b-3 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. "Shares" shall mean shares of Common Stock, $.01 par value, of the Company, or such other securities or property as may become subject to Awards pursuant to an adjustment made under Section 4(c) of the Plan. 2 3 "Stock Appreciation Right" shall mean any right granted under Section 6(b) of the Plan. 3. Administration. (a) Power and Authority of the Committee. The Plan shall be administered by the Committee. Subject to the terms of the Plan and applicable law, the Committee shall have full power and authority to: (i) designate Participants; (ii) determine the type or types of Awards to be granted to each Participant under the Plan; (iii) determine the number of Shares to be covered by (or with respect to which payments, rights or other matters are to be calculated in connection with) each Award; (iv) determine the terms and conditions of any Award or Award Agreement; (v) amend the terms and conditions of any Award or Award Agreement and accelerate the exercisability of any Award or the lapse of restrictions relating to any Award; (vi) determine whether, to what extent and under what circumstances Awards may be exercised in cash, Shares, other securities, other Awards or other property, or canceled, forfeited or suspended; (vii) determine whether, to what extent and under what circumstances cash, Shares, other securities, other Awards, other property and other amounts payable with respect to an Award under the Plan shall be deferred either automatically or at the election of the holder thereof or the Committee; (viii) interpret and administer the Plan and any Award made under or instrument or agreement, including an Award Agreement, relating to the Plan; (ix) establish, amend, suspend or waive such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan; and (x) make any other determination and take any other action that the Committee deems necessary or desirable for the administration of the Plan. Unless otherwise expressly provided in the Plan, all designations, determinations, interpretations and other decisions under or with respect to the Plan or any Award shall be within the sole discretion of the Committee, may be made at any time and shall be final, conclusive and binding upon any Participant, any holder or beneficiary of any Award and any employee of the Company or any Affiliate. (b) Delegation. The Committee may delegate to one or more officers of the Company or any Affiliate or a committee of such officers the authority, subject to such terms and limitations as the Committee shall determine, to grant Awards to Eligible Persons who are not officers or directors of the Company for purposes of Section 16 of the Securities Exchange Act of 1934, as amended. 4. Shares Available for Awards. (a) Shares Available. Subject to adjustment as provided in Section 4(c), the total number of Shares available for granting Awards under the Plan shall be [________]. Shares to be issued under the Plan may be either authorized but unissued Shares or Shares acquired in the open market or otherwise. Any Shares that are used by a Participant as full or partial payment to the Company of the purchase price relating to an Award, or in connection with the satisfaction of tax obligations relating to an Award, shall again be 3 4 available for granting Awards (other than Incentive Stock Options) under the Plan. If any Shares covered by an Award or to which an Award relates are not purchased or are forfeited, or if an Award otherwise terminates without delivery of any Shares, then the number of Shares counted against the aggregate number of Shares available under the Plan with respect to such Award, to the extent of any such forfeiture or termination, shall again be available for granting Awards under the Plan. (b) Accounting for Awards. For purposes of this Section 4, if an Award entitles the holder thereof to receive or purchase Shares, the number of Shares covered by such Award or to which such Award relates shall be counted on the date of grant of such Award against the aggregate number of Shares available for granting Awards under the Plan. Such Shares may again become available for granting Awards under the Plan pursuant to the provisions of Section 4(a) of the Plan, subject to the adjustments set forth in Section 4(c) of the Plan. (c) Adjustments. In the event that the Committee shall determine that any dividend or other distribution (whether in the form of cash, Shares, other securities or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of Shares or other securities of the Company, issuance of warrants or other rights to purchase Shares or other securities of the Company, or other similar corporate transaction or event affects the Shares such that an adjustment is determined by the Committee to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Committee shall, in such manner as it may deem equitable, adjust any or all of (i) the number and type of Shares (or other securities or other property) that thereafter may be made the subject of Awards, (ii) the number and type of Shares (or other securities or other property) subject to outstanding Awards, and (iii) the purchase or exercise price with respect to any Award; provided, however, that the number of Shares covered by any Award or to which such Award relates shall always be a whole number. (d) Award Limitations Under the Plan. No Eligible Person may be granted any Award or Awards, the value of which is based solely on an increase in the value of the Shares after the date of grant of such Awards, for more than 500,000 Shares, subject to adjustment as provided in the Plan, in the aggregate in any calendar year. The foregoing annual limitation specifically includes the grant of any "performance-based" Awards within the meaning of Section 162(m) of the Code. 5. Eligibility. Any Eligible Person of the Company or any Affiliate shall be eligible to be designated a Participant. In determining which Eligible Persons shall receive an Award and the terms of any Award, the Committee may take into account the nature of the services rendered by the respective Eligible Persons, their present and potential contributions to the success of the Company or such other factors as the Committee, in its discretion, shall deem relevant. Notwithstanding the foregoing, an Incentive Stock Option may be granted only to full-time or part-time employees (which term as used herein includes, without limitation, officers and directors who are also employees), and an Incentive Stock Option shall not be granted to an 4 5 employee of an Affiliate unless such Affiliate is also a "subsidiary corporation" of the Company within the meaning of Section 424(f) of the Code or any successor provision. 6. Awards. (a) Options. The Committee is hereby authorized to grant Options to Participants with the following terms and conditions and with such additional terms and conditions not inconsistent with the provisions of the Plan as the Committee shall determine: (i) Exercise Price. The purchase price per Share purchasable under an Option shall be determined by the Committee; provided, however, that the purchase price for Shares underlying Incentive Stock Options shall not be less than 100% of the Fair Market Value of a Share on the date of grant of such Incentive Stock Option. (ii) Option Term. The term of each Option shall be fixed by the Committee. (iii) Time and Method of Exercise. The Committee shall determine the time or times at which an Option may be exercised in whole or in part and the method or methods by which, and the form or forms (including, without limitation, cash, Shares, other securities, other Awards or other property, or any combination thereof, having a Fair Market Value on the exercise date equal to the relevant exercise price) in which, payment of the exercise price with respect thereto may be made or deemed to have been made. (iv) Reload Options. The Committee may grant Reload Options, separately or together with another Option, pursuant to which, subject to the terms and conditions established by the Committee and any applicable requirements of Rule 16b-3 or any other applicable law, the Participant would be granted a new Option when the payment of the exercise price of a previously granted Option is made by the delivery of Shares owned by the Participant pursuant to Section 6(a)(iii) hereof or the relevant provisions of another plan of the Company, and/or when Shares are tendered or forfeited as payment of the amount to be withheld under applicable tax laws in connection with the exercise of an Option, which new Option would be an option to purchase the number of Shares not exceeding the sum of (A) the number of Shares so provided as consideration upon the exercise of the previously granted Option to which such Reload Option relates and (B) the number of Shares so tendered or forfeited, if any, as payment of the amount to be withheld under applicable tax laws in connection with the exercise of the Option to which such Reload Option relates. Reload Options may be granted with respect to Options previously granted under this Plan or any other stock option plan of the Company or any of its Affiliates (which shall explicitly include plans assumed by the Company in connection with mergers and the like), or may be granted in connection with any Option granted under this Plan or any other stock 5 6 option plan of the Company or any of its Affiliates at the time of such grant. Reload Options shall have a per share exercise price equal to the Fair Market Value as of the date of grant of the new Option. Any Reload Option shall be subject to availability of sufficient Shares for grant under the Plan. (b) Stock Appreciation Rights. The Committee is hereby authorized to grant Stock Appreciation Rights to Participants subject to the terms of the Plan and any applicable Award Agreement. A Stock Appreciation Right granted under the Plan shall confer on the holder thereof a right to receive upon exercise thereof the excess of (i) the Fair Market Value of one Share on the date of exercise (or, if the Committee shall so determine, at any time during a specified period before or after the date of exercise) over (ii) the grant price of the Stock Appreciation Right as specified by the Committee, which price shall not be less than 100% of the Fair Market Value of one Share on the date of grant of the Stock Appreciation Right. Subject to the terms of the Plan and any applicable Award Agreement, the grant price, term, methods of exercise, dates of exercise, methods of settlement and any other terms and conditions of any Stock Appreciation Right shall be as determined by the Committee. The Committee may impose such conditions or restrictions on the exercise of any Stock Appreciation Right as it may deem appropriate. (c) Restricted Stock and Restricted Stock Units. The Committee is hereby authorized to grant Restricted Stock and Restricted Stock Units to Participants with the following terms and conditions and with such additional terms and conditions not inconsistent with the provisions of the Plan as the Committee shall determine: (i) Restrictions. Shares of Restricted Stock and Restricted Stock Units shall be subject to such restrictions as the Committee may impose (including, without limitation, any limitation on the right to vote a Share of Restricted Stock or the right to receive any dividend or other right or property with respect thereto), which restrictions may lapse separately or in combination at such time or times, in such installments or otherwise as the Committee may deem appropriate. (ii) Stock Certificates; Delivery of Shares. Any Restricted Stock granted under the Plan shall be evidenced by issuance of a stock certificate or certificates, which certificate or certificates shall be held by the Company. Such certificate or certificates shall be registered in the name of the Participant and shall bear an appropriate legend referring to the restrictions applicable to such Restricted Stock. Promptly upon the lapse or waiver of applicable restrictions, Shares representing Restricted Stock that is no longer subject to restrictions shall be delivered to the holder thereof. In the case of Restricted Stock Units, no Shares shall be issued at the time such Awards are granted. Upon the lapse or waiver of restrictions and the restricted period relating to Restricted Stock Units evidencing the right to receive Shares, such Shares shall be issued and delivered to the holders of the Restricted Stock Units. 6 7 (iii) Forfeiture. Except as otherwise determined by the Committee, upon a Participant's termination of employment (as determined under criteria established by the Committee) during the applicable restriction period, all Shares of Restricted Stock and all Restricted Stock Units held by the Participant at such time shall be forfeited and reacquired by the Company; provided, however, that the Committee may, when it finds that a waiver would be in the best interest of the Company, waive in whole or in part any or all remaining restrictions with respect to Shares of Restricted Stock or Restricted Stock Units. (d) Performance Awards. The Committee is hereby authorized to grant Performance Awards to Participants subject to the terms of the Plan and any applicable Award Agreement. A Performance Award granted under the Plan (i) may be denominated or payable in cash, Shares (including, without limitation, Restricted Stock and Restricted Stock Units), other securities, other Awards or other property and (ii) shall confer on the holder thereof the right to receive payments, in whole or in part, upon the achievement of such performance goals during such performance periods as the Committee shall establish. Subject to the terms of the Plan and any applicable Award Agreement, the performance goals to be achieved during any performance period, the length of any performance period, the amount of any Performance Award granted, the amount of any payment or transfer to be made pursuant to any Performance Award and any other terms and conditions of any Performance Award shall be determined by the Committee. (e) Other Stock-Based Awards. The Committee is hereby authorized to grant to Participants such other Awards that are denominated or payable in, valued in whole or in part by reference to, or otherwise based on or related to, Shares (including, without limitation, securities convertible into Shares), as are deemed by the Committee to be consistent with the purpose of the Plan; provided, however, that such grants must comply with applicable law. Subject to the terms of the Plan and any applicable Award Agreement, the Committee shall determine the terms and conditions of such Awards. Shares or other securities delivered pursuant to a purchase right granted under this Section 6(e) shall be purchased for such consideration, which may be paid by such method or methods and in such form or forms (including, without limitation, cash, Shares, other securities, other Awards or other property or any combination thereof), as the Committee shall determine. (f) General. (i) No Cash Consideration for Awards. Awards shall be granted for no cash consideration or for such minimal cash consideration as may be required by applicable law. (ii) Awards May Be Granted Separately or Together. Awards may, in the discretion of the Committee, be granted either alone or in addition to, in tandem with or in substitution for any other Award or any award granted under any plan of the Company or any Affiliate other than the Plan. Awards granted in 7 8 addition to or in tandem with other Awards or in addition to or in tandem with awards granted under any such other plan of the Company or any Affiliate may be granted either at the same time as or at a different time from the grant of such other Awards or awards. (iii) Forms of Payment under Awards. Subject to the terms of the Plan and of any applicable Award Agreement, payments or transfers to be made by the Company or an Affiliate upon the grant, exercise or payment of an Award may be made in such form or forms as the Committee shall determine (including, without limitation, cash, Shares, other securities, other Awards or other property or any combination thereof), and may be made in a single payment or transfer, in installments or on a deferred basis, in each case in accordance with rules and procedures established by the Committee. Such rules and procedures may include, without limitation, provisions for the payment or crediting of reasonable interest on installment or deferred payments. (iv) Limits on Transfer of Awards. No Award and no right under any such Award shall be transferable by a Participant otherwise than by will or by the laws of descent and distribution; provided, however, that, if so determined by the Committee, a Participant may, in the manner established by the Committee, transfer Options (other than Incentive Stock Options) or designate a beneficiary or beneficiaries to exercise the rights of the Participant and receive any property distributable with respect to any Award upon the death of the Participant. Except as otherwise provided in any applicable Award Agreement or amendment thereto (other than an Award Agreement relating to an Incentive Stock Option), pursuant to terms determined by the Committee, each Award or right under any Award shall be exercisable during the Participant's lifetime only by the Participant or, if permissible under applicable law, by the Participant's guardian or legal representative. Except as otherwise provided in any applicable Award Agreement or amendment thereto (other than an Award Agreement or amendment thereto relating to an Incentive Stock Option), no Award or right under any such Award may be pledged, alienated, attached or otherwise encumbered, and any purported pledge, alienation, attachment or encumbrance thereof shall be void and unenforceable against the Company or any Affiliate. (v) Term of Awards. The term of each Award shall be for such period as may be determined by the Committee. (vi) Restrictions; Securities Exchange Listing. All certificates for Shares or other securities delivered under the Plan pursuant to any Award or the exercise thereof shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the Plan or the rules, regulations and other requirements of the Securities and Exchange Commission and any applicable federal or state securities laws, and the Committee may cause appropriate entries to be made or legend or legends to be affixed on any such certificates to reflect such restrictions. If the Shares or other securities are listed 8 9 on a securities exchange, the Company shall not be required to deliver any Shares or other securities covered by an Award unless and until such Shares or other securities have been listed on such securities exchange. 7. Amendment and Termination; Adjustments. Except to the extent prohibited by applicable law and unless otherwise expressly provided in an Award Agreement or in the Plan: (a) Amendments to the Plan. The Board may amend, alter, suspend, discontinue or terminate the Plan; provided, however, that, notwithstanding any other provision of the Plan or any Award Agreement, without the approval of the shareholders of the Company, no such amendment, alteration, suspension, discontinuation or termination shall be made that, absent such shareholder approval: (i) would cause Rule 16b-3 or Section 162(m) of the Code to become unavailable with respect to the Plan; (ii) would violate the rules or regulations of the Nasdaq National Market, any other securities exchange or the National Association of Securities Dealers, Inc. that are applicable to the Company; or (iii) would cause the Company to be unable, under the Code, to grant Incentive Stock Options under the Plan. (b) Amendments to Awards. The Committee may waive any conditions of or rights of the Company under any outstanding Award, prospectively or retroactively. The Committee may not amend, alter, suspend, discontinue or terminate any outstanding Award, prospectively or retroactively, to the detriment of the Participant of holder of beneficiary thereof without the consent of such Participant or holder or beneficiary thereof, except as otherwise herein provided or in the Award Agreement. (c) Correction of Defects, Omissions and Inconsistencies. The Committee may correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Award in the manner and to the extent it shall deem desirable to carry the Plan into effect. 8. Income Tax Withholding; Tax Bonuses. (a) Withholding. In order to comply with all applicable federal or state income tax laws or regulations, the Company may take such action as it deems appropriate to ensure that all applicable federal or state payroll, withholding, income or other taxes that are the sole and absolute responsibility of a Participant are withheld or collected from such Participant. In order to assist a Participant in paying all or a portion of the federal and state taxes to be withheld or collected upon exercise or receipt of (or the lapse of restrictions relating to) an Award, the Committee, in its discretion and subject to such additional terms and conditions as it may adopt, may permit the Participant to satisfy such tax obligation by (i) electing to have the Company withhold a portion of the 9 10 Shares otherwise to be delivered upon exercise or receipt of (or the lapse of restrictions relating to) such Award with a Fair Market Value equal to the amount of such taxes or (ii) delivering to the Company Shares other than Shares issuable upon exercise or receipt of (or the lapse of restrictions relating to) such Award with a Fair Market Value equal to the amount of such taxes. The election, if any, must be made on or before the date that the amount of tax to be withheld is determined. (b) Tax Bonuses. The Committee, in its discretion, shall have the authority, at the time of grant of any Award under this Plan or at any time thereafter, to approve cash bonuses to designated Participants to be paid upon their exercise or receipt of (or the lapse of restrictions relating to) Awards in order to provide funds to pay all or a portion of federal and state taxes due as a result of such exercise or receipt (or the lapse of restrictions relating to) Awards in order to provide funds to pay all or a portion of federal and state taxes due as a result of such exercise or receipt (or the lapse of such restrictions). The Committee shall have full authority in its discretion to determine the amount of any such tax bonus. 9. General Provisions. (a) No Rights to Awards. No Eligible Person, Participant or other Person shall have any claim to be granted any Award under the Plan, and there is no obligation for uniformity of treatment of Eligible Persons, Participants or holders or beneficiaries of Awards under the Plan. The terms and conditions of Awards need not be the same with respect to different Participants. (b) Award Agreements. No Participant will have rights under an Award granted to such Participant unless and until an Award Agreement shall have been duly executed on behalf of the Company. In the event the terms of an Award Agreement conflict with the granting resolution of the Committee setting forth the terms of an Award, the granting resolution of the Committee shall govern the terms of the Award and the Award Agreement shall be null and void to the extend of any such conflict. (c) No Rights of Shareholders. Except with respect to Restricted Stock and other grants of Common Stock of the Company, neither a Participant nor the Participant's legal representative shall be, or shall have any of the rights and privileges of, a shareholder of the Company in respect of any Shares issuable upon the exercise or payment of any Award, in whole or in part, unless and until the Shares have been issued. (d) No Limit on Other Compensation Arrangements. Nothing contained in the Plan shall prevent the Company or any Affiliate from adopting or continuing in effect other or additional compensation arrangements, and such arrangements may be either generally applicable or applicable only in specific cases. (e) No Right to Employment. The grant of an Award shall not be construed as giving a Participant the right to be retained in the employ, or as giving a Non-Employee Director the right to continue as a director, of the Company or any Affiliate, 10 11 nor will it affect in any way the right of the Company or an Affiliate to terminate such employment or the term of a Non-Employee Director at any time, with or without cause. In addition, the Company or an Affiliate may at any time dismiss a Participant from employment or terminate the term of a Non-Employee Director free from any liability or any claim under the Plan, unless otherwise expressly provided in the Plan or in any Award Agreement. (f) Governing Law. The validity, construction and effect of the Plan and any rules and regulations relating to the Plan shall be determined in accordance with the laws of the State of Montana. (g) Severability. If any provision of the Plan or any Award is or becomes or is deemed to be invalid, illegal or unenforceable in any jurisdiction or would disqualify the Plan or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to applicable laws, or if it cannot be so construed or deemed amended without, in the determination of the Committee, materially altering the purpose or intent of the Plan or the Award, such provision shall be stricken as to such jurisdiction or Award, and the remainder of the Plan or any such Award shall remain in full force and effect. (h) No Trust or Fund Created. Neither the Plan nor any Award shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company or any Affiliate and a Participant or any other Person. To the extent that any Person acquires a right to receive payments from the Company or any Affiliate pursuant to an Award, such right shall be no greater than the right of any unsecured general creditor of the Company or any Affiliate. (i) No Fractional Shares. No fractional Shares shall be issued or delivered pursuant to the Plan or any Award, and the Committee shall determine whether cash shall be paid in lieu of any fractional Share or whether such fractional Share or any rights thereto shall be canceled, terminated or otherwise eliminated. (j) Headings. Headings are given to the Sections and subsections of the Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Plan or any provision thereof. (k) Section 16 Compliance. The Plan is intended to comply in all respects with Rule 16b-3 or any successor provision, as in effect from time to time, and in all events the Plan shall be construed in accordance with the requirements of Rule 16b-3. If any Plan provision does not comply with Rule 16b-3 as hereafter amended or interpreted, the provision shall be deemed inoperative. The Board, in its absolute discretion, may bifurcate the Plan so as to restrict, limit or condition the use of any provision of the Plan with respect to persons who are officers or directors subject to Section 16 of the Securities and Exchange Act of 1934, as amended, without so restricting, limiting or conditioning the Plan with respect to other Participants. 11 12 10. Effective Date of the Plan. The Plan shall be effective as of the date (the "Effective Date") immediately prior to the date on which the Company's registration statement relating to its initial public offering of Common Stock is declared effective by the Securities and Exchange Commission, subject to approval by the Company's shareholders in accordance with applicable law. 11. Term of the Plan. Awards shall be granted under the Plan only during a 10-year period beginning on the Effective Date of the Plan. However, unless otherwise expressly provided in the Plan or in an applicable Award Agreement, any Award theretofore granted may extend beyond the end of such 10-year period, and the authority of the Committee provided for hereunder with respect to the Plan and any Awards, and the authority of the Board to amend the Plan, shall extend beyond the end of such period. 12 EX-10.8 8 c57156a2ex10-8.txt LOAN AND SECURITY AGREEMENT 1 EXHIBIT 10.8 This LOAN AND SECURITY AGREEMENT is entered into as of June 28, 1999, by and between SILICON VALLEY BANK ("Bank") and ILX LIGHTWAVE CORPORATION ("Borrower"). RECITALS Borrower wishes to obtain credit from time to time from Bank, and Bank desires to extend credit to Borrower. This Agreement sets forth the terms on which Bank will advance credit to Borrower and Borrower will repay the amounts owing to Bank. AGREEMENT The parties agree as follows: 1. DEFINITIONS AND CONSTRUCTION 1.1 Definitions. As used in this Agreement, the following terms shall have the following definitions: "Accounts" means all presently 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 (including, without limitation, the licensing of software and other technology) or the rendering of services by Borrower, whether or not earned by performance, and any and all credit insurance, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed by Borrower and Borrower's Books relating to any of the foregoing. "Advance" or "Advances" means a cash advance under the Revolving Facility. "Affiliate" means, with respect to any Person, any Person that owns or controls directly or indirectly such Person, any Person that controls or is controlled by or is under common control with such Person, and each of such Person's senior executive officers, directors, and partners. "Bank Expenses" means all reasonable costs or expenses (including reasonable attorneys' fees and expenses) incurred in connection with the preparation, negotiation, administration, and enforcement of the Loan Documents; reasonable Collateral audit fees; and Bank's reasonable attorneys' fees and expenses incurred in amending, enforcing or defending the Loan Documents (including fees and expenses of appeal), incurred before, during and after an Insolvency Proceeding, whether or not suit is brought. "Borrower's Books" means all of Borrower's books and records including: ledgers; records concerning Borrower's assets or liabilities, the Collateral, business operations or financial condition; and all computer programs, or tape files, and the equipment, containing such information. "Borrowing Base" means an amount equal to eighty percent (80%) of Eligible Accounts, as determined by Bank with reference to the most recent Borrowing Base Certificate delivered by Borrower, provided that, notwithstanding the foregoing, until such time as an initial audit is completed by Bank, the results of which are satisfactory to Bank, pursuant to Section 6.3, "Borrowing Base" shall mean an amount equal to fifty percent (50%) of Eligible Accounts, as determined by Bank with reference to the most recent Borrowing Base Certificate delivered by Borrower. "Business Day" means any day that is not a Saturday, Sunday, or other day on which banks in the State of California or the State of Colorado are authorized or required to close. "Closing Date" means the date of this Agreement. "Code" means the California Uniform Commercial Code. "Collateral" means the property described on Exhibit A attached hereto. 1 2 "Committed Revolving Line" means a credit extension of up to One Million Five Hundred Thousand Dollars ($1,500,000). "Contingent Obligation" means, as applied to any Person, any direct or indirect liability, contingent or otherwise, of that Person with respect to (i) any indebtedness, lease, dividend, letter of credit or other obligation of another, including, without limitation, any such obligation directly or indirectly guaranteed, endorsed, co-made or discounted or sold with recourse by that Person, or in respect of which that Person is otherwise directly or indirectly liable; (ii) any obligations with respect to undrawn letters of credit issued for the account of that Person; and (iii) all obligations arising under any interest rate, currency or commodity swap agreement, interest rate cap agreement, interest rate collar agreement, or other agreement or arrangement designated to protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices; provided, however, that the term "Contingent Obligation" shall not include endorsements for collection or deposit in the ordinary course of business. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determined amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by such Person in good faith; provided, however, that such amount shall not in any event exceed the maximum amount of the obligations under the guarantee or other support arrangement. "Copyrights" means any and all copyright rights, copyright applications, copyright registrations and like protections in each work or authorship and derivative work thereof, whether published or unpublished and whether or not the same also constitutes a trade secret, now or hereafter existing, created, acquired or held. "Credit Extension" means each Advance or any other extension of credit by Bank for the benefit of Borrower hereunder. "Current Liabilities" means, as of any applicable date, all amounts that should, in accordance with GAAP, be included as current liabilities on the consolidated balance sheet of Borrower and its Subsidiaries, as at such date, plus, to the extent not already included therein, all outstanding Advances made under this Agreement, including all Indebtedness that is payable upon demand or within one year from the date of determination thereof unless such Indebtedness is renewable or extendible at the option of Borrower or any Subsidiary to a date more than one year from the date of determination. "Daily Balance" means the amount of the Obligations owed at the end of a given day. "Eligible Accounts" means those Accounts that arise in the ordinary course of Borrower's business that comply with all of Borrower's representations and warranties to Bank set forth in Section 5.4; provided, that standards of eligibility may be fixed and revised from time to time by Bank as a consequence of any Collateral audits done pursuant to Section 6.3 in Bank's reasonable judgment and upon notification thereof to Borrower in accordance with the provisions hereof. Unless otherwise agreed to by Bank, Eligible Accounts shall not include the following: (a) Accounts that the account debtor has failed to pay within ninety (90) days of invoice date; (b) Accounts with respect to an account debtor, fifty percent (50%) of whose Accounts the account debtor has failed to pay within ninety (90) days of invoice date; (c) Accounts with respect to which the account debtor is an officer, employee, or agent of Borrower; (d) Accounts with respect to which goods are placed on consignment, guaranteed sale, sale or return, sale on approval, bill and hold, or other terms by reason of which the payment by the account debtor may be conditional; (e) Accounts with respect to which the account debtor is an Affiliate of Borrower; 2 3 (f) Accounts with respect to which the account debtor does not have its principal place of business in the United States, except for Eligible Foreign Accounts; (g) Accounts with respect to which the account debtor is the United States or any department, agency, or instrumentality of the United States; (h) Accounts with respect to which Borrower is liable to the account debtor for goods sold or services rendered by the account debtor to Borrower, but only to the extent of any amounts owing to the account debtor against amounts owed to Borrower; (i) Accounts with respect to an account debtor, including Subsidiaries and Affiliates, whose total obligations to Borrower exceed twenty-five percent (25%) of all Accounts, to the extent such obligations exceed the aforementioned percentage (the "Concentration Limit"), except as approved in writing by Bank, provided that the Concentration Limit for each of Lucent Technologies or Corning shall be thirty-five percent (35%) of all Accounts; (j) Accounts with respect to which the account debtor disputes liability or makes any claim with respect thereto as to which Bank believes, in its sole discretion, that there may be a basis for dispute (but only to the extent of the amount subject to such dispute or claim), or is subject to any Insolvency Proceeding, or becomes insolvent, or goes out of business; and (k) Accounts the collection of which Bank reasonably determines to be doubtful. "Eligible Foreign Accounts" means Accounts with respect to which the account debtor does not have its principal place of business in the United States and that (i) are supported by one or more letters of credit in an amount and of a tenor, and issued by a financial institution, acceptable to Bank, (ii) that Bank approves on a case-by-case basis, or (iii) Accounts with respect to which Corning, Marconi Communications, or Siemens are the account debtors provided that the aggregate value of such accounts shall not exceed Two Hundred Thousand Dollars ($200,000) at any given time. "Equipment" means all present and future machinery, equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments in which Borrower has any interest. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and the regulations thereunder. "Event of Default" has the meaning assigned in Article 8. "GAAP" means generally accepted accounting principles as in effect from time to time. "Indebtedness" means (a) all indebtedness for borrowed money or the deferred purchase price of property or services, including without limitation reimbursement and other obligations with respect to surety bonds and letters of credit, (b) all obligations evidenced by notes, bonds, debentures or similar instruments, (c) all capital lease obligations and (d) all Contingent Obligations. "Insolvency Proceeding" means any proceeding commenced by or against any person or entity under any provision of the United States Bankruptcy Code, as amended, or under any other bankruptcy or insolvency law, including assignments for the benefit of creditors, formal or informal moratoria, compositions, extension generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief. "Intellectual Property Collateral" means: (l) Copyrights, Trademarks and Patents; (m) Any and all trade secrets, and any and all intellectual property rights in computer software and computer software products now or hereafter existing, created, acquired or held; 3 4 (n) Any and all design rights which may be available to Borrower now or hereafter existing, created, acquired or held; (o) Any and all claims for damages by way of past, present and future infringement of any of the rights included above, with the right, but not the obligation, to sue for and collect such damages for said use or infringement of the intellectual property rights identified above; (p) All licenses or other rights to use any of the Copyrights, Patents or Trademarks, and all license fees and royalties arising from such use to the extent permitted by such license or rights; (q) All amendments, renewals and extensions of any of the Copyrights, Trademarks or Patents; and (r) All proceeds and products of the foregoing, including without limitation all payments under insurance or any indemnity or warranty payable in respect of any of the foregoing. "Inventory" means all present and future inventory in which Borrower has any interest, including merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products intended for sale or lease or to be furnished under a contract of service, of every kind and description now or at any time hereafter owned by or in the custody or possession, actual or constructive, of Borrower, including such inventory as is temporarily out of its custody or possession or in transit and including any returns upon any accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing and any documents of title representing any of the above, and Borrower's Books relating to any of the foregoing. "Investment" means any beneficial ownership of (including stock, partnership interest or other securities) any Person, or any loan, advance or capital contribution to any Person. "IRC" means the Internal Revenue Code of 1986, as amended, and the regulations thereunder. "Lien" means any mortgage, lien, deed of trust, charge, pledge, security interest or other encumbrance. "Loan Documents" means, collectively, this Agreement, any note or notes executed by Borrower, and any other agreement entered into between Borrower and Bank in connection with this Agreement, all as amended or extended from time to time. "Material Adverse Effect" means a material adverse effect on (i) the business operations or condition (financial or otherwise) of Borrower and its Subsidiaries taken as a whole or (ii) the ability of Borrower to repay the Obligations or otherwise perform its obligations under the Loan Documents. "Negotiable Collateral" means all of Borrower's present and future letters of credit of which it is a beneficiary, notes, drafts, instruments, securities, documents of title, and chattel paper, and Borrower's Books relating to any of the foregoing. "Obligations" means all debt, principal, interest, Bank Expenses and other amounts owed to Bank by Borrower pursuant to this Agreement or any other agreement, whether absolute or contingent, due or to become due, now existing or hereafter arising, including any interest that accrues after the commencement of an Insolvency Proceeding and including any debt, liability, or obligation owing from Borrower to others that Bank may have obtained by assignment or otherwise. "Patents" means all patents, patent applications and like protections including without limitation improvements, divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same. 4 5 "Periodic Payments" means all installments or similar recurring payments that Borrower may now or hereafter become obligated to pay to Bank pursuant to the terms and provisions of any instrument, or agreement now or hereafter in existence between Borrower and Bank. "Permitted Indebtedness" means: (a) Indebtedness of Borrower in favor of Bank arising under this Agreement or any other Loan Document; (b) Indebtedness existing on the Closing Date and disclosed in the Schedule; (c) Indebtedness secured by a lien described in clause (c) of the defined term "Permitted Liens," provided such Indebtedness does not exceed the lesser of the cost or fair market value of the equipment financed with such Indebtedness; and (d) Subordinated Debt. "Permitted Investment" means: (a) Investments existing on the Closing Date disclosed in the Schedule; and (b) (i) marketable direct obligations issued or unconditionally guaranteed by the United States of America or any agency or any State thereof maturing within one (1) year from the date of acquisition thereof, (ii) commercial paper maturing no more than one (1) year from the date of creation thereof and currently having the highest rating obtainable from either Standard & Poor's Corporation or Moody's Investors Service, Inc., (iii) certificates of deposit maturing no more than one (1) year from the date of investment therein issued by Bank, (iv) Bank's money market accounts, and (v) any Investments permitted by Borrower's investment policy, provided that such investment policy has been approved by Borrower's board of directors and by Bank. "Permitted Liens" means the following: (a) Any Liens existing on the Closing Date and disclosed in the Schedule or arising under this Agreement or the other Loan Documents; (b) Liens for taxes, fees, assessments or other governmental charges or levies, either not delinquent or being contested in good faith by appropriate proceedings, provided the same have no priority over any of Bank's security interests; (c) Liens (i) upon or in any equipment, acquired or held by Borrower or any of its Subsidiaries to secure the purchase price of such equipment or indebtedness incurred solely for the purpose of financing the acquisition of such equipment in the ordinary course of business, or (ii) existing on such equipment at the time of its acquisition in the ordinary course of business, provided that the Lien is confined solely to the property so acquired and improvements thereon, and the proceeds of such equipment; and (d) Liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by Liens of the type described in clauses (a) through (c) above, provided that any extension, renewal or replacement Lien shall be limited to the property encumbered by the existing Lien and the principal amount of the indebtedness being extended, renewed or refinanced does not increase. "Person" means any individual, sole proprietorship, partnership, limited liability company, joint venture, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or governmental agency. "Prime Rate" means the variable rate of interest, per annum, most recently announced by Bank, as its "prime rate," whether or not such announced rate is the lowest rate available from Bank. 5 6 "Quick Assets" means, at any date as of which the amount thereof shall be determined, the unrestricted cash and cash-equivalents, accounts receivable and investments with maturities not to exceed twelve months, of Borrower determined in accordance with GAAP. "Responsible Officer" means each of the Chief Executive Officer, the Chief Operating Officer, the Chief Financial Officer and the Controller of Borrower. "Revolving Facility" means the facility under which Borrower may request Bank to issue Advances, as specified in Section 2.1 hereof. "Revolving Maturity Date" means June 27, 2000. "Schedule" means the schedule of exceptions attached hereto, if any. "Subordinated Debt" means any debt incurred by Borrower that is subordinated to the debt owing by Borrower to Bank on terms reasonably acceptable to Bank (and identified as being such by Borrower and Bank). "Subsidiary" means any corporation or partnership in which (i) any general partnership interest or (ii) more than 50% of the stock of which by the terms thereof ordinary voting power to elect the Board of Directors, managers or trustees of the entity, at the time as of which any determination is being made, is owned by Borrower, either directly or through an Affiliate. "Tangible Net Worth" means at any date as of which the amount thereof shall be determined, the sum of the capital stock and additional paid-in capital plus retained earnings (or minus accumulated deficit) of Borrower and its Subsidiaries minus intangible assets, plus Subordinated Debt, on a consolidated basis determined in accordance with GAAP. "Total Liabilities" means at any date as of which the amount thereof shall be determined, all obligations that should, in accordance with GAAP be classified as liabilities on the consolidated balance sheet of Borrower, including in any event all Indebtedness. "Trademarks" means any trademark and servicemark rights, whether registered or not, applications to register and registrations of the same and like protections, and the entire goodwill of the business of Borrower connected with and symbolized by such trademarks. 1.2 Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with GAAP and all calculations made hereunder shall be made in accordance with GAAP. When used herein, the terms "financial statements" shall include the notes and schedules thereto. 2. LOAN AND TERMS OF PAYMENT 2.1 Credit Extensions. Borrower promises to pay to the order of Bank, in lawful money of the United States of America, the aggregate unpaid principal amount of all Credit Extensions made by Bank to Borrower hereunder. Borrower shall also pay interest on the unpaid principal amount of such Credit Extensions at rates in accordance with the terms hereof. 2.1.1 Revolving Advances. (a) Subject to and upon the terms and conditions of this Agreement, Borrower may request Advances in an aggregate outstanding amount not to exceed the lesser of (i) the Committed Revolving Line or (ii) the Borrowing Base. Subject to the terms and conditions of this Agreement, amounts borrowed pursuant to this Section 2.1.1 may be repaid and reborrowed at any time prior to the Revolving Maturity Date, at which time all Advances under this Section 2.1.1 shall be immediately due and payable. Borrower may prepay any Advances without penalty or premium. 6 7 (b) Procedures. Whenever Borrower desires an Advance, Borrower will notify Bank by facsimile transmission or telephone no later than 4:00 p.m. Colorado time, on the Business Day that the Advance is to be made. Each such notification shall be promptly confirmed by a Payment/Advance Form in substantially the form of Exhibit B hereto. Bank is authorized to make Advances under this Agreement, based upon instructions received from a Responsible Officer or a designee of a Responsible Officer, or without instructions if in Bank's discretion such Advances are necessary to meet Obligations which have become due and remain unpaid. Bank shall be entitled to rely on any telephonic notice given by a person who Bank reasonably believes to be a Responsible Officer or a designee thereof, and Borrower shall indemnify and hold Bank harmless for any damages or loss suffered by Bank as a result of such reliance. Bank will credit the amount of Advances made under this Section 2.1.1 to Borrower's deposit account. 2.2 Overadvances. If at any time the aggregate amount of all outstanding Advances exceeds the lesser of (i) the Borrowing Base or (ii) the Committed Revolving Line, Borrower shall immediately pay to Bank, in cash, the amount of such excess. 2.3 Interest Rates, Payments, and Calculations. (a) Interest Rates. (i) Advances. Except as set forth in Section 2.3((b)), the Advances shall bear interest, on the outstanding daily balance thereof, at a rate equal to the Prime Rate plus one percent (1.0%). (b) Late Fee; Default Rate. If any payment is not made within ten (10) days after the date such payment is due, Borrower shall pay Bank a late fee equal to the lesser of (i) five percent (5%) of the amount of such unpaid amount or (ii) the maximum amount permitted to be charged under applicable law. All Obligations shall bear interest, from and after the occurrence and during the continuance of an Event of Default, at a rate equal to five (5) percentage points above the interest rate applicable immediately prior to the occurrence of the Event of Default. (c) Payments. Interest hereunder shall be due and payable on the eighteenth (18th) calendar day of each month during the term hereof. Borrower hereby authorizes Bank to debit any accounts with Bank, including, without limitation, Account Number 3300128757 for payments of principal and interest due on the Obligations and any other amounts owing by Borrower to Bank. Bank will notify Borrower of all debits which Bank has made against Borrower's accounts. Bank shall, at its option, charge such interest, all Bank Expenses, and all Periodic Payments against any of Borrower's deposit accounts or against the Committed Revolving Line, in which case those amounts shall thereafter accrue interest at the rate then applicable hereunder. Any interest not paid when due shall be compounded by becoming a part of the Obligations, and such interest shall thereafter accrue interest at the rate then applicable hereunder. Bank shall deliver to Borrower statements of account in the ordinary course of business reflecting charges made hereunder. (d) Computation. In the event the Prime Rate is changed from time to time hereafter, the applicable rate of interest hereunder shall be increased or decreased effective as of 12:01 a.m. on the day the Prime Rate is changed, by an amount equal to such change in the Prime Rate. All interest chargeable under the Loan Documents shall be computed on the basis of a three hundred sixty (360) day year for the actual number of days elapsed. 2.4 Crediting Payments. Prior to the occurrence of an Event of Default, Bank shall credit a wire transfer of funds, check or other item of payment to such deposit account or Obligation as Borrower specifies. After the occurrence of an Event of Default, the receipt by Bank of any wire transfer of funds, check, or other item of payment shall be immediately applied to conditionally reduce Obligations, but shall not be considered a payment on account unless such payment is of immediately available federal funds or unless and until such check or other item of payment is honored when presented for payment. Notwithstanding anything to the contrary contained herein, any wire transfer or payment received by Bank after 1:00 p.m. Colorado time shall be deemed to have been received by Bank as of the opening of business on the immediately following Business Day. Whenever any payment to Bank under the Loan Documents would otherwise be due (except by reason of acceleration) on a date 7 8 that is not a Business Day, such payment shall instead be due on the next Business Day, and additional fees or interest, as the case may be, shall accrue and be payable for the period of such extension. 2.5 Fees. Borrower shall pay to Bank the following: (a) Facility Fee. A facility fee equal to Seven Thousand Five Hundred Dollars ($7,500), which fee shall be due on the Closing Date and shall be fully earned and non-refundable. (b) Financial Examination and Appraisal Fees. Bank's customary fees and out-of-pocket expenses for Bank's audits of Borrower's Accounts, and for each appraisal of Collateral and financial analysis and examination of Borrower performed from time to time by Bank or its agents, provided that the initial audit shall not exceed One Thousand Five Hundred Dollars ($1,500) and each additional audit shall not exceed Two Thousand Dollars ($2,000); (c) Bank Expenses. On the Closing Date, all Bank Expenses incurred through the Closing Date, including reasonable attorneys' fees and expenses (such attorneys fees and expenses not to exceed $5,000), and, after the Closing Date, all Bank Expenses, including reasonable attorneys' fees and expenses, as and when they become due. 2.6 Additional Costs. In case any law, regulation, treaty or official directive or the interpretation or application thereof by any court or any governmental authority charged with the administration thereof or the compliance with any guideline or request of any central bank or other governmental authority (whether or not having the force of law): (a) subjects Bank to any tax with respect to payments of principal or interest or any other amounts payable hereunder by Borrower or otherwise with respect to the transactions contemplated hereby (except for taxes on the overall net income of Bank imposed by the United States of America or any political subdivision thereof); (b) imposes, modifies or deems applicable any deposit insurance, reserve, special deposit or similar requirement against assets held by, or deposits in or for the account of, or loans by, Bank; or (c) imposes upon Bank any other condition with respect to its performance under this Agreement, and the result of any of the foregoing is to increase the cost to Bank, reduce the income receivable by Bank or impose any expense upon Bank with respect to the Obligations, Bank shall notify Borrower thereof. Borrower agrees to pay to Bank the amount of such increase in cost, reduction in income or additional expense as and when such cost, reduction or expense is incurred or determined, upon presentation by Bank of a statement of the amount and setting forth Bank's calculation thereof, all in reasonable detail, which statement shall be deemed true and correct absent manifest error. 2.7 Term. This Agreement shall become effective on the Closing Date and, subject to Section 12.7, shall continue in full force and effect for a term ending on the Revolving Maturity Date. Notwithstanding the foregoing, Bank shall have the right to terminate its obligation to make Credit Extensions under this Agreement immediately and without notice upon the occurrence and during the continuance of an Event of Default. Notwithstanding termination, Bank's Lien on the Collateral shall remain in effect for so long as any Obligations are outstanding. Upon request by Borrower, Bank and Borrower shall terminate this Agreement and Bank shall have no further obligation to make Credit Extensions to Borrower, provided that (i) Bank receives three (3) days prior written notice thereof, and (ii) all Obligations have been repaid in full. 3. CONDITIONS OF LOANS. 3.1 Conditions Precedent to Initial Credit Extension. The obligation of Bank to make the initial Credit Extension is subject to the condition precedent that Bank shall have received, in form and substance satisfactory to Bank, the following: 8 9 (a) this Agreement; (b) a certificate of the Secretary of Borrower with respect to incumbency and resolutions authorizing the execution and delivery of this Agreement; (c) financing statements (Form UCC-1) to be filed in Colorado and Montana; (d) an intellectual property security agreement; (e) agreement to provide insurance; (f) payment of the fees and Bank Expenses then due specified in Section 2.5 hereof; and (g) such other documents, and completion of such other matters, as Bank may reasonably deem necessary or appropriate. 3.2 Conditions Precedent to all Credit Extensions. The obligation of Bank to make each Credit Extension, including the initial Credit Extension, is further subject to the following conditions: (a) timely receipt by Bank of the Payment/Advance Form as provided in Section 2.1; (b) timely receipt by Bank of the invoices or other documents as provided in Section 4.2; and (c) the representations and warranties contained in Section 5 shall be true and correct in all material respects on and as of the date of such Payment/Advance Form and on the effective date of each Credit Extension as though made at and as of each such date, and no Event of Default shall have occurred and be continuing, or would result from such Credit Extension (provided, however, that those representations and warranties expressly referring to another date shall be true, correct and complete in all material respects as of such date). The making of each Credit Extension shall be deemed to be a representation and warranty by Borrower on the date of such Credit Extension as to the accuracy of the facts referred to in this Section 3.2(c). 4. CREATION OF SECURITY INTEREST 4.1 Grant of Security Interest. Borrower grants and pledges to Bank a continuing security interest in all presently existing and hereafter acquired or arising Collateral in order to secure prompt repayment of any and all Obligations and in order to secure prompt performance by Borrower of each of its covenants and duties under the Loan Documents. Except as set forth in the Schedule, such security interest constitutes a valid, first priority security interest in the presently existing Collateral, and will constitute a valid, first priority security interest in Collateral acquired after the date hereof. 4.2 Delivery of Additional Documentation Required. Borrower shall from time to time execute and deliver to Bank, at the request of Bank, all Negotiable Collateral, all financing statements and other documents that Bank may reasonably request, in form satisfactory to Bank, to perfect and continue perfected Bank's security interests in the Collateral and in order to fully consummate all of the transactions contemplated under the Loan Documents. 4.3 Right to Inspect. Bank (through any of its officers, employees, or agents) shall have the right, upon reasonable prior notice, from time to time during Borrower's usual business hours but no more than once a year (unless an Event of Default has occurred and is continuing) to inspect Borrower's Books and to make copies thereof and to check, test, and appraise the Collateral in order to verify Borrower's financial condition or the amount, condition of, or any other matter relating to, the Collateral. 5. REPRESENTATIONS AND WARRANTIES 9 10 Borrower represents and warrants as follows: 5.1 Due Organization and Qualification. Borrower and each Subsidiary is a corporation duly existing and in good standing under the laws of its state of incorporation and qualified and licensed to do business in, and is in good standing in, any state in which the conduct of its business or its ownership of property requires that it be so qualified. 5.2 Due Authorization; No Conflict. The execution, delivery, and performance of the Loan Documents are within Borrower's powers, have been duly authorized, and are not in conflict with nor constitute a breach of any provision contained in Borrower's Articles of Incorporation or Bylaws, nor will they constitute an event of default under any material agreement to which Borrower is a party or by which Borrower is bound. Borrower is not in default under any agreement to which it is a party or by which it is bound, which default could have a Material Adverse Effect. 5.3 No Prior Encumbrances. Borrower has good and indefeasible title to the Collateral, free and clear of Liens, except for Permitted Liens. 5.4 Bona Fide Eligible Accounts. The Eligible Accounts are bona fide existing obligations. The property giving rise to such Eligible Accounts has been delivered to the account debtor or to the account debtor's agent for immediate shipment to and unconditional acceptance by the account debtor. Borrower has not received notice of actual or imminent Insolvency Proceeding of any account debtor that is included in any Borrowing Base Certificate as an Eligible Account. 5.5 Merchantable Inventory. All Inventory is in all material respects of good and marketable quality, free from all reasonable material defects. 5.6 Intellectual Property Collateral. Borrower is the sole owner of the Intellectual Property Collateral, except for non-exclusive licenses granted by Borrower to its customers in the ordinary course of business. Each of the Patents is valid and enforceable, and no part of the Intellectual Property Collateral has been judged invalid or unenforceable, in whole or in part, and no claim has been made that any part of the Intellectual Property Collateral violates the rights of any third party. 5.7 Name; Location of Chief Executive Office. Except as disclosed in the Schedule, Borrower has not done business under any name other than that specified on the signature page hereof. The chief executive office of Borrower is located at the address indicated in Section 10 hereof. 5.8 Litigation. Except as set forth in the Schedule, there are no actions or proceedings pending by or against Borrower or any Subsidiary before any court or administrative agency in which an adverse decision could have a Material Adverse Effect or a material adverse effect on Borrower or such Subsidiary or Borrower's interest or Bank's security interest in the Collateral. Borrower does not have knowledge of any such pending or threatened actions or proceedings. 5.9 No Material Adverse Change in Financial Statements. All consolidated financial statements related to Borrower or any Subsidiary that are delivered by Borrower to Bank fairly present in all material respects Borrower's or such Subsidiary's consolidated financial condition as of the date thereof and Borrower's or such Subsidiary's consolidated results of operations for the period then ended. There has not been a material adverse change in the consolidated financial condition of Borrower or Subsidiary since the date of the most recent of such financial statements submitted to Bank. 5.10 Solvency, Payment of Debts. Borrower is solvent and able to pay its debts (including trade debts) as they mature. 5.11 Regulatory Compliance. Borrower and each Subsidiary have met the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA. No event has occurred resulting from Borrower's failure to comply with ERISA that is reasonably likely to result in Borrower's incurring any liability that could have a Material Adverse Effect. Borrower is not an "investment company" or a company 10 11 "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940. Borrower is not engaged principally, or as one of the important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulations T and U of the Board of Governors of the Federal Reserve System). Borrower has complied with all the provisions of the Federal Fair Labor Standards Act. Borrower has not violated any statutes, laws, ordinances or rules applicable to it, violation of which could have a Material Adverse Effect. 5.12 Environmental Condition. Except as disclosed in the Schedule, none of Borrower's or any Subsidiary's properties or assets has ever been used by Borrower or any Subsidiary or, to the best of Borrower's knowledge, by previous owners or operators, in the disposal of, or to produce, store, handle, treat, release, or transport, any hazardous waste or hazardous substance other than in accordance with applicable law; to the best of Borrower's knowledge, none of Borrower's properties or assets has ever been designated or identified in any manner pursuant to any environmental protection statute as a hazardous waste or hazardous substance disposal site, or a candidate for closure pursuant to any environmental protection statute; no lien arising under any environmental protection statute has attached to any revenues or to any real or personal property owned by Borrower or any Subsidiary; and neither Borrower nor any Subsidiary has received a summons, citation, notice, or directive from the Environmental Protection Agency or any other federal, state or other governmental agency concerning any action or omission by Borrower or any Subsidiary resulting in the releasing, or otherwise disposing of hazardous waste or hazardous substances into the environment. 5.13 Taxes. Borrower and each Subsidiary has filed or caused to be filed all tax returns required to be filed, and has paid, or has made adequate provision for the payment of, all taxes reflected therein. 5.14 Subsidiaries. Borrower does not own any stock, partnership interest or other equity securities of any Person, except for Permitted Investments. 5.15 Government Consents. Borrower and each Subsidiary has obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all governmental authorities that are necessary for the continued operation of Borrower's or such Subsidiary's business as currently conducted, the failure to obtain which could have a Material Adverse Effect. 5.16 Full Disclosure. No representation, warranty or other statement made by Borrower in any certificate or written statement furnished to Bank contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained in such certificates or statements not misleading. 6. AFFIRMATIVE COVENANTS Borrower covenants and agrees that, until payment in full of all outstanding Obligations, and for so long as Bank may have any commitment to make a Credit Extension hereunder, Borrower shall do all of the following: 6.1 Good Standing. Borrower shall maintain its and each of its Subsidiaries' corporate existence and good standing in its jurisdiction of incorporation and maintain qualification in each jurisdiction in which the failure to so qualify could have a Material Adverse Effect. Borrower shall maintain, and shall cause each of its Subsidiaries to maintain in force all licenses, approvals and agreements, the loss of which could have a Material Adverse Effect. 6.2 Government Compliance. Borrower shall meet, and shall cause each Subsidiary to meet, the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA. Borrower shall comply, and shall cause each Subsidiary to comply, with all statutes, laws, ordinances and government rules and regulations to which it is subject, noncompliance with which could have a Material Adverse Effect or a material adverse effect on the Collateral or the priority of Bank's Lien on the Collateral. 6.3 Financial Statements, Reports, Certificates. Borrower shall deliver to Bank: (a) as soon as available, but in any event within thirty (30) days after the end of each calendar month, a company prepared 11 12 consolidated balance sheet and income statement covering Borrower's consolidated operations during such period, in a form acceptable to Bank and certified by a Responsible Officer; (b) as soon as available, but in any event within one hundred twenty (120) days after the end of Borrower's fiscal year, audited consolidated financial statements of Borrower prepared in accordance with GAAP, consistently applied, together with an unqualified opinion on such financial statements of an independent certified public accounting firm reasonably acceptable to Bank; (c) if applicable, copies of all statements, reports and notices sent or made available generally by Borrower to its security holders or to any holders of Subordinated Debt and all reports on Form 10-K and 10-Q filed with the Securities and Exchange Commission; (d) promptly upon receipt of notice thereof, a report of any legal actions pending or threatened against Borrower or any Subsidiary that could result in damages or costs to Borrower or any Subsidiary of Fifty Thousand Dollars ($50,000) or more; and (e) such budgets, sales projections, operating plans or other financial information as Bank may reasonably request from time to time generally prepared by Borrower in the ordinary course of business. Within twenty (20) days after the last day of each month, Borrower shall deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer in substantially the form of Exhibit C hereto, together with aged listings of accounts receivable and accounts payable, provided that, for any month during which no Obligations were outstanding at any time under Section 2.1 of this Agreement, Borrower shall deliver the foregoing within thirty (30) days after the last day of such month. Borrower shall deliver to Bank with the monthly financial statements a Compliance Certificate signed by a Responsible Officer in substantially the form of Exhibit D hereto. Bank shall have a right initially (the "Initial Audit") and from time to time thereafter to audit Borrower's Accounts and appraise Collateral at Borrower's expense, provided that such audits will be conducted no more often than every twelve (12) months unless an Event of Default has occurred and is continuing. The results of the Initial Audit shall be satisfactory to Bank by May 30, 1999. 6.4 Inventory; Returns. Borrower shall keep all Inventory in good and marketable condition, free from all material defects. Returns and allowances, if any, as between Borrower and its account debtors shall be on the same basis and in accordance with the usual customary practices of Borrower, as they exist at the time of the execution and delivery of this Agreement. Borrower shall promptly notify Bank of all returns and recoveries and of all disputes and claims, where the return, recovery, dispute or claim involves more than One Hundred Thousand Dollars ($100,000). 6.5 Taxes. Borrower shall make, and shall cause each Subsidiary to make, due and timely payment or deposit of all material federal, state, and local taxes, assessments, or contributions required of it by law, and will execute and deliver to Bank, on demand, appropriate certificates attesting to the payment or deposit thereof; and Borrower will make, and will cause each Subsidiary to make, timely payment or deposit of all material tax payments and withholding taxes required of it by applicable laws, including, but not limited to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal income taxes, and will, upon request, furnish Bank with proof satisfactory to Bank indicating that Borrower or a Subsidiary has made such payments or deposits; provided that Borrower or a Subsidiary need not make any payment if the amount or validity of such payment is contested in good faith by appropriate proceedings and is reserved against (to the extent required by GAAP) by Borrower. 6.6 Insurance. (a) Borrower, at its expense, shall keep the Collateral insured against loss or damage by fire, theft, explosion, sprinklers, and all other hazards and risks, and in such amounts, as ordinarily insured against by other owners in similar businesses conducted in the locations where Borrower's business is conducted on the date hereof. Borrower shall also maintain insurance relating to Borrower's ownership and use of the Collateral in amounts and of a type that are customary to businesses similar to Borrower's. (b) All such policies of insurance shall be in such form, with such companies, and in such amounts as reasonably satisfactory to Bank. All such policies of property insurance shall contain a lender's loss payable endorsement, in a form satisfactory to Bank, showing Bank as an additional loss payee thereof and all 12 13 liability insurance policies shall show the Bank as an additional insured, and shall specify that the insurer must give at least twenty (20) days notice to Bank before canceling its policy for any reason. Upon Bank's request, Borrower shall deliver to Bank certified copies of such policies of insurance and evidence of the payments of all premiums therefor. All proceeds payable under any such policy shall, at the option of Bank, be payable to Bank to be applied on account of the Obligations. 6.7 Principal Depository. Borrower shall maintain its principal depository and operating accounts with Bank. 6.8 Quick Ratio. Borrower shall maintain, as of the last day of each calendar month, a ratio of Quick Assets to Current Liabilities of at least 1.50 to 1.00. 6.9 Tangible Net Worth. Borrower shall maintain, as of the last day of each calendar month, a Tangible Net Worth of not less than Four Million Dollars ($4,000,000) plus thirty-five percent (35%) of Borrower's quarterly net income. 6.10 Profitability. Borrower shall show a profit of at least One Dollar ($1.00) for each fiscal quarter, except that in one and only one fiscal quarter during the term of this Agreement, Borrower shall be permitted to fail to show a profit of at least One Dollar ($1.00), provided that Borrower shall not lose more than Three Hundred Thousand Dollars ($300,000) for such quarter. In addition to the foregoing, Borrower shall show a profit of at least One Dollar ($1.00) for each fiscal year during the term of this Agreement. 6.11 Registration of Intellectual Property Rights. If an Event of Default has occurred, upon Bank's reasonable request, Borrower shall do all of the following: (a) Register or cause to be registered on an expedited basis (to the extent not already registered and to the extent commercially viable) with the United States Patent and Trademark Office or the United States Copyright Office, as applicable, those intellectual property rights listed on Exhibits A, B and C to the Intellectual Property Security Agreement delivered to Bank by Borrower in connection with this Agreement within thirty (30) days of the date of this Agreement. Borrower shall, on an expedited basis, register or cause to be registered with the United States Patent and Trademark Office or the United States Copyright Office, as applicable, and notify Bank of, all registerable intellectual property rights Borrower has developed as of the date of this Agreement but heretofore failed to register and give Bank notice thereof. Borrower shall register or cause to be registered with the United States Patent and Trademark Office or the United States Copyright Office, as applicable, and notify Bank of those additional intellectual property rights developed or acquired by Borrower from time to time in connection with any product prior to the sale or licensing of such product to any third party and prior to Borrower's use of such product (including without limitation major revisions or additions to the intellectual property rights listed on such Exhibits A, B and C) and shall give Bank notice thereof; (b) Execute and deliver such additional instruments and documents from time to time as Bank shall reasonably request to perfect Bank's security interest in the Intellectual Property Collateral; (c) Borrower shall (i) protect, defend and maintain the validity and enforceability of the Trademarks, Patents and Copyrights, (ii) use its best efforts to detect infringements of the Trademarks, Patents and Copyrights and promptly advise Bank in writing of material infringements detected and (iii) not allow any material Trademarks, Patents or Copyrights to be abandoned, forfeited or dedicated to the public without the written consent of Bank, which shall not be unreasonably withheld. (d) Bank may audit Borrower's Intellectual Property Collateral to confirm compliance with this Section 6.11, provided such audit may not occur more often than once per year, unless an Event of Default has occurred and is continuing. Bank shall have the right, but not the obligation, to take, at Borrower's sole expense, any actions that Borrower is required under this Section 6.11 to take but which Borrower fails to take, after fifteen (15) days' notice to Borrower. Borrower shall reimburse and indemnify Bank for all reasonable costs and reasonable expenses incurred in the reasonable exercise of its rights under this Section 6.11. (e) Borrower shall within twenty-five (25) days of the last day of each fiscal quarter, deliver to Bank in form and substance satisfactory to Bank a report signed by Borrower, in form reasonably 13 14 acceptable to Bank, listing any applications or registrations that Borrower has made or filed in respect of any Patents, Copyrights or Trademarks and the status of any outstanding applications or registrations, as well as any material change in Borrower's intellectual property, including but not limited to any subsequent ownership right of Borrower in or to any Trademark, Patent or Copyright not specified in Exhibits A, B, and C of the Intellectual Property Security Agreement delivered to Bank by each Borrower in connection with this Agreement 6.12 Further Assurances. At any time and from time to time Borrower shall execute and deliver such further instruments and take such further action as may reasonably be requested by Bank to effect the purposes of this Agreement. 7. NEGATIVE COVENANTS Borrower covenants and agrees that, so long as any credit hereunder shall be available and until payment in full of the outstanding Obligations or for so long as Bank may have any commitment to make any Credit Extensions, Borrower will not do any of the following: 7.1 Dispositions. Convey, sell, lease, transfer or otherwise dispose of (collectively, a "Transfer"), or permit any of its Subsidiaries to Transfer, all or any part of its business or property, including intellectual property, other than: (i) Transfers of Inventory in the ordinary course of business; (ii) Transfers of non-exclusive licenses and similar arrangements for the use of the property of Borrower or its Subsidiaries; or (iii) Transfers of surplus, worn-out or obsolete Equipment. 7.2 Change in Business. Engage in any business, or permit any of its Subsidiaries to engage in any business, other than the businesses currently engaged in by Borrower and any business substantially similar or related thereto (or incidental thereto). Borrower will not, without thirty (30) days prior written notification to Bank, relocate its chief executive office. 7.3 Mergers or Acquisitions. Merge or consolidate, or permit any of its Subsidiaries to merge or consolidate, with or into any other business organization, or acquire, or permit any of its Subsidiaries to acquire, all or substantially all of the capital stock or property of another Person. 7.4 Indebtedness. Create, incur, assume or be or remain liable with respect to any Indebtedness, or permit any Subsidiary so to do, other than Permitted Indebtedness. 7.5 Encumbrances. Create, incur, assume or suffer to exist any Lien with respect to any of its property, or assign or otherwise convey any right to receive income, including the sale of any Accounts, or permit any of its Subsidiaries so to do, except for Permitted Liens. 7.6 Distributions. Pay any dividends or make any other distribution or payment on account of or in redemption, retirement or purchase of any capital stock. Notwithstanding the foregoing, Borrower may acquire capital stock or property of another Person and/or repurchase its own capital stock in an aggregate amount not to exceed twenty-five percent (25%) of Borrower's Tangible Net Worth, as long as an Event of Default does not exist prior to such repurchase or acquisition or would not exist after giving effect to such repurchase or acquisition. 7.7 Investments. Directly or indirectly acquire or own, or make any Investment in or to any Person, or permit any of its Subsidiaries so to do, other than Permitted Investments. 7.8 Transactions with Affiliates. Directly or indirectly enter into or permit to exist any material transaction with any Affiliate of Borrower except for transactions that are in the ordinary course of Borrower's business, upon fair and reasonable terms that are no less favorable to Borrower than would be obtained in an arm's length transaction with a nonaffiliated Person. 7.9 Subordinated Debt. Make any payment in respect of any Subordinated Debt, or permit any of its Subsidiaries to make any such payment, except in compliance with the terms of such Subordinated Debt, or amend any provision contained in any documentation relating to the Subordinated Debt without Bank's prior written consent. 14 15 7.10 Inventory. Store the Inventory with a bailee, warehouseman, or similar party unless Bank has received a pledge of the warehouse receipt covering such Inventory. Except for Inventory sold in the ordinary course of business and except for such other locations as Bank may approve in writing, Borrower shall keep the Inventory only at the location set forth in Section 10 hereof and such other locations of which Borrower gives Bank prior written notice and as to which Borrower signs and files a financing statement where needed to perfect Bank's security interest. 7.11 Compliance. Become an "investment company" or be controlled by an "investment company," within the meaning of the Investment Company Act of 1940, or become principally engaged in, or undertake as one of its important activities, the business of extending credit for the purpose of purchasing or carrying margin stock, or use the proceeds of any Credit Extension for such purpose. Fail to meet the minimum funding requirements of ERISA, permit a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur, fail to comply with the Federal Fair Labor Standards Act or violate any law or regulation, which violation could have a Material Adverse Effect or a material adverse effect on the Collateral or the priority of Bank's Lien on the Collateral, or permit any of its Subsidiaries to do any of the foregoing. 7.12 Intellectual Property Agreements. Borrower shall not permit the inclusion in any material contract to which it becomes a party of any provisions that could or might in any way prevent the creation of a security interest in Borrower's rights and interests in any property included within the definition of the Intellectual Property Collateral acquired under such contracts. 8. EVENTS OF DEFAULT Any one or more of the following events shall constitute an Event of Default by Borrower under this Agreement: 8.1 Payment Default. If Borrower fails to pay, when due, any of the Obligations; 8.2 Covenant Default. If Borrower fails to perform any obligation under Article 6 or violates any of the covenants contained in Article 7 of this Agreement, or fails or neglects to perform, keep, or observe any other material term, provision, condition, covenant, or agreement contained in this Agreement, in any of the Loan Documents, or in any other present or future agreement between Borrower and Bank and as to any default under such other term, provision, condition, covenant or agreement that can be cured, has failed to cure such default within ten (10) days after Borrower receives notice thereof or any officer of Borrower becomes aware thereof; provided, however, that if the default cannot by its nature be cured within the ten (10) day period or cannot after diligent attempts by Borrower be cured within such ten (10) day period, and such default is likely to be cured within a reasonable time, then Borrower shall have an additional reasonable period (which shall not in any case exceed thirty (30) days) to attempt to cure such default, and within such reasonable time period the failure to have cured such default shall not be deemed an Event of Default (provided that no Credit Extensions will be required to be made during such cure period); 8.3 Material Adverse Change. If there occurs a material adverse change in Borrower's business or financial condition, or if there is a material impairment of the prospect of repayment of any portion of the Obligations or a material impairment of the value or priority of Bank's security interests in the Collateral; 8.4 Attachment. If any material portion of Borrower's assets is attached, seized, subjected to a writ or distress warrant, or is levied upon, or comes into the possession of any trustee, receiver or person acting in a similar capacity and such attachment, seizure, writ or distress warrant or levy has not been removed, discharged or rescinded within ten (10) days, or if Borrower is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs, or if a judgment or other claim becomes a lien or encumbrance upon any material portion of Borrower's assets, or if a notice of lien, levy, or assessment is filed of record with respect to any of Borrower's assets by the United States Government, or any department, agency, or instrumentality thereof, or by any state, county, municipal, or governmental agency, and the same is not paid within ten (10) days after Borrower receives notice thereof, provided that none of the foregoing shall constitute an Event of Default where such action or event is stayed or an adequate bond has been posted pending a good faith contest by Borrower (provided that no Credit Extensions will be required to be made during such cure period); 15 16 8.5 Insolvency. If Borrower becomes insolvent, or if an Insolvency Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced against Borrower and is not dismissed or stayed within thirty (30) days (provided that no Credit Extensions will be made prior to the dismissal of such Insolvency Proceeding); 8.6 Other Agreements. If there is a default in any agreement to which Borrower is a party with a third party or parties resulting in a right by such third party or parties, whether or not exercised, to accelerate the maturity of any Indebtedness in an amount in excess of One Hundred Thousand Dollars ($100,000) or that could have a Material Adverse Effect; 8.7 Subordinated Debt. If Borrower makes any payment on account of Subordinated Debt, except to the extent such payment is allowed under any subordination agreement entered into with Bank; 8.8 Judgments. If a judgment or judgments for the payment of money in an amount, individually or in the aggregate, of at least One Hundred Thousand Dollars ($100,000) shall be rendered against Borrower and shall remain unsatisfied and unstayed for a period of thirty (30) days (provided that no Credit Extensions will be made prior to the satisfaction or stay of such judgment); or 8.9 Misrepresentations. If any material misrepresentation or material misstatement exists now or hereafter in any warranty or representation set forth herein or in any certificate delivered to Bank by any Responsible Officer pursuant to this Agreement or to induce Bank to enter into this Agreement or any other Loan Document. 9. BANK'S RIGHTS AND REMEDIES 9.1 Rights and Remedies. Upon the occurrence and during the continuance of an Event of Default, Bank may, at its election, without notice of its election and without demand, do any one or more of the following, all of which are authorized by Borrower: (a) Declare all Obligations, whether evidenced by this Agreement, by any of the other Loan Documents, or otherwise, immediately due and payable (provided that upon the occurrence of an Event of Default described in Section 8.5 all Obligations shall become immediately due and payable without any action by Bank); (b) Cease advancing money or extending credit to or for the benefit of Borrower under this Agreement or under any other agreement between Borrower and Bank; (c) Settle or adjust disputes and claims directly with account debtors for amounts, upon terms and in whatever order that Bank reasonably considers advisable; (d) Make such payments and do such acts as Bank considers necessary or reasonable to protect its security interest in the Collateral. Borrower agrees to assemble the Collateral if Bank so requires, and to make the Collateral available to Bank as Bank may designate. Borrower authorizes Bank to enter the premises where the Collateral is located, to take and maintain possession of the Collateral, or any part of it, and to pay, purchase, contest, or compromise any encumbrance, charge, or lien which in Bank's determination appears to be prior or superior to its security interest and to pay all expenses incurred in connection therewith. With respect to any of Borrower's owned premises, Borrower hereby grants Bank a license to enter into possession of such premises and to occupy the same, without charge, in order to exercise any of Bank's rights or remedies provided herein, at law, in equity, or otherwise; (e) Set off and apply to the Obligations any and all (i) balances and deposits of Borrower held by Bank, or (ii) indebtedness at any time owing to or for the credit or the account of Borrower held by Bank; (f) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell (in the manner provided for herein) the Collateral. Bank is hereby granted a license or other right, 16 17 solely pursuant to the provisions of this Section 9.1, to use, without charge, Borrower's labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and, in connection with Bank's exercise of its rights under this Section 9.1, Borrower's rights under all licenses and all franchise agreements shall inure to Bank's benefit; (g) Sell the Collateral at either a public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including Borrower's premises) as Bank determines is commercially reasonable, and apply any proceeds to the Obligations in whatever manner or order Bank deems appropriate; (h) Bank may credit bid and purchase at any public sale; and (i) Any deficiency that exists after disposition of the Collateral as provided above will be paid immediately by Borrower. 9.2 Power of Attorney. Effective only upon the occurrence and during the continuance of an Event of Default, Borrower hereby irrevocably appoints Bank (and any of Bank's designated officers, or employees) as Borrower's true and lawful attorney to: (a) send requests for verification of Accounts or notify account debtors of Bank's security interest in the Accounts; (b) endorse Borrower's name on any checks or other forms of payment or security that may come into Bank's possession; (c) sign Borrower's name on any invoice or bill of lading relating to any Account, drafts against account debtors, schedules and assignments of Accounts, verifications of Accounts, and notices to account debtors; (d) dispose of any Collateral; (e) make, settle, and adjust all claims under and decisions with respect to Borrower's policies of insurance; (f) settle and adjust disputes and claims respecting the accounts directly with account debtors, for amounts and upon terms which Bank determines to be reasonable; (g) to modify, in its sole discretion, any intellectual property security agreement entered into between Borrower and Bank without first obtaining Borrower's approval of or signature to such modification by amending Exhibits A, B, and C, thereof, as appropriate, to include reference to any right, title or interest in any Copyrights, Patents or Trademarks acquired by Borrower after the execution hereof or to delete any reference to any right, title or interest in any Copyrights, Patents or Trademarks in which Borrower no longer has or claims to have any right, title or interest; (h) to file, in its sole discretion, one or more financing or continuation statements and amendments thereto, relative to any of the Collateral without the signature of Borrower where permitted by law; and (i) to transfer the Intellectual Property Collateral into the name of Bank or a third party to the extent permitted under the California Uniform Commercial Code; provided Bank may exercise such power of attorney to sign the name of Borrower on any of the documents described in Section 4.2 regardless of whether an Event of Default has occurred. The appointment of Bank as Borrower's attorney in fact, and each and every one of Bank's rights and powers, being coupled with an interest, is irrevocable until all of the Obligations have been fully repaid and performed and Bank's obligation to provide advances hereunder is terminated. 9.3 Accounts Collection. Subject to Section 6.3, upon the occurrence and during the continuation of an Event of Default, Bank may notify any Person owing funds to Borrower of Bank's security interest in such funds and verify the amount of such Account. Upon the occurrence and during the continuation of an Event of Default, Borrower shall collect all amounts owing to Borrower for Bank, receive in trust all payments as Bank's trustee, and immediately deliver such payments to Bank in their original form as received from the account debtor, with proper endorsements for deposit. 9.4 Bank Expenses. Effective only upon the occurrence and during the continuance of an Event of Default, if Borrower fails to pay any amounts or furnish any required proof of payment due to third persons or entities, as required under the terms of this Agreement, then Bank may do any or all of the following: (a) make payment of the same or any part thereof; (b) set up such reserves under the Revolving Facility as Bank deems necessary to protect Bank from the exposure created by such failure; or (c) obtain and maintain insurance policies of the type discussed in Section 6.6 of this Agreement, and take any action with respect to such policies as Bank deems prudent. Any amounts so paid or deposited by Bank shall constitute Bank Expenses, shall be immediately due and payable, and shall bear interest at the then applicable rate hereinabove provided, and shall be secured by the Collateral. Any payments made by Bank shall not constitute an agreement by Bank to make similar payments in the future or a waiver by Bank of any Event of Default under this Agreement. 17 18 9.5 Bank's Liability for Collateral. So long as Bank complies with reasonable banking practices, Bank shall not in any way or manner be liable or responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage thereto occurring or arising in any manner or fashion from any cause; (c) any diminution in the value thereof; or (d) any act or default of any carrier, warehouseman, bailee, forwarding agency, or other person whomsoever. All risk of loss, damage or destruction of the Collateral shall be borne by Borrower. 9.6 Remedies Cumulative. Bank's rights and remedies under this Agreement, the Loan Documents, and all other agreements shall be cumulative. Bank shall have all other rights and remedies not inconsistent herewith as provided under the Code, by law, or in equity. No exercise by Bank of one right or remedy shall be deemed an election, and no waiver by Bank of any Event of Default on Borrower's part shall be deemed a continuing waiver. No delay by Bank shall constitute a waiver, election, or acquiescence by it. No waiver by Bank shall be effective unless made in a written document signed on behalf of Bank and then shall be effective only in the specific instance and for the specific purpose for which it was given. 9.7 Demand; Protest. Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees at any time held by Bank on which Borrower may in any way be liable. 10. NOTICES Unless otherwise provided in this Agreement, all notices or demands by any party relating to this Agreement or any other agreement entered into in connection herewith shall be in writing and (except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by a recognized overnight delivery service, certified mail, postage prepaid, return receipt requested, or by telefacsimile to Borrower or to Bank, as the case may be, at its addresses set forth below: If to Borrower: ILX Lightwave Corporation 31950 E. Frontage Road Bozeman, MT 59771 Attn: Larry Johnson FAX: (406) 586-9405 If to Bank: Silicon Valley Bank 4430 Arapahoe Avenue, Suite 225 Boulder, CO 80303 Attn: Mike Devery / Megan Varveris Fax: (303) 938-0486 The parties hereto may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other. 11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER The Loan Documents shall be governed by, and construed in accordance with, the internal laws of the State of California, without regard to principles of conflicts of law. Each of Borrower and Bank hereby submits to the exclusive jurisdiction of the state and Federal courts located in the County of Santa Clara, State of California. BORROWER AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. 18 19 12. GENERAL PROVISIONS 12.1 Successors and Assigns. This Agreement shall bind and inure to the benefit of the respective successors and permitted assigns of each of the parties; provided, however, that neither this Agreement nor any rights hereunder may be assigned by Borrower without Bank's prior written consent, which consent may be granted or withheld in Bank's sole discretion. Bank shall have the right without the consent of or notice to Borrower to sell, transfer, negotiate, or grant participation in all or any part of, or any interest in, Bank's obligations, rights and benefits hereunder. 12.2 Indemnification. Borrower shall defend, indemnify and hold harmless Bank and its officers, employees, and agents against: (a) all obligations, demands, claims, and liabilities claimed or asserted by any other party in connection with the transactions contemplated by the Loan Documents and (b) all losses or Bank Expenses in any way suffered, incurred, or paid by Bank as a result of or in any way arising out of, following, or consequential to transactions between Bank and Borrower whether under the Loan Documents or otherwise (including without limitation reasonable attorneys fees and expenses), except for losses caused by Bank's gross negligence or willful misconduct. 12.3 Time of Essence. Time is of the essence for the performance of all obligations set forth in this Agreement. 12.4 Severability of Provisions. Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision. 12.5 Amendments in Writing, Integration. This Agreement cannot be amended or terminated orally. All prior agreements, understandings, representations, warranties, and negotiations between the parties hereto with respect to the subject matter of this Agreement, if any, are merged into this Agreement and the Loan Documents. 12.6 Counterparts. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement. 12.7 Survival. All covenants, representations and warranties made in this Agreement shall continue in full force and effect so long as any Obligations remain outstanding. The obligations of Borrower to indemnify Bank with respect to the expenses, damages, losses, costs and liabilities described in Section 12.2 shall survive until all applicable statute of limitations periods with respect to actions that may be brought against Bank have run. 19 20 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. ILX LIGHTWAVE CORPORATION By: --------------------------------- Title: ------------------------------ SILICON VALLEY BANK By: --------------------------------- Title: ------------------------------ 20 21 EXHIBIT A COLLATERAL DESCRIPTION ATTACHMENT TO LOAN AND SECURITY AGREEMENT The Collateral shall consist of all right, title and interest of Borrower in and to the following: (i) All goods and equipment now owned or hereafter acquired, including, without limitation, all machinery, fixtures, vehicles (including motor vehicles and trailers), and any interest in any of the foregoing, and all attachments, accessories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing, wherever located; (ii) All inventory, now owned or hereafter acquired, including, without limitation, all merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products including such inventory as is temporarily out of Borrower's custody or possession or in transit and including any returns upon any accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing and any documents of title representing any of the above, and Borrower's Books relating to any of the foregoing; (iii) All contract rights and general intangibles now owned or hereafter acquired, including, without limitation, goodwill, trademarks, servicemarks, trade styles, trade names, patents, patent applications, leases, license agreements, franchise agreements, blueprints, drawings, purchase orders, customer lists, route lists, infringements, claims, computer programs, computer discs, computer tapes, literature, reports, catalogs, design rights, income tax refunds, payments of insurance and rights to payment of any kind; (iv) All now existing and hereafter arising accounts, contract rights, royalties, license rights and all other forms of obligations owing to Borrower arising out of the sale or lease of goods, the licensing of technology or the rendering of services by Borrower, whether or not earned by performance, and any and all credit insurance, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed by Borrower and Borrower's Books relating to any of the foregoing; (v) All documents, cash, deposit accounts, securities, letters of credit, certificates of deposit, instruments and chattel paper now owned or hereafter acquired and Borrower's Books relating to the foregoing; (vi) All copyright rights, copyright applications, copyright registrations and like protections in each work of authorship and derivative work thereof, whether published or unpublished, now owned or hereafter acquired; all trade secret rights, including all rights to unpatented inventions, know-how, operating manuals, license rights and agreements and confidential information, now owned or hereafter acquired; all mask work or similar rights available for the protection of semiconductor chips, now owned or hereafter acquired; all claims for damages by way of any past, present and future infringement of any of the foregoing; and (vii) Any and all claims, rights and interests in any of the above and all substitutions for, additions and accessions to and proceeds thereof. 21 22 FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT This First Amendment to Loan and Security Agreement is entered into as of March 23, 2000 (the "Amendment"), by and between SILICON VALLEY BANK ("Bank") and ILX LIGHTWAVE CORPORATION ("Borrower"). RECITALS Borrower and Bank are parties to that certain Loan and Security Agreement dated as of July 27, 1999, as amended (the "Agreement"). The parties desire to amend the Agreement in accordance with the terms of this Amendment. NOW, THEREFORE, the parties agree as follows: 1. Certain defined terms in Section 1.1 of the Agreement are hereby added or amended to read as follows: "Capitalized Product Development Costs" are all costs associated with the development of Borrower's product, including, but not limited to software, that are not recorded as an expense and have been classified as an asset account. "Committed Revolving Line" means a credit extension of up to Two Million Dollars ($2,000,000). "Credit Extension" means each Advance, Term Advance or any other extension of credit by Bank for the benefit of Borrower hereunder. "Debt Service Coverage" means, as of any date of determination, a ratio of earnings after tax less Capitalized Product Development Costs plus interest, depreciation and amortization for the preceding quarter on an annualized basis to current maturities of long term debt and capitalized leases, plus interest expense annualized. "Term Line" means a credit extension of up to One Million Four Hundred Thousand Dollars ($1,400,000). "Term Maturity Date" means April 30, 2003. "Revolving Maturity Date" means March 22, 2001. 2. A new Section 2.1.2 is hereby added to the Agreement to read as follows: 2.1.2 Term Loan. (a) Subject to and upon the terms and conditions of this Agreement, at any time from the date hereof through April 30, 2000, Bank agrees to make an advance (the "Term Advance") to Borrower in an amount not in excess of the Term Line. (b) Interest shall accrue from the date of the Term Advance at the rate specified in Section 2.3(a). The Term Advance shall be payable in thirty-six (36) equal monthly installments of principal, plus all accrued interest, beginning on May 31, 2000, and continuing on the last day of each month thereafter through the Term Maturity Date, at which time all amounts due under this Section 2.1.2 shall be immediately due and payable. Once repaid, neither the Term Advance nor any portion thereof may be reborrowed. Borrower may prepay the Term Advance without penalty or premium. 1 23 (c) When Borrower desires to obtain the Term Advance, Borrower shall notify Bank (which notice shall be irrevocable) by facsimile transmission to be received no later than 4:00 p.m. Colorado time one (1) Business Day before the day on which the Term Advance is to be made. Such notice shall be substantially in the form of Exhibit B. The notice shall be signed by a Responsible Officer or its designee. 3. Section 2.3(a) is hereby amended in its entirety to read as follows: (a) Interest Rates. (i) Advances. Except as set forth in Section 2.3(b), the Advances shall bear interest, on the outstanding daily balance thereof, at a rate equal to three quarters percent (0.75%) above the Prime Rate. (ii) Term Advance. Except as set forth in Section 2.3(b), the Term Advance shall bear interest, on the outstanding daily balance thereof, at a rate equal to one and one half percent (1.50%) above the Prime Rate. 4. The first sentence of Section 2.3(c) of the Agreement is hereby amended in its entirety to read as follows: "Interest hereunder shall be due and payable on the last calendar day of each month during the term hereof." 5. The first sentence of Section 2.7 is hereby amended in its entirety to read as follows: "This Agreement shall become effective on the Closing Date and, subject to Section 12.7, shall continue in full force and effect for a term ending on the Term Maturity Date." 6. Section 6.8 is hereby amended in its entirety to read as follows: 6.8 Quick Ratio. Borrower shall maintain, as of the last day of each calendar month through the month ending on February 28, 2001, a ratio of Quick Assets to Current Liabilities of at least 1.25 to 1.00. Borrower shall maintain, as of the last day of each calendar month thereafter, a ratio of Quick Assets to Current Liabilities of at least 1.50 to 1.00. 7. Sections 6.9 and 6.10 are hereby amended in their entirety to read as follows: 6.9 Tangible Net Worth. As of the Closing Date, Borrower shall maintain, as of the last day of each calendar month, a Tangible Net Worth of not less than Four Million Dollars ($4,000,000) plus thirty-five percent (35%) of Borrower's quarterly net income after March 23, 2000. 6.10 Profitability. Borrower shall show a profit of at least One Dollar ($1.00) for each fiscal quarter. 8. A new Section 6.13 is hereby added to the Agreement to read as follows: 6.13 Debt Service Coverage. Borrower shall maintain a Debt Service Coverage of at least 2.0 to 1.0 as of the last day of each quarter. 9. Section 7.6 of the Agreement is hereby amended in its entirety to read as follows: 7.6 Distributions. Pay any dividends or make any other distribution or payment on account of or in redemption, retirement or purchase of any capital stock. Notwithstanding the foregoing, Borrower may (i) acquire capital stock or property of another Person in an aggregate amount not to exceed ten percent (10%) of Borrower's Tangible Net Worth and (ii) repurchase its own capital stock in an aggregate amount not to exceed One Million Four Hundred Fifty Thousand Dollars ($1,450,000), as long as an Event 2 24 of Default does not exist prior to any such repurchase or acquisition and would not exist after giving effect to any such repurchase or acquisition. 10. The Compliance Certificate to be delivered after the date of this Amendment shall be in substantially the form of Exhibit D hereto. 11. Borrower hereby acknowledges and agrees that the next audit of Borrower's Accounts pursuant to Section 6.3 will be due in July of 2000. 12. Unless otherwise defined, all capitalized terms in this Amendment shall be as defined in the Agreement. Except as amended, the Agreement remains in full force and effect. 13. Borrower represents and warrants that the representations and warranties contained in the Agreement are true and correct as of the date of this Amendment, and that no Event of Default has occurred and is continuing. 14. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one instrument. 15. As a condition to the effectiveness of this Amendment, Bank shall have received, in form and substance satisfactory to Bank, the following: (a) this Amendment, duly executed by Borrower; (b) a non-refundable loan fee of Twelve Thousand Six Hundred Twenty-Five Dollars ($12,625), plus all Bank Expenses incurred through the date of this Amendment including reasonable attorneys' fees and expenses not to exceed Two Thousand Dollars ($2,000); (c) Corporate Resolutions to Borrow; and (d) such other documents, and completion of such other matters, as Bank may reasonably deem necessary or appropriate. 3 25 IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the first date above written. ILX LIGHTWAVE CORPORATION By: ------------------------------------- Title: ---------------------------------- SILICON VALLEY BANK By: ------------------------------------- Title: ---------------------------------- 4 26 SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT This Second Amendment to Loan and Security Agreement is entered into as of October 23, 2000 (the "Amendment"), by and between SILICON VALLEY BANK ("Bank") and ILX LIGHTWAVE CORPORATION ("Borrower"). RECITALS Borrower and Bank are parties to that certain Loan and Security Agreement dated as of July 27, 1999, as amended including without limitation by that certain First Amendment to Loan and Security Agreement dated as of March 23, 2000 (collectively, the "Agreement"). The parties desire to amend the Agreement in accordance with the terms of this Amendment. NOW, THEREFORE, the parties agree as follows: 1. Certain defined terms in Section 1.1 of the Agreement are hereby added or amended to read as follows: "Borrowing Base" is (i) 80% of Eligible Accounts plus (ii) the least of (A) 20% of the value of Borrower's Eligible Inventory (valued at the lower of cost or wholesale fair market value), (B) $500,000, or (C) 30% of Eligible Accounts, as determined by Bank from Borrower's most recent Borrowing Base Certificate. "Committed Revolving Line" means a credit extension of up to Five Million Dollars ($5,000,000). "Eligible Accounts" means those Accounts that arise in the ordinary course of Borrower's business that comply with all of Borrower's representations and warranties to Bank set forth in Section 5.4; provided, that standards of eligibility may be fixed and revised from time to time by Bank as a consequence of any Collateral audits done pursuant to Section 6.3 in Bank's reasonable judgment and upon notification thereof to Borrower in accordance with the provisions hereof. Unless otherwise agreed to by Bank, Eligible Accounts shall not include the following: (a) Accounts that the account debtor has failed to pay within ninety (90) days of invoice date; (b) Accounts with respect to an account debtor, fifty percent (50%) of whose Accounts the account debtor has failed to pay within ninety (90) days of invoice date; (c) Accounts with respect to which the account debtor is an officer, employee, or agent of Borrower; (d) Accounts with respect to which goods are placed on consignment, guaranteed sale, sale or return, sale on approval, bill and hold, or other terms by reason of which the payment by the account debtor may be conditional; (e) Accounts with respect to which the account debtor is an Affiliate of Borrower; (f) Accounts with respect to which the account debtor does not have its principal place of business in the United States to the extent that they exceed $500,000 in the aggregate; (g) Accounts with respect to which the account debtor is the United States or any department, agency, or instrumentality of the United States; 27 (h) Accounts with respect to which Borrower is liable to the account debtor for goods sold or services rendered by the account debtor to Borrower, but only to the extent of any amounts owing to the account debtor against amounts owed to Borrower; (i) Accounts with respect to an account debtor, including Subsidiaries and Affiliates, whose total obligations to Borrower exceed twenty-five percent (25%) of all Accounts, to the extent such obligations exceed the aforementioned percentage (the "Concentration Limit"), except as approved in writing by Bank; notwithstanding the foregoing, the Concentration Limit for each of Lucent Technologies, JDS Uniphase, and Corning (collectively, the "High Concentration Companies") shall be thirty-five percent (35%) of all Accounts, provided that Accounts on which the Account debtor is a High Concentration Companies will be excluded to the extent that in the aggregate High Concentration Companies exceed 75% of all Accounts; (j) Accounts with respect to which the account debtor disputes liability or makes any claim with respect thereto as to which Bank believes, in its sole discretion, that there may be a basis for dispute (but only to the extent of the amount subject to such dispute or claim), or is subject to any Insolvency Proceeding, or becomes insolvent, or goes out of business; and (k) Accounts the collection of which Bank reasonably determines to be doubtful. "Eligible Inventory" means Borrower's Inventory which is composed of raw materials, located at its principal place of business (or any other location of which Borrower has given Bank at least 10 days prior written notice) that complies with representations and warranties in Section 5.5, but does not include used, returned, obsolete, consigned, work in progress, demonstrative or custom inventory, supplies, packing or shipping materials. "Revolving Maturity Date" means October 22, 2002, with an annual renewal on October 22, 2001. 2. Section 2.3(a)(i) is hereby amended in its entirety to read as follows: (i) Advances. Except as set forth in Section 2.3(b), the Advances shall bear interest, on the outstanding daily balance thereof, at a rate equal to one quarter percent (0.25%) above the Prime Rate. 3. A new Section 2.5(d) is hereby added to the Agreement to read as follows: (d) Commitment Fee. On the last day of each fiscal quarter, an amount equal to one quarter of one percent (0.25%) per annum of the average unused portion of the Committed Revolving Line during that quarter. Unless Borrower chooses to terminate the Committed Revolving Line on October 22, 2001 and gives Bank at least 30 days prior written notice of such termination, in the event Borrower chooses to terminate the Committed Revolving Line prior to October 22, 2002, all future quarterly commitment fees will be immediately due and payable upon such termination. 4. The first sentence of Section 2.7 of the Agreement is hereby amended in its entirety to read as follows: "This Agreement shall become effective on the Closing Date and, subject to Section 12.7, shall continue in full force and effect for so long as any Obligations remain outstanding or Bank has any obligation to make Credit Extensions under this Agreement." 5. The second paragraph of Section 6.3 of the Agreement is hereby amended in its entirety to read as follows: Within twenty (20) days after the last day of each month, Borrower shall deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer in substantially the form of Exhibit C hereto, together with aged listings of accounts receivable and accounts payable and an inventory report in form and substance satisfactory to Bank, provided that, for any month during which no Obligations were outstanding 28 at any time under Section 2.1.1 or Section 2.1.3 of this Agreement, Borrower shall deliver the foregoing within thirty (30) days after the last day of such month. 6. Section 6.9 is hereby amended in its entirety to read as follows: 6.9 Tangible Net Worth. Borrower shall maintain, as of the last day of each calendar month, a Tangible Net Worth of not less than (i) before the effective date of Borrower's initial public offering (the "IPO Date"), Seven Million Dollars ($7,000,000), increasing each quarter by 35% of Borrower's quarterly net operating profit after tax, or (ii) after the IPO Date, 25% of the net equity raised by Borrower in such initial public offering, increasing each quarter by 35% of Borrower's quarterly net operating profit after tax. 7. Section 7.3 of the Agreement is hereby amended in its entirety to read as follows: 7.3 Mergers or Acquisitions. Merge or consolidate, or permit any of its Subsidiaries to merge or consolidate, with or into any other business organization, or acquire, or permit any of its Subsidiaries to acquire, all or substantially all of the capital stock or property of another Person. Notwithstanding the foregoing, acquisitions in which Borrower is the surviving entity and which meet the following criteria will be permitted, provided that no Event of Default has occurred which is continuing at the time of the acquisition or would exist after giving effect to the acquisition: (i) the sole consideration is Borrower's stock, and, after giving effect to such acquisition, the change in Borrower's ownership is not greater than 25%, or (ii) cash acquisitions in which the aggregate consideration paid by Borrower does not exceed the Applicable Percentage of Borrower's Tangible Net Worth both immediately prior to and immediately after such acquisition. As used herein, "Applicable Percentage" means 25%, provided that if Borrower completes a public offering with aggregate gross cash proceeds to Borrower of at least $60,000,000, thereafter, "Applicable Percentage" shall mean 50%. 8. Section 7.6 of the Agreement is hereby amended in its entirety to read as follows: 7.6 Distributions. Pay any dividends or make any other distribution or payment on account of or in redemption, retirement or purchase of any capital stock. 9. The Borrowing Base Certificate to be delivered after the date of this Amendment shall be in substantially the form of Exhibit C hereto. 10. The Compliance Certificate to be delivered after the date of this Amendment shall be in substantially the form of Exhibit D hereto. 11. Unless otherwise defined, all capitalized terms in this Amendment shall be as defined in the Agreement. Except as amended, the Agreement remains in full force and effect. 12. Borrower represents and warrants that the representations and warranties contained in the Agreement are true and correct as of the date of this Amendment, and that no Event of Default has occurred and is continuing. 13. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one instrument. 14. As a condition to the effectiveness of this Amendment, Bank shall have received, in form and substance satisfactory to Bank, the following: (a) this Amendment, duly executed by Borrower; (b) a non-refundable loan fee of Five Thousand Dollars ($5,000), plus all Bank Expenses incurred through the date of this Amendment, including reasonable attorneys' fees and expenses for preparation and negotiation of this Amendment (not to exceed Five Hundred Dollars ($500) if Borrower negotiates in good faith); 29 (c) Corporate Resolutions to Borrow; and (d) such other documents, and completion of such other matters, as Bank may reasonably deem necessary or appropriate. IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the first date above written. ILX LIGHTWAVE CORPORATION By: /s/ Randall T. Dugger ------------------------- Title: Vice President and CFO SILICON VALLEY BANK By: /s/ ------------------------- Title: Senior Vice President EX-10.9 9 c57156a2ex10-9.txt LEASE AGREEMENT DATED SEPTEMBER 18, 2000 1 Exhibit 10.9 LEASE AGREEMENT between DaPuzzo Investment Group, LLC as Landlord and ILX Lightwave, as Tenant 6797 Winchester Circle Boulder, Colorado 2 TABLE OF CONTENTS 1. BASIC LEASE DEFINITIONS, EXHIBITS AND ADDITIONAL DEFINITIONS...................................1 2. GRANT OF LEASE.................................................................................3 3. RENT...........................................................................................4 4. PERMITTED USE AND OCCUPANCY....................................................................5 5. UTILITIES, HVAC AND SECURITY...................................................................6 6. REPAIRS........................................................................................7 7. ALTERATION AND IMPROVEMENTS....................................................................7 8. LIENS..........................................................................................8 9. INSURANCE......................................................................................8 10. DAMAGE OR DESTRUCTION..........................................................................9 11. WAIVERS AND INDEMNITIES.......................................................................10 12. CONDEMNATION..................................................................................10 13. ASSIGNMENT AND SUBLETTING.....................................................................11 14. PERSONAL PROPERTY.............................................................................12 15. END OF TERM...................................................................................12 16. ESTOPPEL CERTIFICATES.........................................................................13 17. TRANSFERS OF LANDLORD'S INTEREST..............................................................13 18. RULES AND REGULATIONS.........................................................................14 19. TENANT'S DEFAULT AND LANDLORD'S REMEDIES......................................................14 20. LANDLORD'S DEFAULT AND TENANT'S REMEDIES......................................................16 21. SECURITY DEPOSIT..............................................................................17 22. BROKERS.......................................................................................17 23. LIMITATIONS ON LANDLORD'S LIABILITY...........................................................17 24. NOTICES.......................................................................................17 25. MISCELLANEOUS.................................................................................17
3 LEASE AGREEMENT 6797 WINCHESTER CIRCLE BOULDER, COLORADO THIS LEASE AGREEMENT (this "Lease") is entered into as of the Date, and by and between the Landlord and Tenant, identified in Section 1.1 below. 1 BASIC LEASE DEFINITIONS, EXHIBITS AND ADDITIONAL DEFINITIONS. 1.1 Basic Lease Definitions. IN THIS LEASE, THE FOLLOWING DEFINED TERMS HAVE THE MEANINGS INDICATED: (a) "Date" means September 18, 2000. (b) "Landlord" means DaPuzzo Investment Group, LLC, a Colorado limited liability company. (c) "Tenant" means ILX Lightwave, a Minnesota corporation. (d) "Property" means Lot 8, Replat of Gunbarrel Technical Center, County of Boulder, State of Colorado, located at 6797 Winchester Circle, Boulder, Colorado. (e) "Premises" means the Property and the Building and all other improvements located on the Property. (f) "Building" means the building and other related improvements located on the Property. The Building contains 36,496 square feet of measured area. (g) "Permitted Use" means any use permitted under applicable Laws and the Declaration, and for no other use or purpose. (h) "Commencement Date" is defined in the Work Letter attached to this Lease as Exhibit C. (i) "Term" means the duration of this Lease, which will be approximately 10 years, beginning on the Commencement Date and ending on the "Expiration Date" (as defined below), unless terminated earlier or extended further as provided in this Lease. The "Expiration Date" means (1) if the Commencement Date is the first day of a month, the 10-year anniversary of the day immediately preceding, the Commencement Date; or (2) if the Commencement Date is not the first day of a month, the 10-year anniversary of the last day of the month in which the Commencement Date occurs. The Term will also include any exercised renewal or extension of this Lease. (j) "Base Rent" means the Rent payable in each Lease Year according to Section 3.1, as follows:
Base Rent Base Rent Lease Year(s) Per Month Per Year ------------- --------- -------- Lease Year 1 $38,777.00 $465,324.00 Lease Year 2 $40,134.20 $481,610.34 Lease Year 3 $41,538.89 $498,466.70 Lease Year 4 $42,992.75 $515,913.04 Lease Year 5 $44,497.50 $533,969.99 Lease Year 6 $46,054.91 $552,658.94 Lease Year 7 $47,666.83 $572,002.01 Lease Year 8 $49,335.17 $592,022.08 Lease Year 9 $51,061.90 $612,742.85 Lease Year 10 $52,849.07 $634,188.85
(k) "Security Deposit" means $38,777.00. (l) "Landlord's Address" means: DaPuzzo Investment Group 6325 Gunpark Drive, Suite 200 Boulder, CO 80301 4 (m) "Tenant's Address" means: ILX Lightwave, a Minnesota corporation 6797 Winchester Circle Boulder, Colorado 80301-3513 (n) "Broker" means The Colorado Group, Inc., acting as a transaction broker representing both Landlord and Tenant. Landlord will pay Broker a commission in accordance with a separate listing agreement with Broker. (o) "Exhibits" means those exhibits listed in Section 25.15 below. 1.2 ADDITIONAL DEFINITIONS. In addition to those terms defined in Section 1.1 and other sections of this Lease, the following defined terms when used in this Lease have the meanings indicated: (a) "ADA" means the American with Disabilities Act, as amended from time to time. (b) "Additional Rent" means all amounts required to be paid by Tenant under this Lease in addition to Base Rent, including, without limitation, the costs of Taxes and Landlord's premises Expenses. (c) "Affiliates" means, with respect to any party, any persons or entities that own or control, are owned or controlled by, or are under common ownership or control with, such party and such party's and each of such other person's or entity's respective officers, directors, shareholders, partners, venturers, members, managers, agents and employees. For purposes of this definition, a party is "owned" by anyone that owns more than 50% of the equity interests in such party and a party is "controlled" by anyone that owns sufficient voting interests to control the management decisions of such party. (d) "Landlord's Premises Expenses" means all costs (other than those expressly excluded below) incurred or accrued by Landlord during each calendar year for maintaining, repairing and keeping the Premises (including the Building, and the landscaping and parking areas of the Premises) in good order and repair and as otherwise required pursuant to Section 6.1 of this Lease, including, without limitation, costs and expenses of insurance, repairs, maintenance. Replacements, cleaning, snow removal, painting (including painting of the exterior of the Building; the cost of such complete exterior painting shall be amortized over the useful life of such painting), resurfacing of any parking areas (the cost of any substantial or complete resurfacing shall be amortized over the useful life of such resurfacing); the costs of all insurance deductibles paid by Landlord; reasonable management fees calculated according to any management agreement between Landlord and its managing agent or property manager, if any; fees and expenses (including reasonable attorneys' fees) incurred in contesting the validity of any Laws that would cause an increase in Landlord's Premises Expenses; costs of replacements and improvements that are incurred by Landlord; and costs of any capital improvements (depreciated over the useful economic life of such improvements together with interest, at the average Prime Rate in effect during each such calendar year) by Landlord (1) for the purpose of reducing Landlord's Premises Expenses, or (2) after the date of this Lease and which are required under any Laws that were not applicable to the Building at the time it was constructed and which are not a result of the nature of Tenant's use of the Premises (whether or not such Laws are applicable to the Building as a result of Landlord's or any tenant's status under such Laws, Landlord's or any tenant's use, occupancy or alteration of any portion of the Building or improvements made by or for any tenant in its premises). Notwithstanding the foregoing, Landlord's Premises Expenses will not include (1) mortgage principal or interest; (2) leasing commissions; costs or expenses for which Landlord is reimbursed by insurance proceeds; (4) legal fees incurred for negotiating future leases of the Premises; (5) costs directly and solely related to the maintenance and operation of the entity that constitutes the Landlord, such as accounting fees incurred solely for the purpose of reporting Landlord's financial condition; and (6) the cost of any capital improvements other than those referred to above. (e) "Declaration" means any declaration of covenants or reciprocal easement agreements recorded against the Premises, as the same may be adopted, amended, supplemented, or superseded from time to time. 5 (f) "Encumbrance" means any ground lease, first mortgage, or first deed of trust now or later encumbering the Premises and all their renewals, modifications, supplements, consolidations, and replacements. (g) "Environmental Laws" means the Resource Conservation and Recovery Act, 42 U.S.C. ss. 6901, et seq.; the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. ss. 9601, et seq. (including the so-called "Superfund" amendments thereto); the Clean Water Act, 33 U.S.C. ss. 1251, et seq.; the Hazardous Materials Transportation Act, 49 U.S.C. ss. 1801, et seq., the Toxic Substances Control Act, 15 U.S.C. ss. 2601, et seq.; the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. ss. 136, et seq.; the Atomic Energy Act of 1954, 42 U.S.C. ss. 2014, et seq., and any other applicable Laws governing, or pertaining to any hazardous substances, hazardous wastes, chemicals or other materials, including, without limitation, asbestos, polychlorinated biphenyls, radon, petroleum products and any derivative thereof or any common law theory based on nuisance or strict liability. (h) "Hazardous Substance" means any substance, chemical or material declared to be, or regulated as hazardous or toxic under any Environmental Law or the presence of which may give rise to liability under any Environmental Law. (i) "Laws" means any and all present or future federal, state or local laws, statutes, ordinances, rules, regulations or orders of any and all Governmental or quasi-governmental authorities having jurisdiction. (j) "Lease Year" means each successive period of 12 calendar months during the Term, ending on the same day and month (but not year, except in the case of the last Lease Year) as the day and month on which the Expiration Date will occur. If the Commencement Date is not the first day of a month, the first Lease Year will be greater than 12 months by the number of days from the Commencement Date to the last day of the month in which the Commencement Date occurs. (k) "Leasehold Improvements" is defined in the Work Letter attached to this Lease as Exhibit C. (l) "Lender" means the ground lessor of any around lease, the mortgagee of any mortgage or the beneficiary of any deed of trust, that constitutes an Encumbrance. (m) "Prime Rate" means the rate of interest announced from time to time by The Chase Manhattan Bank, or any successor to it, as its prime rate. If The Chase Manhattan Bank, or any successor to it, ceases to announce a prime rate, Landlord will designate a reasonably comparable financial institution for purposes of determining the Prime Rate. (n) "Rent" means the Base Rent, Additional Rent, and all other amounts required to be paid by Tenant under this Lease. (o) "Taxes" means the amount incurred by Landlord on an accrued basis during the Term according to generally accepted accounting principles for that portion of the following items that is allocable to the Premises: all ad valorem real and personal property taxes and assessments, special or otherwise, levied upon or with respect to the Premises, the personal property used in operating the Premises, and the additional charges payable by Tenant as a tenant of the Premises, and imposed by any taxing authority having, jurisdiction, all taxes, levies and charges which are assessed, levied or imposed in replacement of, or in addition to, all or any part of ad valorem real or personal property taxes or assessments as revenue sources, and which in whole or in part are measured or calculated by or based upon the Premises, the leasehold estate of Tenant, or the rents and other charges payable by Tenant; and any reasonable expenses incurred by Landlord in attempting, to reduce or avoid an increase in Taxes, including, without limitation, reasonable legal fees and costs. Taxes will not include any net income taxes of Landlord. Tenant acknowledges that Taxes may increase during the Term and that if the Premises is currently subject to a Taxes abatement program and such program ceases to benefit the Premises during the Term, Taxes will increase. 2 GRANT OF LEASE. 2.1 DEMISE. Subject to the terms, covenants, conditions and provisions of this Lease, Landlord leases to Tenant and Tenant leases from Landlord the Premises for the Term to be used for the Permitted Use. 6 2.2 QUIET ENJOYMENT. Landlord covenants that during the Term Tenant will have quiet and peaceable possession of the Premises, subject to the terms, covenants, conditions and provisions of this Lease, and Landlord will not disturb such possession except as expressly provided in this Lease. 3 RENT. 3.1 BASE RENT. Commencing on the Commencement Date and then throughout the Term, Tenant will pay Landlord Base Rent according, to the following provisions. Base Rent during each Lease Year (or portion of a Lease Year) will be payable in monthly installments in the amount specified for such Lease Year (or portion thereof) in Section 1.10), in advance, on or before the first day of each and every month during the Term. However, if the Term commences on other than the first day of a month or ends on other than the last day of a month, Base Rent for such month will be appropriately prorated based on the number of days in such month. Tenant covenants to pay all Rent when due to Landlord's Address, or to such other place of which Landlord notifies Tenant from time to time, and to observe and perform all of the terms, covenants and conditions applicable to Tenant in this Lease. Tenant further agrees that the covenant to pay Rent is an independent covenant, not subject to abatement, offset, or deduction, except as may be provided in this Lease. 3.2 PAYMENT OF LANDLORD'S PREMISES EXPENSES AND TAXES. Commencing on the Commencement Date and continuing for the duration of the Term, Tenant agrees to pay Landlord, as Additional Rent, in the manner provided below, Landlord's Premises Expenses and Taxes. (a) Estimated Payments. Prior to or within 60 days after the beginning, of each calendar year, Landlord will notify Tenant of Landlord's estimate of Landlord's Premises Expenses and Taxes for such calendar year. For calendar year 2000, Landlord estimates that Landlord's Premises Expenses will be approximately $18,248.00, insurance will be approximately $2,198.00 and that Taxes will be approximately $36,496.00. On or before the first day of each month during each calendar year, Tenant will pay to Landlord, in advance, 1/12 of the sum of such estimated amounts; provided that until such notice is given with respect to the ensuing calendar year, Tenant will continue to pay on the basis of the prior calendar year's estimate until the month after the month in which such notice is given. In the month Tenant first pays based on Landlord's new estimate, Tenant will pay to Landlord 1/12 of the difference between the new estimate and the prior year's estimate for each month which has elapsed since the beginning of the current calendar year. If at any time or times it appears to Landlord that Landlord's Premises Expenses or Taxes for the then-current calendar year will vary from Landlord's estimate by more than 10%, Landlord may, by notice to Tenant, revise its estimate for such year, and subsequent payments by Tenant for such year will be based upon the revised estimate. (b) Annual Settlement. As soon as practicable after the close of each calendar year, but in no event more than 90 days after the close of each calendar year, Landlord will deliver to Tenant its statement of Landlord's Premises Expenses and Taxes for such calendar year. If, on the basis of such statement, Tenant owes an amount that is less than the estimated payments previously made by Tenant for such calendar year, Landlord will either refund such excess amount to Tenant or credit such excess amount against the next Additional Rent payment(s), if any, due from Tenant to Landlord. If, on the basis of such statement, Tenant owes an amount that is more than the estimated payments previously made by Tenant for such calendar year, Tenant "-ill pay the deficiency to Landlord within 30 days after the delivery of such statement. If this Lease commences on a day other than the first day of a calendar year or terminates on a day other than the last day of a calendar year, Landlord's Premises Expenses and Taxes applicable to the calendar year in which such commencement or termination occurs will be prorated on the basis of the number of days within such calendar year that are within the Term. (c) Final Payment. Tenant's obligation to pay Landlord's Premises Expenses and Taxes that accrue but are not paid for periods prior to the expiration OR early termination of the Term will survive such expiration or early termination. Prior to or as soon as practicable after the expiration or early termination of the Term, Landlord may submit an invoice to Tenant stating Landlord's estimate of the amount by which Landlord's Premises Expenses and Taxes through the date of such expiration or early termination will exceed Tenant's estimated payments for the calendar year in which such expiration or termination has occurred or will occur. Tenant will pay the amount of any such excess to Landlord within 30 days after the date of Landlord's invoices. 3.3 TENANT'S TAXES. Tenant will pay, before delinquency, all taxes assessed or levied upon its occupancy of the Premises, or upon Tenant's leasehold improvements, trade fixtures, furnishings, 7 equipment, or other personal property of Tenant located on the Premises, and any other taxes (including, without limitation, sales taxes and employee withholding taxes) which, if unpaid, could become a lien or charge against any such property and are not paid by Tenant as Taxes pursuant to Section 3.2. When possible, Tenant will cause such leasehold improvements, trade fixtures, furnishings, equipment, or other personal property to be assessed and billed separately from the property of Landlord. Tenant will reimburse Landlord upon demand for any and all such taxes billed to and paid by Landlord if Landlord is charged such taxes due to (a) the cost or value of Tenant's equipment, furniture, fixtures and other personal property located in the Premises; (b) upon or measured by Rent; (c) upon or with respect to the possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises or any portion of the Premises; and (d) upon this transaction or any document to which Tenant is a party creating or transferring an interest or an estate in the Premises. If it is not lawful for Tenant to reimburse Landlord, the Base Rent payable to Landlord under this Lease will be revised to yield to Landlord the same net rental after the imposition of any such tax upon Landlord as would have been payable to Landlord prior to the imposition of any such tax. 3.4 TAX CONTESTS. Landlord agrees to use reasonable efforts to contest Taxes in a manner similar to efforts being pursued by landlords of similar industrial or flex space properties containing similar tenants in the metropolitan area of the Building provided, however, in the event Landlord reasonably believes that the savings resulting from any such tax contest would be less than the costs incurred in connection therewith, Landlord will not be required to conduct any tax contest. Tenant will not contest Taxes. Landlord will pay to Tenant, Tenant's proportionate share of any refund in Taxes received by Landlord for a calendar year for which Tenant paid Taxes hereunder, net of Landlord's costs of obtaining such refund. 3.5 LATE PAYMENTS. To compensate Landlord for its additional cost of processing late payments for any payment of Rent which is not received within 7 days after it is due, Tenant will pay a late charge of 1% of the late payment, but not less than $100 or more than $1,000. In addition, all amounts payable under this Lease by Tenant to Landlord, if not paid when due, will bear interest from the due date until paid at the lesser of the highest interest rate permitted by law or 5% in excess of the then-current Prime Rate. 3.6 RIGHT TO ACCEPT PAYMENTS. No receipt by Landlord of an amount less than Tenant's full amount due will be deemed to be other than payment "on account," nor will any endorsement or statement on any check or any accompanying letter effect or evidence an accord and satisfaction. Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance or pursue any right of Landlord. No payments by Tenant to Landlord after the expiration or other termination of the Term, or after the giving of any notice (other than a demand for payment of money) by Landlord to Tenant, will reinstate, continue or extend the Term or make ineffective any notice given to Tenant prior to such payment. After notice or commencement of a suit, or after final judgment granting Landlord possession of the Premises, Landlord may receive and collect any sums of Rent due under this Lease, and such receipt will not void any notice or in any manner affect any pending suit or any judgment obtained. 4 PERMITTED USE AND OCCUPANCY. 4.1 PERMITTED USE. Tenant agrees to use and occupy the Premises only for the Permitted Use and for no other purpose without the prior written consent of Landlord, which written consent shall not be unreasonably withheld or delayed. 4.2 COMPLIANCE. (a) Use. Tenant agrees to use the Premises in a safe, careful and proper manner, and to comply, at Tenant's expense, with all Laws applicable to Tenant's use, occupancy or alteration of the Premises and with any Laws that require any alterations to the Building due to Tenant's status under such Laws, including without limitation, the ADA. If due to the nature or manner of any use or occupancy of the Premises by Tenant, any improvements or alterations to the Premises or Building are required to comply with any Laws, or with requirements of Landlord's insurers, then Tenant will pay all costs of the required improvements, alterations or changes in services. Tenant will not keep anything on the Premises for any purpose which increases the insurance premium cost or invalidates any insurance policy carried on the Premises by Landlord. Tenant will pay, as Rent and upon demand of Landlord, any such 8 increased premium cost due to Tenant's use or occupation of the Premises. Tenant will not cause, maintain or permit any nuisance or waste in or about the Premises. In addition, except as expressly provided otherwise in the Lease, Tenant will keep the Premises free of debris, and anything of a dangerous, noxious, toxic or offensive nature or which could create a fire hazard or undue vibration, heat, noise, fumes, vapors or odors. If any item of equipment, building material or other property brought into the Building by Tenant or on Tenant's request causes a dangerous, noxious, toxic or offensive effect (including an environmental effect) and in Landlord's reasonable opinion such effect will not be permanent but will only be temporary and is able to be eliminated, then Tenant will not be required to remove such item, provided that Tenant promptly and diligently causes such effect to be eliminated. pays for all costs of elimination and indemnifies Landlord against all liabilities arising from such effect. (b) Hazardous Materials. Landlord and Tenant agree that, during the Term, each will comply with all Laws, including, without limitation, all Environmental Laws, governing, and all procedures established by Landlord for the use, abatement, removal, storage, disposal or transport of any Hazardous Substances and any required or permitted alteration, repair, maintenance, restoration, removal or other work in or about the Premises that involves or affects any Hazardous Substances. Except for the lawful use of cleaning-agents used in the course of regular janitorial service, no Hazardous Substances will be stored, used, released, produced, processed or disposed in, on or about, or transported to or from, the Premises by Tenant or any of Tenant's agents, employees, contractors or invitees, without first obtaining Landlord's express written consent (any Hazardous Substances which are stored, used, released, produced, processed or disposed in, on or about, or transported to or from, the Premises by any of such persons or entities are called "Tenant's Hazardous Substances"). If such approval is granted, any such use, storage or production of the Hazardous Substances shall be done in compliance with all Environmental Laws. Tenant, at its expense, will take all action necessary to restore the Building and Premises to the condition existing prior to the introduction of Tenant's Hazardous Substances, whether such action is required by any governmental authority in order to comply with applicable Laws or by Landlord in order for Landlord to make the same economic use of the Building, and Premises as Landlord could have made prior to the introduction of Tenant's Hazardous Substances. Such action may include, without limitation, the investigation of the environmental condition of the Building or Premises, the preparation of remediation plans or feasibility studies and the performance of cleanup, remedial, removal or restoration work. Tenant will obtain Landlord's written approval before undertaking any action required by this Section 4.2(b), which approval will not be unreasonably withheld or delayed so long, as the proposed actions will not have an avoidable material and adverse effect on the Building. Each party will indemnify and hold the other and the other's Affiliates harmless from and against any and all claims, costs and liabilities (including reasonable attorneys' fees) arising out of or in connection with any breach by such party of its covenants under this Section 4.2(b). The parties' obligations under this Section 4.2(b) will survive the expiration or early termination of the Term. 4.3 SIGNS AND DISPLAYS. Tenant will not place, cause or permit to be placed and maintained on the exterior of the Premises any sign, awning, lettering or other advertising matter, unless previously approved by Landlord in Landlord's reasonable discretion. Landlord agrees to allow Tenant, subject to Landlord's reasonable approval, to apply for the maximum amount of signage allowable under applicable Laws. 5 UTILITIES, HVAC AND SECURITY. 5.1 UTILITIES. Tenant will pay for all electricity, gas, water, sewer or other utility service provided to the Premises from and after the Commencement Date and will arrange with the providers of such services for separate metering and direct billing to Tenant. Neither Landlord nor its agents or employees will be liable to Tenant or any of Tenant's employees, agents or anyone claiming through or under Tenant, for any damages, injuries, losses, expenses, claims, or causes of action, 9 because of any interruption, curtailment or discontinuance of any utility service nor shall any such interruption, curtailment or discontinuance be deemed an eviction or disturbance of Tenant's use or possession of the Premises or any part thereof, nor relieve Tenant from full performance of Tenant's obligations under this Lease; provided, however, that if any utility service to the Premises shall become unavailable for a period in excess of seventy-two (72) consecutive hours and such unavailability is directly and proximately caused by the gross negligence or intentional misconduct of Landlord, its agents, contractors or employees, all Base Rent shall abate until utility service to the Premises is restored. 5.2 HVAC. Tenant will pay the cost for all heating, air conditioning and ventilation service provided to the Premises, including the cost of maintenance, repair, and replacement of same, including, without limitation, rooftop units. Tenant will maintain a preventative maintenance contract on the HVAC units in the Premises, which contract will provide for periodic maintenance in accordance with the manufacturer's specifications, by a contractor reasonably approved by Landlord. Tenant will deliver to Landlord a copy of such maintenance contract on or before the Commencement Date and each anniversary of the Commencement Date during the Term. In the event Tenant fails to maintain such preventative maintenance contract, Landlord, at its option, may arrange for such a preventative maintenance contract for the HVAC units; provided, however, Landlord has notified Tenant of such failure of Tenant to comply with the maintenance requirements set forth herein and Tenant has failed to cure such noncompliance within 30 days from receipt by Tenant of Landlord's notice, in which event the cost of such preventative HVAC maintenance will be billed directly to Tenant and will be paid within 10 days of receipt of invoice therefor. Landlord reserves the right to obtain preventative maintenance contracts on all the HVAC units on the Building, and to include the cost in Landlord's Premises Expenses. 5.3 SECURITY. Tenant will be responsible for any security services to the Premises, but Tenant will only use security services which are reputable in the Boulder, Colorado market. In no event will landlord be liable to Tenant, and Tenant hereby waives any claim against Landlord and Landlord's Affiliates, for (a) any entry of third parties onto the Premises or into the Building; (b) any damage or injury to persons or property, or (c) any loss of property in or about the Premises or the Building occurring as a result of any unauthorized or criminal acts of third parties, regardless of any action, inaction, failure, breakdown, malfunction or insufficiency of any security services provided by Landlord, unless such damage to the Premises was the result of Landlord's gross negligence or intentional misconduct. 6 REPAIRS. 6.1 LANDLORD MAINTENANCE AND REPAIRS. Landlord will keep the exterior supporting, walls, foundations, roof and down spouting of the Building, and the parking areas, landscaping, and sidewalks on the Premises in reasonable condition and in good repair, provided that the costs of such maintenance and repairs will be included as Landlord's Premises Expenses as provided in this Lease. 6.2 TENANT'S MAINTENANCE AND REPAIRS. Subject to the tenets of Articles 4, 10, and 12, and Section 5.1, Tenant will, at Tenant's own expense and at all times during the Term, maintain the Building, all windows and doors in the Building, and Tenant's furnishings, equipment, personal property, and trade fixtures in the Building, and any mechanical, plumbing, electrical, heating, ventilating, air conditioning, and the mechanical installations serving the Building ("Equipment"), in good working order, clean condition, and repair and in a condition that complies with all applicable Laws, including, without limitation, the replacement of the Equipment, fixtures and all broken glass (with a glass of the same size and quality), at Tenant's expense. Tenant will also be responsible for the cost of repairing all damage to the Premises or Building (or any equipment or fixtures in or serving the same) caused by Tenant or its subtenants, or an), of their respective agents, employees, contractors, licensees or invitees. All work done by Tenant or its contractors (which contractors will be subject to Landlord's reasonable prior written approval) is subject to Landlord's approval and must be done in a first-class workmanlike manner using, only grades of materials at least equal in quality to the materials being replaced and will comply with all insurance requirements and all applicable Laws. Tenant will not overload the electrical wiring and ventilation or utilities serving the Building and will install at Tenant's sole expense, after first obtaining Landlord's written approval, any additional electrical wiring that may be required in connection with Tenant's apparatus, equipment or fixtures. In the event that any warranties exist from time to time during the Term that cover and/or apply to any of the items required to be maintained and/or repaired by 10 Tenant hereunder, Landlord shall, upon the prior written notice from Tenant, use reasonable efforts to assist Tenant in pursing warranty claims for such items; provided, however, that Landlord shall not be obligated to expend any cost or expense in pursuing, such warranty claims. Nothing contained herein shall obligate Landlord to make any repair or perform any maintenance which is the responsibility of Tenant under this Section 6.2. 6.3 FAILURE TO MAINTAIN PREMISES. If Tenant fails to perform any of its obligations under Section 6.2, then Landlord may perform such obligations and Tenant will pay as Rent to Landlord the cost of such performance, including an amount sufficient to reimburse Landlord for overhead and supervision, within 10 days after the date of Landlord's invoice therefor. For purposes of performing such obligations, or to inspect the Building, Landlord may enter the Building upon not less than 12 hours' prior notice to Tenant (except in cases of actual or suspected emergency, in which case no prior notice will be required) without liability to Tenant for any loss or damage incurred as a result of such entry, provided that Landlord will take reasonable steps in connection with such entry to minimize any disruption to Tenant's business or Tenant's use of the Premises. 6.4 NOTICE OF DAMAGE. Tenant will notify Landlord promptly after Tenant learns of (a) any fire or other casualty on the Premises; (b) any damage to or defect in the Building, including any fixtures or equipment in or serving the same, which was Caused by Tenant or its agents, employees, contractors or invitees, or for the repair of which Landlord might be responsible; and (C) any damage to or defect in any parts or appurtenances of the Equipment located in the Premises. 7 ALTERATION AND IMPROVEMENTS. Tenant may, from time to time, at its own expense make nonstructural changes, additions, and improvements to the Premises (including the Building) to better adapt the same to its business, provided that any such change, addition, or improvement exceeding $15,000.00 in total value shall be approved by Landlord subject to the terms and conditions described in Paragraphs 13 and 14 of Exhibit C attached to this Lease. All changes, additions and improvements to the Premises (including, the Building) (but excluding Tenant's trade fixtures), whether temporary or permanent in character, made or paid for by Landlord or Tenant will, without compensation to Tenant, become Landlord's property upon installation. If at the time Landlord consents to their installation, Landlord requests or approves the removal by Tenant of any such changes, additions or improvements upon termination of this Lease, Tenant will remove the same upon termination of this Lease as provided in Section 15.1. All other changes, additions and improvements will remain Landlord's property upon termination of this Lease and will be relinquished to Landlord in good condition, ordinary wear and tear excepted. 8 LIENS. Tenant agrees to pay before delinquency all costs for work, services or materials furnished to Tenant for the Premises, the nonpayment of which could result in any lien against the Premises. Tenant will keep title to the Premises free and clear of any such lien. Tenant will immediately notify Landlord of the filing of any such lien or any pending claims or proceedings relating to any such lien and will indemnify and hold Landlord harmless from and against all loss, damages and expenses (including reasonable attorneys' fees) suffered or incurred by Landlord as a result of such lien, claims and proceedings. In case any such lien attaches, Tenant agrees to cause it to be immediately released and removed of record (failing which Landlord may do so at Tenant's sole expense), unless Tenant has a good faith dispute as to such lien in which case Tenant may contest such lien by appropriate proceedings so long as Tenant deposits with the court or Landlord, whichever is required by applicable Laws, a bond or other security in an amount reasonably acceptable to Landlord and any Lender which may be used by Landlord to release such lien if Tenant's contest is abandoned or is unsuccessful. If Landlord incurs any legal costs in causing the removal of such lien, Tenant will pay all legal costs incurred by Landlord, including, without limitation, Landlord's reasonable attorneys' fees. Upon final determination of any permitted contest, Tenant will immediately pay any judgment rendered and cause the lien to be released. 9 INSURANCE. 9.1 LANDLORD'S INSURANCE. (k) During the Term as part of Landlord's Premises Expenses, Landlord will provide and keep in force the following, insurance for its benefit and the benefit of any Lender: (1) all-risk or fire insurance (including standard extended coverage endorsement perils, leakage from fire protective devices and other water damage relating to the Building (but excluding Leasehold Improvements, Equipment, and Tenant's documents, files, and work products), (2) loss of rental income insurance or loss of insurable gross profits; and (3) such other insurance (including boiler, machinery, earthquake, flood, and commercial general liability insurance) as Landlord reasonably elects to obtain or any Lender requires. 11 (l) Insurance maintained by Landlord under this Section 9.1 will be in amounts that Landlord from time to time reasonably determines sufficient or any Lender requires; will be subject to such deductibles and exclusions as Landlord reasonably determines will, in the case of insurance under Section 9.1(a)(1), permit the release of Tenant from certain liability under Section I 1.1; and will otherwise be on such terms and conditions as Landlord from time to time reasonably determines sufficient. 9.2 TENANT'S INSURANCE. During the Term, Tenant will provide and keep in force the following insurance: (a) Commercial general liability insurance relating to Tenant's business (carried on, in or from the Premises) and Tenant's use and occupancy of the Premises, for personal and bodily injury and death, and damage to others' property, with limits of not less than $2,000,000 for any one accident or occurrence; (b) All risk or fire insurance (including standard extended endorsement perils, leakage from fire protective devices and other water damage) relating, to Leasehold Improvements, Equipment, inventory and stock-in-trade on a full replacement cost basis in amounts sufficient to prevent Tenant from becoming a co-insurer and subject only to such deductibles and exclusions as Landlord may reasonably approve; (c) If any boiler or machinery is operated in the Premises, boiler and machinery insurance; (d) If Tenant operates owned, hired or non-owned vehicles on the Premises, automobile liability insurance with limits of not less than $1,000,000 combined bodily injury and property damage; and (e) Workers' compensation and employer's liability insurance in any amounts required to comply with applicable Laws. Landlord, Landlord's property manager (if any), and any Lender will be named as additional insureds in the policy described in Section 9.2(a), which will include cross liability and severability of interests clauses and will be on an 11 occurrence" (and not a "claims made") form. The policies described in Sections 9.2(b) and (c) will permit the release of Landlord from certain liability under Section 11.2. Tenant's insurance policies will be written by insurers that are rated A-IX or better by Best's Rating Guide and licensed in the State of Colorado, will be written as primary policies, not contributing with and not supplemental to the coverage that Landlord may carry, and will otherwise be upon such terms and conditions as Landlord from time to time reasonably requires, including limits on Tenant's deductibles. Tenant will file with Landlord, on or before the Commencement Date and at least 10 days before the expiration date of expiring policies, such copies of either current policies or certificates, or other proofs, as may be reasonably required to establish Tenant's insurance coverage in effect from time to time and payment of premiums. Tenant's insurers will agree to give Landlord and all other additional insureds at least 30 days' prior notice of any non-renewal, and at least 10 days' prior notice of any cancellation, of any insurance coverage required by this Section 9.2. If Tenant fails to insure or pay premiums, or to file satisfactory proof as required, Landlord may, upon a minimum of 24 hours' notice, effect such insurance and Tenant will pay to Landlord, on demand, the cost of any premiums paid by Landlord. Tenant shall be entitled to maintain an umbrella policy covering all of Tenant's assets. 10 DAMAGE OR DESTRUCTION. 10.1 TERMINATION OPTIONS. If fire or other casualty damages the Building, Landlord will, promptly after learning of such damage. Notify Tenant in writing of the time necessary to repair or restore such damage, as estimated by Landlord's architect, engineer or contractor (the "Repair Notice"). If the damage renders the Premises or a material part of the Premises untenantable and such Repair Notice states that repair or restoration of all of such damage that was caused to the Premises cannot be completed within 180 days from the date of such damage (or within 30 days from the date of such damage if such damage occurred within the last 12 months of the Term), then Tenant will have the option to terminate this Lease. If such Repair Notice states that repair or restoration of all of such damage that was caused to the Building cannot be completed within 180 days from the date of such damage, or if such damage occurred within the last 12 months of the Term and such Repair Notice states that repair or restoration of all such damage that was caused to the Premises cannot be 12 completed within 30 days from the date of such damage, or if such damage renders more than 50% of the rentable area of the Build in untenantable, or if such damage is not insured against by the insurance policies required to be maintained by Landlord according to Section 9.1, then Landlord will have the option to terminate this Lease. Any option to terminate granted above must be exercised by written notice to the other party given within 10 days after Landlord delivers to Tenant the Repair Notice. If either party exercises its option to terminate this Lease, the Term will expire and this Lease will terminate 10 days after notice of termination is delivered; provided, however, that Rent for the period commencing on the date of such damage until the date this Lease terminates will be reduced to the reasonable value of any use or occupation of the Premises by Tenant during such period. If Tenant elects to terminate the Lease, Landlord will be entitled to up to a maximum of $802,912.00 of the proceeds of Tenant's insurance for Leasehold Improvements and Equipment (excluding Tenant's furnishings, equipment, personal property, and trade fixtures in the Building). 10.2 REPAIR OBLIGATIONS. If the Building is damaged by fire or other casualty and neither party terminates this Lease according to Section 10.1, then Landlord will repair and restore such damage with reasonable promptness, subject to delays for insurance adjustments and delays caused by matters beyond Landlord's control. However, Landlord will not be required to spend more for such repair and restoration than the insurance proceeds available to Landlord as a result of the fire or other casualty. To the extent Tenant is responsible for insuring Leasehold Improvements, Equipment, and Tenant's inventory and stock-in-trade, Tenant agrees, promptly upon notice from Landlord that Landlord is repairing the Building, to file such claims and pursue such repairs to the Premises in order to rebuild the Leasehold Improvements and Equipment to reopen Tenant's business within 20 days after the completion of Landlord's repairs. Landlord will have no liability to Tenant and Tenant will not be entitled to terminate this Lease if Landlord's repairs and restoration are not in fact completed within the estimated time period, provided that Landlord promptly commences and diligently pursues such repairs and restoration to completion. In no event will Landlord be obligated to repair, restore or replace any of the property required to be insured by Tenant according to Section 9.2. 10.3 RENT ABATEMENT. If any fire or casualty damage renders the Premises untenantable and if this Lease is not terminated according to Section 10.1, then Rent will abate beginning on the date of such damage. Such abatement will end on the earlier of 30 days after the date Landlord has substantially completed the repairs and restoration Landlord is required to perform according to Section 10.2 or the date Tenant accepts the Premises for occupancy. Such abatement will be in an amount bearing the same ratio to the total amount of Rent for such period as the untenantable portion of the Premises bears to the entire Premises. In no event will Landlord be liable for any inconvenience or annoyance to Tenant or injury to the business of Tenant resulting in any way from damage caused by fire or other casualty or the repair of such damage, provided however that, to the extent Tenant remains in possession of a portion of the Premises, Landlord will take all reasonable steps to minimize the disruption to Tenant's business and use of such portion of the Premises during the period of repair. 11 WAIVERS AND INDEMNITIES. 11.1 LANDLORD'S WAIVERS. Tenant and its Affiliates will not be liable or in any way responsible to Landlord for, and Landlord waives all claims against Tenant and its Affiliates for, any loss, injury or damage that is insured or required to be insured by Landlord under Section 9.1(a)(1), so long as such loss, injury or damage results from or in connection with this Lease or Tenant's use and occupancy of the Premises. 11.2 TENANT'S WAIVERS. Except to the extent caused by the willful or negligent act or omission or breach of this Lease by Landlord or its agents or employees, Landlord and its Affiliates will not be liable or in any way responsible for, and Tenant waives all claims against Landlord and its Affiliates for, any loss, injury or damage suffered by Tenant or others relating to (a) loss or theft of, or damage to, property of Tenant or others; (b) injury or damage to persons or property resulting, from fire, explosion, failing plaster, escaping steam or gas, electricity, water, rain or snow, or leaks from any part of the Building or from any pipes, appliances or plumbing, or from dampness; or (c) damage caused by the public or by construction of any private or public work. In addition, Landlord and its Affiliates will not be liable or in any way responsible to Tenant for, and Tenant waives all claims against Landlord and its Affiliates for, any loss, injury or damage that is insured 13 or required to be insured by Tenant under Sections 9.2(b) or 9.2(c), so long as such loss, injury or damage results from or in connection with this Lease. 11.3 LANDLORD'S INDEMNITY. Subject to Section 11.2 and except to the extent caused by the willful or negligent act or omission or breach of this Lease by Tenant, its subtenants or licensees, or any of their respective agents, employees or invitees, Landlord will indemnify and hold Tenant harmless from and against any and all liability, loss, claims, demands, damages or expenses (including reasonable attorneys' fees) due to or arising out of any willful or negligent act or omission or breach of this Lease by Landlord or its agents or employees. Landlord's obligations under this Section 1 1.3 will survive the expiration or early termination of the Term. 11.4 TENANT'S INDEMNITY. Subject to Section I 1. I and except to the extent caused by the willful or negligent act or omission or breach of this Lease by Landlord or its agents or employees, Tenant will indemnify and hold Landlord harmless from and against any and all liability, loss, claims, demands, damages or expenses (including reasonable attorneys' fees) due to or arising out of any willful or negligent act or omission of or breach of this Lease by Tenant, its subtenants or licensees, or any of their respective agents, employees or invitees. Tenant's obligations under this Section 1 1.4 will survive the expiration or early termination of the Tenn. 12 CONDEMNATION. 12.1 FULL TAKING. If all or substantially all of the Premises are taken for any public or quasi-public use under any applicable Laws or by right of eminent domain. or are sold to the condemning authority in lieu of condemnation, then this Lease will terminate as of the date when the condemning authority takes physical possession of the Premises. 12.2 PARTIAL TAKING. (a) Landlord's Termination of Lease. If only part of the Building- or Premises is thus taken or sold, and if after such partial taking in Landlord's reasonable judgment, alteration or reconstruction of any affected improvements necessary for Tenant's use and enjoyment of the Premises is not economically justified, then Landlord (whether or not the Building is affected) may terminate this Lease by giving written notice to Tenant within 60 days after the taking. (b) Tenant's Termination of Lease. If over 20% of the Building- is thus taken or sold, Tenant may terminate this Lease if in Tenant's reasonable judgment the Building cannot be operated by Tenant in an economically viable fashion because of such partial taking,. Such termination by Tenant must be exercised by written notice to Landlord given not later than 60 days after Tenant is notified of the taking of the Building. (c) Effective Date of Termination. Termination by Landlord or Tenant will be effective as o the date when physical possession of the applicable portion of the Building or Premises is taken by the condemning authority. (d) Election to Continue Lease. If neither Landlord nor Tenant elects to terminate this Lease upon a partial taking, of a portion of the Premises, the Rent payable under this Lease will be diminished b an amount allocable to the portion of the Premises which was so taken or sold. If this Lease is no terminated upon a partial taking, of the Building, or Premises, Landlord will, at Landlord's sole expense promptly restore and reconstruct the Building- and Premises to substantially their former condition to the extent the same is feasible. However, Landlord will not be required to spend for such restoration o reconstruction an amount in excess of the net amount received by Landlord as compensation or damage for the part of the Building or Premises so taken. In the event landlord is unable to restore and reconstruct the Building and Premises to substantially their former condition to the extent the same is acceptable to Tenant, in Tenant's reasonable business judgment, Tenant may terminate this Lease. Such termination by Tenant must be exercised by written notice to Landlord given not later than 30 days after Tenant is notified of the completion of such restoration and reconstruction of the Building, and Premises. 12.3 AWARDS. As between the parties to this Lease, Landlord will be entitled to receive, and Tenant assigns to Landlord, all of the compensation awarded upon taking of any part or all of the Premises, including an award for the value of the unexpired Term. However, Tenant may assert a claim in a 14 separate proceeding against the condemning authority for any damages resulting from the taking of Tenant's trade fixtures or personal property or for moving expenses, business relocation expenses or damages to Tenant's business incurred as a result of such condemnation. 13 ASSIGNMENT AND SUBLETTING. 13.1 LIMITATION. Except as permitted in Section 13.7, "without Landlord's prior written consent, Tenant will not assign all or any of its interest under this Lease, sublet all or any part of the Premises or permit the Premises to be used by any parties other than Tenant and its employees. 13.2 NOTICE OF PROPOSED TRANSFER; LANDLORD'S OPTIONS. If Tenant desires to enter into an assignment of this Lease or a sublease of all or any part of the Premises, Tenant will first give Landlord written notice, at least 30 days prior to the proposed assignment or sublease, of the proposed assignment or sublease, which notice will contain (a) the name and address of the proposed transferee, (b) the proposed use of the Premises if other than the Permitted Use, (c) statements reflecting the proposed transferee's current financial condition and income and expenses for the past two years, and (d) the principal terms of the proposed assignment or sublease. Tenant shall not permit the proposed transferee to occupy the Premises, or a portion thereof, without Landlord's written consent. Except in the case of any transfer permitted under Section 13.7, Landlord will have the option, which must be exercised, if at all, by notice given to Tenant within 20 days after Landlord's receipt of Tenant's notice of the proposed transfer, either (a) if Tenant's notice relates to a subletting, to sublet from Tenant such space as i described in the notice for such portion of the Term as is described in the notice, upon the same terms and condition and for the same Rent (apportioned, as appropriate, to the amount of such space) as provided in this Lease; or (b) i such notice relates to an assignment, to become Tenant's assignee. 13.3 CONSENT NOT TO BE UNREASONABLY WITHHELD. If Landlord does not exercise its applicable option under Section 13.2, then Landlord will not unreasonably withhold or delay ITS consent to the proposed assignment o subletting if each of the following conditions is satisfied: (a) the proposed transferee, in Landlord's opinion, has sufficient financial capacity an business experience to perform Tenant's obligations under this Lease; (b) the proposed transferee will make use of the Premises which in Landlord's reasonable opinion (1) is lawful; (2) is consistent with the Permitted Use of the Premises under this Lease; (3) i consistent with the general character of uses conducted by the other occupants of the Gunbarrel Technical Center; (4) will not increase the likelihood of damage or destruction to the Building; (5) will not increase the rate of wear and tear to the Building; and (6) will not cause an increase in insurance premiums for insurance policies applicable to the Building; (c) the proposed transferee does not have a poor reputation in the general business community (such as a reputation for engaging in illegal or unethical business practices); (d) if the proposed transfer is a sublease, the rent which the proposed transferee will be required to pay will be equal to at least 90% of the then-current market rent for the portion of the premises being sublet; (e) the proposed transferee, at the time of the proposed transfer, is neither a tenant in any building owned or managed by Landlord or any Affiliate of Landlord in the same county in which the Building is located, nor a party with whom Landlord is then negotiating for the lease of space in the Gunbarrel Technical Center; (f) at the time of the proposed transfer no "Default" (as defined in Section 19.1) exists under this Lease beyond any applicable notice and cure period; and (g) the proposed transferee or Tenant will pay Landlord's reasonable costs associated with Landlord's review and approval of the proposed transfer, including, without limitation, attorneys' fees and costs. 13.4 FORM OF TRANSFER. If Landlord consents to a proposed assignment or sublease, Landlord's consent will not be effective unless and until Tenant delivers to Landlord an original duly executed assignment or sublease, as the case may be, that provides, in the case of a sublease, that the subtenant will comply with all applicable terms and conditions of this Lease and, in the case of an assignment, an assumption by the assignee of all of the terms, covenants and conditions which this Lease requires Tenant to perform. 15 13.5 PAYMENTS TO LANDLORD. If Landlord does not exercise its applicable option under Section 13.2 and Tenant effects an assignment or sublease, then Landlord will be entitled to receive and collect, either from Tenant or directly from the transferee, 50% of the amount by which the consideration required to be paid by the transferee for the use and enjoyment of Tenant's rights under this Lease (after deducting from such consideration Tenant's reasonable costs incurred in effecting the assignment or sublease) exceeds the Rent payable by Tenant to Landlord allocable to the transferred space. Such percentage of such amount will be payable to Landlord at the time(s) Tenant receives the same from its transferee (whether in monthly installments, a lump sum, or otherwise). Landlord hereby agrees that Tenant shall be entitled to retain the remaining 50% of the amount by which the consideration required to be paid by the transferee for the use and enjoyment of Tenant's rights under this Lease exceeds the Rent payable by Tenant to Landlord allocable to the transferred space. 13.6 Change of Ownership. Any change by Tenant in the form of its legal organization (such as, for example, a change from a general to a limited partnership), any transfer of 5 1 % or more of Tenant's assets, and any other transfer of interest effecting a change in identity of persons exercising effective control of Tenant will be deemed an "assignment" of this Lease requiring Landlord's prior written consent. The transfer of any outstanding capital stock of a corporation whose stock is publicly traded will not, however, be deemed a "transfer of interest" under this Section 13.6. Landlord acknowledges that Tenant plans to initiate an initial public offering, ("IPO") of Tenant's stock sometime prior to or during the Term and Landlord expressly agrees that Tenant's IPO does not constitute an "assignment" of this Lease requiring Landlord's prior written consent. 13.7 Permitted Transfers. Tenant may, upon notice to Landlord but without obtaining Landlord's consent, assign this Lease or sublease all or any part of the Premises to a wholly-owned subsidiary of Tenant or the parent of Tenant, providing, that the financial statements of the resulting entity are better than, or equal to, those of the initial Tenant. 13.8 Effect of Transfers. No subletting, or assignment will release Tenant from any of its obligations under this Lease unless Landlord agrees to the contrary in writing Acceptance of Rent by Landlord from any person other than Tenant will not be deemed a waiver by Landlord of any provision of this Section 13.8. Consent to one assignment or sub-letting will not be deemed consent to any subsequent assignment or subletting. In the event of any default by any assignee or subtenant or any successor of Tenant in the performance of any Lease obligation, Landlord may proceed directly against Tenant without exhausting remedies against such assignee, subtenant or successor. The voluntary or other surrender of this Lease by Tenant or the cancellation of this Lease by mutual agreement of Tenant and Landlord will not work a merger and will, at Landlord's option, terminate all or any subleases or operate as an assignment to Landlord of all or any subleases; such option will be exercised by notice to Tenant and all known subtenants in the Premises. 14 PERSONAL PROPERTY. Tenant may install in the Premises its personal property (including- Tenant's usual trade fixtures) in a proper manner, provided that no such installation will interfere with or damage the mechanical, plumbing or electrical systems or the structure of the Building, and provided further that if such installation would require any change, addition or improvement to the Premises, such installation will be subject to Section 7. Any such personal property installed in the Premises by Tenant (a) may be removed from the Premises from time to time in the ordinary course of Tenant's business or in the course of making any changes, additions or improvements to the Premises permitted under Section 7, and (b) will be removed by Tenant at the end of the Term according to Section 15.1. Tenant will promptly repair at its expense any damage to the Premises and the Building resulting from such installation or removal. 15 END OF TERM. 15.1 SURRENDER. Upon the expiration or other termination of the Term, Tenant will immediately vacate and surrender possession of the Premises in good order, repair and condition, except for ordinary wear and tear. Upon the expiration or other termination of the Term, Tenant agrees to remove (a) all chances, additions and improvements to the Premises the removal of which Landlord requested or approved according to Section 7 at the time Landlord consented to their installation, and (b) all of tenant's trade fixtures, furnishings, equipment and other personal property. Tenant will pay Landlord on demand the cost of repairing any damage to the Premises or Building caused by the installation or removal of any such items. Any of Tenant's property remaining on the Premises will 16 be conclusively deemed to have been abandoned by Tenant and may be appropriated, stored, sold, destroyed or otherwise disposed of by Landlord without notice or obligation to account to or compensate Tenant, and Tenant will pay Landlord on demand all costs incurred by Landlord relating to such abandoned property. 15.2 HOLDING OVER. Tenant understands that it does not have the right to hold over at any time and Landlord may exercise any and all remedies at law or in equity to recover possession of the Premises, as well as any damages incurred by Landlord, due to Tenant's failure to vacate the Premises and deliver possession to Landlord as required by this Lease. If Tenant holds over after the Expiration Date with Landlord's prior written consent, Tenant will be deemed to be a tenant from month to month, at a monthly Base Rent, payable in advance, equal to an amount agreed to in writing by Landlord and Tenant, but in no event less than the monthly Base Rent payable during the last Lease Year of the Term, and Tenant will be bound by all of the other terms, covenants and agreements of this Lease as the same may apply to a month-to-month tenancy. If Tenant holds over after the Expiration Date without Landlord's prior written consent, Tenant will be deemed a tenant at sufferance, at a daily Base Rent, payable in advance, equal to 150% of the Base Rent per day payable during the last year of the Term, and Tenant will be bound by all of the other terms, covenants and agreements of this Lease as the same may apply to a tenancy at sufferance. 16 ESTOPPEL CERTIFICATES. Promptly upon Landlord's request after Tenant has occupied the Premises, Tenant will execute and deliver to Landlord an Occupancy Estoppel Certificate in the form of Exhibit A. In addition, Tenant agrees that at any time and from time to time (but on not less than 10 days' prior request by Landlord), Tenant will execute, acknowledge and deliver to Landlord a certificate indicating- any or all of the following: (a) the Commencement Date and Expiration Date; (b) that this Lease is unmodified and in full force and effect (or, if there have been modifications, that this Lease is in full force and effect, as modified, and stating- the date and nature of each modification); (c) the date, if any, through which Base Rent, Additional Rent and any other Rent payable have been paid; (d) that no default by Landlord or Tenant exists which has not been cured, except as to defaults stated in such certificate-, (e) that Tenant has no existing- defenses or setoffs to enforcement of this Lease, except as specifically stated in such certificate: (o provided such events have occurred, that Tenant has accepted the Premises and that all improvements required to be made to the Premises by Landlord have been completed according to this Lease; (g) that, except as specifically stated in such certificate, Tenant, and only Tenant, currently occupies the Premises; and (h) such other matters as may be reasonably requested by Landlord. Any such certificate may be relied upon by Landlord and any prospective purchaser or present or prospective mortgagee, deed of trust beneficiary or ground lessor of all or a portion of the Building. 17 TRANSFERS OF LANDLORD'S INTEREST. 17.1 SALE, CONVEYANCE AND ASSIGNMENT. Subject only to Tenant's rights under this Lease, nothing, in this Lease will restrict Landlord's right to sell, convey, assign or otherwise deal with the Premises or Landlord's interest under this Lease. 17.2 EFFECT OF SALE, CONVEYANCE OR ASSIGNMENT. A sale, conveyance or assignment of the Premises will automatically release Landlord from liability under this Lease from and after the effective date of the transfer, except for any liability relating to the period prior to such effective date; and Tenant will look solely to Landlord's transferee for performance of Landlord's obligations relating TO the period after such effective date. This Lease will not be affected by any such sale, conveyance or assignment and Tenant will attorn to Landlord's transferee. 17.3 SUBORDINATION AND NONDISTURBANCE. This Lease is and will be subject and subordinate in all respects to any Encumbrance. With respect to any Encumbrance first encumbering the Building subsequent to the Date of this Lease, upon Tenant's request, Landlord will use its good faith efforts to cause the Lender to agree (either in the Encumbrance or in a separate agreement with Tenant) that so long as Tenant is not in default of its obligations under this Lease, this Lease will not be terminated and Tenant's possession of the Premises will not be disturbed by the termination or foreclosure, or proceedings for enforcement, of such Encumbrance. While such subordination will occur automatically, Tenant agrees, upon request by and without cost to Landlord or any successor in interest, to promptly execute and deliver to Landlord or any Lender such instrument(s) as may be reasonably required to evidence such subordination. In the alternative, however, any Lender may unilaterally elect to subordinate its Encumbrance to this Lease. 17.4 ATTORNMENT. If the interest of Landlord is transferred to any person (a "Transferee") by reason of the termination or foreclosure, or proceedings for enforcement, of an Encumbrance, or by delivery 17 of a deed in lieu of such foreclosure or proceedings, Tenant will immediately and automatically attorn to the Transferee. Upon attornment this Lease will continue in full force and effect as a direct lease between the Transferee and Tenant, upon all of the same terms, conditions and covenants as stated in this Lease, except that the Transferee will not be: (a) liable for any act or omission of an prior landlord, including, Landlord (but such exemption will not excuse the Transferee from the performance of any obligations of the landlord under this Lease required to be performed subsequent to the transfer to the Transferee)-, (b) subject to any offsets or defenses which Tenant might have against any prior landlord, including, Landlord (excluding, any express right of abatement granted under this Lease, provided that the Lender who held the Encumbrance the enforcement of which resulted in the transfer to the Transferee (the "Foreclosing Lender") was afforded any notice and cure rights to which it was entitled under Section 20.1 with respect to the matter that gave rise to such express right of abatement); (c) bound by any Rent or advance Rent which Tenant might have paid for more than the current month or the next succeeding month to any prior landlord, including Landlord, and all such Rent will remain due and owing, regardless of such advance payment; (d) obligated for repayment to Tenant of the Security Deposit or any other security or advance rental deposit made by Tenant, except to the extent the same is paid over to the Transferee; or (e) bound by any termination, amendment or modification of this Lease (other than one expressly contemplated by the terms of this Lease and effected according to such express terms, such as termination b, Landlord due to a Default by Tenant) made without the written consent of the Foreclosing Lender. Tenant agrees, upon request by and without cost to the Transferee, to promptly execute and deliver to the Transferee such instrument(s) as may be reasonably required to evidence such attornment. 18 RULES AND REGULATIONS. Tenant agrees to faithfully observe and comply with the Rules and Regulations set forth on Exhibit B and with all reasonable modifications and additions to such Rules and Regulations (which will be applicable to all Building tenants) from time to time adopted by Landlord and of which Tenant is notified in writing. No such modification or addition will contradict or abrogate any right expressly granted to Tenant under this Lease. 19 TENANT'S DEFAULT AND LANDLORD'S REMEDIES. 19.1 DEFAULT. Each of the following events will constitute a material breach by Tenant and a "Default" under this Lease: (a) Failure to Pay Rent. Tenant fails to pay Base Rent, Additional Rent or any other Rent payable by Tenant under the terms of this Lease when due, and such failure continues for 7 days after written notice from Landlord to Tenant of such failure; provided that with respect to Base Rent, Landlord's Premises Expenses and Taxes, Tenant will be entitled to only two notices of such failure during any Lease Year and if, after two such notices are given in any Lease Year, Tenant fails, during such Lease Year, to pay any such amounts when due. Such failure will constitute Default without further notice by Landlord or additional cure period. (b) Failure to Perform Other Obligations. Except as otherwise specifically provided in this Lease, Tenant breaches or fails to comply with any other provision of this Lease applicable to Tenant, and such breach or noncompliance continues for a period of 30 days after notice by Landlord to Tenant; or, if such breach or noncompliance cannot be reasonably cured within such 30-day period, Tenant does not IN good faith commence to cure such breach or noncompliance within such 30-day period or does not diligently complete such cure within 90 days after such notice from Landlord. However, if such breach or noncompliance causes or results in (1) a dangerous condition on the Premises or Building, or (2) any insurance coverage carried by Landlord or Tenant with respect to the Premises or Building- being jeopardized, then a Default will exist if such breach or noncompliance is not cured as soon as reasonably possible after notice by Landlord to Tenant, and in any event is not cured within 30 days after such notice. For purposes of this Section 19.1(b), financial inability will not be deemed a reasonable ground for failure to immediately cure any breach of, or failure to comply with, the provisions of this Lease. (c) Non-Occupancy of Premises. Tenant fails to occupy and use the Premises within 60 days after the Commencement Date or leaves substantially all of the Premises unoccupied for 30 consecutive days or vacates and abandons substantially all of the Premises. (d) Transfer of Interest Without Consent. Tenant's interest under this Lease or in the Premises is transferred or passes to, or devolves upon, any other party in violation of Section 13. 18 (e) Execution and Attachment Against Tenant. Tenant's interest under this Lease or in the Premises is taken upon execution or by other process of law directed against Tenant, or is subject to any attachment by any creditor or claimant against Tenant and such attachment is not discharged or disposed of within 30 days after levy. (f) Bankruptcy or Related Proceedings. Tenant files a petition in bankruptcy or insolvency, or for reorganization or arrangement under any bankruptcy or insolvency Laws, or voluntarily takes advantage of any such Laws by answer or otherwise, or dissolves or makes an assignment for the benefit of creditors, or involuntary proceedings under any such Laws or for the dissolution of Tenant are instituted against Tenant, or a receiver or trustee IS appointed for the Premises or for all or substantially all of Tenant's property, and such proceedings are not dismissed or such receivership or trusteeship vacated within 60 days after such institution or appointment. 19.2 REMEDIES. Time is of the essence. If any Default occurs, Landlord will have the right, at Landlord's election, then or at any later time, to exercise any one or more of the remedies described below. Exercise of any of such remedies will not prevent the concurrent or subsequent exercise of any other remedy provided for in this Lease or otherwise available to Landlord at law or in equity. (a) Cure by Landlord. Landlord may, at Landlord's option but without obligation to do so, and without releasing Tenant from any obligations under this Lease, make any payment or take any action as Landlord deems necessary or desirable to cure any Default in such manner and to such extent as Landlord deems necessary or desirable. Landlord may do so without additional demand on, or additional written notice to, Tenant and without giving Tenant an additional opportunity to cure such Default. Tenant covenants and agrees to pay Landlord, upon demand, all advances, costs and expenses of Landlord in connection with making any such payment or taking, any such action, including reasonable attorney's fees, together with interest at the rate described in Section 3.5, from the date of payment of any such advances, costs and expenses by Landlord. (b) Termination of Lease and Damages. Landlord may terminate this Lease, effective at such time as may be specified by written notice to Tenant, and demand (and, if such demand is refused, recover) possession of the Premises from Tenant. Tenant will remain liable to Landlord for damages in an amount equal to the Base Rent, Taxes, Landlord's Premises Expenses and other Rent which would have been owing by Tenant for the balance of the Term had this Lease not been terminated, less the net proceeds, if any, of any reletting of the Premises by Landlord subsequent to such termination, after deducting all Landlord's expenses in connection with such recovery of possession or reletting. Landlord will be entitled to collect and receive such damages from Tenant on the days on which such Rent would have been payable if this Lease had not been terminated. Alternatively, at Landlord's option, Landlord will be entitled to recover from Tenant, as damages for loss of the bargain and not as a penalty, an aggregate sum equal to (1) all unpaid Base Rent, Landlord's Premises Expenses, Taxes and other Rent for any period prior to the termination date of this Lease (including interest from the due date to the date of the award at the rate described in Section 3.5), plus any other sum of money and damages owed by Tenant to Landlord for events or actions occurring prior to the termination date; plus (2) the present value at the time of termination (calculated at the rate commonly called the discount rate in effect at the Federal Reserve Bank of New York on the termination date) of the amount, if any, by which (A) the aggregate of such Rent payable by Tenant under this Lease that would have accrued for the balance of the Term after termination (with respect to Landlord's Premises Expenses and Taxes, such aggregate will be calculated by assuming that Landlord's Premises Expenses and Taxes for the calendar year in which termination occurs and for each subsequent calendar year remaining, in the Term if this Lease had not been terminated will increase by 4% per year over the amount of Landlord's Premises Expenses and Taxes for the prior calendar year), exceeds (B) the amount of such Rent which Landlord will receive for the remainder of the Term from any relenting of the Premises occurring prior to the date of the award, or if the Premises have not been relet prior to the date of the award, the amount, if any, of such Rent which could reasonably be recovered by reletting the Premises for the remainder of the Term at the then-current fair rental value, in either case taking into consideration loss of rent while finding a new tenant, tenant improvements and rent abatements necessary to secure a new tenant, leasing, brokers' commissions and other costs which Landlord has incurred or might incur in leasing, the Premises to a new tenant; plus (3) interest on the amount described in (2) above from the termination date to the date of the award at the rate described in Section 3.5. 19 (c) Repossession and Reletting. Landlord may reenter and take possession of all or any part of the Premises, without additional demand or notice, and repossess the same and expel Tenant and any party claiming by, through or under Tenant, and remove the effects of both using, such force for such purposes as may be necessary, without being liable for prosecution for such action or being deemed guilty of any manner of trespass, and without prejudice to any remedies for arrears of Rent or right to bring any proceeding for breach of covenants or conditions. No such reentry or taking possession of the Premises by Landlord will be construed as an election by Landlord to terminate this Lease unless a written notice of such intention is given to Tenant. No notice from Landlord or notice given under a forcible entry and detainer statute or similar Laws will constitute an election by Landlord to terminate this Lease unless such notice specifically so states. Landlord reserves the right, following, any reentry or reletting to exercise its right to terminate this Lease by giving Tenant such written notice, in which event the Lease will terminate as specified in such notice. After recovering possession of the Premises, Landlord may, from time to time, but will not be obligated to, relet all or any part of the Premises for Tenant's account, for such term or terms and on such conditions and other terms as Landlord, in its discretion, determines. Landlord hereby acknowledges, however, that Landlord shall mitigate its damages to the extent required by applicable Laws. Landlord may make such repairs, alterations or improvements as Landlord considers appropriate to accomplish such reletting, and Tenant will reimburse Landlord upon demand for all costs and expenses, including attorneys' fees, which Landlord may incur in connection with such reletting. Landlord may collect and receive the rents for such reletting but Landlord will in no way be responsible or liable for any failure to relet the Premises or for any inability to collect an, rent due upon such reletting. Regardless of Landlord's recovery of possession of the Premises, Tenant will continue to pay on the dates specified in this Lease, the Rent which would be payable if such repossession had not occurred, less a credit for the net amounts, if any, actually received by Landlord through any reletting of the Premises. Alternatively, at Landlord's option, Landlord will be entitled to recover from Tenant, as damages for loss of the bargain and not as a penalty, an aggregate sum equal to (1) all unpaid Base Rent, Taxes and Landlord's Premises Expenses and other Rent for any period prior to the repossession date (including interest from the due date to the date of the award at the rate described in Section 3.5), plus any other sum of money and damages owed by Tenant to Landlord for events or actions occurring prior to the repossession date; plus (2) the present value at the time of repossession (calculated at the rate commonly called the discount rate in effect at the Federal Reserve Bank of New York on the repossession date) of the amount, if any, by which (A) the aggregate of such Rent payable by Tenant under this Lease that would have accrued for the balance of the Term after repossession (with respect to Landlord's Premises Expenses and Taxes, such aggregate will be calculated by assuming that Landlord's Premises Expenses and Taxes for the calendar year in which repossession occurs and for each subsequent calendar year remaining in the Term if Landlord had not repossessed the Premises will increase by 4% per year over the amount of Landlord's Premises Expenses and Taxes for the prior calendar year), exceeds (B) the amount of such Rent which Landlord will receive for the remainder of the Term from any reletting of the Premises occurring prior to the date of the award, or if the Premises have not been relet prior to the date of the award, the amount, if any, of such Rent which could reasonably be recovered by reletting the Premises for the remainder of the Term at the then-current fair rental value, in either case taking into consideration loss of rent while finding a new tenant, tenant improvements and rent abatements necessary to secure a new tenant, leasing brokers' commissions and other costs which Landlord has incurred or might incur in leasing, the Premises to a new tenant; plus (3) interest on the amount described in (2) above from the repossession date to the date of the award at the rate described in Section 3.5. In no event will Landlord be required to pay Tenant any excess amounts if Landlord successfully relets the Premises. (d) Bankruptcy Relief. Nothing contained in this Lease will limit or prejudice Landlord's right to prove and obtain as liquidated damages in any bankruptcy, insolvency, receivership, reorganization or dissolution proceeding, an amount equal to the maximum allowable by any Laws governing such proceeding in effect at the time when such damages are to be proved, whether or not such amount be greater, equal or less than the amounts recoverable, either as damages or Rent, under this Lease. 20 20 LANDLORD'S DEFAULT AND TENANT'S REMEDIES. 20.1 DEFAULT. If Tenant believes that Landlord has breached or failed to comply with any provision of this Lease applicable to Landlord, Tenant will give written notice to Landlord describing the alleged breach or noncompliance. Landlord will not be deemed in default under this Lease if Landlord cures the breach or noncompliance within 20 days after receipt of Tenant's notice or, if the same cannot reasonably be cured within such 20-day period, if Landlord in good faith commences to cure such breach or noncompliance within such period and then diligently pursues the cure to completion. Tenant will also send a copy of such notice to any Lender of whom Tenant has been notified in writing and such Lender will also have the right to cure the breach or noncompliance within the period of time described above. 20.2 REMEDIES. If Landlord breaches or fails to comply with any provision of this Lease applicable to Landlord, and such breach or noncompliance is not cured within the period of time described in Section 20.1, then Tenant may exercise any right or remedy available to Tenant at law or in equity, except to the extent expressly waived or limited by the terms of this Lease. 21 SECURITY DEPOSIT. 21.1 DEPOSIT. Upon execution of this Lease, Tenant will deposit the Security Deposit with Landlord. The Security Deposit will be used solely as security for Tenant's faithful and diligent performance of all of Tenant's obligations under this Lease, including payment of Rent. The Security Deposit will remain in Landlord's possession for the entire Ten-n, and Landlord will not be required to segregate it from Landlord's general funds, unless required by Law. Tenant will not be entitled to any interest on the Security Deposit, unless required by Law. 21.2 USE AND RESTORATION. If Tenant fails to perform any of its obligations under this Lease, Landlord may, at its option, use, apply or retain all or any part of the Security Deposit for the payment of (a) any Rent in arrears; (b) any expenses Landlord may incur as a direct or indirect result of Tenant's failure to perform; and (c) any other losses or damages Landlord may suffer as a direct or indirect result of Tenant's failure to perform. If Landlord so uses or applies all or any portion of the Security Deposit, Landlord will notify Tenant of such use or application and Tenant will, within 10 days after the date of Landlord's notice, deposit with Landlord a sum sufficient to restore the Security Deposit to the amount held by Landlord immediately prior to such use or application. Tenant's failure to so restore the Security Deposit will constitute Default. 21.3 TRANSFERS. Tenant will not assign or encumber the Security Deposit without Landlord's express written consent. Neither Landlord nor its successors or assigns will be bound by any assignment or encumbrance unless Landlord has given its consent. Landlord shall, at any time and from time to time, transfer the Security Deposit to any purchaser or lessee of the Building. Upon any such transfer, Tenant agrees to look solely to the new owner or lessee for the return of the Security Deposit. 21.4 REFUND. Provided that Tenant has fully and faithfully performed all of its obligations under this Lease, Landlord will refund the Security Deposit, or any balance remaining, to Tenant or, at Landlord's option, to the latest assignee of Tenant's interest under this Lease, within 60 days after the expiration or early termination of the Term and Tenant's vacation and surrender of the Premises to Landlord in the condition required by Section 15. 1. If Tenant fails to make any final estimated payment of Landlord's Premises Expenses and Taxes required by Landlord according to Section 3.2(c), Landlord may withhold such final payment from the amount of the Security Deposit refund. 22 BROKERS. Landlord and Tenant represent and warrant that no broker or agent negotiated or was instrumental in negotiating or consummating, this Lease except the Broker. Neither party knows of any other real estate broker or agent who is or might be entitled to a commission or compensation in connection with this Lease. Landlord will pay all fees, commissions or other compensation payable to the Broker to be paid by Landlord according to Section I.I (n). Tenant and Landlord will indemnify and hold each other harmless from all damages paid or incurred by the other resulting, from any claims asserted against either party by brokers or agents claiming through the other party. Tenant hereby acknowledges that Tenant does not have any separate agreement with the Broker. 23 LIMITATIONS ON LANDLORD'S LIABILITY. Any liability for damages, breach, or nonperformance by Landlord or arising out of the subject matter of, or the relationship created by, this Lease will be collectible only out of Landlord's interest in the Premises and no personal liability is assumed by, or will at any time be asserted 21 against, Landlord, its Affiliates, shareholders, partners, owners or members, Landlord's property manager or asset manager, or any of its or their successors or assigns; all such liability, if any, being expressly waived and released by Tenant. 24 NOTICES. All notices required or permitted under this Lease must be in writing and will only be deemed properly given and received (a) when actually given and received, if delivered in person to a party who acknowledges receipt in writing; or (b) one business day after deposit with a private courier or overnight delivery service, if such courier or service obtains a written acknowledgment of receipt; or (c) two business days after deposit in the United States mails, certified or registered mail with return receipt requested and postage prepaid. All such notices must be transmitted by one of the methods described above to the party to receive the notice at, in the case of notices to Landlord, Landlord's Address. and in the case of notices to Tenant, Tenant's Address, or, in either case, at such other address(es) as either party may notify the other of according to this Section 24. 25 MISCELLANEOUS. 25.1 BINDING EFFECT. Each of the provisions of this Lease will extend to bind or inure to the benefit of, as the case may be, Landlord and Tenant. and their respective heirs, successors and assigns, provided this clause will not permit any transfer by Tenant contract to the provisions of Section 13. 25.2 COMPLETE AGREEMENT; MODIFICATION. All of the representations and obligations of the parties are contained in this Lease and no modification, waiver or amendment of this Lease or of any of its conditions or provisions will be binding upon a party unless in writing sign by such party. 25.3 DELIVERY FOR EXAMINATION. Submission of the form of the Lease for examination will not bind Landlord in any manner, and no obligations will arise under this Lease until it is signed by both Landlord and Tenant and delivery is made to each. 25.4 NO AIR RIGHTS. This Lease does not grant any easements or rights for light, air, or view. Any diminution or blockage of light, air, or view by any structure or condition now or later erected will not affect this Lease or impose any liability on Landlord. 25.5 ENFORCEMENT EXPENSES. Each party agrees to pay, upon demand, all of the other party's costs, charges and expenses, including the fees and out-of-pocket expenses of counsel, agents, and others retained, incurred in successfully enforcing the other party's obligations under this Lease. 25.6 NO WAIVER. No waiver of any provision of this Lease will be implied by any failure of either party to enforce any remedy upon the violation of such provision, even if such violation is continued or repeated subsequently. No express waiver will affect any provision other than the one specified in such waiver, and that only for the time and in the manner specifically stated. 25.7 RECORDING; CONFIDENTIALITY. Tenant will not record this Lease, or a short form memorandum, without Landlord's written consent and any such recording without Landlord's written consent will be Default. Tenant agrees to keep the Lease terms, provisions and conditions confidential and will not disclose them to any other person without Landlord's prior written consent. However, Tenant may disclose Lease terms, provisions and conditions to Tenant's accountants, attorneys, managing employees and others in privity with Tenant, as reasonably necessary for Tenant's business purposes, without such prior consent. 25.8 CAPTIONS. The captions of sections are for convenience only and will not be deemed to limit, construe, affect or alter the meaning of such sections. 25.9 INVOICES. All bills or invoices to be given by Landlord to Tenant will be sent to Tenant's Address. Tenant may change Tenant's Address by notice to Landlord given according to Section 24. If Tenant fails to give Landlord specific written notice of its objections within 60 days after receipt of any bill or invoice from Landlord, such bill or invoice will be deemed true and correct and Tenant may not later question the validity of such bill or invoice or the underlying information or computations used to determine the amount stated. 25.10 SEVERABILITY. If any provision of this Lease is declared void or unenforceable by a final judicial or administrative order, this Lease will continue in full force and effect, except that the void or 22 unenforceable provision will be deemed deleted and replaced with a provision as similar in terms to such void or unenforceable provision as may be possible and be valid and enforceable. 25.11 JURY TRIAL. LANDLORD AND TENANT WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY LANDLORD OR TENANT AGAINST THE OTHER WITH RESPECT TO ANY MATTER ARISING OUT OF OR IN CONNECTION WITH THIS LEASE, TENANT'S USE AND OCCUPANCY OF THE PREMISES, OR THE RELATIONSHIP OF LANDLORD AND TENANT. HOWEVER, SUCH WAIVER OF JURY TRIAL WILL NOT APPLY TO ANY CLAIMS FOR PERSONAL INJURY. 25.12 AUTHORITY TO BIND. The individuals signing this Lease on behalf of Landlord and Tenant represent and warrant that they are empowered and duly authorized to bind Landlord or Tenant, as the case may be, to this Lease according to its terms. 25.13 ONLY LANDLORD/TENANT RELATIONSHIP. Landlord and Tenant agree that neither any provision of this Lease nor any act of the parties will be deemed to create any relationship between Landlord and Tenant other than the relationship of landlord and tenant. Tenant has only a usufruct not subject to levy and sale and not assignable by Tenant except as set forth in this Lease. 25.14 GOVERNING LAW. This Lease will be governed by and construed according to the laws of the State of Colorado. 25.15 EXHIBITS. The following exhibits are attached to and made a part of this Lease by this reference: Exhibit A Occupancy Estoppel Certificate Exhibit B Rules and Regulations Exhibit C Work Letter Having read and intending to be bound by the terms and provisions of this Lease, Landlord and Tenant have signed it as of the date. TENANT: LANDLORD: DaPuzzo Investment Group, LLC, a Colorado ILX Lightwave, A Minnesota Company limited liability company By: /s/ Lawrence A. Johnson By: /s/ Douglas C. DaPuzzo ------------------------------ ------------------------------------- Printed Name: Lawrence A. Johnson Name: Douglas C. DaPuzzo -------------------- Title: President and CEO Title: Manager --------------------------- STATE OF MONTANA ) ) ss: COUNTY OF GALLATIN ) The foregoing instrument was acknowledged before me this 21 day of September 2000, by Lawrence A. Johnson as President/CEO of ILX Lightwave, a Minnesota corporation. Witness my hand and official seal. My commission expires: 3/25/2004. [ILLEGIBLE] ---------------------------------------- Notary Public 23 STATE OF COLORADO ) )ss: COUNTY OF BOULDER ) The foregoing instrument was acknowledged before me this 22nd day of September, 2000, by Douglas C. DaPuzzo, as Manager of DaPuzzo Investment Group, LLC, a Colorado limited liability company. Witness my hand and official seal. My commission expires: 4/28/2003. Christine M. Holland ---------------------------------------- Notary Public [NOTARY SEAL] 24 EXHIBIT A 6797 WINCHESTER CIRCLE OCCUPANCY ESTOPPEL CERTIFICATE THIS OCCUPANCY ESTOPPEL CERTIFICATE (this "Certificate") is made upon this day of , 200 , by ILX Lightwave., a Minnesota corporation (the "Tenant"), with respect to and forming a part of that certain Lease Agreement (the "Lease") dated 2000, between DaPuzzo Investment Group, LLC, a Colorado limited liability company (the "Landlord") and Tenant for the property and building located at 6797 Winchester Circle, Boulder, Colorado (the "Premises"). In consideration of the mutual covenants and agreements stated in the Lease, and intending that this Certificate may be relied upon by Landlord and any prospective purchaser or present or prospective mortgagee, deed of trust beneficiary, or ground lessor of all or a portion of the Premises, Tenant certifies as follows: 1. Except for those terms expressly defined in this Certificate, all initially capitalized terms will have the meanings stated for such terms in the Lease. 2. The Commencement Date occurred on and the Expiration Date will occur on . 3. Tenant's obligation to make monthly payments of Base Rent under the Lease began (or will begin) on and is paid current through the date of this Certificate. 4. Tenant's obligation to make monthly estimated payments of Additional Rent under the Lease and is paid current through the date of this Certificate. 5. Tenant has accepted the Premises, and all leasehold improvements and other work required to be performed by Landlord under the Lease have been satisfactorily completed. 6. Tenant has no existing offset, credit, or defense to the payment of any Rent. IN WITNESS WHEREOF, Tenant has executed this Certificate as of the day and year first written above. TENANT: ILX Lightwave, a Minnesota corporation By ---------------------------------------- Printed Name ------------------------------ Title ------------------------------------- A-1 25 EXHIBIT B 6797 WINCHESTER CIRCLE RULES AND REGULATIONS Tenant covenants and agrees to comply with the following rules and regulations as they may be modified or amended during the Term. Landlord will not be responsible to Tenant for the nonperformance of such rules and regulations by any other tenant or occupant of the Building. 1. No awning or other projections shall be attached to the outside walls of the Building without, in each instance, the prior written consent of Landlord, which consent shall not be unreasonably withheld or delayed. 2. No sign, advertisement, display, notice, or other lettering, shall be exhibited, inscribed, painted, or affixed on any part of the outside of the Building without, in each instance, the prior written consent of Landlord. All such signs, displays, advertisements, and notices of Tenant so approved by Landlord shall be maintained by Tenant in good and attractive condition at Tenant's expense and risk. 3. No aerial, dish, antenna or telecommunications tower shall be erected on the roof or exterior walls of the Building, or on the grounds of the Premises without, in each instance, the prior written consent of Landlord. Any such item so installed without such written consent shall be subject to removal without notice at any time. 4. No loud speakers, television sets, phonographs, radios, musical instruments or other devices shall be used in a manner so as to be heard or seen off the Premises without the prior written consent of Landlord. 5. Tenant shall not make or permit any noise, odor or gases which Landlord deems objectionable to emanate from the Premises. Tenant shall not suffer, allow, or permit any vibration, light, or other effect to emanate from the Premises, or from any machine or other installation therein, or otherwise suffer, allow, or permit the same to constitute a nuisance or otherwise interfere with the safety, comfort, or convenience of Landlord or any of the other occupants of the Gunbarrel Technical Center. Upon notice by Landlord to Tenant that any of the aforesaid is occurring, Tenant agrees to forthwith remove or control the same. 6. During the last nine months of this Lease, or any renewal or extension thereof, or at any time that Tenant may be in default hereunder, Landlord shall have the right, upon reasonable advance notice, to enter the Premises at all reasonable times during usual business hours for the purpose of showing the same to prospective tenants. Landlord may also place signs on the exterior of the Building which are visible from the exterior off the Premises, for the purpose of advertising the availability of the Premises for lease. 7. Tenant shall not permit its employees, licensees or invitees, to smoke any tobacco products in the vicinity of any entrance to the Building. With Landlord's prior consent, which will not be unreasonably withheld or delayed, Tenant may establish an outdoor smoking area in the rear of the Building that is not visible from Winchester Circle. Tenant shall keep such area free of cigarette butts and other trash and debris. B-1 26 EXHIBIT C WORK LETTER 1. Controlling Document; Terms. If there is any conflict or inconsistency between the provisions of the Lease and those of this Exhibit C (this "Work Letter"), the provisions of this Work Letter will control. Except for those terms expressly defined in this Work Letter, all initially capitalized terms will have the meanings stated for such terms in the Lease. The following terms, which are not defined in the Lease, have the meanings indicated: (a) "Scheduled Commencement Date" means February 1, 2001. (b) "Commencement Date" means the first day of the Term, which will be the Scheduled Commencement Date, unless the Commencement Date is extended according to Paragraph 4 below. (c) "Landlord's Representative" means Doug DaPuzzo. Landlord may designate another person as Landlord's Representative at any time by three days' prior written notice to Tenant. (d) "Tenant's Representative" means Kevin Smith of Creative Project Solutions, Inc. Tenant may designate another person as Tenant's Representative at any time by three days' prior written notice to Landlord. (e) "Submission Date" means September 22, 2000. (f) "Landlord's Allowance" means $802,912.00. (g) "Leasehold Improvements" means all alterations, leasehold improvements and installations to be constructed or installed by Landlord for Tenant in the Building according to this Work Letter, as described in the Construction Documents, but excluding, any Base Building work. (h) "Preliminary Plans" means space plans and general specifications for the Leasehold Improvements. (i) "Construction Documents" means complete construction plans and specifications for the Leasehold Improvements. (j) "Total Cost" means the total cost of obtaining all necessary permits, undertaking all necessary preparation activities, preparing the Preliminary Plans and the Construction Documents, obtaining bids and estimates on all cost items, constructing- and installing the Leasehold Improvements in the Building, and providing any Building services required during construction (such as electricity and other utilities, refuse removal and janitorial). Total Cost will not include the cost incurred by Landlord in conducting the initial meeting between Tenant, Landlord and Landlord's architect to begin work on the Preliminary Plans. (k) "Base Building" means the installation of eight 15-ton rooftop HVAC units with gas and electric hookups on the Building, the installation of new windows in the Building as depicted on the plan attached hereto as Attachment 1, the installation of 2,000 AMP, 277/48OV, 3-phase electric service to the Building and the installation of the restrooms and plumbing per Attachment 1. The Base Building work will be performed by Landlord at its sole cost and expense, which costs will not be included within Total Cost and will not be paid out of the Landlord's Allowance. 2. Landlord's Obligations. Landlord will proceed to complete the Leasehold Improvements according to this Work Letter and tender possession of the Premises to Tenant when the Leasehold Improvements have been completed to the extent that only minor construction details that do not materially interfere with Tenant's use and enjoyment of the Premises, require completion or correction. Tenant will accept the Premises when Landlord tenders possession, provided that the Leasehold Improvements have been substantially completed as described above, and provided further that Tenant will not be required to accept possession prior to the Scheduled Commencement Date. Landlord and Tenant agree that all alterations, improvements and additions made to the Premises according to this Work Letter, whether paid for by Landlord or Tenant, will, without compensation to Tenant, become Landlord's property upon installation and will remain Landlord's property at the expiration or earlier termination of the Term. 27 3. Early Occupancy. Subject to the reasonable approval of Landlord's contractor, Tenant will have a license to access the Building during the 60-day period preceding the day on which Landlord reasonably estimates that the Leasehold Improvements will be substantially completed for the purpose of permitting Tenant to complete installation of data, telephone and other communications and furniture installations necessary for the conducting of Tenant's business from the Premises ("Tenant's Installations"). The making of Tenant's Installations and all work performed in connection therewith will be subject to the terms and conditions of Paragraph 14 and subparagraphs (a) through (e) of Paragraph 13. With Landlord's express written consent, Tenant may occupy the Premises for regular conduct of Tenant's business prior to the Scheduled Commencement Date. If Tenant takes possession of any part of the Premises for its regular business purposes prior to the Scheduled Commencement Date with Landlord's prior written consent, then: (a) all of the covenants and conditions of the Lease will bind both parties with respect to such portion of the Premises; (b) Tenant will pay Landlord Rent for the period of such occupancy according to the Lease at the rates applicable to the first Lease Year, prorated for the time and portion of the Premises so occupied; and (c) Tenant will not encase in or permit any activities that interfere with any construction work being conducted within or about the Building, by Landlord, its employees or contractors. No early occupancy under this Paragraph 3 will change the Commencement Date or the Termination Date. 4. Delayed Occupancy. If Landlord fails to tender possession of the Premises to Tenant according to Paragraph 2 above on or before the Scheduled Commencement Date, Landlord will not be in default or liable in damages to Tenant, nor will the obligations of Tenant be affected, provided, however, that: (a) The Commencement Date will be extended automatically by one day for each day of the period after the Scheduled Commencement Date to the day on which Landlord tenders possession of the Premises to Tenant in accordance with Paragraph 2 above, less any portion of that period attributable to Tenant's delay as more particularly described in Paragraph 15, and (b) if Landlord does not tender possession of the Premises to Tenant in accordance with Paragraph 2 above on or before June 1, 2001 (as extended by any period of delay caused by Tenant's delay as described in Paragraph 15 below), Tenant will have the right to terminate the Lease by delivering written notice of termination to Landlord not more than 30 days after such tender deadline date. Upon a termination of this Lease under this subparagraph (b), each party will, upon the other's request, execute and deliver an agreement in recordable form containing, a release and surrender of all right, title and interest in and to the Lease; neither Landlord nor Tenant will have any further obligations to each other, including, without limitation, any obligations to pay for work previously performed in the Premises; all improvements to the Premises will become and remain the property of Landlord, and Landlord will refund to Tenant any sums paid to Landlord by Tenant in connection with the Lease, including,, without limitation, any payments to Landlord of construction costs for the Premises. Such postponement of the commencement of the Term and such termination and refund right will be in full settlement of all claims that Tenant might otherwise have against Landlord by reason of Landlord's failure to substantially complete its obligations under this Work Letter by the Scheduled Commencement Date. 5. Punch List. Subject to Paragraph 11, Tenant's taking possession of any portion of the Premises will be conclusive evidence that such portion of the Premises was in good order and satisfactory condition when Tenant took possession, except as to any defects identified on a Punch list prepared and signed by Landlord's Representative and Tenant's Representative after an inspection of the Premises by both such parties when Tenant takes possession. Landlord will correct and complete all punch list items as soon as practicable following such inspection; provided, however, that Landlord will not be responsible for any items of damage caused by Tenant, its agents, employees, independent contractors or suppliers. No promises to alter, remodel or improve the Premises or Building and no representations concerning the condition of the Premises or Building have been made by Landlord to Tenant other than as may be expressly stated in the Lease (including, this Work Letter). 6. Representatives. Landlord appoints Landlord's Representative to act for Landlord in all matters covered by this Work Letter. Tenant appoints Tenant's Representative to act for Tenant in all matters covered by this Work Letter. All inquiries, requests, instructions, authorizations and other communications with respect to the matters covered by this Work Letter will be made to Landlord's Representative or Tenant's Representative, as the case may be. 7. Preliminary Plans. On or before the Submission Date, Tenant will cooperate with Landlord and submit all information necessary for preparation of the Preliminary Plans (the "Design Information"). Each day after the Submission Date until Tenant has provided all Desit7n Information will be a day of Tenant's delay. Promptly after receipt of all Design Information, Landlord will cause its Architect to prepare the Preliminary Plans based on the submitted Design Information. Within 5 business days after receipt of the proposed Preliminary Plans, Tenant will 28 either approve the same in writing or notify Landlord in writing, of how the proposed Preliminary Plans are inconsistent with the Design Information and how the Preliminary Plans must be chanced in order to overcome Tenant's objections. Each day following the 5th business day after the proposed Preliminary Plans are submitted to Tenant until Tenant either approves them or delivers such notice of objections will be a day of Tenant's delay. Upon receipt of Tenant's notice of objections, Landlord will cause its architect to prepare revised Preliminary Plans according to such notice and submit the revised Preliminary Plans to Tenant. Upon submittal to Tenant of the revised Preliminary Plans, and upon submittal of any further revisions, the procedures described above will be repeated. If the revised Preliminary Plans or any further revisions, are consistent with the Design Information and all requirements identified in Tenant's prior notice(s) of objections, then each day following Landlord's receipt of Tenant's notice of any additional objections until the day on which Landlord receives Tenant's written approval of the Preliminary Plans will be a day of Tenant's delay. 8. Cost Estimate. At such time as Preliminary Plans that have been approved in writing or by both Landlord and Tenant have been prepared, Landlord will obtain from Landlord's contractor, and notify Tenant of, an estimate of the Total Cost based on the approved Preliminary Plans ("Cost Estimate"). If the Cost Estimate is less than or equal to Landlord's Allowance, then Tenant will be deemed to have approved the Cost Estimate. If the Cost Estimate is greater than Landlord's Allowance, then Tenant, at Tenant's option, may either approve the Cost Estimate in writing, or elect to eliminate or revise one or more items shown on the Preliminary Plans so as to reduce the Cost Estimate and then approve in writing the reduced Cost Estimate (based on the revised Preliminary Plans). If the Cost Estimate is greater than Landlord's Allowance, then each day following the 5th business day after Tenant's receipt of such Cost Estimate until the day Landlord receives Tenant's written approval of the Cost Estimate (as the same may have been revised) will be a day of Tenant's delay. 9. Construction Documents. At such time as the Cost Estimate has been approved (or deemed approved) by Tenant, Landlord will cause its architect and engineer to prepare the Construction Documents based strictly on the Preliminary Plans. The Construction Documents will be subject to Landlord's approval. Within 5 business days after receipt of the Construction Documents, Tenant will either approve the same in writing or notify Landlord in writing, of how the Construction Documents are inconsistent with the Preliminary Plans and how the Construction Documents must be changed in order to overcome Tenant's objections. Each day following the 5th business day after the Construction Documents are submitted to Tenant until Tenant either approves them or delivers such notice of objections will be a day of Tenant's delay. Upon receipt of Tenant's notice of objections, Landlord will cause its architect and engineer to prepare revised Construction Documents according to such notice and submit the revised Construction Documents to Tenant. Upon submittal to Tenant of the revised Construction Documents, and upon submittal of any further revisions, the procedures described above will be repeated. If the revised Construction Documents, or any further revisions, are consistent with the Preliminary Plans and all requirements identified in Tenant's prior notice(s) of objections, then each day following Landlord's receipt of Tenant's notice of any additional objections until the day on which Landlord receives Tenant's written approval of the Construction Documents will be a day of Tenant's delay. 10. Cost Proposal. At such time as the Construction Documents have been reviewed and approved pursuant to Paragraph 9 above, Landlord will obtain from Landlord's contractor a bid for the Total Cost and will notify Tenant of the proposed Total Cost (the "Cost Proposal"). If the Cost Proposal is less than or equal to the Cost Estimate approved (or deemed approved) by Tenant, then Tenant will be deemed to have approved the Cost Proposal. If the Cost Proposal is greater than the Cost Estimate approved (or deemed approved) by Tenant, then Tenant, at Tenant's option, may either approve the Cost Proposal in writing or elect to eliminate or revise one or more items shown on the Construction Documents so as to reduce the Cost Proposal and then approve in writing the reduced Cost Proposal (based on the revised Construction Documents). If the Cost Proposal approved or deemed approved by Tenant is greater than Landlord's Allowance, then Tenant will immediately deposit with Landlord an amount (the "Construction Deposit") equal to one-half of the difference between Landlord's Allowance and the approved Cost Proposal. Each day following the 5th business day after Tenant's receipt of the Cost Proposal until the day on which Landlord has received Tenant's written approval of the Cost Proposal (if required) and Landlord has received the Construction Deposit (if required) will be a day of Tenant's delay. 11. Construction of Leasehold Improvements. At such time as Tenant has approved (or is deemed to have approved) the Cost Proposal and has made any required Construction Deposit, Landlord will cause the Leasehold Improvements (and the Base Building work, if not already completed) to be constructed or installed in the Premises in a good and workmanlike manner and according to the Construction Documents and all applicable Laws. Upon substantial completion of the construction and installation of the Leasehold Improvements and prior to Tenant's occupancy of the Premises, Tenant will pay to Landlord the amount, if any, by which the Total Cost exceeds the sum of the Landlord's Allowance and the Construction Deposit. If Landlord's Allowance exceeds t e Total Cost, Tenant will be entitled, during the Term of the Lease, to use the unused portion of Landlord's Allowance (the "Remaining Landlord's Allowance") for Approved Additional Leasehold Improvements. "Approved Additional Leasehold Improvements" shall mean any additional alterations, leasehold improvements and installations to be constructed or 29 installed by Tenant in the Premises, excluding any repairs, replacements and/or maintenance to the Base Building work and the Leasehold Improvements. Approved Additional Leasehold Improvements shall be subject to Landlord's prior written approval in accordance with the terms and provisions of the Lease and this Work Letter, which approval shall not be unreasonably withheld or delayed. Plans and specifications for Approved Additional Leasehold Improvements shall be subject to Landlord's approval according to Paragraph 14 below. If Landlord approves Tenant's plans for the Approved Additional Leasehold Improvements, Tenant may perform or cause to be performed the Approved Additional Leasehold Improvements in accordance with and subject to the applicable terms, covenants and conditions of the Lease and this Work Letter, including specifically, without limitation, Paragraph 13 below and Paragraphs 8 and 9 of the Lease. With respect to the Approved Additional Leasehold Improvements, Landlord agrees to pay Tenant an allowance to be applied to the cost of designing and performing the Approved Additional Leasehold Improvements in an amount equal to the lesser of (a) Tenant's costs; or (b) the Remaining Landlord's Allowance. Landlord will distribute the Remaining Landlord's Allowance (or any portion thereof actually used by Tenant as herein provided), in a single payment to Tenant within thirty (30) days after (a) Tenant has completed all of the Approved Additional Leasehold Improvements in the Premises, and (b) Tenant delivers to Landlord original lien waivers from all contractors and any and all applicable subcontractors or suppliers indicating that claims for mechanics' or material men's liens with respect to the Approved Additional Leasehold Improvements for the Premises have been waived. Additionally, Tenant shall provide to Landlord written notice from all contractors and Tenant's architect (or other evidence satisfactory to Landlord) that the Approved Additional Leasehold Improvements for the Premises have been completed. 12. Change Orders. Tenant's Representative may authorize chances in the Leasehold Improvements work during construction only by written instructions to Landlord's Representative on a form approved by Landlord. All such changes will be subject to Landlord's prior written approval according to Paragraph 14 below. Prior to commencing any change, Landlord will prepare and deliver to Tenant, for Tenant's approval, a change order ("Change Order") identifying the total cost of such change, which will include associated architectural, engineering and construction contractor's fees, and an amount sufficient to reimburse Landlord for overhead and related expenses incurred in connection with the Change Order. If Tenant fails to approve and pay for such Change Order within 10 days after delivery by Landlord, Tenant will be deemed to have withdrawn the proposed change and Landlord will not proceed to perform the chance. Upon Landlord's receipt of Tenant's approval and payment, Landlord will proceed to perform the change. 13. Additional Tenant Work. If Tenant desires any work in addition to the Leasehold Improvements and Tenant's Installations to be performed in the Premises ("Additional Tenant Work"), Tenant, at Tenant's expense, will cause plans and specifications for such work to be prepared either by Landlord's architect or engineer or by consultants of Tenant's own selection. All plans and specifications for Additional Tenant Work will be subject to Landlord's approval according to Paragraph 14 below. If Landlord approves Tenant's plans and specifications for any Additional Tenant Work, Landlord will, subject to the following terms and conditions, grant to Tenant and Tenant's agents a license to enter the Premises prior to the Scheduled Commencement Date in order that Tenant may perform or cause to be performed the Additional Tenant Work according to the plans and specifications previously approved by Landlord: (a) Tenant will give Landlord not less than 5 days prior written notice of the request to have such access to the Premises, which notice must contain or be accompanied by: (i) a description and schedule for the work to be performed by those persons and entities for whom such early access is being requested; (ii) the names and addresses of all contractors, subcontractors and material suppliers for whom such access is being requested; (iii) the approximate number of individuals, itemized by trade, who will be present in the Premises; (iv) copies of all contracts pertaining to the performance of the work for which such early access is being requested; (v) copies of all licenses and permits required in connection with the performance of the work for which such access is being requested; (vi) certificates of insurance and instruments of indemnification against a claims, costs, expenses, damages, suits, fines, penalties, actions, causes of action and liabilities which may arise in connection with such work, and (vii) assurances of the availability of funds sufficient to pay for all such work, if such assurances are requested by Landlord. Each of such matters will be subject to Landlord's approval, which approval will not be arbitrarily withheld. (b) Such early access is subject to scheduling by Landlord. (c) Tenant's agents, contractors, workers, mechanics, suppliers and invitees must work in harmony and not interfere with Landlord and Landlord's agents in doing work in the Premises and in other premises and Common Areas of the Building or the general operation of the Building. If at any time any agent, contractor, worker, mechanic, supplier or invitee of Tenant 30 causes or threatens to cause disharmony or interference, including labor disharmony, Landlord may immediately withdraw Tenant's license for access. (d) If Landlord's work in the Premises and Tenant's work in the Premises (under such license granted by Landlord) progress simultaneously, Landlord will not be liable for any injury to person or damage to property of Tenant, or of Tenant's contractors, employees, licensees or invitees, from any cause whatsoever occurring upon or about the Premises, and Tenant will indemnify and save Landlord harmless from any and all liability and claims arising out of or connected with any such injury or damage. (e) Tenant agrees that it is liable to Landlord for any damage to the Building (including the Premises) or any portion of the work in the Building caused by Tenant or any of Tenant's employees, agents, contractors, workers or suppliers. 14. Landlord's Approval. All Preliminary Plans, Construction Documents and Change Orders, and any drawing space plans, plans and specifications for Tenant's Installations and any Additional Tenant Work or any other improvements or installations in the Premises, are expressly subject to Landlord's prior written approval. Landlord may withhold its approval of any such items that require work which: (a) exceeds or adversely affects the capacity or integrity of the Building's structure or any of its heating, ventilating, air conditioning, plumbing, mechanical, electrical, communications or other systems; (b) is not approved by the holder of any encumbrance upon the Premises; (c) violates any agreement which affects the Premises or binds Landlord; (d) Landlord reasonably believes will reduce the market value of the Premises at the end of the Term; (e) does not comply with any applicable Law or is not approved by any governmental authority having jurisdiction over the Premises; or (f) would create any unsafe or hazardous condition or risk of casualty or injury to person or property. 15. Tenant's Delays. The Term of the Lease (and therefore Tenant's obligation for the payment of Rent) will not commence until Landlord has substantially completed all work to be performed by Landlord pursuant to Paragraph 11 above; provided, however, that if Landlord is delayed in substantially completing such work as a result of: (a) any Tenant's delay described in Paragraphs 7, 8 or 9 above; (b) any Change Orders or changes in any drawings, plans or specifications requested by Tenant; (c) tenant's failure to review or approve in a timely manner any item requiring Tenant's review or approval; (d) performance of any of Tenant's Installations or Additional Tenant Work or any failure to complete or delay in completion of such work; or (e) any other act or omission of Tenant or Tenant's architects, engineers, contractors or subcontractors (all of which will be deemed to be delays caused by Tenant), then the Commencement Date will only be extended under Paragraph 4 above until the date on which Landlord would have substantially completed the performance of such work but for such delays. 16. General. No approval by Landlord or Landlord's architect or engineer of any drawings, plans or specifications which are prepared in connection with construction of improvements in the Premises will constitute a representation or warranty by Landlord as to the adequacy or sufficiency of such drawings, plans or specifications, or the improvements to which they relate, for any use, purpose or condition, but such approval will merely be the consent of Landlord to the construction or installation of improvements in the Premises according to such drawings, plans or specifications. Failure by Tenant to pay any amounts due under this Work Letter will have the same effect as failure to pay Rent under the Lease, and such failure or Tenant's failure to perform any of its other obligations under this Work Letter will, subject to the notice and cure provisions of the Lease, constitute a Default under Section 19.1 of the Lease, entitling Landlord to all of its remedies under the Lease as well as all remedies otherwise available to Landlord. EX-10.10 10 c57156a2ex10-10.txt PROMISSORY NOTES ISSUED BY RANDALL T. DUGGER 1 Exhibit 10.10 PROMISSORY NOTE $9,200 BOZEMAN, MONTANA DECEMBER 30, 1996 FOR VALUE RECEIVED, Randall T. Dugger ("Maker") hereby promises to pay to the order of ILX Lightwave Corporation, or its successors or assigns, as the case may be ("Payee"), at Bozeman, Montana, or such other place as may be specified in writing by the Payee, the principal sum of nine thousand two hundred dollars ($9,200), plus simple interest on the outstanding principal balance at the rate of five and three-fourths percent (5.75%) per annum. The principal amount of this promissory note shall be due and payable in full on December 30, 2003. Accrued interest shall be due and payable on December 30, 1997 and on December 30 of each year subsequent until the principal amount of this promissory note is paid in full. Maker shall have the right to prepay all or any part of this promissory note at any time without penalty or premium, but any such prepayment shall be applied first to the payment of accrued interest and then to the principal due. Upon failure by Maker to make timely payments of the principal or interest due hereunder, which is not cured within thirty (30) days after written notice of such nonpayment is delivered to Maker, Payee may, at Payee's option, declare the unpaid principal amount of this promissory note and any accrued interest thereon immediately due and payable. This promissory note is secured by ILX Lightwave Corporation common stock certificate number fifty-four (54), in the amount of 2,500 shares and issued to Maker on December 30, 1996. This stock certificate shall be maintained in the possession of Payee until this promissory is fully paid. This promissory note shall be governed by the laws of the state of Montana. Maker hereby waives presentment for payment, notice of dishonor, protest and notice of protest and, in the event of default hereunder, Maker agrees to pay all costs of collection, including reasonable attorneys fees. IN WITNESS WHEREOF, Maker has executed this promissory note as of the date first above written. /s/ Randall T. Dugger -------------------------------- Randall T. Dugger 2 PROMISSORY NOTE $45,000 BOZEMAN, MONTANA JANUARY 28, 1998 FOR VALUE RECEIVED, Randall T. Dugger ("Maker") hereby promises to pay to the order of ILX Lightwave Corporation, or its successors or assigns, as the case may be ("Payee"), at Bozeman, Montana, or such other place as may be specified in writing by the Payee, the principal sum of forty-five thousand dollars ($45,000), plus simple-interest on the outstanding principal balance at the rate of five and three-fourths percent (5.75%) per annum. The principal amount of this promissory note shall be due and payable in full on January 28, 2003. Accrued interest shall be due and payable on January 28, 1999 and on January 28 of each year subsequent until the principal amount of this promissory note is paid in full. Maker shall have the right to prepay all or any part of this promissory note at any time without penalty or premium, but any such prepayment shall be applied first to the payment of accrued interest and then to the principal due. Upon failure by Maker to make timely payments of the principal or interest due hereunder, which is not cured within thirty (30) days after written notice of such nonpayment is delivered to Maker, Payee may, at Payee's option, declare the unpaid principal amount of this promissory note and any accrued interest thereon immediately due and payable. This promissory note is secured by ILX Lightwave Corporation common stock certificate number sixty-three (63), in the amount of 10,000 shares and issued to Maker on January 28, 1998. This stock certificate shall be maintained in the possession of Payee until this promissory note is fully paid. This promissory note shall be governed by the laws of the state of Montana. Maker hereby waives presentment for payment, notice of dishonor, protest and notice of protest and, in the event of default hereunder, Maker agrees to pay all costs of collection, including reasonable attorneys fees. IN WITNESS WHEREOF, Maker has executed this promissory note as of the date first above written. /s/ Randall T. Dugger -------------------------------- Randall T. Dugger 3 PROMISSORY NOTE $9,200 BOZEMAN, MONTANA JUNE 9, 1997 FOR VALUE RECEIVED, Randall T. Dugger ("Maker") hereby promises to pay to the order of ILX Lightwave Corporation, or its successors or assigns, as the case may be ("Payee"), at Bozeman, Montana, or such other place as may be specified in writing by the Payee, the principal sum of nine thousand two hundred dollars ($9,200), plus simple interest on the outstanding principal balance at the rate of six and one-fourth percent (6.25%) per annum. The principal amount of this promissory note shall be due and payable in full on June 9, 2004. Accrued interest shall be due and payable on June 9, 1998 and on June 9 of each year subsequent until the principal amount of this promissory note is paid in full. Maker shall have the right to prepay all or any part of this promissory note at any time without penalty or premium, but any such prepayment shall be applied first to the payment of accrued interest and then to the principal due. Upon failure by Maker to make timely payments of the principal or interest due hereunder, which is not cured within thirty (30) days after written notice of such nonpayment is delivered to Maker, Payee may, at Payee's option, declare the unpaid principal amount of this promissory note and any accrued interest thereon immediately due and payable. This promissory note is secured by ILX Lightwave Corporation common stock certificate number fifty-six (56), in the amount of 2,500 shares and issued to Maker on June 9, 1997. This stock certificate shall be maintained in the possession of Payee until this promissory note is fully paid. This promissory note shall be governed by the laws of the state of Montana. Maker hereby waives presentment for payment, notice of dishonor, protest and notice of protest and, in the event of default hereunder, Maker agrees to pay all costs of collection, including reasonable attorneys fees. IN WITNESS WHEREOF, Maker has executed this promissory note as of the date first above written. /s/ Randall T. Dugger -------------------------------- Randall T. Dugger 4 PROMISSORY NOTE $13,500 BOZEMAN, MONTANA JANUARY 28, 1998 FOR VALUE RECEIVED, Randall T. Dugger ("Maker") hereby promises to pay to the order of ILX Lightwave Corporation, or its successors or assigns, as the case may be ("Payee"), at Bozeman, Montana, or such other place as may be specified in writing by the Payee, the principal sum of thirteen thousand five hundred dollars ($13,500), plus simple interest on the outstanding principal balance at the rate of five and three-fourths percent (5.75%) per annum. The principal amount of this promissory note shall be due and payable in full on January 28, 2003. Accrued interest shall be due and payable on January 28, 1999 and on January 28 of each year subsequent until the principal amount of this promissory note is paid in full. Maker shall have the right to prepay all or any part of this promissory note at any time without penalty or premium, but any such prepayment shall be applied first to the payment of accrued interest and then to the principal due. Upon failure by Maker to make timely payments of the principal or interest due hereunder, which is not cured within thirty (30) days after written notice of such nonpayment is delivered to Maker, Payee may, at Payee's option, declare the unpaid principal amount of this promissory note and any accrued interest thereon immediately due and payable. This promissory note is secured by ILX Lightwave Corporation common stock certificate number sixty-four (64), in the amount of 3,000 shares and issued to Maker on January 28, 1998. This stock certificate shall be maintained in the possession of Payee until this promissory note is fully paid. This promissory note shall be governed by the laws of the state of Montana. Maker hereby waives presentment for payment, notice of dishonor, protest and notice of protest and, in the event of default hereunder, Maker agrees to pay all costs of collection, including reasonable attorneys fees. IN WITNESS WHEREOF, Maker has executed this promissory note as of the date first above written. /s/ Randall T. Dugger -------------------------------- Randall T. Dugger EX-23.1 11 c57156a2ex23-1.txt CONSENT OF KPMG LLP 1 EXHIBIT 23.1 INDEPENDENT ACCOUNTANTS' CONSENT The Board of Directors ILX Lightwave Corporation We consent to the use of our report included herein and to the reference to our firm under the heading "Experts" in the prospectus. /s/ KPMG LLP Billings, Montana November 3, 2000 EX-24.1 12 c57156a2ex24-1.txt POWERS OF ATTORNEY 1 EXHIBIT 24.1 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned whose signature appears below hereby constitutes and appoints Lawrence A. Johnson and Randall T. Dugger, and each of them, his true and lawful attorneys-in-fact and agents, with full powers of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all (i) amendments (including post-effective amendments) and additions to the ILX Lightwave Corporation registration statement on Form S-1 (File No. 333-45120) and (ii) registration statements, and any and all amendments thereto (including post-effective amendments), relating to the offering contemplated pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, and hereby grants to such attorneys-in-fact and agents and each of them full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them or his or their substitute or substitutes may lawfully do or cause to be done by virtue hereof.
Signature Title Date - --------- ----- ---- /s/ David I. Polinsky Director October 19, 2000 - --------------------- David I. Polinsky
EX-27.1 13 c57156a2ex27-1.txt FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 INCLUDED IN THE REGISTRATION STATEMENT ON FORM S-1 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1,000 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 1,253 0 8,071 38 4,518 14,642 3,625 1,901 16,438 5,860 0 0 0 318 9,425 16,438 28,708 28,733 12,193 0 8,714 18 89 7,719 3,038 4,681 0 0 0 4,681 .14 .13
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