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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER: 0-24085
AMERICAN XTAL TECHNOLOGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 94-3031310
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
4311 SOLAR WAY, FREMONT, CALIFORNIA 94538
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (510) 683-5900
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $.001
PAR VALUE
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by checkmark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing sale price of the common stock on
December 31, 1998 as reported on the Nasdaq National Market, was approximately
$115,515,000. Shares of common stock held by each officer, director and by each
person who owns 5% or more of the outstanding common stock have been excluded in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not a conclusive determination for other purposes.
As of December 31, 1998, 16,116,675 shares, $.001 par value, of the
registrant's common stock was outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the registrant's 1999 annual
meeting of stockholders to be filed with the Commission pursuant to Regulation
14A not later than 120 days after the end of the fiscal year covered by this
form are incorporated by reference into Part III of this Form 10-K report.
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PART I
This report includes forward-looking statements which reflect our current
views with respect to future events and our potential financial performance.
These forward-looking statements are subject to certain risks and uncertainties,
including those discussed in "Business", "Management's Discussion and Analysis
of Financial Condition and Results of Operations", and elsewhere in this report,
that could cause actual results to differ materially from historical results or
those anticipated. In this report, the words "anticipates," "believes,"
"expects," "intends," "future" and similar expressions identify forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this report.
ITEM 1. BUSINESS
GENERAL
We use a proprietary vertical gradient freeze, commonly referred to as
"VGF," technique to produce high-performance compound semiconductor substrates
which are used in a variety of electronic and opto-electronic applications such
as wireless and fiber optic telecommunications, lasers, LEDs, satellite solar
cells and consumer electronics. We primarily manufacture and sell gallium
arsenide, called GaAs, substrates. Sales of GaAs substrates accounted for
approximately 81.8% of our product revenues in 1998. We also manufacture and
sell indium phosphide, or InP, and germanium, or Ge, substrates and are
currently developing other high-performance compound substrates including
gallium phosphide, or GaP, and gallium nitride, or GaN. Our customers include:
- EMCORE,
- Hewlett Packard,
- Motorola,
- NEC,
- Nortel,
- Siemens,
- Sony,
- Spectrolab, and
- TRW.
BACKGROUND
Recent advances in communications and information technologies have created
a growing need for power efficient, high-performance electronic systems that
operate at very high frequencies, have increased computational and display
capabilities, and can be produced cost-effectively in commercial volumes. In the
past, electronic systems manufacturers have relied on advances in silicon
semiconductor technology to meet many of these demands. Silicon-based
semiconductor devices, however, have performance limitations in power efficient,
high-performance electronic applications. In addition, silicon-based
semiconductor devices currently do not possess the electrical properties
necessary to be used effectively in most opto-electronic applications such as
LEDs and lasers.
As a result of the limitations of silicon, semiconductor device
manufacturers are increasingly utilizing alternative substrates to improve the
performance of semiconductor devices or to enable new applications. These
alternative substrates may be composed of a single element, such as Ge, or
multiple elements which may include:
- gallium,
- aluminum,
- indium,
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- arsenic,
- phosphorus, and
- nitrogen.
Substrates that consist of more than one element are commonly referred to
as "compound substrates" and include GaAs, InP, GaP and GaN. GaAs is currently
the most widely used compound substrate. In comparison to silicon, compound
substrates have electrical properties that allow semiconductor devices to
operate at much higher speeds or at the same speed with lower power consumption.
For example, electrons move up to five times faster in GaAs than in silicon.
Compound substrates also have better opto-electronic characteristics than
silicon which allow them to convert energy into light and lasers, or to detect
light and convert light into electrical energy. The GaAs substrate market is
divided into two segments, semi-insulating and semi-conducting.
Semi-insulating GaAs substrates. The market for semi-insulating GaAs
substrates is the fastest growing segment of the GaAs market. According to
projections by Dataquest, IDC and Strategies Unlimited, the market for
semi-insulating GaAs substrates was estimated at $125 million in 1998 and is
expected to grow to approximately $400 million by the year 2002. This growth is
being driven by increasing demand for semi-insulating GaAs substrates in a
variety of power-efficient, high-performance applications, including cellular
phones, radars, satellite communication systems and direct broadcast systems.
Manufacturers integrate semi-insulating GaAs substrates into devices using
either an ion implantation or epitaxial process. Ion implantation is the process
of implanting ions directly into the semi-insulating GaAs substrate to modify
the electrical parameters of the substrate so that it can be used to manufacture
many of today's high-performance electronic devices. This process requires the
electrical parameters of the substrate to be as uniform as possible. Epitaxy, a
more recently developed process, involves the growth of layers of other
materials onto the semi-insulating GaAs substrate. While generally more
expensive than the ion implantation process, the epitaxial process enables
devices to achieve even greater performance advantages. The epitaxial process
requires that the GaAs substrate have an extremely smooth surface, few physical
imperfections, uniform electrical properties and low dislocation density, which
is a measurement of the crystalline perfection of the substrate material.
Traditionally, crystals for semi-insulating GaAs substrates for the ion
implantation and epitaxy markets have been grown using the liquid-encapsulated
czochralski, or LEC technique. The LEC technique requires a high temperature
gradient in the manufacturing process. Because the temperature gradient in the
LEC technique is high, the resulting crystals have a relatively high dislocation
density which weakens a crystal's physical structure and increases the risk of
breakage of the GaAs substrate during device manufacturing. In addition, as
semi-insulating GaAs substrates continue to grow in size to support increasingly
complex devices, the manufacturing challenges facing the LEC technique increase.
Semi-conducting GaAs substrates. We believe that the market for
semi-conducting GaAs substrates, based on 1998 market data and annual growth
rates projected by Dataquest, IDC and Strategies Unlimited, was approximately
$90 million in 1998 and we expect that the market will continue to grow. The
market for semi-conducting GaAs substrates is being driven by increasing demand
for a number of opto-electronic applications such as LEDs and lasers, which are
incorporated into a variety of products including:
- traffic lights,
- digital versatile discs, more commonly known as DVD players,
- CD players,
- CD-ROMs,
- laser printers,
- automobile lights and
- electronic displays.
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In contrast to semi-insulating GaAs substrates which undergo either an ion
implantation or epitaxial process, semi-conducting GaAs substrates only undergo
an epitaxial process. As with semi-insulating GaAs substrates, semi-conducting
GaAs substrates that undergo the epitaxial process must have a smooth surface,
few physical imperfections, uniform electrical properties and a low dislocation
density. The traditional method of growing crystals for producing
semi-conducting GaAs substrates is the Horizontal Bridgeman, or HB, technique.
With the HB technique, the crystal is grown in a semi-cylindrical container
which results in a semi-circular, or D-shaped, substrate. In order to produce a
round semi-conducting GaAs substrate, the HB technique requires that the
D-shaped substrate be cut into a circle, resulting in a large amount of
discarded substrate. In addition, crystals grown using the HB technique
generally have a relatively high dislocation density and less uniform electrical
properties. These and other inherent technical difficulties limit the ability of
the HB technique to be used to cost-effectively produce high-quality substrates
greater than three inches in diameter.
Other high-performance substrates. We believe there are significant growth
opportunities in manufacturing other high-performance substrates. For example,
we believe that the markets for InP and GaP substrates, based on 1997 market
data and annual growth rates projected by Dataquest, IDC and Strategies
Unlimited, were an aggregate of approximately $150 million in 1998 and we expect
that these markets will continue to grow. Semi-insulating InP substrates are
used in power-efficient, high-performance electronic applications such as
wireless and high-bandwidth communications and semi-conducting InP substrates
are used in such applications as fiber optic communications and lasers. GaP
substrates are used by manufacturers of LEDs. The traditional method for growing
crystals for InP and GaP substrates has been the LEC, technique. In addition to
compound substrates, the market for the element Ge is developing in response to
the growing demand for solar cells in satellite communications. We believe that
the market for Ge substrates used to manufacture solar cells was approximately
$60 million in 1998 and we expect that the market will continue to grow. This
application requires the use of Ge substrates which must be manufactured with
few defects and minimal breakage. We believe the further development of these
markets depends on the ability of suppliers to cost-effectively manufacture
power-efficient, high-performance compound and single-element substrates.
THE AXT SOLUTION
We use a proprietary VGF technique to produce high-performance GaAs and
other substrates for use in a variety of electronic and opto-electronic
applications. We believe that our VGF technique, which we have developed over
the past 12 years, provides certain significant advantages over traditional
manufacturing methods for growing crystals used in the production of
semi-insulating and semi-conducting GaAs substrates. We believe that we are
currently the only high-volume supplier of GaAs substrates manufactured by using
the VGF technique and are positioned to become a leading manufacturer and
supplier of other compound and Ge substrates.
In the GaAs substrate market, crystals grown using our proprietary VGF
technique have a dislocation density that is significantly lower than crystals
grown using either the LEC or HB technique. As a result, we believe our GaAs
substrates have greater mechanical strength which often results in reduced
breakage during the ion implantation and epitaxial growth processes.
Furthermore, we believe the low dislocation density of our semi-insulating and
semi-conducting GaAs substrates translates into fewer defects in the materials
layered onto the substrate during the epitaxy process. In addition,
semi-insulating GaAs substrates produced using our VGF technique have more
uniform electrical properties than LEC-produced GaAs substrates, which is
important for the ion implantation process. In the semi-conducting GaAs
substrate market, VGF-grown crystals, unlike those grown using the traditional
HB technique, can be processed into round substrates with minimal wasted
material. Using our VGF technique, we have been able to produce GaAs substrates
as large as six inches in diameter.
In addition to the GaAs substrate market, we believe we can leverage our
expertise in the VGF technique to manufacture and produce commercial volumes of
other compound and single-element substrates. For example, in 1998, we shipped
Ge and InP substrates to customers and qualified our wafers with many more
potential customers.
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STRATEGY
Our strategy is to be the leading developer and supplier of
high-performance GaAs substrates for both the semi-insulating and
semi-conducting markets, and to continue to expand into the development and
supply of other substrates. The key elements of our strategy include:
Advance VGF technology leadership. We pioneered the commercial use of the
VGF technique and have continued to develop and enhance our technology over the
course of 12 years through substantial investments in research and development.
Our efforts have led to significant improvements in the dislocation density,
mechanical strength and uniformity of the electrical properties of GaAs
substrates. We believe that our experience and expertise in VGF technology
provides us with a competitive advantage over more recent market entrants who
are utilizing variations of the VGF technology. We intend to continue to advance
our VGF technology through continued investment in research and development and
participation in certain government sponsored research programs.
Extend leadership in GaAs market. We are currently one of the largest
suppliers of GaAs substrates worldwide. Historically, we have been a leading
supplier of GaAs substrates in the epitaxy segment of the semi-insulating market
and in the semi-conducting market for GaAs substrates for lasers. We intend to
increase our share of these markets by continuing to provide high-quality,
price-competitive substrates. In addition, in the semi-insulating GaAs substrate
market, we intend to leverage our demonstrated success in the epitaxy segment to
further penetrate the ion implantation segment. In the semi-conducting GaAs
substrate market, we also intend to capitalize on our leadership to further
penetrate the high-volume, cost-sensitive LED market.
Leverage VGF technology to manufacture additional substrates. We believe
our VGF technology is a platform which we can leverage to rapidly develop and
cost-effectively manufacture additional high-quality compound substrates for
emerging applications in markets such as wireless and fiber optic
communications. For example, we recently began shipping InP and Ge substrates
developed using our VGF technique to customers. Unlike the more traditional
methods of growing crystals, we can use our VGF technology to grow the crystals
for these other substrates without having to make a significant investment in
new capital equipment.
Increase manufacturing capacity to target high-volume markets. We increased
our manufacturing capacity by approximately 30,000 square feet in the fourth
quarter of 1998. In addition, in June 1998, we have purchased an additional
58,000 square foot facility in Fremont, California. In January 1999, we
announced we had received a business license for operations in Beijing, China
and had purchased a 30,000 square foot facility in a major tax-free industrial
park in Beijing. These new facilities provide us with additional manufacturing
capacity. We believe that this increased manufacturing capacity will enable us
to further lower unit production costs and provide our high-performance
substrates at competitive prices for high-volume markets such as LEDs.
Leverage existing customer relationships. We currently sell our GaAs
substrates to over 200 customers, including:
- EMCORE,
- Hewlett Packard,
- Motorola,
- NEC,
- Nortel,
- Siemens,
- Sony,
- Spectrolab, and
- TRW.
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We believe our past success in providing high-quality GaAs substrates to
these customers will provide us with a competitive advantage in supplying them
additional substrates as their needs develop. For example, we recently began
shipments of InP substrates to TRW, which currently purchases a significant
portion of its GaAs substrates from us. In addition, we intend to establish
alliances and joint development arrangements with customers to develop new
products, increase manufacturing efficiencies and more effectively serve our
customers' needs.
CUSTOMERS
We sold our products to over 200 customers during 1998. Each of the
customers listed below purchased substrates in excess of $500,000 during 1998:
<TABLE>
<S> <C>
Alpha Industries Picogiga
Alpha Photonics Quantum Epitaxial Designs
Electronics & Materials, Inc. RF Micro Devices
Epitaxial Products International SDL, Inc.
EMCORE Co. Siemens
Hewlett Packard Sony
Motorola Spectrolab
Nortel Sumitomo Chemical
Opto Power TRW Space & Defense
</TABLE>
We have historically entered into significant contracts with a number of
government agencies and customers for the development of certain products. For
more information regarding our development efforts, see " Research and
Development."
In the twelve months ended December 31, 1998, one customer accounted for
13.7% of our total revenues. No customer accounted for more than 10.0% of our
total revenues in 1996 and 1997. In 1996, 1997 and 1998, our five largest
customers accounted for 35.5%, 34.9% and 39.5%, respectively, of our total
revenues. Generally, we do not have long-term or other non-cancelable
commitments from our customers and usually sell products pursuant to customer
purchase orders. The loss of any major customer could have a material adverse
effect on our business and operating results.
TECHNOLOGY
AXT's VGF technique. Our proprietary VGF technique produces high-quality
crystals from which we produce high-performance compound and single-element
substrates for use in a variety of electronic and opto-electronic applications.
Our VGF technique is designed to control the crystal-growth process with
minimal temperature variation. Unlike traditional techniques, our VGF technique
places the hot GaAs melt above the cool crystal, thereby reducing the turbulence
of the GaAs melt which results when the melt and crystal are inverted. The
temperature gradient between the melt and the crystal in the VGF technique is
significantly lower than in traditional techniques. These aspects of the VGF
technique enable us to grow crystals that have a relatively low dislocation
density and high uniformity. One of the benefits of these characteristics is
that the crystal, and the substrate into which the crystal is manufactured, are
mechanically strong. The mechanical strength often results in substrates with
lower breakage rates during a customer's manufacturing process.
Under the VGF technique, the GaAs melt and growing crystal are contained in
a closed chamber. A number of benefits result from the use of this closed
system. Because the VGF system is sealed and the crystal growth is isolated,
both semi-insulating and semi-conducting crystals can be grown in the same
system without the time consuming and expensive process of completely
reconfiguring the system. The closed system isolates the crystal from the
outside environment during growth and significantly reduces potential
contamination of the crystal by impurities. The closed system also allows for
more precise control of the gallium-to-arsenic ratio which results in better
consistency and uniformity of the crystals. Therefore, crystals grown using the
VGF technique are consistently of a high quality. In addition, the use of
cylindrical crucibles, which are sized to
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meet a customer's requirements, enables us to produce circular substrates with a
minimum amount of discarded material.
The VGF technique is highly automated and the temperature gradient is
controlled electronically rather than by physically moving the crystal or
furnace. As a result, there is no physical movement to disturb the sensitive
crystal. The entire crystal growth process is run under computer control with
minimal operator intervention. A single operator can supervise the control of
many VGF furnaces which results in significant cost savings.
We believe the VGF technology is a platform which we can leverage to
rapidly develop and cost-effectively manufacture additional high-quality
substrates. Unlike the more traditional methods of growing crystals, we can use
the VGF technology to grow crystals from these other substrates without having
to make a significant investment in new capital equipment. For example, we use
the proprietary VGF technique to manufacture InP and Ge substrates.
VGF compared to traditional techniques for producing GaAs substrates. We
believe our proprietary VGF technique provides significant advantages over the
traditional crystal growth techniques. The LEC technique is the traditional
method for producing semi-insulating GaAs substrates. Unlike the VGF technique,
the LEC technique is designed so that the hotter GaAs melt is located beneath
the cooler crystal, which results in greater turbulence in the melt. The LEC
technique requires a temperature gradient between the GaAs melt and the cool
crystal which is approximately 50 to 200 times higher than the temperature
gradient of the VGF technique. The turbulence and the high temperature gradient
cause LEC-grown crystals to have a higher dislocation density than VGF-grown
crystals. This characteristic results in a higher rate of breakage of the
LEC-developed substrate during the device manufacturing process. In addition,
the LEC technique is essentially an open process whereby the melt and growing
crystal are exposed to the environment for the entire duration of the crystal
growth process. This exposure results in greater propensity for impurity
contamination as well as difficulty in controlling the ratio of gallium to
arsenic. Because the crystal is not contained in a crucible, fluctuations in
temperature cause the diameter of the crystal to vary. Thus, to ensure proper
size with the LEC technique, the crystal must be grown significantly larger than
the desired size of the resulting substrate. During the LEC process, the crystal
is grown by dipping a seed crystal through molten boric oxide into a melt and
slowly pulling the seed up into the cool zone above the boric oxide where the
crystal hardens. As the GaAs melt is consumed, the crucible containing the
remaining liquid must be raised in coordination with the pulling of the crystal.
These moving parts and the relative complexity of the system result in higher
maintenance costs. Unlike the VGF technique, the LEC technique uses large,
complex electro-mechanical systems that are expensive to acquire and require
highly skilled personnel to operate.
The HB technique is the traditional method for producing semi-conducting
GaAs substrates. The HB technique holds the GaAs melt in a semi-cylindrical
"boat." Because of the semi-cylindrical shape of the boat, semi-conducting GaAs
crystals grown using the HB technique have a semi-circular cross-section. As a
result of this semi-circular shape, more crystal material must be discarded to
cut the crystal ingot into a cylindrical shape from which round substrates can
be produced. Furthermore, crystals grown using the HB technique have a higher
dislocation density than VGF-grown crystals. These and other inherent technical
difficulties limit the ability of the HB technique to be used to
cost-effectively produce high-quality substrates greater than three inches in
diameter. Since the HB technique uses a quartz crucible during the growth
process which can contaminate the GaAs melt with silicon impurities, the HB
technique is also unsuitable for making semi-insulating GaAs substrates.
PRODUCTS
We currently sell the compound substrates GaAs and InP, and the
single-element substrate Ge. We supply various sizes of substrates in 2, 3, 4,
and 6 square inches according to our customers' specifications and work closely
with our customers to ensure that we manufacture substrates to each customer's
particular specifications.
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The table below sets forth our products, their available sizes and selected
applications:
<TABLE>
<CAPTION>
SUBSTRATE MATERIAL DIAMETER (IN INCHES) APPLICATIONS
------------------ -------------------- ------------
<S> <C> <C>
GaAs semi-insulating 2,3,4,6 - Cellular phones
- Direct broadcast television
- High-performance transistors
- Satellite communications
GaAs semi-conducting 2,3,4 - LEDs
- Lasers
- Optical couplers
- Displays
InP semi-insulating 2,3 - Fiber optic communications
- Satellite communications
- High-performance transistors
- Automotive collision avoidance radars
InP semi-conducting 2 - Fiber optic communications
- Lasers
Ge 4 - Satellite solar cells
</TABLE>
MANUFACTURING
Our manufacturing operations, which include crystal growth, slicing,
testing, edge grinding, polishing, inspecting and packaging the substrates for
shipment, are located at our headquarters in Fremont, California. Our Fremont
facilities are ISO 9002 certified. Many of our manufacturing operations are
computer monitored or controlled, enhancing reliability and yield.
We depend on a single or limited number of suppliers for certain critical
materials, including gallium, for use in the production of substrates. We
generally purchase these materials through standard purchase orders and not
pursuant to long-term supply contracts. We seek to maintain sufficient levels of
inventory for certain materials to guard against interruptions in supply and to
meet our near term needs. To date, we have been able to obtain sufficient
supplies of materials in a timely manner. However, a stoppage or delay in
supply, receipt of defective or contaminated materials, or increases in the
pricing of such raw materials could materially adversely affect our operating
results.
In the third quarter of 1998, we completed the expansion of our
approximately 50,000 square feet facility located in Fremont, California by
approximately 30,000 square feet to meet anticipated production needs through
1999. Because we currently perform all steps in our manufacturing process at our
Fremont facility, any interruption resulting from earthquake, fire, equipment
failures or other causes would have a material adverse effect on our results of
operations. For more information regarding the risks relating to our
manufacturing process and our new facility, see "Factors Affecting Future
Results -- If we do not achieve acceptable yields of crystals and the successful
and timely production of substrates, the shipment of our products would be
delayed and our business adversely affected." and "Factors Affecting Future
Results -- We are subject to additional risks as a result of the recent
completion of a new manufacturing facility," respectively.
Additionally, in connection with further expanding our manufacturing
capacity, we purchased an additional 58,000 square foot facility in Fremont,
California and a 30,000 square foot facility in Beijing, China in 1998.
SALES AND MARKETING
We sell our products worldwide through our direct sales force as well as
through independent international sales representatives. Our direct sales force
consists of highly trained, technically sophisticated sales engineers who are
knowledgeable in the manufacturing and use of compound and single-element
substrates. Our direct sales force operates out of our corporate office in
Fremont, California and our Japanese subsidiary. Our sales engineers work with
customers during all stages of the substrate manufacturing process, from
developing the precise composition of the substrate through manufacturing and
processing the substrate
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to the customer's exact specifications. We believe that maintaining a close
relationship with customers and providing customers with ongoing technical
support improves customer satisfaction and will provide us with a competitive
advantage in selling other substrates to our customers.
International sales, excluding Canada, as a percentage of total revenues in
1996, 1997 and 1998 were 35.0%, 34.1% and 28.8%, respectively. In addition to
our direct sales force in Japan, we have independent sales representatives in
France, Japan, South Korea, Taiwan and the United Kingdom. Except for sales by
our Japanese subsidiary, which are denominated in yen, we receive all payments
for products in U.S. dollars.
In order to raise market awareness of our products, we advertise in trade
publications, distribute promotional materials, publish technical articles,
conduct marketing programs and participate in industry trade shows and
conferences. For more information regarding the risks relating to our
international operations, see "Factors Affecting Future Results -- We derive a
significant portion of our revenues from international sales and our ability to
sustain and increase our international sales involve significant risks".
RESEARCH AND DEVELOPMENT
Our research and development efforts are focused on developing new
substrates, improving the performance of existing products and processes, and
reducing costs in the manufacturing process. We have assembled a
multi-disciplinary team of highly skilled scientists, engineers and technicians
to meet our research and development objectives. Among other projects, we have
research and development projects involving the development of GaN and high
purity GaAs epitaxy substrates.
Our research and development expenses in 1996, 1997 and 1998 were $592,000,
$1.3 million and $2.5 million, respectively. In addition to internally funded
research and development, we have also funded a significant portion of our
research and development efforts through contracts with the U.S. government and
customer funded research projects. In 1996, 1997 and 1998, we received $2.0
million, $2.3 million and $1.8 million, respectively, from U.S. government
agencies and customer funded research contracts. Under our contracts, we retain
rights to the VGF and wafer fabrication technology which we develop. The U.S.
government retains rights to utilize the technologies we develop for government
purposes only.
Our total research and development costs, including both contract funded
and internally funded research and development expenses, for 1996, 1997 and 1998
totaled $1.4 million, $2.8 million and $3.3 million, respectively. We expect to
continue to expend substantial resources on research and development. The
development of compound and single-element substrates is highly complex. There
can be no assurance that we will successfully develop and introduce new products
in a timely and cost-effective manner or that our development efforts will
successfully permit our products to meet changing market demands. For more
information regarding the risks relating to our research and development
efforts, see "Factors Affecting Future Results -- We must effectively respond to
rapid technological changes by continually introducing new products that achieve
broad market acceptance."
COMPETITION
The markets for GaAs substrates are intensely competitive. Our principal
competitors in the market for semi-insulating GaAs substrates currently include:
- Freiberger;
- Hitachi Cable;
- Litton Airtron; and
- Sumitomo Electric.
In the semi-conducting GaAs substrate market, our principal competitors
currently are Sumitomo Electric and Hitachi Cable. We also face competition from
manufacturers that produce GaAs substrates for their own use. In addition, we
face competition from companies, such as IBM, that are actively developing
alternative materials to GaAs. As we enter new markets, such as the Ge and InP
substrate markets, we expect
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to face competitive risks similar to those for its GaAs substrates. Many of our
competitors and potential competitors have been in the business longer than us
and have greater manufacturing experience, more established technologies than
our VGF technique, broader name recognition and significantly greater financial,
technical and marketing resources than us. We cannot assure you that we will
compete successfully against these competitors in the future or that our
competitors or potential competitors will not develop enhancements to the LEC,
HB or VGF techniques that will offer price and performance features that are
superior to ours. Increased competitive pressure could also lead to intensified
price-based competition, resulting in lower prices and margins, which would
materially adversely affect our business, financial condition and results of
operations.
We believe that the primary competitive factors in the markets in which our
products compete are:
- quality,
- price,
- performance,
- customer support and satisfaction, and
- customer commitment to competing technologies.
Our ability to compete in target markets also depends on factors such as:
- the timing and success of the development and introduction of new
products by us and our competitors,
- the availability of adequate sources of raw materials, and
- protection of our products by effective utilization of intellectual
property laws and general economic conditions.
In order to remain competitive, we believe we must invest significant
resources in developing new substrates and in maintaining customer satisfaction
worldwide. There can be no assurance that our products will continue to compete
favorably or that we will be successful in the face of competition from existing
competitors or new companies entering our target markets. If we fail to compete
successfully, our financial condition and results of operation would be
materially adversely affected.
PROTECTION OF OUR INTELLECTUAL PROPERTY
Our success and competitive position for our VGF technique depends
materially on our ability to maintain trade secrets, patents and other
intellectual property protections. To protect our trade secrets, we take certain
measures to ensure their secrecy, such as executing non-disclosure agreements
with our employees, customers and suppliers. Despite our efforts, we cannot
assure you that others will not gain access to our trade secrets, or that we can
meaningfully protect our intellectual property. In addition, effective trade
secret protection may be unavailable or limited in certain foreign countries.
Although we intend to protect our rights vigorously, these measures may not be
successful.
We rely primarily on the technical and creative ability of our personnel,
rather than on patents, to maintain our competitive position. To date, we have
been issued one U.S. patent, which relates to our VGF technique, and have two
patent applications, one of which relates to our VGF technique, pending. We have
one pending application for a Japanese patent but no issued foreign patents.
There can be no assurance that our pending applications or any future U.S. or
foreign patent applications will be approved, that any issued patents will
protect our intellectual property or will not be challenged by third parties, or
that the patents of others will not have an adverse effect on our ability to do
business. Moreover, the laws of certain foreign countries may not protect our
intellectual property rights to the same extent as the laws of the United
States. We believe that, due to the rapid pace of technological innovation in
the GaAs and other substrate markets, our ability to establish and maintain a
position of technology leadership in the industry depends more on the skills of
our development personnel than upon the legal protections afforded our existing
technologies.
9
<PAGE> 11
Although there are currently no pending material lawsuits against us or
unresolved notices that we are infringing intellectual property rights of
others, we may be notified in the future that we are infringing the patent
and/or other intellectual property rights of others. Litigation may be necessary
in the future to enforce our patents and other intellectual property rights, to
protect our trade secrets, to determine the validity and scope of the
proprietary rights of others, or to defend against claims of infringement or
invalidity. We cannot assure you that we would prevail in any future litigation.
Any litigation, whether or not determined in our favor or settled by us, would
be costly and would divert the efforts and attention of our management and
technical personnel from normal business operations, which would have a material
adverse effect on our business, and results of operations. Adverse
determinations in litigation could result in the loss of our proprietary rights,
subject us to significant liabilities, require us to seek licenses from third
parties or prevent us from licensing our technology, any of which could have a
material adverse effect on our business and results of operations.
ENVIRONMENTAL REGULATIONS
We are subject to federal, state and local laws and regulations concerning
the use, storage, handling, generation, treatment, emission, release, discharge
and disposal of certain materials used in our research and development and
production operations, as well as laws and regulations concerning environmental
remediation and employee health and safety. The growing of crystals and the
production of substrates involve the use of certain hazardous raw materials,
including, but not limited to, arsenic. We cannot guarantee that our control
systems will be successful in preventing a release of these materials or other
adverse environmental conditions. Any release or other failure to comply with
present or future environmental laws and regulations could result in the
imposition of significant fines against us, the suspension of production or a
cessation of operations. In addition, there can be no assurance that existing or
future changes in laws or regulations will not require expenditures or
liabilities to be incurred by us, or in restrictions on our operations. At
December 31, 1998, we believe we were in substantial compliance with all
applicable environmental regulations.
BACKLOG
We include in backlog only those customer orders which have been accepted
by us and which shipment is generally expected within 12 months. As of December
31, 1998, our backlog was approximately $8.7 million. Backlog can fluctuate
greatly based upon, among other matters, the timing of orders. In addition,
purchase orders in our backlog are subject to changes in delivery schedules or
to reduction in size or cancellation at the option of the purchaser without
significant penalty. We have experienced, and may continue to experience,
cancellation, reduction and rescheduled delivery of orders in our backlog. Our
backlog may vary significantly from time to time depending upon the level of
capacity available to satisfy unfilled orders. Accordingly, although useful for
scheduling production, backlog as of any particular date may not be a reliable
indicator of sales for any future period.
EMPLOYEES
As of December 31, 1998, we had 314 full-time employees, of whom 263 were
principally engaged in manufacturing, 32 in sales, general and administration
and 19 in research and development. Our success is in part dependent on our
ability to attract and retain highly skilled workers, who are in high demand in
the Silicon Valley area. None of our employees is represented by a union and we
have never experienced a work stoppage. Management considers its relations with
its employees to be good.
10
<PAGE> 12
EXECUTIVE OFFICERS
As of December 31, 1998, our executive officers and directors were as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Morris S. Young, Ph.D. ... 53 Chairman of the Board of Directors, President and Chief
Executive Officer
Theodore S. Young, 58 Senior Vice President, Marketing and Director
Ph.D. ..................
Davis Zhang............... 42 Senior Vice President, Production
Gary S. Young............. 55 Vice President, Sales
Guy D. Atwood............. 56 Vice President and Chief Financial Officer, Treasurer and
Secretary
Xiao Gordon Liu........... 34 Vice President, Engineering and Development
Jesse Chen(1)(2).......... 40 Director
B.J. Moore(1)(2).......... 62 Director
Donald L. Tatzin(1)(2).... 46 Director
</TABLE>
- ------------------------
(1) Member of the compensation committee.
(2) Member of the audit committee.
Morris S. Young, Ph.D. co-founded AXT in 1986 and has served as our
Chairman of the Board of Directors since February 1998 and President and Chief
Executive Officer, as well as a director since 1989. Dr. Young holds a B.S. in
Metallurgical Engineering from Chengkung University, Taiwan, an M.S. in
Metallurgy from Syracuse University and a Ph.D. in Metallurgy from Polytechnic
University.
Theodore S. Young, Ph.D. co-founded AXT in 1986 and has served as our
Senior Vice President, Marketing since 1989 and served as President from 1987 to
1989. He has also acted as a director since our inception, including as the
Chairman of the Board of Directors from January 1987 to January 1998. Dr. Young
holds a B.S. in Physics from National Taiwan University, an M.S. in Geophysics
from the University of Alaska and a Ph.D. in Plasma Physics from the
Massachusetts Institute of Technology.
Davis Zhang co-founded AXT in 1986 and has served as our Senior Vice
President, Production since January 1994. From 1987 to 1993, Mr. Zhang served as
our Senior Production Manager. Mr. Zhang holds a B.S. in Mechanical Engineering
from Northern Communication University, Beijing, China.
Gary S. Young joined us in 1991 and has served as our Vice President, Sales
since July 1993. From 1991 to 1993, Mr. Young served as our Sales and
Administrative Manager. From 1973 to 1991, Mr. Young worked in various
capacities with several companies, including as a Systems Engineer for IBM and
as a software engineer for Boole & Babbage, Inc., an independent software
vendor. Mr. Young holds a B.S. in Mathematics from National Taiwan Normal
University, an M.A. in Mathematics from Northeast Missouri State University and
an M.S. in Operations Research from Purdue University.
Guy D. Atwood joined us in August 1997 as our Vice President and Chief
Financial Officer and has served as our Treasurer and Secretary since February
1998. From 1991 to August 1997, Mr. Atwood served at various times as Chief
Financial Officer for several private companies, most recently the alumni
association for the University of California at Berkeley and AvenuSoftware, a
film and video software company, of which he was also its President. Mr. Atwood
was self-employed as a financial consultant from 1994 to 1995, and also provided
services in such capacity to the Company from June to September 1995. Mr. Atwood
holds a B.S. in Accounting from the University of California at Berkeley.
Xiao Gordon Liu joined us in 1995 as Senior Engineer and was promoted to
Vice President, Engineering and Development in November 1998. Prior to joining
us, Mr. Liu was a postdoctoral fellow and associate specialist at University of
California at Berkeley and a research associate at the University of Lund,
Sweden. Mr. Liu holds a Ph.D. in Physics from the University of Lund, Sweden and
has published more than 30 scientific papers.
11
<PAGE> 13
Jesse Chen has served as a director of AXT since February 1998. Since May
1997, Mr. Chen has served as a Managing Director of Maton Venture, an investment
company. Prior to that, Mr. Chen co-founded BusLogic, Inc., a computer
peripherals company and served as its Chief Executive Officer from 1990 to 1996.
Mr. Chen serves on the Board of Directors of several private companies. Mr. Chen
has a B.S. degree in Aeronautical Engineering from Chenkung University, Taiwan
and an M.S. in Electrical Engineering from Loyola Marymount University.
B.J. Moore has served as a director of AXT since February 1998. Since 1991,
Mr. Moore has been self-employed as a consultant and has served as a director to
several technology-based companies. Mr. Moore currently serves on the Board of
Directors for Adaptec, Inc., a computer peripherals company and Dionex
Corporation, an ion chromatography systems company, as well as several private
companies. From 1986 to 1991, Mr. Moore served as President and Chief Executive
Officer of Outlook Technology, an electronics test equipment company. Mr. Moore
holds a B.S. and an M.S. degree in Electrical Engineering from the University of
Tennessee.
Donald L. Tatzin has served as a director of AXT since February 1998. Since
1993, Mr. Tatzin has served as Executive Vice President of Showboat, Inc., a
gaming company. In addition, Mr. Tatzin served as a director for Sydney Harbour
Casino, an Australian gaming company from 1995 to 1996 and as its Chief
Executive Officer from April to October 1996. Prior to that, Mr. Tatzin was a
director and consultant with Arthur D. Little, Inc., from 1976 to 1993. Mr.
Tatzin holds an S.B. in Economics and an S.B. and masters degrees in City
Planning from the Massachusetts Institute of Technology and an M.S. in Economics
from Australian National University.
ITEM 2. PROPERTIES
In the third quarter of 1998, we completed the expansion of our
approximately 50,000 square foot facility located in Fremont, California by
approximately 30,000 square feet to meet anticipated production needs through
1999. Additionally, in connection with further expanding our manufacturing
capacity, we purchased an additional 58,000 square foot facility in Fremont,
California and a 30,000 square foot facility in Beijing, China in 1998.
ITEM 3. LEGAL PROCEEDINGS
In October 1998, a vendor submitted a claim against us to the Arbitration
Commission in Shenzhen, China, alleging that we failed to honor our obligation
to take delivery of the full quantity of Ge under a purchase contract with the
vendor. We believe that this action is without merit and will continue to
vigorously defend our position. We expect the cost of defending this matter will
not materially adversely affect our operating results through fiscal 1999.
However, there can be no assurance that our defense of this matter will be
successful.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
12
<PAGE> 14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
AXT common stock has been trading publicly on the Nasdaq National Market
under the symbol "AXTI" since May 20, 1998, the date we consummated our initial
public offering. The following table sets forth, for the periods indicated, the
range of quarterly high and low closing sales prices for AXT's common stock on
the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
FISCAL 1998
January 1, 1998 through May 19, 1998..................... Not Applicable
May 20, 1998 through June 30, 1998....................... $15.000 $10.125
Third Quarter ended September 30, 1998................... 15.500 7.000
Fourth Quarter ended December 31, 1998................... 10.813 6.000
</TABLE>
As of December 31, 1998, there were 181 holders of record of our common
stock. Because many shares of AXT's common stock are held by brokers and other
institutions on behalf of stockholders, we are unable to estimate the total
number of stockholders represented by these record holders.
We have never paid or declared any cash dividends on our common stock and
do not anticipate paying cash dividends in the foreseeable future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1994 1995 1996 1997 1998
------ ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Product revenues................................ $5,666 $11,520 $14,222 $23,014 $41,493
Contract revenues............................... 1,791 2,958 2,005 2,321 1,797
------ ------- ------- ------- -------
Total revenues.......................... 7,457 14,478 16,227 25,335 43,290
Cost of revenues:
Cost of product revenues........................ 3,091 6,030 9,270 13,674 24,550
Cost of contract revenues....................... 1,422 2,234 795 1,553 804
------ ------- ------- ------- -------
Total cost of revenues.................. 4,513 8,264 10,065 15,227 25,354
------ ------- ------- ------- -------
Gross profit...................................... 2,944 6,214 6,162 10,108 17,936
Operating expenses:
Selling, general and administrative............... 921 1,716 2,033 2,959 5,016
Research and development.......................... 149 448 592 1,289 2,504
------ ------- ------- ------- -------
Total operating expenses................ 1,070 2,164 2,625 4,248 7,520
------ ------- ------- ------- -------
Income from operations............................ 1,874 4,050 3,537 5,860 10,416
Interest expense.................................. (3) (12) (170) (570) (781)
Interest and other income (expense)............... 65 282 (72) (34) 568
------ ------- ------- ------- -------
Income before provision for income taxes.......... 1,936 4,320 3,295 5,256 10,203
Provision for income taxes........................ 775 1,581 1,249 1,998 3,877
------ ------- ------- ------- -------
Net income........................................ $1,161 $ 2,739 $ 2,046 $ 3,258 $ 6,326
====== ======= ======= ======= =======
Basic net income per share........................ $ 0.44 $ 0.97 $ 0.71 $ 1.11 $ 0.42
====== ======= ======= ======= =======
Diluted net income per share...................... $ 0.10 $ 0.23 $ 0.17 $ 0.25 $ 0.42
====== ======= ======= ======= =======
Shares used in basic net income per share
calculations.................................... 2,634 2,821 2,882 2,938 14,928
Shares used in diluted net income per
share calculations.......... 11,676 11,813 11,811 12,839 15,177
</TABLE>
13
<PAGE> 15
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1994 1995 1996 1997 1998
------ ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments..................................... $1,446 $ 835 $ 756 $ 3,054 $16,122
Working capital................................... 2,859 3,760 5,542 14,209 41,068
Total assets...................................... 5,757 11,316 17,384 30,613 75,023
Long-term debt, net of current portion............ -- 2,350 5,582 7,728 16,347
Stockholders' equity.............................. 4,213 7,005 8,999 18,591 51,168
</TABLE>
14
<PAGE> 16
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations includes a number of forward-looking statements which
reflect current views with respect to future events and financial performance.
These forward-looking statements are subject to certain risks and uncertainties,
including those discussed in the "Factors Affecting Future Results" and
elsewhere in this report that could cause actual results to differ materially
from historical results or those anticipated. In this report, the words
"anticipates," "believes," "expects," "future," "intends," and similar
expressions identify forward-looking statements. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date hereof.
RESULTS OF OPERATIONS
Overview
We use a proprietary VGF technique to produce high-performance compound
semiconductor substrates for use in a variety of electronic and opto-electronic
applications. We were founded in 1986 and commenced product sales in 1990. We
currently sell GaAs, InP and GaN substrates to manufacturers of semiconductor
devices for use in applications such as wireless and fiber optic
telecommunications, lasers, LEDs, and consumer electronics. We also sell Ge
substrates for use in satellite solar cells.
We have been profitable on an annual basis since 1990 and our total
revenues were $16.2 million, $25.3 million and $43.3 million for the years ended
December 31, 1996, 1997 and 1998, respectively. Total revenues consist of
product revenues and contract revenues. Our product revenues were $14.2 million,
$23.0 million and $41.5 million for the years ended December 31, 1996, 1997 and
1998, respectively. Product revenues are generally recognized upon shipment of
products to customers. Historically, virtually all of our product revenues have
been derived from sales of GaAs substrates, which, in the years ended December
31, 1997 and 1998, accounted for 95.0% and 81.8%, respectively, of the our
product revenues. We began selling InP and Ge substrates to our customers in
late 1997 and GaN substrates in late 1998.
Our contract revenues were $2.0 million, $2.3 million and $1.8 million for
the years ended December 31, 1996, 1997 and 1998, respectively. Contract
revenues are recognized under the percentage of completion method and related
research costs are included in cost of contract revenues. Contract revenues
consist of research and development contracts with U.S. government agencies and
customer-funded research projects. The largest of the government contracts was a
four-year U.S. Department of Defense Title III Program for development of GaAs
substrates (the "Title III GaAs contract"), which was awarded to us in March
1994 and under which we were paid an aggregate of $6.1 million. The Title III
GaAs contract was completed in 1998. We retain rights to the VGF and wafer
fabrication technology developed under these government and customer-funded
research contracts and are therefore able to leverage these programs to continue
to broaden our product and technology offerings.
In 1995, we established a wholly-owned subsidiary in Japan to distribute
our products. This subsidiary serves primarily as a direct sales and support
office for our customers in Japan. We also utilize independent sales
representatives in France, Japan, South Korea, Taiwan and the United Kingdom.
Domestic sales are generated by our direct sales force. International sales,
excluding Canada, accounted for 35.0%, 34.1% and 28.8% of total revenues for the
years ended December 31, 1996, 1997 and 1998, respectively. Except for sales in
Japan, which are denominated in yen, we denominate and collect our international
sales in U.S. dollars. Doing business in Japan subjects us to fluctuations in
exchange rates between the U.S. dollar and the Japanese yen. We incurred foreign
exchange losses of $114,000, $186,000 and $24,000 for the years ended December
31, 1996, 1997 and 1998, respectively. During the year ended December 31, 1998,
we bought foreign exchange contracts to hedge against certain trade accounts
receivable in Japanese yen. The outstanding commitments with respect to such
foreign exchange contracts had a total value of approximately $1.6 million as of
December 31, 1998.
Since July 1996, we have conducted all of our operations in a 50,000 square
foot office and production facility located in Fremont, California. Prior to
transitioning our manufacturing operations to this facility, we
15
<PAGE> 17
leased a 20,000 square foot manufacturing facility in Dublin, California. In
late 1998, we expanded the size of our current manufacturing facility by
approximately 30,000 square feet to meet our anticipated future production needs
through 1999. In June 1998, we purchased an additional 58,000 square foot
facility in Fremont, California directly across the street from our existing
manufacturing facility and moved marketing, sales, engineering and
administrative personnel into a portion of the building. We believe that this
new facility will not be used for production of substrates prior to the end of
1999. In January 1999, we announced we had received a business license for
operations in Beijing, China and had purchased a 30,000 square foot facility in
a major tax-free industrial park in Beijing. This facility is expected to be
operational during the second quarter of 1999. We expect that our proprietary
VGF crystal growth operations will continue to be housed in Fremont, California,
and our other manufacturing operations will be conducted in both Fremont and
Beijing.
In connection with the granting of stock options, we recorded aggregate
deferred compensation of $322,000 and $203,000, representing the difference
between the deemed fair value of the Common Stock for accounting purposes and
the option exercise price at the date of grant for the years ended December 31,
1997 and 1998, respectively. This deferred compensation will be amortized over
the vesting period of the applicable options of which $102,000 and $96,000 was
amortized during the years ended December 31, 1997 and 1998, respectively.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
total revenues for the periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Revenues:
Product revenues.......................................... 87.6% 90.8% 95.8%
Contract revenues......................................... 12.4 9.2 4.2
----- ----- -----
Total revenues.................................... 100.0 100.0 100.0
Cost of revenues:
Cost of product revenues.................................. 57.1 54.0 56.7
Cost of contract revenues................................. 4.9 6.1 1.9
----- ----- -----
Total cost of revenues............................ 62.0 60.1 58.6
----- ----- -----
Gross margin................................................ 38.0 39.9 41.4
Operating expenses:
Selling, general and administrative....................... 12.5 11.7 11.5
Research and development.................................. 3.6 5.1 5.8
----- ----- -----
Total operating expenses.......................... 16.1 16.8 17.3
----- ----- -----
Income from operations...................................... 21.9 23.1 24.1
Interest expense............................................ (1.0) (2.2) (1.8)
Interest and other income (expense)......................... (0.5) (0.1) 1.3
----- ----- -----
Income before provision for income taxes.................... 20.4 20.8 23.6
Provision for income taxes.................................. 7.7 7.9 9.0
----- ----- -----
Net income.................................................. 12.7% 12.9% 14.6%
===== ===== =====
</TABLE>
16
<PAGE> 18
The following table sets forth product and contract gross profits and gross
margins for the periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1996 1997 1998
------ ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Product gross profit.................................... $4,952 $9,340 $16,943
Product gross margin.................................... 34.8% 40.6% 40.8%
Contract gross profit................................... $1,210 $ 768 $ 993
Contract gross margin................................... 60.3% 33.1% 55.3%
</TABLE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenues. Total revenues increased 70.9% from $25.3 million for the year
ended December 31, 1997 to $43.3 million for year ended December 31, 1998.
Product revenues increased 80.3% from $23.0 million for the year ended December
31, 1997 to $41.5 million for the year ended December 31, 1998. The increase in
product revenues reflected an increase in the volume of sales of GaAs and InP
substrates to existing domestic and international customers, the addition of new
customers and the introduction of Ge substrates in the fourth quarter of 1997.
Ge substrates totaled 15.6% of product revenues for the year ended December 31,
1998 compared to only 3.6% in 1997.
International revenues, excluding Canada, decreased from 34.1% of total
revenues for the year ended December 31, 1997 to 28.8% of total revenues for the
year ended December 31, 1998, primarily reflecting the introduction of Ge
substrates in late 1997, which are currently sold only to domestic customers. We
believe that Ge substrates will be sold only to U.S. customers for the
foreseeable future, which is expected to cause our international revenues to
decline as a percentage of total revenues.
Contract revenues decreased 22.6% from $2.3 million for the year ended
December 31, 1997 to $1.8 million for the year ended December 31, 1998. Contract
revenues in 1997 were higher than in 1998 primarily because we recognized
significant revenue from a $1.2 million customer-funded Ge substrates research
contract that was completed in June 1997. Contract revenues declined from 9.2%
of total revenues for the year ended December 31, 1997 to 4.2% for the year
ended December 31, 1998 as a result of product revenue growth combined with a
decline in contract revenues. In future periods, we expect contract revenues to
continue to decline as a percentage of total revenues.
Gross margin. Gross margin increased from 39.9% for the year ended December
31, 1997 to 41.4% for the year ended December 31, 1998. Product gross margin
increased slightly from 40.6% for the year ended December 31, 1997 to 40.8% for
the year ended December 31,1998, reflecting the higher yields achieved in GaAs
and InP production, partially offset by lower margins from Ge substrates.
Contract gross margins increased from 33.1% for the year ended December
31,1997 to 55.3% for the year ended December 31, 1998. This increase was due to
a shift in contract revenue mix from a lower margin customer-funded contract for
Ge substrates research completed in June 1997 to higher margin government
contracts.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 69.5% from $3.0 million for the year ended
December 31, 1997 to $5.0 million for the year ended December 31, 1998. This
increase resulted primarily from increased personnel and administrative expenses
required to support additional sales volume. Selling, general and administrative
expenses as a percentage of total revenues decreased slightly from 11.7% for the
year ended December 31,1997 to 11.5% for the year ended December 31, 1998.
Research and development expenses. Research and development expenses
increased 94.3% from $1.3 million for the year ended December 31, 1997 to $2.5
million for the year ended December 31, 1998. This increase resulted primarily
from the hiring of additional engineers and the purchase of materials to develop
new products and to enhance existing products. In addition to our funded
research and development, we incurred research and development expenses relating
to government and customer-funded research contracts, which are included in the
cost of contract revenues. For the year ended December 31, 1998, total research
and
17
<PAGE> 19
development costs, including both contract funded and internally funded research
and development expenses, totaled $3.3 million, or 7.6% of total revenues.
Interest expense. Interest expense increased from $570,000 for the year
ended December 31, 1997 to $781,000 for the year ended December 31, 1998. This
increase was primarily the result of additional borrowings in 1998 we incurred
to finance the purchase of the our new building and to finance expansion of
production facilities and related equipment purchases.
Interest and other income (expense). Interest and other income (expense)
increased from $34,000 of expense for the year ended December 31, 1997 to
$568,000 of income for the year ended December 31, 1998. This increase was
primarily the result of interest income earned on the $25.8 million in net
proceeds raised from our initial public offering in May 1998.
Provision for Income Taxes. Income tax expense remained at 38.0% of income
before provision for income taxes for the years ended December 31, 1997 and
1998.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues. Total revenues increased 56.1% from $16.2 million for the year
ended December 31, 1996 to $25.3 million for the year ended December 31, 1997.
Product revenues increased 61.8% from $14.2 million for the year ended December
31, 1996 to $23.0 million for the year ended December 31, 1997. The increase in
product revenues reflected an increase in the volume of sales of GaAs substrates
to existing domestic and international customers, sales to new customers and the
introduction of Ge substrates in the fourth quarter of 1997.
International revenues, excluding Canada, decreased from 35.0% of total
revenues for the year ended December 31, 1996 to 34.1% of total revenues for the
year ended December 31, 1997, primarily reflecting the introduction of Ge
substrates in late 1997, which were sold only to U.S. customers.
Contract revenues increased 15.8% from $2.0 million for the year ended
December 31, 1996 to $2.3 million for the year ended December 31, 1997. This
increase was primarily due to revenues recognized from a $1.2 million
customer-funded Ge substrates research contract that was completed in 1997. This
increase was partially offset by a reduction in government contract revenues.
Contract revenues declined from 12.4% of total revenues for the year ended
December 31, 1996 to 9.2% for the year ended December 31, 1997 as a result of
product revenue growth exceeding contract revenue growth.
Gross margin. Gross margin increased from 38.0% for the year ended December
31, 1996 to 39.9% for the year ended December 31, 1997. Product gross margin
increased from 34.8% for the year ended December 31, 1996 to 40.6% for the year
ended December 31, 1997. The lower product gross margin in 1996 resulted
primarily from duplicate expenses of approximately $500,000 due to simultaneous
operations of two facilities and manufacturing inefficiencies relating to the
transition to our new production facility.
Contract gross margin declined from 60.3% for the year ended December 31,
1996 to 33.1% for the year ended December 31, 1997. This decrease was due to a
shift in contract revenue mix from higher margin government research contracts
in 1996 to a lower margin customer-funded contract for Ge substrates research.
In addition, in 1996 gross margin was favorably impacted by large incentive
awards which we were paid upon completion of certain milestones of the Title III
GaAs contract.
Selling, general and administrative expenses Selling, general and
administrative expenses increased 45.5% from $2.0 million for the year ended
December 31, 1996 to $3.0 million for the year ended December 31, 1997. This
increase resulted primarily from increased domestic and international sales
personnel and administrative expenses required to support increased sales
volume.
Research and development expenses. Research and development expenses
increased 117.7% from $592,000 for the year ended December 31, 1996 to $1.3
million for the year ended December 31, 1997. This increase resulted primarily
from the hiring of additional engineers to develop new products and to enhance
existing products. For the year ended December 31, 1997, total research and
development costs, including
18
<PAGE> 20
both contract funded and internally funded research and development expenses,
totaled $2.8 million, or 11.2% of total revenues.
Interest expense. Interest expense increased from $170,000 for the year
ended December 31, 1996 to $570,000 for the year ended December 31, 1997. This
increase resulted primarily from additional borrowings incurred in 1996 to
finance our new manufacturing facility, the expansion of production facilities
in 1997 and related equipment purchases.
Interest and other income (expense). Interest and other income (expense)
decreased from $72,000 of expense for the year ended December 31, 1996 to
$34,000 of expense for the year ended December 31, 1997. This decrease was due
to higher interest income generated on investments from the proceeds of a $5.9
million private equity financing completed in March 1997, partially offset by
foreign currency transaction losses incurred due to the increase in the value of
the U.S. dollar compared to the Japanese yen.
Provision for income taxes. Income tax expense was virtually unchanged from
37.9% of income before provision for income taxes for the year ended December
31, 1996 to 38.0% of income before provision for income taxes for the year ended
December 31, 1997.
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly results in dollars for
the eight quarters ended December 31, 1998. We believe that all necessary
adjustments, consisting only of normal recurring adjustments, have been included
in the amounts stated below to present fairly such quarterly information. The
operating results for any quarter are not necessarily indicative of results for
any subsequent period.
<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997 1998 1998 1998 1998
-------- -------- --------- -------- -------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Product revenues.............. $4,494 $5,360 $6,060 $7,100 $9,238 $10,293 $10,887 $11,074
Contract revenues............. 600 842 447 432 492 497 508 301
------ ------ ------ ------ ------ ------- ------- -------
Total revenues......... 5,094 6,202 6,507 7,532 9,730 10,790 11,395 11,375
Cost of revenues:
Cost of product revenues...... 2,805 3,167 3,604 4,098 5,460 6,139 6,684 6,267
Cost of contract revenues..... 498 654 210 191 265 218 157 164
------ ------ ------ ------ ------ ------- ------- -------
Total cost of 3,303 3,821 3,814 4,289 5,725 6,357 6,841 6,431
revenues.............
------ ------ ------ ------ ------ ------- ------- -------
Gross profit.................... 1,791 2,381 2,693 3,243 4,005 4,433 4,554 4,944
Operating expenses:
Selling, general and 642 674 703 940 966 1,119 1,110 1,821
administrative..............
Research and development...... 222 296 306 465 640 669 736 459
------ ------ ------ ------ ------ ------- ------- -------
Total operating 864 970 1,009 1,405 1,606 1,788 1,846 2,280
expenses.............
------ ------ ------ ------ ------ ------- ------- -------
Income from operations.......... 927 1,411 1,684 1,838 2,399 2,645 2,708 2,664
Interest expense................ (115) (151) (158) (146) (181) (157) (169) (273)
Interest and other income (91) 77 (8) (12) 21 (25) 206 365
(expense).....................
------ ------ ------ ------ ------ ------- ------- -------
Income before provision for 721 1,337 1,518 1,680 2,239 2,463 2,745 2,756
income taxes..................
Provision for income taxes...... 274 508 577 639 854 943 1,037 1,043
------ ------ ------ ------ ------ ------- ------- -------
Net income...................... $ 447 $ 829 $ 941 $1,041 $1,385 $ 1,520 $ 1,708 $ 1,713
====== ====== ====== ====== ====== ======= ======= =======
</TABLE>
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<PAGE> 21
The following table sets forth selected consolidated financial information
as a percentage of total revenues for each of our last eight quarters.
<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997 1998 1998 1998 1998
-------- -------- --------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Product revenues.............. 88.2% 86.4% 93.1% 94.3% 94.9% 95.2% 95.5% 97.4%
Contract revenues............. 11.8 13.6 6.9 5.7 5.1 4.8 4.5 2.6
------ ------ ------ ------ ------ ------- ------- -------
Total revenues......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
Cost of product revenues...... 55.0 51.1 55.4 54.4 56.1 56.9 58.6 55.1
Cost of contract revenues..... 9.8 10.5 3.2 2.5 2.7 2.0 1.4 1.4
------ ------ ------ ------ ------ ------- ------- -------
Total cost of 64.8 61.6 58.6 56.9 58.8 58.9 60.0 56.5
revenues.............
------ ------ ------ ------ ------ ------- ------- -------
Gross margin.................... 35.2 38.4 41.4 43.1 41.2 41.1 40.0 43.5
Operating expenses:
Selling, general and 12.6 10.8 10.8 12.5 9.9 10.4 9.7 16.0
administrative..............
Research and development...... 4.4 4.8 4.7 6.2 6.6 6.2 6.5 4.0
------ ------ ------ ------ ------ ------- ------- -------
Total operating 17.0 15.6 15.5 18.7 16.5 16.6 16.2 20.0
expenses.............
------ ------ ------ ------ ------ ------- ------- -------
Income from operations.......... 18.2 22.8 25.9 24.4 24.7 24.5 23.8 23.5
Interest expense................ (2.3) (2.4) (2.4) (1.9) (1.9) (1.5) (1.5) (2.4)
Interest and other income (1.7) 1.2 (0.2) (0.2) 0.2 (0.2) 1.8 3.2
(expense).....................
------ ------ ------ ------ ------ ------- ------- -------
Income before provision for 14.2 21.6 23.3 22.3 23.0 22.8 24.1 24.3
income taxes..................
Provision for income taxes...... 5.4 8.2 8.9 8.5 8.8 8.7 9.1 9.2
------ ------ ------ ------ ------ ------- ------- -------
Net income...................... 8.8% 13.4% 14.4% 13.8% 14.2% 14.1% 15.0% 15.1%
====== ====== ====== ====== ====== ======= ======= =======
</TABLE>
The following table sets forth product and contract gross profits and gross
margins for the eight quarters ended December 31, 1998.
<TABLE>
<CAPTION>
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997 1998 1998 1998 1998
-------- -------- --------- -------- -------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Product gross profit............ $1,689 $2,193 $2,456 $3,002 $3,778 $ 4,154 $ 4,203 $ 4,807
Product gross margin............ 37.6% 40.9% 40.5% 42.3% 40.9% 40.4% 38.6% 43.4%
Contract gross profit........... $ 102 $ 188 $ 237 $ 241 $ 227 $ 279 $ 351 $ 137
Contract gross margin........... 17.0% 22.3% 53.0% 55.8% 46.1% 56.1% 69.1% 45.5%
</TABLE>
Our total revenues have increased in each of the eight quarters ended
December 31, 1998, except for the quarter ended December 31, 1998, which was
comparable to the prior quarter. These quarterly increases reflect increased
product shipments to both the semi-insulating and semi-conducting GaAs and InP
markets and the introduction of Ge substrates in the quarter ended December 31,
1997. In the quarter ended December 31, 1998, revenues from the sales of Ge
substrates declined by $1.2 million from the prior quarter as a result of a
major customer having excess inventory and deferring shipments. This decline in
revenues was offset by a $1.2 million increase in GaAs shipments due primarily
to increased orders from Southeast Asia for semi-conducting substrates. Contract
revenues increased in the quarters ended March 31 and June 30, 1997 primarily as
a result of revenues recognized from a $1.2 million customer-funded Ge
substrates research contract. Contract revenues decreased in the quarter ended
December 31, 1998 due primarily to the temporary reduction in the level of work
performed on contracts in progress.
We experienced higher product gross margins in the four quarters of 1997
primarily as a result of better product yields achieved from the new production
facility completed in 1996 and improved manufacturing efficiencies from larger
production volumes. In addition, due to a recycling program implemented in the
quarter ended December 31, 1997, we were able to recycle scrapped inventory that
had accumulated over prior quarters. This recycling program had a significant
positive impact on the product gross margin for the quarter ended December 31,
1997. While we will continue the recycling program, we expect the program to
have a less significant impact on product gross margins in the future as
evidenced by the decline in product gross
20
<PAGE> 22
margins for March 31, 1998. The increase in the overall product gross margin in
the quarter ended December 31, 1997 was partially offset by lower product gross
margins from sales of Ge substrates, which have lower gross margins than GaAs
and InP substrates. The decrease in the overall product gross margins for the
first three quarters of 1998 was primarily due to an increase in sales of Ge
substrates. We experienced significantly lower contract gross margins for the
quarters ended March 31, 1997 and June 30, 1997 due to a shift in contract
revenue mix from higher margin government research contracts in prior quarters
to a lower margin customer-funded contract for Ge substrates research. The
decrease in contract gross margin from the quarter ended December 31, 1997 to
the quarter ended March 31, 1998 was due to a shift in contract revenue mix from
higher margin government research contracts in prior quarters to a lower margin
cost sharing contract for InP substrates research. Contract gross margin in the
quarter ended September 30, 1998 was favorably impacted by the recognition of
certain performance incentives under the Title III GaAs contract. The lower
contract gross margin in the quarter ended December 31, 1998 was primarily due
to the lower margin on the cost sharing contract for InP substrates research.
Selling, general and administrative expenses for the quarter ended December
31, 1997 were higher than the quarters ended June 30 and September 30, 1997, as
we built our management infrastructure to support its increased sales volume.
Selling, General and administrative expenses for the quarter ended December 31,
1998 were significantly higher than the previous three quarters due primarily to
increases in our bad debt allowance to cover exposure from increased
international sales and for legal expenses in connection with an arbitration
case.
Research and development expenses for the four quarters ended September 30,
1998 significantly increased over the prior three quarters ended September 30,
1997, primarily due to increased new product research and materials purchased
for research on InP substrates. Research and development expenses for the
quarter ended December 31, 1998 decreased primarily due to lower material
purchases for three research projects.
We believe that our quarterly and annual revenues, expenses and operating
results could vary significantly in the future and that period-to-period
comparisons should not be relied upon as indications of future performance.
There can be no assurance that our revenues will grow in future periods or that
it will sustain its level of total revenues or its rate of revenue growth on a
quarterly or annual basis. We may, in some future quarter, have operating
results that will be below the expectations of stock market analysts and
investors. In such event, the price of the our common stock could be materially
adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
During the past five years, we have funded our operations primarily from
cash provided by operations, short-term and long-term borrowings and a private
financing of $5.9 million for preferred stock completed in March 1997. We
completed our initial public offering in May 1998, and raised net proceeds of
approximately $25.8 million. As of December 31, 1998, we had working capital of
$40.8 million, including cash and cash equivalents of $16.1 million, compared to
working capital at December 31, 1997 of $14.2 million, including cash of $3.1
million, and compared to working capital at December 31, 1996 of $5.5 million,
including cash of $756,000.
During the year ended December 31, 1996, net cash provided by operations of
$474,000 was due primarily to net income of $2.0 million, depreciation of
$867,000 and an increase in accounts payable and accrued liabilities of
$629,000, offset in part by increases in inventory of $2.3 million, and accounts
receivable and other assets of $727,000. The increase in inventory was primarily
due to increases in raw material and work-in-process inventory to provide an
adequate supply of material in anticipation of large orders for the upcoming
year. These inventory increases resulted in a decrease in the inventory turnover
ratio from 4.5 turns per year at December 31, 1995 to 3.3 turns per year at
December 31, 1996. The increase in accounts receivable was primarily a result of
increased sales in Japan, which generally have longer payment cycles. The
increase in sales to Japan also adversely impacted days sales outstanding, which
increased from 49 days at December 31, 1995 to 60 days at December 31, 1996.
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<PAGE> 23
During the year ended December 31, 1997, net cash used in operations of
$1.2 million was primarily due to increases in inventory of $4.4 million and
accounts receivable of $3.0 million, offset in part by net income of $3.3
million, depreciation of $1.2 million and increases in accounts payable and
accrued liabilities of $1.6 million. The increase in inventory during this
period included additional Ge inventory, which primarily resulted in a decrease
in the inventory turnover ratio from 3.3 turns per year at December 31, 1996 to
2.2 turns per year at December 31, 1997. The increases in accounts payable and
accrued liabilities, accounts receivable and inventory were primarily the result
of a 56.1% increase in revenues from the prior year. In addition, accounts
receivable increased due to the increase in international revenues, which
historically have longer payment cycles. This increase in payment cycles
resulted in an increase in days sales outstanding from 60 days at December 31,
1996 to 64 days at December 31, 1997.
During the year ended December 31, 1998, net cash used in operations of
$6.3 million was primarily due to increases in inventory of $12.2 million,
accounts receivable of $2.9 million and prepaid and other assets of $1.6
million, offset in part by net income of $6.3 million, depreciation of $2.0
million, and increases in accounts payable of $1.7 million and accrued
liabilities of $496,000. The increases in accounts receivable, inventory and
accounts payable were primarily the result of the 70.9% increase in total
revenues from the prior year. In addition, inventory increased due to our
decision to maintain the Ge substrates production line during the fourth quarter
of 1998 in anticipation of future large orders, although shipments to a large
customer had been deferred. Accordingly, the inventory turnover ratio declined
from 2.2 turns per year at December 31, 1997 to 1.7 turns per year at December
31, 1998. The increase in prepaid and other assets was due primarily to deposits
on manufacturing equipment and materials for our new Beijing, China facility and
U.S. operations and for increases in prepaid insurance, taxable bond fees and
bank fees. The increase in accrued liabilities was the result of an increase in
legal expenses in connection with an arbitration case, and higher vacation and
payroll expenses due to the increased number of personnel. Days sales
outstanding decreased from 64 days at December 31, 1997 to 62 days at December
31, 1998, reflecting improved collection efforts.
Net cash used in investing activities was $3.9 million, $4.9 million, and
$16.4 million for the years ended December 31, 1996, 1997 and 1998,
respectively, which amounts were attributed in each period to the purchase of
property, plant and equipment. For the year ended December 31, 1998, the
property acquired included our new 58,000 square foot building at a cost of $9.0
million and the 30,000 square foot addition for $2.0 million.
Net cash provided by financing activities was $3.5 million, $8.4 million
and $35.5 million for the years ended December 31, 1996, 1997 and 1998,
respectively. For the year ended December 31, 1996, net cash provided by
financing activities resulted primarily from long-term borrowings of $3.5
million to complete our manufacturing facility. For the year ended December 31,
1997, net cash provided by financing activities resulted primarily from the
issuance of $5.9 million of preferred stock and $2.7 million for long-term bank
borrowings, partially offset by the repayment of $300,000 of short-term
borrowings. For the year ended December 31, 1998, net cash provided by financing
activities consisted primarily of net proceeds of $25.8 million from our initial
public offering and long-term net borrowings of $9.6 million. Long-term net
borrowings reflected the issuance of $11.6 million in taxable variable rate
revenue bonds in November 1998 and equipment loans in the amount of $2.3 million
less repayment of existing long-term debts in the amount of $4.3 million.
Long-term borrowings were used for the purchase of the new 58,000 square foot
facility, for construction of the additional 30,000 square foot manufacturing
space and related equipment.
We have generally financed our equipment purchases through secured
equipment loans over five-year terms at interest rates ranging from 6.0% to 9.0%
per annum. Our manufacturing facilities have been financed by long-term
borrowings, which were repaid by the taxable variable rate revenue bonds in
1998, except for a $1.0 million SBA loan. The SBA loan has an interest rate of
7.3% per annum, matures in 2016 and is subordinated to the taxable variable rate
revenue bonds. The taxable variable rate revenue bonds have a term of 25 years
and mature in 2023 with an interest rate at 200 basis points below the prime
rate and are traded in the public market. Repayment of principal and interest
under the bonds is secured by a letter of credit from our bank and is paid on a
quarterly basis. We have the option to redeem in whole or in part the bonds
during their term. At December 31, 1998, $11.6 million was outstanding under the
taxable variable rate revenue bonds.
22
<PAGE> 24
We currently have a $15.0 million line of credit with a commercial bank at
an interest rate equal to the prime rate plus one-half percent. This line of
credit is secured by all business assets, less equipment, and expires in May
1999. This line of credit is subject to certain financial covenants regarding
current financial ratios and cash flow requirements, which were met as of
December 31, 1998. We must obtain the lender's approval to obtain additional
borrowings or to further pledge our assets, except for borrowings secured by the
pledge of equipment or obtained in the normal course of business. At December
31, 1998, no amount was outstanding under the $15.0 million line of credit.
We anticipate that the combination of existing working capital and the
borrowings available under current credit agreements will be sufficient to fund
working capital and capital expenditure requirements for the next 12 months. Our
future capital requirements will depend on many factors, including the rate of
revenue growth, our profitability, the timing and extent of spending to support
research and development programs, the expansion of selling and marketing and
administrative activities, and market acceptance of our products. We expect that
we may need to raise additional equity or debt financing in the future, although
we are not currently negotiating for additional financing nor do we have any
plans to obtain additional financing at this time. There can be no assurance
that additional equity or debt financing, if required, will be available on the
acceptable terms or at all. If we are unable to obtain such additional capital,
if needed, we may be required to reduce the scope of our planned product
development and selling and marketing activities, which would have a material
adverse effect on our business, financial condition and results of operations.
In the event that we do raise additional equity financing, further dilution to
our investors will result.
YEAR 2000 READINESS
Some computers, software, and other equipment include computer code in
which calendar year data is abbreviated to only two digits. As a result of this
design decision, some of these systems could fail to operate or fail to produce
correct results if "00" is interpreted to mean 1900, rather than 2000. These
problems are widely expected to increase in frequency and severity as the year
2000 approaches, and are commonly referred to as the "year 2000 problem."
Assessment. The year 2000 problem affects the computers, software and other
equipment that we use, operate or maintain for our operations. Accordingly, we
have organized a program team responsible for monitoring the assessment and
remediation status of our year 2000 projects and reporting such status to our
board of directors. This project team is currently assessing the potential
effect and costs of remediating the year 2000 problem for our internal systems.
To date, we have obtained verification or validation from our significant
equipment and system vendors that the software programs and applications and
related hardware that we use, operate or maintain for our operations are
compliant with the year 2000.
Internal infrastructure. We believe that we have identified and evaluated
all of the major computers, software applications and related equipment used in
connection with our internal operations to determine if they must be modified,
upgraded or replaced to minimize the possibility of a material disruption to our
business. We are in the process of modifying, upgrading, and replacing major
systems that have been assessed as adversely affected, and expect to complete
this process before the end of fiscal 1999. As of December 31, 1998, we have
incurred approximately $300,000 in this process.
Systems other than information technology systems. In addition to computers
and related systems, the operation of office and facilities equipment, such as
fax machines, telephone switches, security systems, and other common devices may
be affected by the year 2000 problem. We are currently assessing the potential
effect and costs of remediating the year 2000 problem on our office equipment at
our facilities in Fremont, California. We estimate the total cost to us of
completing any required modifications, upgrades or replacements of our internal
systems will not exceed $100,000, almost all of which we believe will be
incurred during 1999. This estimate is being monitored and we will revise it as
additional information becomes available.
Based on the activities described above, we do not believe that the year
2000 problem will have a material adverse effect on our business or operating
results.
23
<PAGE> 25
Suppliers. We are in the process of contacting third-party suppliers of
components used in the manufacture of our products to identify and, to the
extent possible, resolve issues involving the year 2000 problem. However, we
have limited or no control over the actions of these third-party suppliers.
Thus, while we expect that we will be able to resolve any significant year 2000
problems with these third parties, there can be no assurance that these
suppliers will resolve any or all year 2000 problems before the occurrence of a
material disruption to the operation of our business. Any failure of these third
parties to timely resolve year 2000 problems with their systems could have a
material adverse effect on our business, operating results and financial
condition.
Most likely consequences of year 2000 problems. We expect to identify and
resolve all year 2000 problems that could materially adversely affect our
business operations. However, we believe that it is not possible to determine
with complete certainty that all year 2000 problems affecting us have been
identified or corrected. The number of devices that could be affected and the
interactions among these devices are simply too numerous. In addition, no one
can accurately predict how many year 2000 problem-related failures will occur or
the severity, duration, or financial consequences of these perhaps inevitable
failures. As a result, we believe that the following consequences are possible:
- a significant number of operational inconveniences and inefficiencies for
us, our contract manufacturers and our customers that will divert
management's time and attention and financial and human resources from
ordinary business activities;
- business disputes and claims for pricing adjustments or penalties due to
year 2000 problems by our customers, which we believe will be resolved in
the ordinary course of business; and
- business disputes alleging that we failed to comply with the terms of
contracts or industry standards of performance, some of which could
result in litigation or contract termination.
Contingency plans. We are currently developing contingency plans to be
implemented if our efforts to identify and correct year 2000 problems affecting
our internal systems are not effective. We expect to complete our contingency
plans by the end of August 1999. Depending on the systems affected, these plans
could include:
- accelerated replacement of affected equipment or software; short- to
medium-term use of backup equipment and software; increased work hours
for our personnel; and use of contract personnel to correct on an
accelerated schedule any year 2000 problems that arise or to provide
manual workarounds for information systems.
Our implementation of any of these contingency plans could have a material
adverse effect on our business, operating results and financial condition.
Disclaimer. The discussion of our efforts and expectations relating to year
2000 compliance are forward-looking statements. Our ability to achieve year 2000
compliance and the level of incremental costs associated therewith, could be
adversely affected by, among other things, the availability and cost of
programming and testing resources, third party suppliers' ability to modify
proprietary software, and unanticipated problems identified in the ongoing
compliance review.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 established a new model for
accounting for derivatives and hedging activities and supersede and amend a
number of existing accounting standards. SFAS 133 requires that all derivative
be recognized in the balance sheet at their fair market value. In addition,
corresponding derivative gains and losses should be either reported in the
statement of operations or stockholders' equity, depending on the type of
hedging relationship that exists with respect to such derivatives. Adopting the
provisions of SFAS 133, which will be effective in fiscal year 2000, is not
expected to have a material effect on the Company's consolidated financial
statements.
24
<PAGE> 26
FACTORS AFFECTING FUTURE RESULTS
In addition to the other information in this report, the following factors
should be considered carefully in evaluating our business before purchasing
shares of our stock.
A number of factors could cause our quarterly financial results to be worse
than expected, resulting in a decline in our stock price. Although we have been
profitable on an annualized basis since 1990, due to the foregoing factors, we
believe that period-to-period comparisons of our operating results cannot be
relied upon as an indicator of our future performance. It is likely that in some
future quarter, our operating results may be below the expectations of public
market analysts or investors. If this occurs, the price of our common stock
would likely decrease. For more information regarding our results, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
Our quarterly and annual revenues and operating results have varied
significantly in the past and may vary significantly in the future due to a
number of factors, including:
- fluctuations in demand for our substrates due to reduction in the value
of Asian currencies and the turmoil in the Asian financial markets;
- our expense levels and expected research and development requirements;
- our ability to develop and bring to market new products on a timely
basis;
- the volume and timing of orders from our customers;
- the availability of raw materials;
- fluctuations in manufacturing yields;
- our manufacturing expansion in Beijing, China;
- changes in the unit of products sold;
- introduction of products and technologies by our competitors; and
- costs relating to possible acquisitions and integration of technologies
or businesses.
For more information regarding our results, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
VGF is a new technique for producing substrates which must achieve
widespread acceptance if we are to succeed. We believe that our competitors
principally utilize the traditional LEC or HB crystal growing processes for
producing semi-insulating and semi-conducting GaAs substrates. We further
believe that we are the only high-volume supplier of semi-insulating and
semi-conducting GaAs substrates which utilize the VGF technique, a newer
technology than either the LEC or HB techniques. We cannot assure you that our
current customers will continue to use our VGF-produced substrates or that
additional companies will purchase our products manufactured from the VGF
technique. Failure to gain increased market acceptance of our VGF technique by
either current or prospective customers could materially adversely affect our
operating results.
A significant portion of our prospective customers are wireless
communications manufacturers, fiber optic communications manufacturers and
manufacturers of other high-speed semiconductor devices that use GaAs substrates
produced using either the LEC or HB techniques. To establish the VGF technique
as a preferred process for producing substrates for prospective customers, we
must offer products with superior prices and performance on a timely basis and
in sufficient volumes. We must also overcome the reluctance of these customers
to purchase our GaAs substrates due to possible perceptions of risks relating to
concerns about the quality and cost-effectiveness of our GaAs substrates when
compared to substrates produced by the traditional LEC or HB techniques. In
addition, potential GaAs substrate customers may be reluctant to rely on a
relatively small company for critical materials used to manufacture their
semiconductor devices.
If we do not achieve acceptable yields of crystals and the successful and
timely production of substrates, the shipment of our products would be delayed
and our business adversely affected. The highly complex
25
<PAGE> 27
processes of growing crystals as well as other steps involved in manufacturing
substrates which we engage in can be adversely affected by a number of factors,
including the following:
- chemical or physical defects in the crystals;
- contamination of the manufacturing environment;
- substrate breakage;
- equipment failure; and
- performance of personnel involved in the manufacturing process.
We have been adversely affected in the past due to the occurrence of a
combination of these factors which resulted in product shipment delays and
adversely affected our business.
A significant portion of our manufacturing costs are fixed. As a result, we
must increase the production volume of substrates and improve yields in order to
reduce unit costs, increase margins and maintain and improve our results of
operations. Such decreases in production volume and yields could materially
adversely affect our business, financial condition and results of operations.
In the past, we have sometimes manufactured substrates which have not met
certain customers' manufacturing process requirements. We have fixed such
occurrences through minor changes to the substrates or the manufacturing
process. Recurrence of such problems and our inability to solve them may
materially hurt our performance.
We have begun producing and shipping Ge and InP substrates in commercial
volume. We also understand that we must achieve the same manufacturing
capability for six inch GaAs wafers. We cannot assure you that we will be able
to manufacture the Ge and InP substrate or the larger GaAs substrates in
commercial volumes with acceptable yields. Our business, financial condition and
results of operations would be materially adversely affected if we experience
low yields of these substrates.
Because substantially all of our revenue is derived from sales of our GaAs
substrates, we are dependent on widespread market acceptance of these
products. We currently derive substantially all of our revenues from sales of
our GaAs substrates. We expect that revenue from GaAs substrates will account
for a significant majority of our revenues for the next several years. GaAs
substrates are primarily used in electronic applications such as wireless
communications, fiber optic communications and other high-speed semiconductor
devices, as well as in opto-electronic applications such as lasers and LEDs. If
there is a decrease in demand for GaAs substrates by semiconductor device
manufacturers or if new substrates for these electronic and opto-electronic
applications are developed and successfully introduced by competitors, our
revenues may decline and our business will be materially adversely affected.
Further, other companies, including IBM, are actively involved in
developing other devices which could provide the same high-performance, low
power capabilities as GaAs-based devices at competitive prices, such as
silicon-germanium based devices for use in certain wireless applications. If
these silicon-germanium based devices are successfully developed and are adopted
by semiconductor device manufacturers, demand for GaAs substrates could
decrease. This development could cause our revenues to fall, which could
adversely affect our business, financial condition and results of operations.
In order to be successful, we must develop and introduce in a timely manner
new substrates and continue to improve our current substrates to address
customer requirements and compete effectively on the basis of price and
performance. Recently, we have begun commercial shipments of Ge and InP
substrates and are currently developing other substrates, including gallium
phosphide and gallium nitride. Factors that may affect the success of product
improvements and product introductions include the development of markets for
such improvements and substrates, achievement of acceptable yields, price and
market acceptance. Many of these factors are beyond our control. We cannot
assure you that our product development efforts will be successful or that our
new products will achieve market acceptance. To the extent that product
improvements and new product introductions do not achieve market acceptance, our
business, financial condition and results of operations would be materially
adversely affected.
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<PAGE> 28
Our limited ability to protect our intellectual property may adversely
affect our ability to compete. We rely on a combination of patents, copyrights,
trademarks and trade secret laws and contractual restrictions on employees,
consultants and third parties from disclosure to protect our intellectual
property rights. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy or otherwise obtain and use our
products or technology. Policing unauthorized use of our products is difficult,
and we cannot be certain that the steps we have taken will prevent
misappropriation of our technology, particularly in foreign countries where the
laws may not protect our proprietary rights as fully as in the United States. We
believe that, due to the rapid pace of technological innovation in the GaAs and
other substrate markets, our ability to establish and maintain a position of
technology leadership in the industry depends more on the skills of our
development personnel than upon the legal protections afforded our existing
technologies.
To date, we have been issued one U.S. patent, which relates to the VGF
technique, and have two U.S. patent applications pending, one which relates to
the VGF technique. Additionally, we have one pending application for a Japanese
patent but no issued foreign patents. We cannot assure you that:
- the pending or any future U.S. or foreign patent applications will be
approved;
- any issued patents will protect our intellectual property;
- third parties will not challenge the ownership rights of the patents or
the validity of the patent applications;
- the patents owned by others will not have an adverse effect on our
ability to do business; or
- others will not independently develop similar or competing technology or
design around any patents issued to us.
Moreover, the laws of certain foreign countries may not lend protection to
our patents to the same extent as the laws of the United States. See
"Business-Intellectual property" for more information regarding risks relating
to protecting our intellectual property rights.
If we infringe the proprietary rights of others, we may be forced to enter
costly royalty or licensing agreements. We could in the future receive a claim
that we are infringing the patent, trademark, copyright or other proprietary
rights of other third parties. If any claims were asserted against us for
violation of patent, trademark, copyright or other similar laws as a result of
the use by us, our customers or other third parties of our products, those
claims would be costly and time-consuming to defend, would divert our
management's attention and could cause product delays. In addition, if we
discovered we violated other third party rights, we could be required to enter
into costly royalty or licensing agreements as a result of such claims. These
royalty or licensing agreements may adversely affect our operating results.
If we fail to comply with stringent environmental regulations, we may be
subject to significant fines or the cessation of our operations. We are subject
to federal, state and local environmental laws and regulations. Any failure to
comply with present or future environmental laws and regulations could result in
the imposition of significant fines on us, the suspension of production or a
cessation of operations. In addition, existing or future changes in laws or
regulations may require us to incur further significant expenditures or
liabilities, or additional restriction in our operations. For more information
regarding environmental regulations that affect our operations, see
"Business -- Environmental regulations."
We purchase critical raw materials required to grow crystals from single or
limited sources, and could lose sales if these sources fail to fill our
needs. We do not have any long-term supply contracts with any of our suppliers,
and we currently purchase raw materials required to grow crystals from single or
a limited number of suppliers. For example, we purchase a majority of the
gallium we use from Rhone-Poulenc.
Due to our reliance on a limited group of suppliers, we are exposed to
several risks such as the potential inability to obtain adequate supply of
materials, reduced control over pricing of our products and meeting customer
delivery schedules.
We have experienced delays receiving orders of certain materials due to
shortages. We may continue to experience these delays due to shortages of
materials and as a result be subject to higher costs. Although we
27
<PAGE> 29
attempt to preempt supply interruptions by maintaining adequate levels of
inventory of critical materials and attempts to obtain additional suppliers,
shortages or price increases caused by suppliers may nevertheless recur.
If we are unable to receive adequate and timely deliveries of critical raw
materials, relationships with current and future customers could be harmed,
which could materially adversely affect our business, financial condition and
results of operations.
We are subject to additional risks as a result of the recent completion of
a new manufacturing facility. In connection with further expanding our
manufacturing capacity, we purchased an additional 58,000 square foot facility
in Fremont, California and a 30,000 square foot facility in Beijing, China. in
1998. The improvements to the new facility subject us to significant risks,
including:
- unavailability or late delivery of process equipment;
- unforeseen engineering problems;
- work stoppages;
- unanticipated cost increases; and
- unexpected changes or concessions required by local, state or federal
regulatory agencies with respect to necessary licenses, land use permits
and building permits.
If any of the above occur, it could materially adversely affect operations
under the new facility which in turn would materially adversely affect our
business, financial condition and results of operations.
Finally, the operation of the new facility, together with the recent
expansion of our current facility by approximately 30,000 square feet, will also
expose us to additional risks. For example, the additional fixed operating
expenses associated with the new facility may only be offset by sufficient
increases in product revenues. We cannot assure you that the demand for our
products will grow as we currently expect, and if this does not occur, we would
not be able to offset the costs of operating the new facility, which may
materially adversely affect our results of operations.
We must effectively respond to rapid technological changes by continually
introducing new products that achieve broad market acceptance. We and our
customers compete in a market that is characterized by rapid technological
changes and continuous improvements in substrates. Accordingly, our future
success depends upon whether we can apply our proprietary VGF technique to
develop new substrates that meet the needs of customers and compete effectively
on the basis of quality, price and performance. If we are unable to timely
develop new, economically viable products that meet market demands, our revenues
will decline, which could adversely affect our results of operation and cause
the price of our stock to fall.
It is difficult to predict accurately the time required and the costs
involved in researching, developing and engineering new products. Thus, our
actual development costs could exceed budgeted amounts and our product
development schedules could require extension. We have experienced product
development delays in the past and may experience similar delays in the future
which could materially adversely affect our business. For example, our
introduction of InP substrates was delayed approximately six months as a result
of delays in the finalization of the manufacturing process for these substrates.
In addition, if we are unable to introduce reliable quality products, we could
suffer from reduced orders, higher manufacturing costs, product returns and
additional service expenses, all of which could result in lower revenues.
The sales cycle for our GaAs substrates is long and we may incur
substantial, non-recoverable expenses or devote significant resources to sales
that do not occur as anticipated. We have experienced and continue to experience
delays in obtaining purchase orders for GaAs substrates while customers evaluate
our substrates. A customer's decision to purchase our GaAs substrates is based
upon whether the customer prefers substrates developed using our proprietary VGF
technique or substrates developed using the more traditional LEC and HB
techniques. The amount of time it takes for a customer to evaluate our GaAs
substrates typically ranges from three months to a year or more, depending on
the amount of time required to test and qualify substrates from new vendors.
Since our substrates are generally incorporated into a customer's products at
the design
28
<PAGE> 30
stage, the customer's decision to use our substrates often precedes volume
sales, if any, by a significant period. If a customer decides at the design
stage not to incorporate our substrates into its products, we may not have
another opportunity to sell substrates for those products for many months or
even years. Thus, our GaAs substrates typically have a lengthy sales cycle,
during which we may expend substantial funds and sales, marketing and management
efforts to attract the potential customer. However, there is a risk that these
expenditures may not result in sales. Consequently, if sales forecasted from a
specific customer for a particular quarter are not delivered in that quarter, we
may be unable to compensate for the shortfall, which could materially adversely
affect our operating results.
We anticipate that sales of any future products under development will have
similar lengthy sales cycles and will, therefore, be subject to risks
substantially similar to those inherent in the lengthy sales cycle of our GaAs
substrates.
The loss of one or more of our key customers would significantly hurt our
operating results. A small number of customers have historically accounted for a
substantial portion of our revenues. We expect that a significant portion of our
future sales will be due to a limited number of customers. Our top five
customers accounted for approximately 35.5%, 34.9% and 39.5% of our revenues in
1996, 1997 and 1998, respectively. Our customers are not obligated to purchase
any specified quantity of products or to provide us with binding forecasts of
product purchases. In addition, our customers may reduce, delay or cancel orders
at any time without any significant penalty.
Our substrates are typically one of many components used in semiconductor
devices produced by our customers. Demand for our products is therefore subject
to many factors beyond our control, including:
- demand for our customers' products;
- competition faced by our customers in their particular industries;
- the technical, sales and marketing and management capabilities of our
customers; and
- the financial and other resources of our customers.
In the past, we have experienced reductions, cancellations and delays in
customer orders. If any one of our major customers reduces, cancels or delays
orders in the future, our business, financial condition and results of operation
could be materially adversely affected.
Intense competition in the market for GaAs substrates could prevent us from
increasing revenue and sustaining profitability. The market for GaAs substrates
is intensely competitive. In the semi-insulating GaAs substrates market, our
principal competitors currently include:
- Freiberger Compound Materials;
- Hitachi Cable;
- Litton Airtron; and
- Sumitomo Electric Industries.
We also compete with manufacturers that produce GaAs substrates for their
own use. In addition, we compete with companies, such as IBM, that are actively
developing alternative materials to GaAs. As we enter new markets, such as the
Ge and InP substrate markets, we expect to face competitive risks similar to
those for our GaAs substrates.
Many of our competitors and potential competitors have a number of
significant advantages over us, including:
- having been in the business longer than we have;
- more manufacturing experience;
- more established technologies than our VGF technique;
29
<PAGE> 31
- broader name recognition; and
- significantly greater financial, technical and marketing resources.
Our competitors could develop enhancements to the LEC, HB or VGF techniques
that are superior to ours in terms of price and performance. Our competitors
also could intensify price-based competition, resulting in lower prices and
margins. For more information regarding the risks we face from our competitors,
see "Business -- Competition."
We derive a significant portion of our revenues from international sales
and our ability to sustain and increase our international sales involve
significant risks. Our ability to grow will depend in part on the expansion of
international sales and operations which have and are expected to constitute a
significant portion of our revenues. International sales, excluding Canada,
represented 34.1% and 28.8% of our total revenues in 1997 and 1998,
respectively. Sales to customers located in Japan and other Asian countries
represented 23.5% and 18.7% of our total revenues in 1997 and 1998. Sales to
customers in Japan, in particular, accounted for 17.1% and 11.5% of our total
revenues in 1997 and 1998, respectively. We expect that sales to customers
outside the United States, including device manufacturers located in Japan and
other Asian countries who sell their products worldwide, will continue to
represent a significant portion of our revenues.
Our dependence on international sales involves a number of risks,
including:
- import restrictions and other trade barriers;
- unexpected changes in regulatory requirements;
- longer periods to collect accounts receivable;
- export license requirements;
- political and economic instability (in particular, the current
instability of the economies of Japan and other Asian countries); and
- unexpected changes in diplomatic and trade relationships.
Our sales, except for sales by our Japanese subsidiary, are denominated in
U.S. dollars. Thus, increases in the value of the dollar could increase the
price of our products in non-U.S. markets and make our products more expensive
than competitors' products in such markets. For example, doing business in Japan
subjects us to fluctuations in the exchange rates between the U.S. dollar and
the Japanese yen. In 1996, 1997 and 1998, we incurred foreign exchange losses of
$114,000, $186,000 and $24,000, respectively. If we do not effectively manage
the risks associated with international sales, our business, financial condition
and results of operations could be materially adversely affected. In order to
minimize our foreign exchange risk, we have bought foreign exchange contracts to
hedge against certain trade accounts receivable in Japanese yen. Because we
currently denominate sales in U.S. dollars except in Japan, we do not anticipate
that the adoption of the Euro as a functional legal currency of certain European
countries will materially affect our business.
If we lose certain key personnel or are unable to hire additional qualified
personnel as necessary, we may not be able to successfully manage our business
or achieve our objectives. Our success depends to a significant degree upon the
continued service of Morris S. Young, Ph.D., AXT's President and Chief Executive
Officer, as well as other key management and technical personnel. We neither
have long-term employment contracts with, nor key person life insurance on, any
of our key personnel. In addition, our management team has limited experience as
executive officers of a public company.
We believe our future success will also depend in large part upon our
ability to attract and retain highly skilled managerial, engineering, sales and
marketing, finance and manufacturing personnel. The competition for these
employees is intense, especially in Silicon Valley, and there can be no
assurance that we will be successful in attracting and retaining new personnel.
The loss of the services of any of our key personnel, the inability to attract
or retain qualified personnel in the future or delays in hiring required
personnel, particularly engineers, could make it difficult for us to manage our
business and meet key objectives, such as product introduction, on time.
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<PAGE> 32
Continued rapid growth may strain our operations. We have recently
experienced a period of rapid growth and expansion which has placed, and
continues to place, a significant strain on our operations. To accommodate this
anticipated growth, we will be required to:
- improve existing and implement new operational and financial systems,
procedures and controls;
- hire, train and manage additional qualified personnel;
- effectively manage multiple relationships with our customers, suppliers
and other third parties; and
- maintain effective cost controls.
We may not be able to install adequate control systems in an efficient and
timely manner, and our current or planned personnel systems, procedures and
controls may not be adequate to support our future operations. We are in the
process of installing a new management information system; however, the
functionality of this new system has not been fully implemented. The
difficulties associated with installing and implementing these new systems,
procedures and controls may place a significant burden on our management and our
internal resources. In addition, international growth will require expansion of
our worldwide operations and enhance our communications infrastructure. Any
delay in the implementation of such new or enhanced systems, products and
controls, or any disruption in the transition to such new or enhanced systems,
products and controls, could adversely affect our ability to accurately forecast
sales demand, manage manufacturing, purchasing and inventory levels, and record
and report financial and management information on a timely and accurate basis.
Our inability to manage growth effectively could affect our revenues and
adversely impact our profitability.
Our failure and the failure of our key suppliers and customers to be year
2000 compliant could negatively impact our business. The year 2000 computer
issue creates a risk for us. If systems do not correctly recognize date
information when the year changes to 2000, there could be an adverse impact on
our operations. The risk exists in four areas:
- potential warranty or other claims from our customers;
- systems we used to run our business;
- systems used by our suppliers; and
- the potential reduced spending by other companies on networking solutions
as a result of significant information systems spending on year 2000
remediation.
We are currently evaluating our exposure in all of these areas.
We are in the process of conducting a comprehensive inventory and
evaluation of the information systems used to run our business. We have a number
of projects underway to replace older systems that are known to be year 2000
non-compliant. Other systems, which are identified as non-compliant, will be
upgraded or replaced. For the year 2000 non-compliance issues identified to
date, the cost of remediation is not expected to be material to our operating
results. However, if implementation of replacement systems is delayed, or if
significant new non-compliance issues are identified, our operating results or
financial condition could be materially adversely affected.
We have contacted more than thirty key suppliers to determine if their
operations and the products and services they provide are year 2000 compliant.
Where practicable, we will attempt to mitigate our risks with respect to the
failure of suppliers to be year 2000 ready. However, such failures remain a
possibility and could have an adverse impact on our operating results or
financial condition.
We believe our current products are year 2000 compliant; however, since all
customer situations cannot be anticipated, we may see an increase in warranty
and other claims as a result of the year 2000 transition. In addition,
litigation regarding year 2000 compliance issues is expected to escalate. For
these reasons, the impact of customer claims could have a material adverse
impact on our operating results or financial condition.
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<PAGE> 33
Year 2000 compliance is an issue for virtually all businesses whose
computer systems and applications may require significant hardware and software
upgrades or modifications. Companies owning and operating such systems may plan
to devote a substantial portion of their information systems' spending to fund
such upgrades and modifications and divert spending away from networking
solutions. Such changes in customers' spending patterns could have a material
adverse impact on our business, operating results or financial condition.
We may engage in future acquisitions that we must successfully integrate
into our business and that may dilute our stockholders and cause us to assume
contingent liabilities. As part of our business strategy, we may in the future
review acquisition prospects that would complement our current product
offerings, augment our market coverage or enhance our technical capabilities, or
that may otherwise offer growth opportunities. In the event of any future
acquisitions, we could:
- issue equity securities which would dilute current stockholders'
percentage ownership;
- incur substantial debt; or
- assume contingent liabilities.
Such actions by us could materially adversely affect our operating results
and/or the price of our common stock.
Any future acquisitions creates risks for us, including:
- difficulties in the assimilation of acquired personnel, operations,
technologies or products;
- unanticipated costs associated with the acquisition could materially
adversely affect our operating results;
- diversion of management's attention from other business concerns;
- adverse effects on existing business relationships with suppliers and
customers;
- risks of entering markets where we have no or limited prior experience;
- potential loss of key employees of acquired organizations; and
- loss of customers that, through product acquisition, now become
competitors.
These risks and difficulties could disrupt our ongoing business, distract
our management and employees and increase our expenses. We may not be able to
successfully integrate any businesses, products, technologies or personnel that
we might acquire in the future, and our failure to do so could have a material
adverse effect on our business, operating results and financial condition.
We may need additional capital to fund our future operations which may not
be available. We believe that our cash balances and cash available from credit
facilities and future operations will enable us to meet our working capital
requirements for at least the next 12 months. We do not currently anticipate the
need for additional capital but if cash from future operations is insufficient,
or if cash is used for acquisitions or other currently unanticipated uses, we
may need additional capital. To the extent that we raise additional capital
through the sale of equity or convertible debt securities, the issuance of such
securities could result in dilution to existing stockholders.
On December 1, 1998, we raised approximately $11.6 million by issuing
variable rate taxable demand revenue bonds series 1998 for:
- the purchase of a commercial building and to finance tenant improvements
at 4281 Technology Drive, Fremont, California;
- to refinance an existing loan and to finance tenant improvements on our
principal offices; and
- the permanent financing for an existing bank construction loan.
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<PAGE> 34
These debt securities have rights, preferences and privileges that are
senior to holders of common stock, as other debt securities which we may issue
in the future would be, and the term of any debt could impose restrictions on
our operations. We cannot assure you that if we required additional capital, it
will be available on acceptable terms, or at all. If we are unable to obtain
additional capital, we may be required to reduce the scope of our planned
product development and marketing efforts, which would materially adversely
affect our business, financial condition and operating results. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Our executive officers and directors control 21% of our common stock and
are able to significantly influence matters requiring stockholder
approval. Executive officers, directors and entities affiliated with them, in
the aggregate, currently beneficially own approximately 21% of our outstanding
common stock. These stockholders, if acting together, are able to significantly
influence all matters requiring our stockholder approval, including the election
of directors and the approval of mergers or other business combination
transactions. This concentration of ownership could delay or prevent a change of
control of AXT and could reduce the likelihood of an acquisition of AXT at a
premium price.
Provisions in our charter or agreements may delay or prevent a change of
control. Provisions in our amended and restated certificate of incorporation and
bylaws may have the effect of delaying or preventing a merger or acquisition or
a change of control or changes in our management. These provisions include,
among others:
- the division of the board of directors into three separate classes of
three year terms;
- the right of the board to elect the director to fill a space created by
the expansion of the board;
- the ability of the board to alter our bylaws;
- authorizing the issuance of up to 2,000,000 shares of "blank check"
preferred stock; and
- the requirement that at least 10% of the outstanding shares are needed to
call a special meeting of stockholders.
Furthermore, because we are incorporated in Delaware, we are subject to the
provisions of section 203 of the Delaware General Corporation Law. These
provisions prohibit certain large stockholders, in particular those owning 15%
or more of the outstanding voting stock, from consummating a merger or
combination with a corporation unless:
- 66 2/3% of the shares of voting stock not owned by this large stockholder
approve the merger or combination, or
- the board of directors approves the merger or combination or the
transaction which resulted in the large stockholder owning 15% or more of
our outstanding voting stock.
Our stock price has been and may continue to be volatile and is dependent
on external and internal factors. Our stock has fluctuate significantly since we
began trading on the Nasdaq national market. In 1998, our stock price closed as
low as $6.00 and as high as $15.50. Various factors could cause the price of our
common stock to continue to fluctuate substantially, including:
- actual or anticipated fluctuations in our quarterly or annual operating
results;
- changes in expectations as to our future financial performance or changes
in financial estimates of securities analysts;
- announcements of technological innovations by us or our competitors;
- new product introduction by us or our competitors;
- large customer orders or order cancellations; and
- the operating and stock price performance of other comparable companies.
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<PAGE> 35
In addition, the stock market in general has experienced extreme volatility
that often has been unrelated to the operating performance of particular
companies. These broad market and industry fluctuations may adversely affect the
trading price of our common stock, regardless of our actual operating
performance.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Since many of our Japanese invoices are denominated in yen, we have bought
foreign exchange contracts to hedge against certain trade accounts receivable in
Japanese yen. As of December 31, 1998, our outstanding commitments with respect
to the foreign exchange contracts had a total value of approximately $1.6
million equivalent. Many of the contracts were entered six months prior to the
due date and the dates coincide with the receivable terms we have on the
invoices. By matching the receivable collection date and contract due date, we
attempt to minimize the impact of foreign exchange fluctuation.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and Supplementary Data required by
this item are set forth at the pages indicated at Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
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PART III
The SEC allows us include information required in this report by referring
to other documents or reports we have already or will soon be filing. This is
called "Incorporation by Reference." We intend to file your definitive proxy
statement pursuant to Regulation 14A not later than 120 days after the end of
the fiscal year covered by this report, and certain information therein is
incorporated in this report by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item is incorporated by reference to
information set forth in our definitive proxy statement under the heading
"Proposal No. 1 -- Election of Directors" and in Part I of this report under the
heading "Executive Officers of the Registrant."
The information required by this Item with respect to compliance with
Section 16(a) of the Securities Exchange Act of 1934 is incorporated by
reference to information set forth in the definitive Proxy Statement under the
heading "Executive Compensation and Other matters."
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference to
information set forth in our definitive proxy statement under the heading
"Executive Compensation and Other matters."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated by reference to
information set forth in our definitive proxy statement under the heading "Stock
Ownership of Certain Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated by reference to
information set forth in our definitive proxy statement under the heading
"Certain Relationships and Related Transactions."
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
<TABLE>
<S> <C> <C>
(1) Financial Statements:
</TABLE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Report of Independent Accountants........................... 37
Consolidated Balance Sheets as of December 31, 1997 and
1998........................................................ 38
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1997, and 1998........................... 39
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1996, 1997 and 1998................ 40
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1997, and 1998........................... 41
Notes to Consolidated Financial Statements.................. 42
(2) Financial Statement Schedules
All schedules have been omitted because the required
information is not present or not present in amounts
sufficient to require submission of the schedules or because
the information required is included in the Consolidated
Financial Statements or Notes thereto.
(3) Exhibits
See Index to Exhibits on page 54 hereof. The exhibits listed
in the accompanying Index to Exhibits are filed as part of
this report.
</TABLE>
(b) Reports on form 8-K
None
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of American Xtal Technology, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholders' equity and cash
flows present fairly, in all material respects, the financial position of
American Xtal Technology, Inc. and its subsidiaries at December 31, 1997 and
1998, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
January 28, 1999
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AMERICAN XTAL TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998
------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 3,054 $16,122
Accounts receivable, less allowance for doubtful accounts
of $100 and $550....................................... 6,005 8,902
Inventories............................................... 8,361 20,579
Prepaid expenses and other current assets................. 858 2,507
Deferred income taxes..................................... 225 466
------- -------
Total current assets.............................. 18,503 48,576
Property, plant and equipment............................... 12,110 26,447
------- -------
Total assets...................................... $30,613 $75,023
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,722 $ 3,455
Accrued liabilities....................................... 1,827 2,323
Current portion of long-term debt......................... 745 1,730
------- -------
Total current liabilities......................... 4,294 7,508
Long-term debt, net of current portion...................... 7,728 16,347
------- -------
Total liabilities................................. 12,022 23,855
------- -------
Contingencies (Note 12)
Stockholders' equity:
Convertible preferred stock, no par value, 25,000,000
shares authorized, 10,128,737 and 0 shares issued and
outstanding............................................ 8,553 --
Common stock, no par value, 100,000,000 shares authorized,
3,041,531 shares with no par value and 16,116,675
shares with $0.001 par value issued and outstanding.... 867 16
Additional paid in capital................................ -- 35,537
Deferred compensation..................................... (220) (327)
Retained earnings......................................... 9,584 15,910
Accumulated other comprehensive income -- cumulative
translation adjustments................................ (193) 32
------- -------
Total stockholders' equity........................ 18,591 51,168
------- -------
Total liabilities and stockholders' equity........ $30,613 $75,023
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
38
<PAGE> 40
AMERICAN XTAL TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Revenues:
Product revenues.......................................... $14,222 $23,014 $41,493
Contract revenues......................................... 2,005 2,321 1,797
------- ------- -------
Total revenues.................................... 16,227 25,335 43,290
Cost of revenues:
Cost of product revenues.................................. 9,270 13,674 24,550
Cost of contract revenues................................. 795 1,553 804
------- ------- -------
Total cost of revenues............................ 10,065 15,227 25,354
------- ------- -------
Gross profit................................................ 6,162 10,108 17,936
Operating expenses:
Selling, general and administrative....................... 2,033 2,959 5,016
Research and development.................................. 592 1,289 2,504
------- ------- -------
Total operating expenses.......................... 2,625 4,248 7,520
------- ------- -------
Income from operations...................................... 3,537 5,860 10,416
Interest expense............................................ (170) (570) (781)
Interest and other income (expense)......................... (72) (34) 568
------- ------- -------
Income before provision for income taxes.................... 3,295 5,256 10,203
Provision for income taxes.................................. 1,249 1,998 3,877
------- ------- -------
Net income.................................................. $ 2,046 $ 3,258 $ 6,326
======= ======= =======
Net income per share:
Basic..................................................... $ 0.71 $ 1.11 $ 0.42
======= ======= =======
Diluted................................................... $ 0.17 $ 0.25 $ 0.42
======= ======= =======
Shares used in net income per share calculations:
Basic..................................................... 2,882 2,938 14,928
======= ======= =======
Diluted................................................... 11,811 12,839 15,177
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
39
<PAGE> 41
AMERICAN XTAL TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE
CONVERTIBLE INCOME --
PREFERRED STOCK COMMON STOCK ADDITIONAL CUMULATIVE
--------------------- ------------------- PAID IN DEFERRED RETAINED TRANSLATION
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION EARNINGS ADJUSTMENTS
----------- ------- ---------- ------ ---------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1996..................... 8,928,737 $ 2,618 2,848,956 $ 107 $ -- $ -- $ 4,280 $ --
Common stock options
exercised................ -- -- 40,750 52 -- -- -- --
Comprehensive income
Net income............... -- -- -- -- -- -- 2,046 --
Other comprehensive
income
Currency translation
adjustment........... -- -- -- -- -- -- -- (104)
Comprehensive income....... -- -- -- -- -- -- -- --
----------- ------- ---------- ------ ------- ----- ------- -----
Balance at December 31,
1996..................... 8,928,737 2,618 2,889,706 159 -- -- 6,326 (104)
Issuance of series C
convertible preferred
stock in March 1997 at
$5.00 per share, net of
issuance costs........... 1,200,000 5,935 -- -- -- --
----
Common stock options
exercised................ -- -- 151,825 386 -- -- -- --
Deferred compensation...... -- -- -- 322 -- (322) -- --
Amortization of deferred
compensation............. -- -- -- -- -- 102 -- --
Comprehensive income
Net income............... -- -- -- -- -- -- 3,258 --
Other comprehensive
income
Currency translation
adjustment........... -- -- -- -- -- -- -- (89)
Comprehensive income....... -- -- -- -- -- -- -- --
----------- ------- ---------- ------ ------- ----- ------- -----
Balance at December 31,
1997..................... 10,128,737 8,553 3,041,531 867 -- (220) 9,584 (193)
Common stock with no par
value converted to common
stock of $0.001 par
value.................... -- -- -- (864) 864 -- -- --
Conversion of preferred
stock to common stock.... (10,128,737) (8,553) 10,128,737 10 8,543 -- -- --
Common stock options
exercised................ -- -- 71,407 -- 138 -- -- --
Issuance of common stock
upon initial public
offering, net of issuance
costs.................... -- -- 2,875,000 3 25,789 -- -- --
Deferred compensation...... -- -- -- -- 203 (203) -- --
Amortization of deferred
compensation............. -- -- -- -- -- 96 -- --
Comprehensive income
Net income............... -- -- -- -- -- -- 6,326 --
Other comprehensive
income
Currency translation
adjustment........... -- -- -- -- -- -- -- 225
Comprehensive income....... -- -- -- -- -- -- -- --
----------- ------- ---------- ------ ------- ----- ------- -----
Balance at December 31,
1998..................... -- $ -- 16,116,675 $ 16 $35,537 $(327) $15,910 $ 32
=========== ======= ========== ====== ======= ===== ======= =====
<CAPTION>
COMPREHENSIVE
TOTAL INCOME
------- -------------
<S> <C> <C>
Balance at January 1,
1996..................... $ 7,005 $ --
Common stock options
exercised................ 52 --
Comprehensive income
Net income............... 2,046 2,046
Other comprehensive
income
Currency translation
adjustment........... (104) (104)
-------
Comprehensive income....... -- $ 1,942
------- =======
Balance at December 31,
1996..................... 8,999
Issuance of series C
convertible preferred
stock in March 1997 at
$5.00 per share, net of
issuance costs........... 5,935 --
Common stock options
exercised................ 386 --
Deferred compensation...... -- --
Amortization of deferred
compensation............. 102 --
Comprehensive income
Net income............... 3,258 3,258
Other comprehensive
income
Currency translation
adjustment........... (89) (89)
-------
Comprehensive income....... -- $ 3,169
------- =======
Balance at December 31,
1997..................... 18,591
Common stock with no par
value converted to common
stock of $0.001 par
value.................... -- --
Conversion of preferred
stock to common stock.... --
Common stock options
exercised................ 138 --
Issuance of common stock
upon initial public
offering, net of issuance
costs.................... 25,792 --
Deferred compensation...... -- --
Amortization of deferred
compensation............. 96 --
Comprehensive income
Net income............... 6,326 6,326
Other comprehensive
income
Currency translation
adjustment........... 225 225
-------
Comprehensive income....... -- $ 6,551
------- =======
Balance at December 31,
1998..................... $51,168
=======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
40
<PAGE> 42
AMERICAN XTAL TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 2,046 $ 3,258 $ 6,326
Adjustments to reconcile net income to cash provided by
(used in) operations:
Depreciation and amortization............................. 867 1,164 2,048
Deferred income taxes..................................... (43) 264 (241)
Stock compensation........................................ -- 102 96
Changes in assets and liabilities:
Accounts receivable.................................... (578) (3,013) (2,897)
Inventories............................................ (2,298) (4,406) (12,218)
Prepaid expenses and other current assets.............. (149) (84) (1,649)
Accounts payable....................................... 247 894 1,733
Accrued liabilities.................................... 382 665 496
------- ------- --------
Net cash provided by (used in) operating
activities...................................... 474 (1,156) (6,306)
------- ------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment................ (3,946) (4,856) (16,385)
------- ------- --------
Net cash used in investing activities............. (3,946) (4,856) (16,385)
------- ------- --------
Cash flows from financing activities:
Proceeds from the issuance of common stock, net........... 52 386 25,930
Proceeds from the issuance of convertible preferred
stock.................................................. -- 5,935 --
Payments of short-term bank borrowings.................... (300) (300) --
Proceeds from long-term debt borrowings................... 3,469 2,654 13,942
Payments of long-term debt borrowings..................... -- -- (4,338)
Proceeds from (payments of) notes payable to related
parties................................................ 276 (276) --
------- ------- --------
Net cash provided by financing activities......... 3,497 8,399 35,534
------- ------- --------
Effect of exchange rate changes............................. (104) (89) 225
------- ------- --------
Net increase (decrease) in cash and cash equivalents........ (79) 2,298 13,068
Cash and cash equivalents at beginning of year.............. 835 756 3,054
------- ------- --------
Cash and cash equivalents at end of year.................... $ 756 $ 3,054 $ 16,122
======= ======= ========
Supplemental disclosures:
Interest paid............................................. $ 203 $ 579 $ 781
======= ======= ========
Income taxes paid......................................... $ 794 $ 1,814 $ 4,378
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
41
<PAGE> 43
AMERICAN XTAL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
American Xtal Technology, Inc. (the "Company") was incorporated in
California in December 1986 and reincorporated in Delaware in 1998. The Company
uses a proprietary vertical gradient freeze ("VGF") technique to produce
high-performance compound semiconductor base materials, or substrates, for use
in a variety of electronic and opto-electronic applications. The Company
manufactures and sells gallium arsenide ("GaAs"), indium phosphide ("InP") and
germanium ("Ge") substrates. The Company also has research and development
contracts with the U.S. Department of Defense ("DOD") and other third parties
for developing GaAs and other substrates.
In May 1998, the Company completed its initial public offering ("IPO") and
issued 2,875,000 shares of its common stock at $10.00 per share, including the
shares from an over-allotment option. The Company received cash of approximately
$25,792,000 net of underwriting discounts, commissions and IPO expenses. Upon
the closing of the IPO, all outstanding shares of the Company's then convertible
preferred stock were automatically converted into shares of common stock.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All material intercompany accounts and
transactions have been eliminated.
Foreign Currency Translation
The functional currencies of the Company's Japanese and Chinese
subsidiaries are the local currencies. Transaction gains and losses resulting
from transactions denominated in currencies other than the US dollar for the
Company or in the local currencies for the subsidiaries are included in the
results of operations for the year.
The assets and liabilities of the subsidiaries are translated at the rates
of exchange on the balance sheet date. Income and expense items are translated
at the average rate of exchange for the period. Gains and losses from foreign
currency translation are included as a separate component of stockholders'
equity.
Revenue Recognition
Product revenues are generally recognized upon shipment. The Company
provides an allowance for estimated returns at the time revenue is recognized.
Contract revenues are recognized under the percentage of completion method based
on costs incurred relative to total contract costs. Costs associated with
contract revenues are included in cost of contract revenues. All costs of
contract revenues are research and development expenses which are funded by the
contract.
Concentration of Credit Risk
The Company manufactures and distributes GaAs, InP and Ge substrates and
performs services under research and development contracts. Financial
instruments which potentially subject the Company to concentration of credit
risk consist primarily of trade accounts receivable. The Company invests
primarily in
42
<PAGE> 44
AMERICAN XTAL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
money market accounts and commercial paper instruments. Cash equivalents are
maintained with high quality institutions and their composition and maturities
are regularly monitored by management.
The Company performs ongoing credit evaluations of its customers' financial
condition and limits the amount of credit extended when deemed necessary, but
generally does not require collateral. No customer represented greater than
10.0% of product revenues in fiscal years 1996 and 1997, and one customer in
1998, represented 14.2% of product revenues. For fiscal 1996, one government
entity represented 91.3% of contract revenues. For fiscal 1997, one government
entity and a third party represented 47.4% and 52.6%, respectively, of contract
revenues. For fiscal 1998, one government entity represented 100% of contract
revenues. No customer accounted for 10% or more of the trade accounts receivable
balance as of December 31, 1997, and 1998.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Inventory
Inventory is stated at the lower of cost or market, cost being determined
using the weighted average method.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated
depreciation computed using the straight-line method over the estimated economic
lives of the assets, generally five years. Leasehold improvements are amortized
over the shorter of the estimated useful life or the term of the lease.
Impairment of Long-Lived Assets
Pursuant to Statement of Financial Accounting Standard No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of" ("SFAS 121"), the Company reviews long-lived assets based upon a gross cash
flow basis and will reserve for impairment whenever events or changes in
circumstances indicate the carrying amount of the assets may not be fully
recoverable. Based on its most recent analysis, the Company believes that there
was no impairment of its property, plant and equipment as of December 31, 1998.
Stock-Based Compensation
The Company accounts for stock-based employee compensation arrangements
using the intrinsic value method as prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
Interpretations thereof. Accordingly, compensation costs for stock options is
measured as the excess, if any, of the market price of the Company's stock at
the date of grant over the stock option exercise price. In addition, the Company
complies with the disclosure provisions of Statement of Financial Accounting
Standard No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123").
Income Taxes
The Company accounts for deferred income taxes using the liability method,
under which the expected future tax consequences of timing differences between
the book and tax basis of assets and liabilities are recognized as deferred tax
assets and liabilities.
43
<PAGE> 45
AMERICAN XTAL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Comprehensive Income
In 1998, the Company adopted Statement of Financial Accounting Standard No.
130 "Reporting Comprehensive Income" ("SFAS 130"). Comprehensive income is
defined as the change in equity of a company during a period from transactions
and other events and circumstances excluding transactions resulting from
investment by owners and distribution to owners. The difference between net
income and comprehensive income for the Company relates to foreign currency
translation adjustments. Comprehensive income for the years ended December 31,
1996, 1997 and 1998 is disclosed in the Statement of Stockholders' Equity.
Segment Reporting
In 1998, the Company adopted Statement of Financial Accounting Standard No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131 requires that companies report separately, in the
financial statements, certain financial and descriptive information about
operating segment profit or loss, certain specific revenue and expense items,
and segment assets. Additionally, companies are required to report information
about the revenues derived from their products and service groups, about
geographic areas in which the Company earns revenues and holds assets, and about
major customers. (See Note 11 for these disclosures).
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 established a new model for
accounting for derivatives and hedging activities and supersedes and amends a
number of existing accounting standards. SFAS 133 requires that all derivatives
be recognized in the balance sheet at their fair market value. In addition,
corresponding derivative gains and losses should be either reported in the
statement of operations or stockholders' equity, depending on the type of
hedging relationship that exists with respect to such derivatives. Adopting the
provisions of SFAS 133, which will be effective in fiscal year 2000, is not
expected to have a material effect on the Company's consolidated financial
statements.
44
<PAGE> 46
AMERICAN XTAL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. BALANCE SHEET DETAIL
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Inventories:
Raw materials.......................................... $ 2,224 $ 7,687
Work in process........................................ 5,623 12,059
Finished goods......................................... 514 833
------- -------
$ 8,361 $20,579
======= =======
Property, plant and equipment:
Land................................................... $ 1,120 $ 1,120
Building............................................... 4,731 14,191
Machinery and equipment................................ 8,130 13,668
Leasehold improvements................................. 240 256
Construction in progress............................... 1,773 3,144
------- -------
15,994 32,379
Less: Accumulated depreciation and amortization........ 3,884 5,932
------- -------
$12,110 $26,447
======= =======
Accrued liabilities:
Accrued compensation................................... $ 690 $ 934
Accrued income tax..................................... 282 --
Customer advances...................................... 260 --
Allowance for sales returns............................ 247 336
Other.................................................. 348 1,053
------- -------
$ 1,827 $ 2,323
======= =======
</TABLE>
NOTE 3. DEBT
On September 11, 1995, the Company obtained a bank loan of up to $4.5
million to finance the construction of a new commercial building in Fremont,
California. The loan, which was due on September 11, 1996, was refinanced with
two new loans:
(1) On October 1, 1996, the Company obtained a loan for $3.5 million from a
commercial bank. The loan has an interest rate of 8.3% per annum,
matures in 2006 and is secured by the land and building. The loan was
fully repaid as of December 31, 1998.
(2) On August 15, 1996, the Company obtained a $1.0 million debenture loan
from the Bay Area Employment Development Company guaranteed by the U.S.
Small Business Administration. The loan has an interest rate of 7.3%
per annum, matures in 2016 and is subordinate to the $3.5 million bank
loan. As of December 31, 1997 and 1998, $1.0 million and $0.9 million
was outstanding under this debenture loan, respectively.
The Company obtained equipment loans from several different banks through
financing companies to finance the purchase of new manufacturing equipment for
the Company's Fremont, California facility. These loans have a maturity of five
years with interest rates ranging from 6.0% to 9.0% per annum. These loans are
secured by the machinery and equipment purchased with the loans. As of December
31, 1997 and 1998, $3.2 million and $5.5 million was outstanding under these
loans, respectively.
45
<PAGE> 47
AMERICAN XTAL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In November 1996, the Company obtained a $3.0 million line of credit
("LOC") with a bank which expired in April 1998. In March 1998, the Company
obtained a $15.0 million LOC which expires in May 1999 to replace the $3.0
million LOC. The $15.0 million LOC is secured by the Company's business assets,
excluding equipment. Borrowings under the $15.0 million LOC bear interest at the
bank's prime interest rate plus one-half percent. The $15.0 million LOC is
subject to certain financial covenants regarding current financial ratios and
cash flow requirements which have all been met as of December 31, 1998. At
December 31, 1997 and 1998, no amount was outstanding under the LOC.
In May 1997, the Company obtained a bank loan for $1.4 million under the
$3.0 million LOC. The loan was to finance construction of manufacturing
facility. The loan consisted of two parts: (i) a loan for $750,000 which bears
interest at the bank's prime rate plus one percent and is secured by property
and (ii) a loan for $690,000 which bears interest at the bank's prime rate plus
one-half percent and is secured by the Company's business assets, excluding
equipment, which was assumed under the LOC. At the time of building completion,
the $750,000 loan is convertible into a new term loan with a maturity of ten
years and an interest rate fixed at the nine-year U.S. Treasury Bond yield plus
2.3% and will be secured by the land and building. At December 31, 1997,
$106,000 was outstanding at an interest rate of 8.3% per annum. During the year
ended December 31, 1998, this construction loan was fully prepaid.
In December 1998, the Company completed the sale of $11.6 million bonds.
The bonds, which are secured by a letter of credit from a bank, have a term of
25 years, bear interest at 200 basis points below prime (5.6% at December 31,
1998). Repayment of principal and interest under the bonds is by installment
payments on a quarterly basis. The Company has an option to redeem in whole or
in part of the bonds during the term of the bonds.
The aggregate future repayments of long-term debt outstanding at December
31, 1998 are $2.8 million in 1999, $2.9 million in 2000, $2.9 million in 2001,
$2.6 million in 2002, $1.7 million in 2003 and $10.6 million thereafter. A total
interest amount of $5.4 million is included in these aggregate future
repayments.
NOTE 4. RESEARCH AND DEVELOPMENT CONTRACTS
In March 1994, the Company was awarded a four-year, $6.1 million contract
under the DOD Title III program for the development of GaAs substrates. The
Title III contract is comprised of three different contract components: A
cost-plus-fixed-fee component totaling $1.2 million, a firm-fixed-price ("FFP")
component totaling $4.4 million and a $500,000 component consisting of a bonus
award. The bonus award may be earned upon reaching specific contract milestones.
Under the FFP component, 10.0% of the cost reimbursement is withheld by the DOD
until the completion of the project in May 1998. The amounts relating to this
10.0% withholding were $625,000, $319,000, and $325,000 at December 31, 1996,
1997 and 1998, respectively.
For the years ended December 31, 1996, 1997 and 1998, the Company
recognized contract revenues of $1.5 million, $364,000 and $416,000,
respectively, under the Title III contract. For the years ended December 31,
1996, 1997 and 1998, the Company incurred costs of $468,000, $211,000 and
$87,000, respectively, under the Title III contract. As of December 31, 1998,
the Title III contract was completed and the total contract revenue of $6.1
million had been completely recognized.
Certain products were manufactured under the Title III contract and the
costs were charged to such contracts. As permitted under the contract, the
products were sold to third parties, generating product revenues of $95,000, $0
and $0 for the years ended December 31, 1996, 1997 and 1998, respectively.
In January 1997, the Company was awarded a $1.2 million contract from a
third party. The contract was an FFP contract under which the Company produced
Ge substrates. The contract was completed in July 1997. For the year ended
December 31, 1997, the Company recognized contract revenues of $1.2 million and
incurred contract costs of $1.1 million under the contract.
46
<PAGE> 48
AMERICAN XTAL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In May 1997, the Company was awarded a $2.5 million, 30-month contract
under the DOD Title III program. In August 1998, the contract was amended such
that the work scope was extended and the total contract amount was increased to
$3.1 million. The contract is a cost-sharing agreement for the development of
InP substrates. Contract revenues are recognized under the percentage of
completion method based on total estimated revenue and the proportion of costs
incurred relative to total contract costs. For the years ended December 31, 1997
and 1998, the Company recognized contract revenues of $661,000 and $1,238,000,
respectively and incurred contract costs of $252,000 and $628,000, respectively
under this contract.
The Company has no additional obligations with regards to any of the above
research and development contracts.
NOTE 5. FOREIGN EXCHANGE CONTRACTS AND TRANSACTION LOSSES
The Company uses short-term forward exchange contracts for hedging purposes
to reduce the effects of adverse foreign exchange rate movements. During the
year ended December 31, 1998, the Company bought foreign exchange contracts to
hedge against certain trade accounts receivable in Japanese yen. These contracts
are accounted for using hedge accounting, under which the change in the fair
value of the forward contracts is recognized as part of the related foreign
currency transactions as they occur. As of December 31, 1998, the Company's
outstanding commitments with respect to the foreign exchange contracts, which
were commitments to sell Japanese yen, had a total value of approximately $1.6
million.
During the years ended December 31, 1996, 1997 and 1998, the Company
incurred foreign transaction exchange losses of $114,000, $186,000 and $24,000,
respectively.
NOTE 6. INCOME TAXES
The components of the provision for income taxes were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1996 1997 1998
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal........................................ $1,116 $1,571 $3,627
State.......................................... 178 79 441
Foreign........................................ -- 84 50
------ ------ ------
Total current.......................... 1,294 1,734 4,118
------ ------ ------
Deferred:
Federal........................................ (36) 235 (228)
State.......................................... (9) 29 (13)
------ ------ ------
Total deferred......................... (45) 264 (241)
------ ------ ------
Total provision........................ $1,249 $1,998 $3,877
====== ====== ======
</TABLE>
47
<PAGE> 49
AMERICAN XTAL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a reconciliation of the effective income tax rates and the
U.S. statutory federal income tax rate:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Statutory federal income tax rate.................... 34.0% 34.0% 34.0%
State income taxes, net of federal tax benefits...... 4.7 4.1 2.7
Foreign sales corporation benefit.................... (2.4) (1.7) (1.7)
Foreign income taxed at higher rate.................. -- 1.6 0.2
Other................................................ 1.6 0.0 2.8
---- ---- ----
Effective tax rate................................... 37.9% 38.0% 38.0%
==== ==== ====
</TABLE>
Deferred tax assets (liabilities) are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1997 1998
---- ------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Bad debt and inventory reserves........................... $497 $ 816
Vacation accrual.......................................... 67 75
State taxes............................................... 13 137
Other..................................................... -- 181
---- ------
Deferred tax assets....................................... 577 1,209
Deferred tax liabilities:
Depreciation.............................................. (352) (743)
---- ------
Net deferred tax asset............................ $225 $ 466
==== ======
</TABLE>
NOTE 7. RETIREMENT SAVINGS PLAN
The Company has a 401(k) Savings Plan (the "Savings Plan") which qualifies
as a thrift plan under Section 401(k) of the Internal Revenue Code. All
full-time U.S. employees are eligible to participate in the Savings Plan after
one year from the date of hire. Participants may contribute up to 6.0% of their
earnings to the Savings Plan with a discretionary matching amount provided by
the Company. The Company's contributions to the Savings Plan for the years ended
December 31, 1996, 1997 and 1998 were $69,000, $87,000 and $101,000,
respectively.
NOTE 8. STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS
Stock Option Plans
In 1993, the Company adopted the 1993 Stock Option Plan ("1993 Plan") which
provides for granting of incentive and non-qualified stock options to employees,
consultants, and directors of the Company. Under the 1993 Plan, 880,000 shares
of common stock have been reserved for issuance as of December 31, 1998. Options
granted under the 1993 Plan are generally for periods not to exceed ten years
and are granted at the fair market value of the stock at the date of grant as
determined by the board of directors. Options granted under the 1993 Plan
generally vest 25.0% upon grant and 25.0% each year thereafter, with full
vesting occurring on the third anniversary of the grant date.
In May 1997, the Company adopted the 1997 Stock Option Plan ("1997 Plan")
which provides for granting of incentive and non-qualified stock options to
employees, consultants and directors of the Company. Under the 1997 Plan,
2,800,000 shares of common stock have been reserved for issuance as of December
31,
48
<PAGE> 50
AMERICAN XTAL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1998. Options granted under the 1997 Plan are generally for periods not to
exceed ten years (five years if the option is granted to a 10.0% stockholder)
and are granted at the fair market value of the stock at the date of grant as
determined by the board of directors. Options granted under the 1997 Plan
generally vest 25.0% at the end of one year and 2.1% each month thereafter, with
full vesting after four years.
The following summarizes the Company's stock option activity under the 1993
Plan and the 1997 Plan and related weighted average exercise price within each
category for each of the years ended December 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
SHARES OPTIONS WEIGHTED AVERAGE
AVAILABLE OUTSTANDING OPTION PRICE
---------- ----------- ----------------
<S> <C> <C> <C>
Balance at December 31, 1995............ 322,594 244,900 $1.53
Granted............................... -- -- --
Exercised............................. -- (40,750) 1.26
Canceled.............................. -- -- --
---------- ---------
Balance at December 31, 1996............ 322,594 204,150 1.58
Additional shares authorized.......... 1,367,000 -- --
Granted............................... (1,315,100) 1,315,100 4.95
Exercised............................. -- (151,825) 2.54
Canceled.............................. 24,475 (24,475) 3.38
---------- ---------
Balance at December 31, 1997............ 398,969 1,342,950 4.77
Additional shares authorized.......... 1,500,000 -- --
Granted............................... (246,000) 246,000 7.10
Exercised............................. -- (71,407) 1.94
Canceled.............................. 100,968 (100,968) 5.39
---------- ---------
Balance at December 31, 1998............ 1,753,937 1,416,575 5.25
========== =========
</TABLE>
At December 31, 1996, 1997 and 1998, options for 107,450, 76,725 and
956,827 shares, respectively, were vested.
During the years ended December 31, 1997 and 1998, the Company granted
options for the purchase of 1,315,100 shares and 246,000 shares, respectively,
of common stock to employees at a weighted average exercise price of $4.95 per
share and $7.10 per share, respectively. Management calculated deferred
compensation of $322,000 and $203,000 related to options granted during the
years ended December 31, 1997 and 1998, respectively. Such deferred compensation
is amortized over the vesting period relating to these options of which
approximately $102,000 and $96,000 was amortized during the years ended December
31, 1997 and 1998, respectively.
Information relating to stock options outstanding under the 1993 Plan and
the 1997 Plan at December 31, 1998 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------------------------
WEIGHTED
AVERAGE WEIGHTED
NUMBER REMAINING AVERAGE
OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE
----------- ---------------- --------------
<S> <C> <C> <C>
Range of exercise prices:
$1.20 - $1.90......................... 43,675 6.6 years $1.56
$5.00 - $5.50......................... 1,152,900 8.2 years 5.00
$7.00 - $8.25......................... 220,000 9.6 years 7.29
---------
$1.20 - $8.25......................... 1,416,575 8.4 years 5.25
=========
</TABLE>
49
<PAGE> 51
AMERICAN XTAL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
OPTIONS VESTED
------------------------
WEIGHTED
NUMBER AVERAGE
VESTED EXERCISE PRICE
------- --------------
<S> <C> <C>
Range of exercise prices:
$1.20 - $7.00........................................ 956,827 $2.61
</TABLE>
Certain Pro Forma Disclosures
In October 1995, SFAS 123 established a fair value based method of
accounting for employee stock options. The weighted average grant-date fair
value of options granted during the years ended December 31, 1997 and 1998 (no
options were granted during the year ended December 31, 1996) was $0.06 and
$0.98, respectively. Had compensation cost for the Company's options been
determined based on the fair value at the grant dates, as prescribed in SFAS
123, the Company's pro forma net income and net income per share would have been
as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1996 1997 1998
------ ------ ------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net income:
As reported.................................... $2,046 $3,258 $6,326
Pro forma net income........................... 2,032 3,111 6,131
Net income per share:
As reported:
Basic....................................... $ 0.71 $ 1.11 $ 0.42
Diluted..................................... 0.17 0.25 0.42
Pro forma net income:
Basic....................................... $ 0.71 $ 1.06 $ 0.41
Diluted..................................... 0.17 0.24 0.40
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants during the years ended December 31, 1997 and 1998
(no options were granted during the year ended December 31, 1996); dividend
yield of 0.0% for both periods; risk-free interest rates of 6.1% and 5.2% for
options granted during the years ended December 31, 1997 and 1998, respectively;
and expected lives of 4.5 and 5.0 years for options granted during the years
ended December 31, 1997 and 1998, respectively; and volatility of 0.0% and 75%
for the years ended December 31, 1997 and 1998.
Because additional option grants are expected to be made each year, the
above pro forma disclosures are not representative of pro forma effects on
reported net income for future years.
50
<PAGE> 52
AMERICAN XTAL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Employee Stock Purchase Plan
In May 1997, the Company's board of directors approved an Employee Stock
Purchase Plan (the "1997 Purchase Plan"). Under this plan, employees of the
Company were allowed to purchase a certain number of shares of Common Stock by
December 31, 1997. A total of 67,000 shares were purchased as of December 31,
1997.
In February 1998, the Company's board of directors approved a 1998 Employee
Stock Purchase Plan (the "1998 Purchase Plan") and reserved a total of 250,000
shares of the Company's common stock for issuance thereunder. The Company's
shareholders approved the 1998 Purchase Plan in March 1998. The 1998 Purchase
Plan permits eligible employees to acquire shares of the Company's common stock
through payroll deductions. The common stock purchase price is determined as 85%
of the lower of the market price of the common stock at the purchase date or the
date of offer to the employee.
NOTE 9. NET INCOME PER SHARE
Statement of Financial Accounting Standard No. 128 "Earnings per Share"
requires a reconciliation of the numerators and denominators of the basic and
diluted net income per share calculations as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------
1996 1997 1998
------------------------ ------------------------ ------------------------
PER PER PER
SHARE SHARE SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ ------ ------ ------ ------ ------ ------ ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS calculation............ $2,046 2,882 $0.71 $3,258 2,938 $1.11 $6,326 14,928 $0.42
Effect of dilutive securities
Common stock options........... -- -- -- -- 72 -- -- 249 --
Convertible preferred stock.... -- 8,929 -- -- 9,829 -- -- -- --
Diluted EPS calculation.......... $2,046 11,811 $0.17 $3,258 12,839 $0.25 $6,326 15,177 $0.42
</TABLE>
NOTE 10. RELATED PARTY TRANSACTIONS
During the years ended December 31, 1996, 1997 and 1998, the Company
purchased $760,000, $1,540,000 and $ 3,681,000, respectively, of raw materials
and manufactured quartz from a supplier which is owned by a family member of an
officer.
51
<PAGE> 53
AMERICAN XTAL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. SEGMENT AND FOREIGN OPERATIONS INFORMATION
The Company has two reportable segments: semiconductor substrates
manufacturing and research and development contracting. In the semiconductor
substrates manufacturing segment, the Company manufactures and sells
high-performance compound semiconductor substrates for use in electronic and
opto-electronic applications. In the research and development contracting
segment, the Company contracts with the U.S. Department of Defense and other
parties for developing semiconductor substrates. The research and development
contracting segment did not meet the requirements for separate disclosure of a
reportable segment as defined in SFAS 131.
The Company sells its substrates in the United States and in other parts of
the world. The Company has operations in Japan and China. Revenues by geographic
location based on the country of the customer, and income from operations and
identifiable assets based on country in which the Company operates, were as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1997 1998
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Net revenues:
United States............................... $10,028 $15,653 $29,449
Europe...................................... 2,216 2,497 3,960
Canada...................................... 522 1,034 1,356
Japan....................................... 2,653 4,323 4,997
Asia Pacific and other...................... 808 1,828 3,528
------- ------- -------
Consolidated................................ $16,227 $25,335 $43,290
======= ======= =======
Income from operations:
United States............................... $ 3,529 $ 5,662 $10,334
Japan....................................... 8 198 82
------- ------- -------
Consolidated................................ $ 3,537 $ 5,860 $10,416
======= ======= =======
Identifiable assets at end of year:
United States............................... $16,467 $28,967 $71,019
Japan....................................... 917 1,056 2,728
China....................................... -- -- 1,276
------- ------- -------
Consolidated................................ $17,384 $30,613 $75,023
======= ======= =======
</TABLE>
NOTE 12. CONTINGENT LIABILITIES
From time to time the Company is involved in litigation in the normal
course of business. Management believes that the outcome of matters to date will
not have a material adverse effect on the Company's financial position or
results of operations.
52
<PAGE> 54
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AMERICAN XTAL TECHNOLOGY, INC.
By: /s/ MORRIS S. YOUNG
------------------------------------
Morris S. Young
President and Chief Executive
Officer
(Principal Executive Officer)
Date: March 30, 1999
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Morris S Young and Guy D. Atwood,
and each of them, his true and lawful attorney-in-fact and agent, with full
power of substitution, each with power to act alone, to sign and execute on
behalf of the undersigned any and all amendments to this Report on Form 10-K,
and to perform any acts necessary in order to file the same, with all exhibits
thereto and other documents in connection therewith with the Securities and
Exchange Commission, granting unto said attorney-in-fact and agent full power
and authority to do and perform each and every act and thing requested and
necessary to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent, or their or his or her substitutes, shall
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ MORRIS S. YOUNG President, Chief Executive March 30, 1999
- -------------------------------------------------------- Officer, and Chairman of the
Morris S. Young Board (Principal Executive
Officer)
/s/ GUY D. ATWOOD Vice President, Chief March 30, 1999
- -------------------------------------------------------- Financial Officer (Principal
Guy D. Atwood Financial and Accounting
Officer)
/s/ THEODORE S. YOUNG Senior Vice President, March 30, 1999
- -------------------------------------------------------- Marketing, Director
Theodore S. Young
/s/ DONALD L. TATZIN Director March 30, 1999
- --------------------------------------------------------
Donald L. Tatzin
/s/ JESSE CHEN Director March 30, 1999
- --------------------------------------------------------
Jesse Chen
/s/ B.J. MOORE Director March 30, 1999
- --------------------------------------------------------
B.J. Moore
</TABLE>
53
<PAGE> 55
AMERICAN XTAL TECHNOLOGY, INC.
EXHIBITS
TO
FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED
DECEMBER 31, 1998
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
2.1* Agreement and Plan of Merger between American Xtal
Technology, a California corporation, and American Xtal
Technology Delaware Corporation, a Delaware corporation.
3.1 Restated Certificate of Incorporation.
10.1* Form of Indemnification Agreement for directors and
officers.
10.2* 1993 Stock Option Plan and forms of agreements thereunder.
10.3* 1997 Stock Option Plan and forms of agreements thereunder.
10.4* 1997 Employee Stock Purchase Plan and forms of agreements
thereunder.
10.5* 1998 Employee Stock Purchase Plan and forms of agreements
thereunder.
10.6* Loan Agreement between U.S. Bank National Association and us
dated March 4, 1998.
10.7** Purchase and Sale Agreement by and between Limar Realty
Corp. #23 and us dated April 1998.
10.8 Loan Agreement between U.S. Bank National Association and us
dated September 18, 1998.
10.9 Letter of Credit and Reimbursement Agreement between U.S.
Bank National Association and us dated December 1, 1998.
10.10 Bond Purchase Contract between Dain Rauscher Incorporated
and us dated December 1, 1998.
10.11 Remarketing Agreement between Dain Rauscher Incorporated and
us dated December 1, 1998.
21.1* List of Subsidiaries.
23.1 Consent of Independent Accountants.
23.2** Consent of Counsel (included in Exhibit 5.1).
24.1* Power of Attorney (see signature page).
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* As filed with the SEC in our Registration Statement on Form S-1 on March 17,
1998.
** As filed with the SEC in our Registration Statement on Amendment No. 2 to
Form S-1 on May 11, 1998.
54
<PAGE> 1
EXHIBIT 3.1
RESTATED
CERTIFICATE OF INCORPORATION
OF
AMERICAN XTAL TECHNOLOGY, INC.
AMERICAN XTAL TECHNOLOGY, INC., a corporation organized and existing under
the laws of the State of Delaware, hereby certifies as follows:
1. The name of the corporation is American Xtal Technology, Inc.
2. The original name of the corporation was American Xtal Technology
Delaware Corporation.
3. The date of filing of its original Certificate of Incorporation with
the Secretary of State of the State of Delaware was November 13, 1997.
4. This Restated Certificate of Incorporation was duly adopted in
accordance with the provisions of Section 245 of the Delaware General
Corporation Law. This Restated Certificate of Incorporation only restates and
integrates and does not further amend the provisions of the corporation's
certificate of incorporation as heretofore amended, and there is no discrepancy
between those provisions and the provisions of this Restated Certificate of
Incorporation.
5. This Restated Certificate of Incorporation restates and integrates the
Certificate of Incorporation of this corporation as herein set forth in full:
FIRST: The name of the corporation is American Xtal Technology, Inc.
(hereinafter sometimes referred to as the "Corporation").
SECOND: The address of the registered office of the Corporation in the
State of Delaware is Incorporating Services, Ltd., 15 East North
Street, in the City of Dover, County of Kent. The name of the
registered agent at that address is Incorporating Services, Ltd.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the
General Corporation Law of Delaware.
1
<PAGE> 2
FOURTH:
STOCK
The Corporation is authorized to issue two classes of stock to be
designated, respectively, "Preferred Stock" and "Common Stock."
The total number of shares of Preferred Stock the Corporation
shall have authority to issue is 2,000,000, $.001 par value per
share, and the total number of shares of Common Stock the
Corporation shall have authority to issue is 40,000,000, $0.001
par value per share. The shares of Preferred Stock shall
initially be undesignated as to series.
The Board of Directors is hereby authorized, within the
limitations and restrictions stated herein, to determine or alter
the rights, preferences, privileges and restrictions granted to
or imposed upon a wholly unissued series of Preferred Stock, and
the number of shares constituting any such series and the
designation thereof, or any of them; and to increase or decrease
the number of shares constituting any such series and the
designation thereof, or any of them; and to increase or decrease
the number of shares of any series subsequent to the issue of
shares of that series, but, in respect of decreases, not below
the number of shares of such series then outstanding. If the
number of shares of any such series of Preferred Stock shall be
so decreased, the shares constituting such decrease shall be
retired and shall not be reissued by the Corporation.
FIFTH: The following provisions are inserted for the management of the
business and the conduct of the affairs of the Corporation, and
for further definition, limitation and regulation of the powers
of the Corporation and of its directors and stockholders:
A. The business and affairs of the Corporation shall be managed by
or under the direction of the Board of Directors. In addition to
the powers and authority expressly conferred upon them by statute
or by this Certificate of Incorporation or the Bylaws of the
Corporation, the directors are hereby empowered to exercise all
such powers and do all such acts and things as may be exercised
or done by the Corporation.
B. The directors of the Corporation need not be elected by written
ballot unless the Bylaws so provide.
C. Any action required or permitted to be taken by the stockholders
of the Corporation must be effected at a duly called annual or
special meeting of stockholders of the Corporation and may not be
effected by any consent in writing by such stockholders.
2
<PAGE> 3
D. Special meetings of stockholders of the Corporation may be called
only (1) by the Board of Directors pursuant to a resolution
adopted by a majority of the total number of authorized directors
(whether or not there exist any vacancies in previously
authorized directorships at the time any such resolution is
presented to the Board for adoption) or (2) by the holders of not
less than ten percent (10%) of all of the shares entitled to cast
votes at the meeting.
SIXTH:
A. The number of directors shall initially be set at five (5) and,
thereafter, shall be fixed from time to time exclusively by the
Board of Directors pursuant to a resolution adopted by a majority
of the total number of authorized directors (whether or not there
exist any vacancies in previously authorized directorships at the
time any such resolution is presented to the Board for adoption).
The directors shall be divided into three classes with the term
of office of the first class (Class I) to expire at the first
annual meeting of the stockholders; the term of office of the
second class (Class II) to expire at the second annual meeting of
stockholders; the term of office of the third class (Class III)
to expire at the third annual meeting of stockholders; and
thereafter for each such term to expire at each third succeeding
annual meeting of stockholders after such election. Subject to
the rights of the holders of any series of Preferred Stock then
outstanding, a vacancy resulting from the removal of a director
by the stockholders as provided in Article SIXTH, Section C below
may be filled at a special meeting of the stockholders held for
that purpose. All directors shall hold office until the
expiration of the term for which elected, and until their
respective successors are elected, except in the case of the
death, resignation, or removal of any director.
B. Subject to the rights of the holders of any series of Preferred
Stock then outstanding, newly created directorships resulting
from any increase in the authorized number of directors or any
vacancies in the Board of Directors resulting from death,
resignation or other cause (other than removal from office by a
vote of the stockholders) may be filled only by a majority vote
of the directors then in office, though less than a quorum, and
directors so chosen shall hold office for a term expiring at the
next annual meeting of stockholders at which the term of office
of the class to which they have been elected expires, and until
their respective successors are elected, except in the case of
the death, resignation, or removal of any director. No decrease
in the number of directors constituting the Board of Directors
shall shorten the term of any incumbent director.
C. Subject to the rights of the holders of any series of Preferred
Stock then outstanding, any directors, or the entire Board of
Directors, may be
3
<PAGE> 4
removed from office at any time, with or without cause, but only
by the affirmative vote of the holders of at least a majority of
the voting power of all of the then outstanding shares of capital
stock of the Corporation entitled to vote generally in the
election of directors, voting together as a single class.
Vacancies in the Board of Directors resulting from such removal
may be filled by a majority of the directors then in office,
though less than a quorum, or by the stockholders as provided in
Article SIXTH, Section A above. Directors so chosen shall hold
office for a term expiring at the next annual meeting of
stockholders at which the term of office of the class to which
they have been elected expires, and until their respective
successors are elected, except in the case of the death,
resignation, or removal of any director.
SEVENTH: The Board of Directors is expressly empowered to adopt, amend or
repeal Bylaws of the Corporation. Any adoption, amendment or
repeal of Bylaws of the Corporation by the Board of Directors
shall require the approval of a majority of the total number of
authorized directors (whether or not there exist any vacancies in
previously authorized directorships at the time any resolution
providing for adoption, amendment or repeal is presented to the
Board). The stockholders shall also have power to adopt, amend or
repeal the Bylaws of the Corporation. Any adoption, amendment or
repeal of Bylaws of the Corporation by the stockholders shall
require, in addition to any vote of the holders of any class or
series of stock of the Corporation required by law or by this
Certificate of Incorporation, the affirmative vote of the holders
of at least sixty-six and two-thirds percent (66-2/3%) of the
voting power of all of the then outstanding shares of the capital
stock of the Corporation entitled to vote generally in the
election of directors, voting together as a single class.
EIGHTH: A director of the Corporation shall not be personally liable to
the Corporation or its stockholders for monetary damages for
breach of fiduciary duty as a director, except for liability (i)
for any breach of the director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involved intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the Delaware
General Corporation Law, or (iv) for any transaction from which
the director derived an improper personal benefit.
If the Delaware General Corporation Law is hereafter amended to
authorize the further elimination or limitation of the liability
of a director, then the liability of a director of the
Corporation shall be eliminated or limited to the fullest extent
permitted by the Delaware General Corporation Law, as so amended.
4
<PAGE> 5
Any repeal or modification of the foregoing provisions of this
Article EIGHTH by the stockholders of the Corporation shall not
adversely affect any right or protection of a director of the
Corporation existing at the time of such repeal or modification.
NINTH: The Corporation reserves the right to amend or repeal any
provision contained in this Certificate of Incorporation in the
manner prescribed by the laws of the State of Delaware and all
rights conferred upon stockholders are granted subject to this
reservation; provided, however, that, notwithstanding any other
provision of this Certificate of Incorporation or any provision
of law which might otherwise permit a lesser vote or no vote, but
in addition to any vote of the holders of any class or series of
the stock of this Corporation required by law or by this
Certificate of Incorporation, the affirmative vote of the holders
of at least 66-2/3% of the voting power of all of the then
outstanding shares of the capital stock of the Corporation
entitled to vote generally in the election of directors, voting
together as a single class, shall be required to amend or repeal
this Article NINTH, Article FIFTH, Article SIXTH, Article SEVENTH
or Article EIGHTH.
[remainder of page intentionally left blank]
5
<PAGE> 6
IN WITNESS WHEREOF, this Restated Certificate of Incorporation has been
executed on behalf of the Corporation by Morris S. Young, its President and
Chief Executive Officer and attested by Guy D. Atwood, its Secretary, this 18th
day of June, 1998.
AMERICAN XTAL TECHNOLOGY, INC.
By: /s/ Morris S. Young
--------------------------------
Morris S. Young, President and
Chief Executive Officer
Attest:
By: /s/ Guy D. Atwood
---------------------------
Guy D. Atwood, Secretary
6
<PAGE> 1
Exhibit 10.8
LOAN AGREEMENT
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No. Call 19 Collateral Account Officer Initials
$15,000,000.00 09-18-1998 320-18 070 0215644521 JAF35
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any
particular loan or item.
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Borrower: AMERICAN XTAL TECHNOLOGY Lender: U.S. BANK NATIONAL ASSOCIATION
4311 SOLAR WAY Fremont Business Banking
FREMONT, CA 94538 39510 Paseo Padre Pkwy
Fremont, CA 94538
THIS LOAN AGREEMENT between AMERICAN XTAL TECHNOLOGY ("Borrower") and U.S.
BANK NATIONAL ASSOCIATION ("Lender") is made and executed on the following terms
and conditions. Borrower has received prior commercial loans from Lender or has
applied to Lender for a commercial loan or loans and other financial
accommodations, including those which may be described on any exhibit or
schedule attached to this Agreement. All such loans and financial
accommodations, together with all future loans and financial accommodations from
Lender to Borrower, are referred to in this Agreement individually as the "Loan"
and collectively as the "Loans." Borrower understands and agrees that: (a) in
granting, renewing, or extending any Loan, Lender is relying upon Borrower's
representations, warranties, and agreements, as set forth in this Agreement; (b)
the granting, renewing, or extending of any Loan by Lender at all times shall be
subject to Lender's sole judgment and discretion; and (c) all such Loans shall
be and shall remain subject to the following terms and conditions of this
Agreement.
TERM. This Agreement shall be effective as of SEPTEMBER 18, 1998, and shall
continue thereafter until all Indebtedness of Borrower to Lender has been
performed in full and the parties terminate this Agreement in writing.
DEFINITIONS. The following words shall have the following meanings when
used in this Agreement. Terms not otherwise defined in this Agreement shall have
the meanings attributed to such terms in the Uniform Commercial Code. All
references to dollar amounts shall mean amounts in lawful money of the United
States of America.
Agreement. The word "Agreement" means this Loan Agreement, as this Loan
Agreement may be amended or modified from time to time, together with all
exhibits and schedules attached to this Loan Agreement from time to time.
Account. The word "Account" means a trade account, account receivable, or
other right to payment for goods sold or services rendered owing to Borrower (or
to a third party grantor acceptable to Lender).
Account Debtor. The words "Account Debtor" mean the person or entity
obligated upon an Account.
<PAGE> 2
Advance. The word "Advance" means a disbursement of Loan funds under this
Agreement.
Borrower. The word "Borrower" means AMERICAN XTAL TECHNOLOGY. The word
"Borrower" also includes, as applicable, all subsidiaries and affiliates of
Borrower as provided below in the paragraph titled "Subsidiaries and
Affiliates."
Borrowing Base. The words "Borrowing Base" mean as determined by Lender
from time to time, the lesser of (a) $15,000,000.00; or (b) the sum of (i)
80.000% of the aggregate amount of Eligible Accounts, plus (ii) 50.000% of the
aggregate amount of eligible Inventory (not to exceed in corresponding Loan
amount based on Eligible Inventory of $5,500,000.00). The Borrowing Base formula
applies only when borrowings exceed $5,000,000.00
Business Day. The words "Business Day" mean a day on which commercial banks
are open for business in the State of California.
CERCLA. The word "CERCLA" means the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended.
Cash Flow. The words "Cash Flow" mean net income after taxes, and exclusive
of extraordinary gains and income, plus depreciation and amortization.
Collateral. The word "Collateral" means and includes without limitation all
property and assets granted as collateral security for a Loan, whether real or
personal property, whether granted directly or indirectly, whether granted now
or in the future, and whether granted in the form of a security interest,
mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust,
factor's lien, equipment trust, conditional sale, trust receipt, lien, charge,
lien or title retention contract, lease or consignment intended as a security
device, or any other security or lien interest whatsoever, whether created by
law, contract, or otherwise. The word "Collateral" includes without limitation
all collateral described below in the section titled "COLLATERAL."
Debt. The word "Debt" means all of Borrower's liabilities excluding
Subordinated Debt.
Eligible Accounts. The words "Eligible Accounts" mean, at any time, all of
Borrower's Accounts which contain selling terms and conditions acceptable to
Lender. The net amount of any Eligible Account against which Borrower may borrow
shall exclude all returns, discounts, credits, and offsets of any nature. Unless
otherwise agreed to by Lender in writing, Eligible Accounts do not include:
(a) Accounts with respect to which the Account Debtor is an officer,
an employee or agent of Borrower.
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(b) Accounts with respect to which the Account Debtor is a subsidiary
of, or affiliated with or related to Borrower or its shareholders, officers, or
directors.
(c) Accounts with respect to which goods are placed on consignment,
guaranteed sale, or other terms by reason of which the payment by the Account
Debtor may be conditional.
(d) Accounts with respect to which Borrower is or may become liable
to the Account Debtor for goods sold or services rendered by the Account Debtor
to Borrower.
(e) Accounts which are subject to dispute, counterclaim, or setoff.
(f) Accounts with respect to which the goods have not been shipped or
delivered, or the services have not been rendered, to the Account Debtor.
(g) Accounts with respect to which Lender, in its sole discretion,
deems the creditworthiness or financial condition of the Account Debtor to be
unsatisfactory.
(h) Accounts of any Account Debtor who has filed or has had filed
against it a petition in bankruptcy or an application for relief under any
provision of any state or federal bankruptcy, insolvency, or debtor-in-relief
acts; or who has had appointed a trustee, custodian, or receiver for the assets
of such Account Debtor; or who has made an assignment for the benefit of
creditors or has become insolvent or fails generally to pay its debts (including
its payrolls) as such debts become due.
(i) Accounts with respect to which the Account Debtor is the United
States government or any department or agency of the United States.
(j) Accounts which have not been paid in full within 90 DAYS from the
invoice date. The entire balance of any Account of any single Account debtor
will be ineligible whenever the portion of the Account which has not been paid
within 90 DAYS from the invoice date is in excess of 25.000% of the total amount
outstanding on the Account.
(k) That portion of the Accounts of any single Account Debtor which
exceeds 20.000% of all of Borrower's Accounts.
(l) Accounts with respect to Datings, Progress Billings, Retainage,
Cash Sales, Cash on Delivery, Potential Offsets and Service Charges.
(m) Accounts with respect to which the Account Debtor is not a
resident of the United States, except to the extent such Accounts are supported
by insurance, bonds or other assurances satisfactory to Lender. (Foreign
advances will be allowed as pre-qualified by CRD).
Eligible Inventory. The words "Eligible Inventory" mean, at any time, all
of Borrower's Inventory as defined below except:
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(a) Inventory which is not owned by Borrower free and clear of all
security interests, liens, encumbrances, and claims of third parties.
(b) Inventory which Lender, in its sole discretion, deems to be
obsolete, unsalable, damaged, defective, or unfit for further processing.
(c) Eligible inventory for purposes of determining the Borrower's
Borrowing Base shall be defined as raw material at cost and scrap value of WIP
and finished goods.
ERISA. The word "ERISA" means the Employee Retirement Income Security Act
of 1974, as amended.
Event of Default. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section titled
"EVENTS OF DEFAULT."
Expiration Date. The words "Expiration Date" mean the date of termination
of Lender's commitment to lend under this Agreement.
Grantor. The word "Grantor" means and includes without limitation each and
all of the persons or entities granting a Security Interest in any Collateral
for the Indebtedness, including without limitation all Borrowers granting such a
Security Interest.
Guarantor. The word "Guarantor" means and includes without limitation each
and all of the guarantors, sureties, and accommodation parties in connection
with any indebtedness.
Indebtedness. The word "Indebtedness" means and includes without limitation
all Loans, together with all other obligations, debts and liabilities of
Borrower to Lender, or any one or more of them, as well as all claims by Lender
against Borrower, or any one or more of them; whether now or hereafter existing,
voluntary or involuntary, due or not due, absolute or contingent, liquidated or
unliquidated; whether Borrower may be liable individually or jointly with
others; whether Borrower may be obligated as a guarantor, surety, or otherwise;
whether recovery upon such indebtedness may be or hereafter may become barred by
any statute of limitations; and whether such Indebtedness may be or hereafter
may become otherwise unenforceable.
Inventory. The word "Inventory" means all of Borrower's raw materials, work
in process, finished goods, merchandise, parts and supplies, of every kind and
description, and goods held for sale or lease or furnished under contracts of
service in which Borrower now has or hereafter acquires any right, whether held
by Borrower or others, and all documents of title, warehouse receipts, bills of
lading, and all other documents of every type covering all or any part of the
foregoing. Inventory includes inventory temporarily out of Borrower's custody or
possession and all returns on Accounts.
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Lender. The word "Lender" means U.S. BANK NATIONAL ASSOCIATION, its
successors and assigns.
Line of Credit. The words "Line of Credit" mean the credit facility
described in the Section titled "LINE OF CREDIT" below.
Liquid Assets. The words "Liquid Assets" mean Borrower's cash on hand plus
Borrower's readily marketable securities.
Loan. The word "Loan" or "Loans" means and includes without limitation any
and all commercial loans and financial accommodations from Lender to Borrower,
whether now or hereafter existing, and however evidenced, including without
limitation those loans and financial accommodations described herein or
described on any exhibit or schedule attached to this Agreement from time to
time.
Note. The word "Note" means and includes without limitation Borrower's
promissory note or notes, if any, evidencing Borrower's Loan obligations in
favor of Lender, as well as any substitute, replacement or refinancing note or
notes therefor.
Permitted Liens. The words "Permitted Liens" mean: (a) liens and security
interests securing indebtedness owed by Borrower to Lender; (b) liens for taxes,
assessments, or similar charges either not yet due or being contested in good
faith; (c) liens of materialmen, mechanics, warehousemen, or carriers, or other
like liens arising in the ordinary course of business and securing obligations
which are not yet delinquent; (d) purchase money liens or purchase money
security interests upon or in any property acquired or held by Borrower in the
ordinary course of business to secure indebtedness outstanding on the date of
this Agreement or permitted to be incurred under the paragraph of this Agreement
titled "Indebtedness and Liens"; (e) liens and security interests which, as of
the date of this Agreement, have been disclosed to and approved by the Lender in
writing; and (f) those liens and security interests which in the aggregate
constitute an immaterial and insignificant monetary amount with respect to the
net value of Borrower's assets.
Related Documents. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds of
trust, and all other instruments, agreements and documents, whether now or
hereafter existing, executed in connection with the Indebtedness.
Security Agreement. The words "Security Agreement" mean and include without
limitation any agreements, promises, covenants, arrangements, understandings or
other agreements, whether created by law, contract, or otherwise, evidencing,
governing, representing, or creating a Security Interest.
Security Interest. The words "Security Interest" mean and include without
limitation any type of collateral security, whether in the form of a lien,
charge, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel
trust, factor's lien, equipment trust,
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conditional sale, trust receipt, lien or title retention contract, lease or
consignment intended as a security device, or any other security or lien
interest whatsoever, whether created by law, contract, or otherwise.
SARA. The word "SARA" means the Superfund Amendments and Reauthorization
Act of 1986 as now or hereafter amended.
Subordinated Debt. The words "Subordinated Debt" mean indebtedness and
liabilities of Borrower which have been subordinated by written agreement to
indebtedness owed by Borrower to Lender in form and substance acceptable to
Lender.
Tangible Net Worth. The words "Tangible Net Worth" mean Borrower's total
assets excluding all intangible assets (i.e., goodwill, trademarks, patents,
copyrights, organizational expenses, and similar intangible items, but including
leaseholds and leasehold improvements) less total Debt.
Working Capital. The words "Working Capital" mean Borrower's current
assets, excluding prepaid expenses, less Borrower's current liabilities.
LINE OF CREDIT. Lender agrees to make Advances to Borrower from time to
time from the date of this Agreement to the Expiration Date, provided the
aggregate amount of such Advances outstanding at any time does not exceed the
Borrowing Base. Within the foregoing limits, Borrower may borrow, partially or
wholly prepay, and reborrow under this Agreement as follows.
Conditions Precedent to Each Advance. Lender's obligation to make any
Advance to or for the account of Borrower under this Agreement is subject to the
following conditions precedent, with all documents, instruments, opinions,
reports, and other items required under this Agreement to be in form and
substance satisfactory to Lender:
(a) Lender shall have received evidence that this Agreement and all
Related Documents have been duly authorized, executed, and delivered by Borrower
to Lender.
(b) Lender shall have received such opinions of counsel, supplemental
opinions, and documents as Lender may request.
(c) The security interests in the Collateral shall have been duly
authorized, created, and perfected with first lien priority and shall be in full
force and effect.
(d) All guaranties required by Lender for the Line of Credit shall
have been executed by each Guarantor, delivered to Lender, and be in full force
and effect.
(e) Lender, at its option and for its sole benefit, shall have
conducted an audit of Borrower's Accounts, Inventory, books, records, and
operations, and Lender shall be satisfied as to their condition.
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(f) Borrower shall have paid to Lender all fees, costs, and expenses
specified in this Agreement and the Related Documents as are then due and
payable.
(g) There shall not exist at the time of any Advance a condition
which would constitute an Event of Default under this Agreement, and Borrower
shall have delivered to Lender the compliance certificate called for in the
paragraph below titled "Compliance Certificate."
Making Loan Advances. Advances under the credit facility, as well as
directions for payment from Borrower's accounts, may be requested orally or in
writing by authorized persons. Lender may, but need not, require that all oral
requests be confirmed in writing. Each Advance shall be conclusively deemed to
have been made at the request of and for the benefit of Borrower (a) when
credited to any deposit account of Borrower maintained with Lender or (b) when
advanced in accordance with the instructions of an authorized person. Lender, at
its option, may set a cutoff time, after which all requests for Advances will be
treated as having been requested on the next succeeding Business Day.
Mandatory Loan Repayments. If at any time the aggregate principal amount of
the outstanding Advances shall exceed the applicable Borrowing Base, Borrower,
immediately upon written or oral notice from Lender, shall pay to Lender an
amount equal to the difference between the outstanding principal balance of the
Advances and the Borrowing Base. On the Expiration Date, Borrower shall pay to
Lender in full the aggregate unpaid principal amount of all Advances then
outstanding and all accrued unpaid interest, together with all other applicable
fees, costs and charges, if any, not yet paid.
Loan Account. Lender shall maintain on its books a record of account in
which Lender shall make entries for each Advance and such other debits and
credits as shall be appropriate in connection with the credit facility. Lender
shall provide Borrower with periodic statements of Borrower's account, which
statements shall be considered to be correct and conclusively binding on
Borrower unless Borrower notifies Lender to the contrary within thirty (30) days
after Borrower's receipt of any such statement which Borrower deems to be
incorrect.
COLLATERAL. To secure payment of the Line of Credit and performance of all
other Loans, obligations and duties owed by Borrower to Lender, Borrower (and
others, if required) shall grant to Lender Security Interests in such property
and assets as Lender may require (the "Collateral"), including without
limitation Borrower's present and future Accounts, general intangibles, and
Inventory. Lender's Security Interests in the Collateral shall be continuing
liens and shall include the proceeds and products of the Collateral, including
without limitation the proceeds of any insurance. With respect to the
Collateral, Borrower agrees and represents and warrants to Lender:
Perfection of Security Interests. Borrower agrees to execute such financing
statements and to take whatever other actions are requested by Lender to perfect
and continue Lender's Security Interests in the Collateral Upon request of
Lender, Borrower will deliver to Lender any and all of the documents evidencing
or constituting the Collateral, and Borrower will note Lender's interest upon
any and all chattel paper if not delivered to Lender for
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possession by Lender. Contemporaneous with the execution of this Agreement,
Borrower will execute one or more UCC financing statements and any similar
statements as may be required by applicable law, and will file such financing
statements and all such similar statements in the appropriate location or
locations. Borrower hereby appoints Lender as its irrevocable attorney-in-fact
for the purpose of executing any documents necessary to perfect or to continue
any Security Interest. Lender may at any time, and without further authorization
from Borrower, file a carbon, photograph, facsimile, or other reproduction of
any financing statement for use as a financing statement. Borrower will
reimburse Lender for all expenses for the perfection, termination, and the
continuation of the perfection of Lender's security interest in the Collateral.
Borrower promptly will notify Lender of any change in Borrower's name including
any change to the assumed business names of Borrower. Borrower also promptly
will notify Lender of any change in Borrower's Social Security Number or
Employer Identification Number. Borrower further agrees to notify Lender in
writing prior to any change in address or location of Borrower's principal
governance office or should Borrower merge or consolidate with any other entity.
Collateral Records. Borrower does now, and at all times hereafter shall,
keep correct and accurate records of the Collateral, all of which records shall
be available to Lender or Lender's representative upon demand for inspection and
copying at any reasonable time. With respect to the Accounts, Borrower agrees to
keep and maintain such records as Lender may require, including without
limitation information concerning Eligible Accounts and Account balances and
agings. With respect to the Inventory, Borrower agrees to keep and maintain such
records as Lender may require, including without limitation information
concerning Eligible Inventory and records itemizing and describing the kind,
type, quality, and quantity of Inventory, Borrower's Inventory costs and selling
prices, and the daily withdrawals and additions to Inventory.
Collateral Schedules. Concurrently with the execution and delivery of this
Agreement, Borrower shall execute and deliver to Lender schedules of Accounts
and Inventory and Eligible Accounts and Eligible Inventory, in form and
substance satisfactory to the Lender. Thereafter and at such frequency as Lender
shall require, Borrower shall execute and deliver to Lender such supplemental
schedules of Eligible Accounts and Eligible Inventory and such other matters and
information relating to the Accounts and Inventory as Lender may request.
Representations and Warranties Concerning Accounts. With respect to the
Accounts, Borrower represents and warrants to Lender: (a) Each Account
represented by Borrower to be an Eligible Account for purposes of this Agreement
conforms to the requirements of the definition of an Eligible Account; (b) All
Account information listed on schedules delivered to Lender will be true and
correct, subject to immaterial variance; and (c) Lender, its assigns, or agents
shall have the right at any time and at Borrower's expense to inspect, examine,
and audit Borrower's records and to confirm with Account Debtors the accuracy of
such Accounts.
Representations and Warranties Concerning Inventory. With respect to the
Inventory, Borrower represents and warrants to Lender: (a) All Inventory
represented by
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Borrower to be Eligible Inventory for purposes of this Agreement conforms to the
requirements of the definition of Eligible Inventory; (b) All Inventory values
listed on schedules delivered to Lender will be true and correct, subject to
immaterial variance; (c) The value of the Inventory will be determined on a
consistent accounting basis; (d) Except as agreed to the contrary by Lender in
writing, all Eligible Inventory is now and at all times hereafter will be in
Borrower's physical possession and shall not be held by others on consignment,
sale on approval, or sale or return; (e) Except as reflected in the Inventory
schedules delivered to Lender, all Eligible Inventory is now and at all times
hereafter will be of good and merchantable quality, free from defects; (f)
Eligible Inventory is not now and will not at any time hereafter be stored with
a bailee, warehouseman, or similar party without Lender's prior written consent,
and, in such event, Borrower will concurrently at the time of bailment cause any
such bailee, warehouseman, or similar party to issue and deliver to Lender, in
form acceptable to Lender, warehouse receipts in Lender's name evidencing the
storage of Inventory; and (g) Lender, its assigns, or agents shall have the
right at any time and at Borrower's expense to inspect and examine the Inventory
and to check and test the same as to quality, quantity, value, and condition.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender,
as of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any Loan,
and at all times any Indebtedness exists:
Organization. Borrower is a corporation which is duly organized, validly
existing, and in good standing under the laws of the State of California and is
validly existing and in good standing in all states in which Borrower is doing
business. Borrower has the full power and authority to own its properties and to
transact the businesses in which it is presently engaged or presently proposes
to engage. Borrower also is duly qualified as a foreign corporation and is in
good standing in all states in which the failure to so qualify would have a
material adverse effect on its businesses or financial condition.
Authorization. The execution, delivery, and performance of this Agreement
and all Related Documents by Borrower, to the extent to be executed, delivered
or performed by Borrower, have been duly authorized by all necessary action by
Borrower; do not require the consent or approval of any other person, regulatory
authority or governmental body; and do not conflict with, result in a violation
of, or constitute a default under (a) any provision of its articles of
incorporation or organization, or bylaws, or any agreement or other instrument
binding upon Borrower or (b) any law, governmental regulation, court decree, or
order applicable to Borrower.
Financial Information. Each financial statement of Borrower supplied to
Lender truly and completely disclosed Borrower's financial condition as of the
date of the statement, and there has been no material adverse change in
Borrower's financial condition subsequent to the date of the most recent
financial statement supplied to Lender. Borrower has no material contingent
obligations except as disclosed in such financial statements.
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Legal Effect. This Agreement constitutes, and any instrument or agreement
required hereunder to be given by Borrower when delivered will constitute,
legal, valid and binding obligations of Borrower enforceable against Borrower in
accordance with their respective terms.
Properties. Except for Permitted Liens, Borrower owns and has good title to
all of Borrower's properties free and clear of all Security Interests, and has
not executed any security documents or financing statements relating to such
properties. All of Borrower's properties are titled in Borrower's legal name,
and Borrower has not used, or filed a financing statement under, any other name
for at least the last (5) years.
Hazardous Substances. The terms "hazardous waste," "hazardous substance,"
"disposal," "release," and "threatened release," as used in this Agreement,
shall have the same meanings as set forth in the "CERCLA," "SARA," the Hazardous
Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource
Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., Chapters 6.5
through 7.7 of Division 20 of the California Health and Safety Code, Section
25100, et seq., or other applicable state or Federal laws, rules, or regulations
adopted pursuant to any of the foregoing. Except as disclosed to and
acknowledged by Lender in writing, Borrower represents and warrants that: (a)
During the period of Borrower's ownership of the properties, there has been no
use, generation, manufacture, storage, treatment, disposal, release or
threatened release of any hazardous waste or substance by any person on, under,
about or from any of the properties. (b) Borrower has no knowledge of, or reason
to believe that there has been (i) any use, generation, manufacture, storage,
treatment, disposal, release, or threatened release of any hazardous waste or
substance on, under, about or from the properties by any prior owners or
occupants of any of the properties, or (ii) any actual or threatened litigation
or claims of any kind by any person relating to such matters. (c) Neither
Borrower nor any tenant, contractor, agent or other authorized user of any of
the properties shall use, generate, manufacture, store, treat, dispose of, or
release any hazardous waste or substance on, under, about or from any of the
properties; and any such activity shall be conducted in compliance with all
applicable federal, state, and local laws, regulations, and ordinances,
including without limitation those laws, regulations and ordinances described
above. Borrower authorizes Lender and its agents to enter upon the properties to
make such inspections and tests as Lender may deem appropriate to determine
compliance of the properties with this section of the Agreement. Any inspections
or tests made by Lender shall be at Borrower's expense and for Lender's purposes
only and shall not be construed to create any responsibility or liability on the
part of Lender to Borrower or to any other person. The representations and
warranties contained herein are based on Borrower's due diligence in
investigating the properties for hazardous waste and hazardous substances.
Borrower hereby (a) releases and waives any future claims against Lender for
indemnity or contribution in the event Borrower becomes liable for cleanup or
other costs under any such laws, and (b) agrees to indemnify and hold harmless
Lender against any and all claims, losses, liabilities, damages, penalties, and
expenses which Lender may directly or indirectly sustain or suffer resulting
from a breach of this section of the Agreement or as a consequence of any use,
generation, manufacture, storage, disposal, release or threatened release of a
hazardous waste or substance on the properties. The provisions of this section
of the Agreement, including the obligation to
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indemnify, shall survive the payment of the Indebtedness and the termination or
expiration of this Agreement and shall not be affected by Lender's acquisition
of any interest in any of the properties, whether by foreclosure or otherwise.
Litigation and Claims. No litigation, claim, investigation, administrative
proceeding or similar action (including those for unpaid taxes) against Borrower
is pending or threatened, and no other event has occurred which may materially
adversely affect Borrower's financial condition or properties, other than
litigation, claims, or other events, if any, that have been disclosed to and
acknowledged by Lender in writing.
Taxes. To the best of Borrower's knowledge, all tax returns and reports of
Borrower that are or were required to be filed, have been filed, and all taxes,
assessments and other governmental charges have been paid in full, except those
presently being or to be contested by Borrower in good faith in the ordinary
course of business and for which adequate reserves have been provided.
Lien Priority. Unless otherwise previously disclosed to Lender in writing,
Borrower has not entered into or granted any Security Agreements, or permitted
the filing or attachment of any Security Interests on or affecting any of the
Collateral directly or indirectly securing repayment of Borrower's Loan and
Note, that would be prior or that may in any way be superior to Lender's
Security Interests and rights in and to such Collateral.
Binding Effect. This Agreement, the Note, all Security Agreements directly
or indirectly securing repayment of Borrower's Loan and Note and all of the
Related Documents are binding upon Borrower as well as upon Borrower's
successors, representatives and assigns, and are legally enforceable in
accordance with their respective terms.
Commercial Purposes. Borrower intends to use the Loan proceeds solely for
business or commercial related purposes.
Employee Benefit Plans. Each employee benefit plan as to which Borrower may
have any liability complies in all material respects with all applicable
requirements of law and regulations, and (i) no Reportable Event nor Prohibited
Transaction (as defined in ERISA) has occurred with respect to any such plan,
(ii) Borrower has not withdrawn from any such plan or initiated steps to do so,
(iii) no steps have been taken to terminate any such plan, and (iv) there are no
unfunded liabilities other than those previously disclosed to Lender in writing.
Location of Borrower's Offices and Records. Borrower's place of business,
or Borrower's chief executive office, if Borrower has more than one place of
business, is located at 4311 SOLAR WAY, FREMONT, CA 94538. Unless Borrower has
designated otherwise in writing this location is also the office or offices
where Borrower keeps its records concerning the Collateral.
Information. All information heretofore or contemporaneously herewith
furnished by Borrower to Lender for the purposes of or in connection with this
Agreement or any transaction contemplated hereby is, and all information
hereafter furnished by or on behalf
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of Borrower to Lender will be, true and accurate in every material respect on
the date as of which such information is dated or certified; and none of such
information is or will be incomplete by omitting to state any material fact
necessary to make such information not misleading.
Survival of Representations and Warranties. Borrower understands and agrees
that Lender, without independent investigation, is relying upon the above
representations and warranties in extending Loan Advances to Borrower. Borrower
further agrees that the foregoing representations and warranties shall be
continuing in nature and shall remain in full force and effect until such time
as Borrower's Indebtedness shall be paid in full, or until this Agreement shall
be terminated in the manner provided above, whichever is the last to occur.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that,
while this Agreement is in effect, Borrower will:
Litigation. Promptly inform Lender in writing of (a) all material adverse
changes in Borrower's financial condition, and (b) all existing and all
threatened litigation, claims, investigations, administrative proceedings or
similar actions affecting Borrower or any Guarantor which could materially
affect the financial condition of Borrower or the financial condition of any
Guarantor.
Financial Records. Maintain its books and records in accordance with
generally accepted accounting principles, applied on a consistent basis, and
permit Lender to examine and audit Borrower's books and records at all
reasonable times.
Financial Statements. Furnish Lender with, as soon as available, but in no
event later than ninety (90) days after the end of each fiscal year, Borrower's
balance sheet and income statement for the year ended, audited by a certified
public accountant satisfactory to Lender, and, as soon as available, but in no
event later than forty-five (45) days after the end of each fiscal quarter,
Borrower's balance sheet and profit and loss statement for the period ended,
prepared and certified as correct to the best knowledge and belief by Borrower's
chief financial officer or other officer or person acceptable to Lender. All
financial reports required to be provided under this Agreement shall be prepared
in accordance with generally accepted accounting principles, applied on a
consistent basis, and certified by Borrower as being true and correct.
Additional Information. Furnish such additional information and statements,
lists of assets and liabilities, agings of receivables and payables, inventory
schedules, budgets, forecasts, tax returns, and other reports with respect to
Borrower's financial condition and business operations as Lender may request
from time to time.
Financial Covenants and Ratios. Comply with the following covenants and
ratios:
Net Worth Ratio. Maintain a ratio of Total Liabilities to Tangible Net
Worth of less than 1.00 TO 1.00.
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Working Capital. Maintain Working Capital in excess of $30,000,00.00.
Current Ratio. Maintain a ratio of Current Assets to Current Liabilities in
excess of 1.50 TO 1.00.
Cash Flow Requirements. Maintain Cash Flow at not less than the following
level: 1.50 TO 1.00 DEFINED AS: NET PROFIT AFTER TAXES PLUS DEPRECIATION PLUS
AMORTIZATION PLUS INTEREST EXPENSE MINUS DIVIDENDS MINUS WITHDRAWS MINUS
INTERNALLY FUNDED FIXED ASSETS DIVIDED BY CURRENT PORTION LONG TERM DEBT PLUS
INTEREST EXPENSE. (ONE TIME ALLOWANCE OF $1,760,000.00 TO BE ADDED BACK TO CASH
FLOW FOR FISCAL YEAR 1998 TO COMPENSATE FOR NON-FINANCEABLE PORTION OF
TECHNOLOGY DRIVE PROPERTY PURCHASE EFFECTIVE JUNE 30, 1998). Except as provided
above, all computations made to determine compliance with the requirements
contained in this paragraph shall be made in accordance with generally accepted
accounting principles, applied on a consistent basis, and certified by Borrower
as being true and correct.
Insurance. Maintain fire and other risk insurance, public liability
insurance, and such other insurance as Lender may require with respect to
Borrower's properties and operations, in form, amounts, coverages and with
insurance companies reasonably acceptable to Lender. Borrower, upon request of
Lender, will deliver to Lender from time to time the policies or certificates of
insurance in form satisfactory to Lender, including stipulations that coverages
will not be canceled or diminished without at least ten (10) days' prior written
notice to Lender. Each insurance policy also shall include an endorsement
providing that coverage in favor of Lender will not be impaired in any way by
any act, omission or default of Borrower or any other person. In connection with
all policies covering assets in which Lender holds or is offered a security
interest for the Loans, Borrower will provide Lender with such loss payable or
other endorsements as Lender may require.
Insurance Reports. Furnish to Lender, upon request of Lender, reports on
each existing insurance policy showing such information as Lender may reasonably
request, including without limitation the following: (a) the name of the
insurer; (b) the risks insured; (c) the amount of the policy; (d) the properties
insured; (e) the then current property values on the basis of which insurance
has been obtained, and the manner of determining those values; and (f) the
expiration date of the policy. In addition, upon request of Lender (however not
more often than annually), Borrower will have an independent appraiser
satisfactory to Lender determine, as applicable, the actual cash value or
replacement cost of any Collateral. The cost of such appraisal shall be paid by
Borrower.
Other Agreements. Comply with all terms and conditions of all other
agreements, whether now or hereafter existing, between Borrower and any other
party and notify Lender immediately in writing of any default in connection with
any other such agreements.
Loan Fees and Charges. In addition to all other agreed upon fees and
charges, pay the following: BORROWER AGREES TO PAY LENDER A NONREFUNDABLE LOAN
FEE (FOR LETTER OF CREDIT) IN THE AMOUNT OF $59,933.00.
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<PAGE> 14
Loan Proceeds. Use all Loan proceeds solely for Borrower's business
operations, unless specifically consented to the contrary by Lender in writing.
Taxes, Charges and Liens. Pay and discharge when due all of its
indebtedness and obligations, including without limitation all assessments,
taxes, governmental charges, levies and liens, of every kind and nature, imposed
upon Borrower or its properties, income, or profits, prior to the date on which
penalties would attach, and all lawful claims that, if unpaid, might become a
lien or charge upon any of Borrower's properties, income, or profits. Provided
however, Borrower will not be required to pay and discharge any such assessment,
tax, charge, levy, lien or claim so long as (a) the legality of the same shall
be contested in good faith by appropriate proceedings, and (b) Borrower shall
have established on its books adequate reserves with respect to such contested
assessment, tax, charge, levy, lien, or claim in accordance with generally
accepted accounting practices. Borrower, upon demand of Lender, will furnish to
Lender evidence of payment of the assessments, taxes, charges, levies, liens and
claims and will authorize the appropriate governmental official to deliver to
Lender at any time a written statement of any assessments, taxes, charges,
levies, liens and claims against Borrower's properties, income, or profits.
Performance. Perform and comply with all terms, conditions, and provisions
set forth in this Agreement and in the Related Documents in a timely manner, and
promptly notify Lender if Borrower learns of the occurrence of any event which
constitutes an Event of Default under this Agreement or under any of the Related
Documents.
Operations. Maintain executive and management personnel with substantially
the same qualifications and experience as the present executive and management
personnel; provide written notice to Lender of any change in executive and
management personnel; conduct its business affairs in a reasonable and prudent
manner and in compliance with all applicable federal, state and municipal laws,
ordinances, rules and regulations respecting its properties, charters,
businesses and operations, including without limitation, compliance with the
Americans With Disabilities Act and with all minimum funding standards and other
requirements of ERISA and other laws applicable to Borrower's employee benefit
plans.
Inspection. Permit employees or agents of Lender at any reasonable time to
inspect any and all Collateral for the Loan or Loans and Borrower's other
properties and to examine or audit Borrower's books, accounts, and records and
to make copies and memoranda of Borrower's books, accounts, and records. If
Borrower now or at any time hereafter maintains any records (including without
limitation computer generated records and computer software programs for the
generation of such records) in the possession of a third party, Borrower, upon
request of Lender, shall notify such party to permit Lender free access to such
records at all reasonable times and to provide Lender with copies of any records
it may request, all at Borrower's expense.
Compliance Certificate. Unless waived in writing by Lender, provide Lender
QUARTERLY (WITHIN 45 DAYS) and at the time of each disbursement of Loan proceeds
with a certificate executed by Borrower's chief financial officer, or other
officer or person acceptable
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<PAGE> 15
to Lender, certifying that the representations and warranties set forth in this
Agreement are true and correct as of the date of the certificate and further
certifying that, as of the date of the certificate, no Event of Default exists
under this Agreement.
Environmental Compliance and Reports. Borrower shall comply in all respects
with all environmental protection federal, state and local laws, statutes,
regulations and ordinances; not cause or permit to exist, as a result of an
intentional or unintentional action or omission on its part or on the part of
any third party, on property owned and/or occupied by Borrower, any
environmental activity where damage may result to the environment, unless such
environmental activity is pursuant to and in compliance with the conditions of a
permit issued by the appropriate federal, state or local governmental
authorities; shall furnish to Lender promptly and in any event within thirty
(30) days after receipt thereof a copy of any notice, summons, lien, citation,
directive, letter or other communication from any governmental agency or
instrumentality concerning any intentional or unintentional action or omission
on Borrower's part in connection with any environmental activity whether or not
there is damage to the environmental and/or other natural resources.
Additional Assurances. Make, execute and deliver to Lender such promissory
notes, mortgages, deeds of trust, security agreements, financing statements,
instruments, documents and other agreements as Lender or its attorneys may
reasonably request to evidence and secure the Loans and to perfect all Security
Interests.
RECOVERY OF ADDITIONAL COSTS. If the imposition of or any change in any
law, rule, regulation or guideline, or the interpretation or application of any
thereof by any court or administrative or governmental authority (including any
request or policy not having the force of law) shall impose, modify or make
applicable any taxes (except U.S. federal, state or local income or franchise
taxes imposed on Lender), reserve requirements, capital adequacy requirements or
other obligations which would (a) increase the cost to Lender for extending or
maintaining the credit facilities to which this Agreement relates, (b) reduce
the amounts payable to Lender under this Agreement or the Related Documents, or
(c) reduce the rate of return on Lender's capital as a consequence of Lender's
obligations with respect to the credit facilities to which this Agreement
relates, then Borrower agrees to pay Lender such additional amounts as will
compensate Lender therefore, within five (5) days after Lender's written demand
for such payment, which demand shall be accompanied by an explanation of such
imposition or charge and a calculation in reasonable detail of the additional
amounts payable by Borrower, which explanation and calculations shall be
conclusive in the absence of manifest error.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while
this Agreement is in effect, Borrower shall not, without the prior written
consent of Lender:
Indebtedness and Liens. (a) Except for trade debt incurred in the normal
course of business and indebtedness to Lender contemplated by this Agreement,
create, incur or assume indebtedness for borrowed money, including capital
lease, (b) except as allowed as a Permitted Lien, sell, transfer, mortgage,
assign, pledge, lease, grant a security interest in, or
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<PAGE> 16
encumber any of Borrower's assets, or (c) sell with recourse any of Borrower's
accounts, except to Lender.
Continuity of Operations. (a) Engage in any business activities
substantially different than those in which Borrower is presently engaged, (b)
cease operations, liquidate, merge, transfer, acquire or consolidate with any
other entity, change ownership, change its name, dissolve or transfer or sell
Collateral out of the ordinary course of business, (c) pay any dividends on
Borrower's stock (other than dividends payable in its stock), provided, however
that notwithstanding the foregoing, but only so long as no Event of Default has
occurred and is continuing or would result from the payment of dividends, if
Borrower is a "Subchapter S Corporation" (as defined in the Internal Revenue
Code of 1986, as amended), Borrower may pay cash dividends on its stock to its
shareholders from time to time in amounts necessary to enable the shareholders
to pay income taxes and make estimated income tax payments to satisfy their
liabilities under federal and state law which arise solely from their status as
Shareholders of a Subchapter S Corporation because of their ownership of shares
of stock of Borrower, or (d) purchase or retire any of Borrower's outstanding
shares or alter or amend Borrower's capital structure.
Loans, Acquisitions and Guaranties. (a) Loan, invest in or advance money or
assets, (b) purchase, create or acquire any interest in any other enterprise or
entity, or (c) incur any obligation as surety or guarantor other than in the
ordinary course of business.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan
to Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loan proceeds if:
(a) Borrower or any Guarantor is in default under the terms of this Agreement or
any of the Related Documents or any other agreement that Borrower or any
Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent,
files a petition in bankruptcy or similar proceedings, or is adjudged a
bankrupt; (c) there occurs a material adverse change in Borrower's financial,
condition, in the financial condition of any Guarantor, or in the value of any
Collateral securing any Loan; or (d) any Guarantor seeks, claims or otherwise
attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any
other loan with Lender.
ADDITIONAL DEFINITIONS.
Current Assets. The words "Current Assets" mean Borrower's cash on hand
plus Borrower's receivables plus inventory.
Current Liabilities. The words "Current Liabilities" mean all Borrower's
notes payable plus Borrower's accounts payable plus Borrower's income taxes
payable plus Borrower's accruals plus Borrower's current portion of long term
debt.
Current Ratio. The words "Current Ratio" mean Borrower's total Current
Assets divided by Borrower's total Current Liabilities.
BORROWING BASE CERTIFICATE. Unless waived in writing by Lender, Borrower
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<PAGE> 17
agrees to provide Lender with a Borrower's Certificate within THIRTY (30) days
after the end of each month (if borrowings exceeds $5,000,000.00). Each
"Borrower's Certificate" shall be in a form (Lender form #63-5900) acceptable to
Lender, duly executed by Borrower and detailing the status of the Line of Credit
as of the date thereon.
AGING AND LISTING OF ACCOUNTS RECEIVABLE AND PAYABLE. Borrower covenants
and agrees with Lender that, while this Agreement is in effect, Borrower shall
deliver to Lender within THIRTY (30) DAYS after the end of each month (if
borrowings exceed $5,000,000.00), a detailed aging of Borrower's accounts and
contracts receivable and accounts payable as of the last day of that month
together with an explanation of any adjustments made at the end of that month,
all in a form acceptable to Lender.
CUSTOMER LISTING. Borrower agrees with Lender that, while this Agreement is
in effect, Borrower will furnish Lender with, as soon as available after the end
of each fiscal year, a listing of Account Debtors and their addresses, current
as of the year end, in form satisfactory to Lender.
COLLATERAL AUDITS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, collateral audits will be performed annually.
TANGIBLE NET WORTH. Maintain a Minimum Tangible Net Worth of not less than
$44,000,000.00 (step-up by 100% of any new equity).
INVENTORY REPORTING. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower shall deliver to Lender after the end of
each month, a schedule of Eligible Inventory to include raw materials at cost
plus scrap value of work in progress and finished goods when borrowings exceed
$5,000,000.00.
INVESTMENT ACQUISITIONS. Borrower covenants and agrees with Lender that,
while this Agreement is in effect, Borrower shall not, without prior written
consent of Lender, make any Investment Acquisitions over $250,000.00
PROFITABILITY. Borrower covenants and agrees with Lender that, while this
Agreement is in effect, Borrower shall maintain semi-annual profitability
greater than zero.
ACCESS LAWS. An exhibit, titled "ACCESS LAWS," is attached to this
Agreement and by this reference is made a part of this Agreement just as if all
the provisions, terms and conditions of the Exhibit had been fully set forth in
this Agreement.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of
Default under this Agreement:
Default on Indebtedness. Failure of Borrower to make any payment when due
on the Loans.
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Other Defaults. Failure of Borrower or any Grantor to comply with or to
perform when due any other term, obligation, covenant or condition contained in
this Agreement or in any of the Related Documents, or failure of Borrower to
comply with or to perform any other term, obligation, covenant or condition
contained in any other agreement between Lender and Borrower.
Default in Favor of Third Parties. Should Borrower or any Grantor default
under any loan, extension of credit, security agreement, purchase or sales
agreement, or any other agreement, in favor of any other creditor or person that
may materially affect any of Borrower's property or Borrower's or any Grantor's
ability to repay the Loans or perform their respective obligations under this
Agreement or any of the Related Documents.
False Statements. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Borrower or any Grantor under this
Agreement or the Related Documents is false or misleading in any material
respect at the time made or furnished, or becomes false or misleading at any
time thereafter.
Defective Collateralization. This Agreement or any of the Related Documents
ceases to be in full force and effect (including failure of any Security
Agreement to create a valid and perfected Security Interest) at any time and for
any reason.
Insolvency. The dissolution or termination of Borrower's existence as a
going business, the insolvency of Borrower, the appointment of a receiver for
any part of Borrower's property, any assignment for the benefit of creditors,
any type of creditor workout, or the commencement of any proceeding under any
bankruptcy or insolvency laws by or against Borrower.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help, repossession
or any other method, by any creditor of Borrower, any creditor of any Grantor
against any collateral securing the Indebtedness, or by any governmental agency.
This includes a garnishment, attachment, or levy on or of any of Borrower's
deposit accounts with Lender.
Events Affecting Guarantor. Any of the preceding events occurs with respect
to any Guarantor of any of the Indebtedness or any Guarantor dies or becomes
incompetent, or revokes or disputes the validity of, or liability under, any
Guaranty of the Indebtedness.
Change in Ownership. Any change in ownership of twenty-five percent (25%)
or more of the common stock of Borrower.
Adverse Change. A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness is impaired.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except
where otherwise provided in this Agreement or the Related Documents, all
commitments and
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obligations of Lender under this Agreement or the Related Documents or any other
agreement immediately will terminate (including any obligation to make Loan
Advances or disbursements), and, at Lender's option, all Indebtedness
immediately will become due and payable, all without notice of any kind to
Borrower, except that in the case of an Event of Default of the type described
in the "Insolvency" subsection above, such acceleration shall be automatic and
not optional. In addition, Lender shall have all the rights and remedies
provided in the Related Documents or available at law, in equity, or otherwise.
Except as may be prohibited by applicable law, all of Lender's rights and
remedies shall be cumulative and may be exercised singularly or concurrently.
Election by Lender to pursue any remedy shall not exclude pursuit of any other
remedy, and an election to make expenditures or to take action to perform an
obligation of Borrower or of any Grantor shall not affect Lender's right to
declare a default and to exercise its rights and remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part
of this Agreement:
Amendments. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to the
matters set forth in this Agreement. No alteration of or amendment to this
Agreement shall be effective unless given in writing and signed by the party or
parties sought to be charged or bound by the alteration or amendment.
APPLICABLE LAW. THIS AGREEMENT HAS BEEN DELIVERED TO LENDER AND ACCEPTED BY
LENDER IN THE STATE OF CALIFORNIA. IF THERE IS A LAWSUIT, BORROWER AGREES UPON
LENDER'S REQUEST TO SUBMIT TO THE JURISDICTION OF THE COURTS OF SACRAMENTO
COUNTY, THE STATE OF CALIFORNIA. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA.
Caption Headings. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions of
this Agreement.
Multiple Parties; Corporate Authority. All obligations of Borrower under
this Agreement shall be joint and several, and all references to Borrower shall
mean each and every Borrower. This means that each of the persons signing below
is responsible for ALL obligations in this Agreement.
Consent to Loan Participation. Borrower agrees and consents to Lender's
sale or transfer, whether now or later, of one or more participation interests
in the Loans to one or more purchasers, whether related or unrelated to Lender.
Lender may provide, without any limitation whatsoever, to any one or more
purchasers, or potential purchasers, any information or knowledge Lender may
have about Borrower or about any other matter relating to the Loan, and Borrower
hereby waives any rights to privacy it may have with respect to such matters.
Borrower additionally waives any and all notices of sale of participation
interests, as well as all notices of any repurchase of such participation
interests. Borrower also agrees that the purchasers of any such participation
interests will be considered as the absolute owners of such interests in the
Loans and will have all the rights granted under the participation agreement or
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agreements governing the sale of such participation interests. Borrower further
waives all rights of offset or counterclaim that it may have now or later
against Lender or against any purchaser of such a participation interest and
unconditionally agrees that either Lender or such purchaser may enforce
Borrower's obligation under the Loans irrespective of the failure or insolvency
of any holder of any interest in the Loans. Borrower further agrees that the
purchaser of any such participation interests may enforce its interests
irrespective of any personal claims or defenses that Borrower may have against
Lender.
Costs and Expenses. Borrower agrees to pay upon demand all of Lender's
expenses, including without limitation attorneys' fees, incurred in connection
with the preparation, execution, enforcement, modification and collection of
this Agreement or in connection with the Loans made pursuant to this Agreement.
Lender may pay someone else to help collect the Loans and to enforce this
Agreement, and Borrower will pay that amount. This includes, subject to any
limits under applicable law, Lender's attorneys' fees and Lender's legal
expenses, whether or not there is a lawsuit, including attorneys' fees for
bankruptcy proceedings (including efforts to modify or vacate any automatic stay
or injunction), appeals, and any anticipated post-judgment collection services.
Borrower also will pay any court costs, in addition to all other sums provided
by law.
Notices. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimile (unless otherwise required by
law), and shall be effective when actually delivered or when deposited with a
nationally recognized overnight courier or deposited in the United States mail,
first class, postage prepaid, addressed to the party to whom the notice is to be
given at the address shown above. Any party may change its address for notices
under this Agreement by giving formal written notice to the other parties,
specifying that the purpose of the notice is to change the party's address. To
the extent permitted by applicable law, if there is more than one Borrower,
notice to any Borrower will constitute notice to all Borrowers. For notice
purposes, Borrower will keep Lender informed at all times of Borrower's current
address(es).
Severability. If a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable as to any person or circumstance,
such finding shall not render that provision invalid or unenforceable as to any
other persons or circumstances. If feasible, any such offending provision shall
be deemed to be modified to be within the limits of enforceability or validity;
however, if the offending provision cannot be so modified, it shall be stricken
and all other provisions of this Agreement in all other respects shall remain
valid and enforceable.
Subsidiaries and Affiliates of Borrower. To the extent the context of any
provisions of this Agreement makes it appropriate, including without limitation
any representation, warranty or covenant, the word "Borrower" as used herein
shall include all subsidiaries and affiliates of Borrower. Notwithstanding the
foregoing however, under no circumstances shall this Agreement be construed to
require Lender to make any Loan or other financial accommodation to any
subsidiary or affiliate of Borrower.
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Successors and Assigns. All covenants and agreements contained by or on
behalf of Borrower shall bind its successors and assigns and shall inure to the
benefit of Lender, its successors and assigns. Borrower shall not, however, have
the right to assign its rights under this Agreement or any interest therein,
without the prior written consent of Lender.
Survival. All warranties, representations, and covenants made by Borrower
in this Agreement or in any certificate or other instrument delivered by
Borrower to Lender under this Agreement shall be considered to have been relied
upon by Lender and will survive the making of the Loan and delivery to Lender of
the Related Documents, regardless of any investigation made by Lender or on
Lender's behalf.
Time Is of the Essence. Time is of the essence in the performance of this
Agreement.
Waiver. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No delay
or omission on the part of Lender in exercising any right shall operate as a
waiver of such right or any other right. A waiver by Lender of a provision in
this Agreement shall not prejudice or constitute a waiver of Lender's right
otherwise to demand strict compliance with that provisions or any other
provision of this Agreement. No prior waiver by Lender, nor any course of
dealing between Lender and Borrower, or between Lender and any Grantor, shall
constitute a waiver of any of Lender's rights or of any obligations of Borrower
or of any Grantor as to any future transactions. Whenever the consent of Lender
is required under this Agreement, the granting of such consent by Lender in any
instance shall not constitute continuing consent in subsequent instances where
such consent is required, and in all cases such consent may be granted or
withheld in the sole discretion of Lender.
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS LOAN
AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF
SEPTEMBER 18, 1998.
BORROWER:
AMERICAN XTAL TECHNOLOGY
By: /s/ MORRIS S. YOUNG
-------------------------------------------------
Authorized Officer (Title)
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LENDER:
U.S. BANK NATIONAL ASSOCIATION
By: /s/ JASON FLOYD
-------------------------------------------------
Authorized Officer
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<PAGE> 1
Exhibit 10.9
LETTER OF CREDIT
AND REIMBURSEMENT AGREEMENT
This Letter of Credit and Reimbursement Agreement ("Agreement") is made and
entered into as of December 1, 1998, by and between American Xtal Technology,
Inc. (the "Borrower") and U.S. Bank National Association (the "Bank").
RECITALS
A. The Borrower and Harris Trust Company of California (the "Trustee")
have entered into an Indenture dated as of December 1, 1998 (the "Indenture"),
pursuant to which the Borrower will issue its Variable Rate Taxable Demand
Revenue Bonds Series 1998 (the "Bonds") in an aggregate principal amount of
$11,615,000.
B. To assure payment of the principal and interest with respect to the
Bonds when due, the Borrower has requested that the Bank issue an irrevocable,
direct pay letter of credit in favor of the Trustee in substantially the form of
Exhibit A hereto (such letter of credit and any successor letter of credit being
the "Letter of Credit"), in the amount of $11,986,680 (the "Commitment"), of
which $11,615,000 shall support the payment of principal with respect to the
Bonds and $371,680 shall support the payment of 96 days of interest with respect
to the Bonds at a rate not to exceed 12% per annum based on a 360-day year
(actual days elapsed).
C. As more fully set forth in this Agreement, the Borrower has agreed to
reimburse the Bank for drawings under the Letter of Credit and to grant to the
Bank a security interest in certain Collateral (as hereafter defined) to secure
the Obligations (as hereafter defined) of the Borrower under this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1 Certain Defined Terms. For purposes of this Agreement
(including the Recitals hereof), the following terms shall have the respective
meanings specified below.
"Agreement" shall mean this Letter of Credit and Reimbursement Agreement,
including the exhibits hereto.
"Annual Letter of Credit Fee" shall have the meaning assigned to that term
in Section 8.1(a) hereof.
"Bank" shall mean U.S. Bank National Association.
<PAGE> 2
"Bank Documents" shall mean the Loan Agreement, the Pledge Agreement, the
Deeds of Trust, the Security Agreement, and the Third Party Lienholder
Agreement.
"Business Day" shall mean a day of the year which is not (i) a Saturday or
Sunday or (ii) a day on which banks located in Sacramento, California, or banks
located in the city in which the principal office of the Trustee or the Tender
Agent (as such terms are defined in the Indenture) is located are authorized or
obligated by law or executive order to close or (iii) a day on which the New
York Stock Exchange is closed.
"Bonds" shall have the meaning assigned to that term in Recital A hereto.
"Closing Date" shall mean the date that all conditions precedent to the
issuance of the Letter of Credit are satisfied in accordance with the terms
hereof.
"Collateral" shall mean, collectively, (i) the "Collateral" as defined in
the Security Agreement and (ii) the "Property" and the "Collateral" as defined
in the Deeds of Trust.
"Commitment" shall have the meaning assigned to that term in Recital B
hereto.
"Deeds of Trust" shall mean, collectively, each Deed of Trust, Security
Agreement, Assignment of Leases and Rents and Fixture Filing executed and
delivered by the Borrower for the benefit of the Bank securing the Obligations
(in whole or in part) and encumbering the Collateral or any portion thereof, in
each case, as the same may be amended, supplemented or otherwise modified from
time to time in writing in accordance therewith.
"Event of Default" shall have the meaning assigned to that term in Section
7.1 hereof.
"Fixed Interest Rate" shall mean a fixed, nonfloating interest rate with
respect to the Bonds established in accordance with the terms of Section 2.03(D)
of the Indenture.
"Improvements" shall have the meaning assigned to that term in the Deeds of
Trust.
"Indenture" shall have the meaning assigned to that term in Recital A
hereto.
"Interest Drawing" shall have the meaning assigned to that term in the
Letter of Credit.
"Interest Purchase Drawing" shall have the meaning assigned to that term in
the Letter of Credit.
"Letter of Credit" shall have the meaning assigned to that term in Recital
B hereto.
"Letter of Credit Origination Fee" shall have the meaning assigned to that
term in Section 8.1(b) hereof.
"Loan Agreement" means that certain Loan Agreement dated as of September
18, 1998, by and between the Borrower and the Bank, as the same may be amended,
supplemented or otherwise modified from time to time in writing in accordance
therewith.
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"Obligations" shall mean all obligations of the Borrower to the Bank under
this Agreement and the Related Documents, including without limitation the
obligation to reimburse the Bank for amounts paid under the Letter of Credit,
the obligation to pay the fees due hereunder, and the obligation to prepay
obligations on account of the Letter of Credit during the continuance of an
Event of Default.
"Outstanding" with respect to the Bonds shall have the meaning assigned to
that term in the Indenture.
"Pledge Agreement" means that certain Pledge Agreement and Security
Agreement of even date herewith made by the Borrower in favor of the Bank, as
the same may be amended, supplemented or otherwise modified from time to time in
writing in accordance therewith.
"Potential Default" shall mean an event which, with the passage of time or
the giving of notice, or both, would constitute an Event of Default.
"Principal Drawing" shall have the meaning assigned to that term in the
Letter of Credit.
"Principal Purchase Drawing" shall have the meaning assigned to that term
in the Letter of Credit.
"Property" shall have the meaning assigned to that term in the Deeds of
Trust.
"Reference Rate" shall mean the fluctuating per annum rate announced from
time to time by the Bank in Sacramento, California as its "prime rate." The
prime rate is a rate set by the Bank based upon various factors including the
Bank's costs and desired return and general economic conditions, and is used as
a reference point for pricing some loans, which may be priced at, above, or
below the prime rate.
"Related Documents" shall mean, collectively, the Bank Documents, the
Letter of Credit, the Bonds and the Indenture.
"Security Agreement" shall mean that certain Security Agreement of even
date herewith by and between the Borrower, as debtor, and the Bank, as secured
party, as the same may be amended, supplemented or otherwise modified from time
to time in writing in accordance therewith.
"Third Party Lienholder Agreement" means that certain Third Party
Lienholder Agreement dated as of November 30, 1998, by and between the Bank and
the United States Small Business Administration, and acknowledged and consented
to by the Borrower, as the same may be amended, supplemented or otherwise
modified from time to time in writing in accordance therewith.
SECTION 1.2 Accounting Terms. All accounting terms used herein and not
specifically defined herein shall be construed in accordance with generally
accepted accounting principles, consistently applied.
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ARTICLE II
AMOUNT AND TERMS OF THE LETTER OF CREDIT
SECTION 2.1 The Letter of Credit. The Borrower requests the Bank to issue
the Letter of Credit, and the Bank agrees, on the terms and conditions
hereinafter set forth, to issue the Letter of Credit to the Trustee. The
Borrower agrees to execute and deliver such additional application materials
with respect to the Letter of Credit and such other documents as the Bank shall
reasonably request in connection therewith.
SECTION 2.2 Issuing the Letter of Credit. The Letter of Credit shall be
issued to the Trustee on the Closing Date upon fulfillment of the conditions set
forth in Article III hereof. The Borrower shall reimburse the Bank for any and
all draws under the Letter of Credit in accordance with the terms and conditions
set forth below.
SECTION 2.3 Reimbursement. In satisfaction of its obligation to reimburse
the Bank for any amount drawn under the Letter of Credit, the Borrower hereby
agrees to (i) pay to the Bank the amount of each Interest Drawing and each
Interest Purchase Drawing on the day such drawing is honored by the Bank and
(ii) to pay to the Bank the amount of each Principal Drawing and each Principal
Purchase Drawing on the day such drawing is honored by the Bank.
SECTION 2.4 Grant of Security. As security for its obligation to reimburse
the Bank for any amounts paid pursuant to any drawing under the Letter of Credit
and for all other obligations of the Borrower hereunder, including any interest
due pursuant to Section 2.9, the Borrower hereby pledges and assigns to the
Bank, and grants to the Bank a lien and security interest in, all of the
Borrower's right, title, and interest in and to the Collateral. The Borrower
agrees to maintain and preserve the Collateral and to take such actions as the
Bank shall, from time to time, reasonably request to create, establish, maintain
and perfect the Bank's security interest therein.
SECTION 2.5 Reimbursement and Computations. All payments made on account of
the Obligations shall be made by the Borrower, without setoff or counterclaim,
in lawful money of the United States of America in immediately available funds,
free and clear of and without deduction for any taxes, fees or other charges of
any nature whatsoever imposed by any taxing authority and must be received by
the Bank by 1:00 p.m. California time on the day of payment, it being expressly
agreed and understood that if a payment is received after 1:00 p.m. California
time by the Bank, such payment will be considered to have been made by the
Borrower on the next succeeding Business Day and interest thereon shall be
payable by the Borrower at the rate specified in Section 2.9 hereof during such
extension. All payments to the Bank hereunder shall be made at the following
address: U.S. Bank National Association, 980 Ninth Street, Suite 1200,
Sacramento, California 95814, Attention: International Department.
SECTION 2.6 Non-Business Days. Whenever any payment or reimbursement to be
made hereunder, or any bond redemption required to be made pursuant to Section
5.l(f), shall be due or required on a day which is not a Business Day, such
payment, reimbursement or redemption shall be made on the next succeeding
Business Day, and such extension of time shall
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in such case be included in the computation of any such payment, reimbursement
or redemption (if applicable).
SECTION 2.7 Evidence of Obligation. The Bank shall maintain in accordance
with its usual practice an account or accounts evidencing the obligation of the
Borrower resulting from each drawing under the Letter of Credit. In any legal
action or proceeding in respect of this Agreement, the entries made in such
account or accounts shall, in the absence of error in calculation, be conclusive
evidence of the existence and amounts of the obligations of the Borrower therein
recorded.
SECTION 2.8 Obligations Absolute. The payment or reimbursement obligations
of the Borrower under this Agreement shall be unconditional and irrevocable, and
shall be paid strictly in accordance with and subject to the terms and
conditions of this Agreement under all circumstances, including, without
limitation, the following circumstances:
(a) any lack of validity or enforceability of any of the Related
Documents;
(b) any amendment or waiver of or any consent to departure from all
or any of the Related Documents;
(c) the existence of any claim, set-off, defense, or other right
which the Borrower may have at any time against the Trustee or any other
beneficiary, or any transferee, of the Letter of Credit (or any persons or
entities for whom the Trustee, any such beneficiary, or any such transferee may
be acting), the Bank, or any other person or entity, whether in connection with
this Agreement, the transactions contemplated herein or in the Related
Documents, or any unrelated transaction;
(d) any statement or any other document presented under the Letter of
Credit proving to be forged, fraudulent, or invalid in any respect or any
statement therein being untrue or inaccurate in any respect;
(e) payment by the Bank under the Letter of Credit against
presentation of a draft or certificate which does not comply with the terms of
the Letter of Credit; or
(f) any other circumstance or happening whatsoever, whether or not
similar to any of the foregoing.
SECTION 2.9 Default Interest. If an Event of Default has occurred and is
continuing, the Obligations shall bear interest, payable on demand, at the
Reference Rate plus 5% per annum (such sum, the "Default Rate") until such
required payment plus interest thereon has been paid; provided, however, that
nothing contained in this Section 2.9 shall be construed to waive or limit any
of the rights and remedies of the Bank with respect to such nonpayment under
this Agreement or the Related Documents.
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<PAGE> 6
SECTION 2.10 Tranches of Debt. The obligations owing at any time by the
Borrower to the Bank shall, solely for the purpose of identifying which portions
of the Obligations are secured by specific items of Collateral, be divided into
the following tranches ("Tranches"):
<TABLE>
<CAPTION>
Tranche Maximum Principal Amount of Tranche
------- -----------------------------------
<S> <C>
A $4,900,000
B $5,440,000
C All remaining indebtedness and Obligations
owing hereunder or under the Related
Agreements at any time
</TABLE>
Any payments received by the Bank hereunder shall be applied to the Obligations
payable under each of the Tranches on a pro rata basis. As the maximum amount of
the Letter of Credit is reduced in connection with each partial redemption of
the Bonds required under Section 5.l(f) hereof, the reduction of the maximum
principal amount of Obligations payable under each of the Tranches shall be as
set forth in Schedule I attached hereto.
SECTION 2.11 Repayment of Bank Debt. The Borrower hereby agrees that,
simultaneously with its issuance of the Bonds and the Bank's issuance of the
Letter of Credit, a portion of the proceeds derived from the sale of the Bonds
shall be paid directly to the Bank for the purpose of paying in full all
indebtedness owing under (a) that certain promissory note dated as of October 1,
1996, in favor of Commercial Bank of Fremont (now the Bank) in the original
principal amount of $3,537,355.00 (the "Fremont Note"), and (b) that certain
promissory note dated as of May 27, 1997, in favor of U.S. Bank (now the Bank)
in the original principal amount of $750,000.00 (the "USB Note"). The amount of
principal and interest owing under (i) the Fremont Note is $3,481,838.90 of
principal and accrued and unpaid interest, and (ii) the USB Note is $709,117.68
of principal and accrued and unpaid interest. (The amounts listed in the
preceding clauses (i) and (ii) represent principal and accrued and unpaid
interest outstanding under the Fremont Note and the USB Note, respectively, as
of December 5, 1998. To the extent that the Fremont Note and the USB Note are
repaid prior to December 5, 1998, as is currently anticipated by the parties,
the Bank will promptly refund to the Borrower the amount of any overpayment.)
ARTICLE III
CONDITIONS OF ISSUANCE
SECTION 3.1 Conditions Precedent to Issuance of the Letter of Credit. The
obligation of the Bank to issue the Letter of Credit is subject to the condition
precedent that the Bank shall have received on or before the date of the
issuance of the Letter of Credit each of the following, in form and substance
satisfactory to the Bank:
(a) a fully executed copy of the Indenture;
(b) a fully executed copy of the Pledge Agreement;
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<PAGE> 7
(c) a fully executed copy of each Deed of Trust, acknowledged and in
recordable form;
(d) evidence satisfactory to the Bank that all the Collateral has
been duly pledged to the Bank;
(e) an opinion of counsel to the Borrower, opining as to such matters
(including, but not limited to, the validity and enforceability of this
Agreement and the other Related Documents to which the Borrower is a party), and
otherwise in such form and substance as the Bank shall reasonably require;
(f) certified copies of all documents evidencing any necessary action
approving this Agreement and each Related Document to which the Borrower is a
party and all other necessary action with respect to each such document;
(g) policies of title insurance insuring, to the Bank's satisfaction,
the first priority liens (or, in the case of the lien on the Solar Way property
that is to be junior to the lien on such property held by the SBA, as specified
in the Third Party Lienholder Agreement, such lower priority as the Bank may
accept in its discretion) of the Deeds of Trust encumbering the land described
in Exhibit A to each Deed of Trust ("Land"), in such form, and with such
endorsements, as the Bank shall require;
(h) a fully executed Third Party Lienholder Agreement in form and
substance acceptable to the Bank;
(i) a UCC-1 Financing Statement executed by the Borrower and recorded
in the Office of the Secretary of State of California; and
(j) such credit applications, financial statements, authorizations
and such information concerning the Borrower and its operations and condition
(financial and otherwise) as the Bank may reasonably request.
SECTION 3.2 Additional Conditions Precedent to Issuance of the Letter of
Credit. The obligation of the Bank to issue the Letter of Credit shall be
subject to the further conditions precedent that on the date of the issuance of
the Letter of Credit:
(a) the following statements shall be true, and the Bank shall have
received a certificate signed by the Borrower, dated the date of such issuance,
stating that:
(i) the representations and warranties contained in Section 4.1
of this Agreement, Section 4 of each Deed of Trust and Section 4 of the Security
Agreement are correct on and as of the date of issuance of the Letter of Credit
as though made on and as of such date; and
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<PAGE> 8
(ii) no event has occurred and is continuing, or would result
from the issuance of the Letter of Credit, which constitutes an Event of Default
or would constitute an Event of Default but for the requirement that notice be
given or time elapse or both; and
(b) the Bank shall have received such other filings or recordations,
approvals, opinions, or documents as the Bank may reasonably request.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
SECTION 4.1 Representations and Warranties of the Borrower. The Borrower
represents and warrants as follows:
(a) The Borrower is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction of its incorporation, is
qualified to do business and is in good standing in each jurisdiction in which
the failure so to qualify or be in good standing would result in a material
adverse effect on the business or condition (financial or otherwise) of the
Borrower, and has all requisite power and authority to own its assets and carry
on its business and to execute, deliver and perform its obligations hereunder
and under the Related Documents to which it is a party.
(b) The execution, delivery, and performance by the Borrower of this
Agreement and each Related Document to which it is a party (i) are within its
powers, (ii) have been duly authorized by all necessary action, (iii) do not
contravene any law or contractual restriction binding on or affecting the
Borrower, and (iv) do not result in or require the creation of any lien,
security interest, or other charge or encumbrance (except as provided in or
contemplated by this Agreement or any of the Related Documents) upon or with
respect to any of its properties.
(c) No consent, authorization, approval, or other action by, and no
notice to or filing with, any governmental authority or regulatory body is
required for the due execution, delivery, and performance by the Borrower of
this Agreement and each Related Document to which it is a party other than that
which has been obtained or will be obtained when required.
(d) This Agreement is, and each Related Document to which the
Borrower is a party when delivered hereunder will be, the legal, valid, and
binding obligation of the Borrower enforceable against the Borrower in
accordance with its terms, except to the extent that such enforcement may be
limited by applicable bankruptcy, insolvency, and other similar laws affecting
creditors' rights generally, and by the application of equitable principles.
(e) There is no pending or threatened action, investigation, or
proceeding before any court, governmental agency, or arbitrator against or
affecting the Borrower which may materially adversely affect the ability of the
Borrower to perform its obligations hereunder or under any Related Document to
which it is a party.
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(f) The pledge and assignment pursuant to this Agreement and the
Related Documents of the Collateral and any and all amounts on deposit from time
to time in any accounts which are part of the Collateral, create a valid binding
first priority security interest therein securing the Obligations purported to
be secured thereby.
(g) All financial statements, copies of which have heretofore been
furnished to the Bank, are complete and correct and present fairly in accordance
with generally accepted accounting principles, the financial condition of the
Borrower, and since the date of such statements there has been no material
adverse change in the Borrower or the Collateral.
ARTICLE V
COVENANTS
SECTION 5.1 Affirmative Covenants of the Borrower. So long as a drawing is
available under the Letter of Credit or the Borrower shall have any obligation
to pay any amount to the Bank hereunder, the Borrower will, unless the Bank
shall otherwise consent in writing:
(a) preserve and maintain its existence and its rights, and
franchises that Borrower reasonably deems necessary in the operation of its
business,
(b) comply with the requirements of the Related Documents to which it
is a party, and all applicable laws, ordinances, rules, and regulations of any
governmental authority, the non-compliance with which would have a material
adverse effect on the Borrower's operations, properties, ownership, assets,
management, or condition (financial or otherwise) or which could materially
impair the Borrower's ability to perform its obligations under this Agreement or
any Related Document;
(c) promptly, upon learning thereof, give written notice to the Bank
of:
(1) the occurrence of any Potential Default or Event of Default;
(2) any litigation or proceeding affecting the Borrower which
could have a material adverse effect on the condition of the Borrower or the
Property; and
(3) a material adverse change in the business, operations,
property or financial or other condition of the Borrower;
(d) comply with all agreements, conditions, covenants, restrictions
and other instruments which affect or impose a lien upon the Property or any of
the other Collateral, except as permitted under the Bank Documents;
(e) comply with all agreements, conditions, covenants and
restrictions set forth in the Loan Agreement and the other Bank Documents; and
(f) cause the Bonds to be redeemed on or prior to the dates (subject
to Section 2.6) and in the minimum principal amounts set forth on Schedule 1
hereto.
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<PAGE> 10
SECTION 1.18 Negative Covenants of the Borrower. So long as a drawing is
available under the Letter of Credit or the Borrower shall have any obligation
to pay any amount to the Bank hereunder, the Borrower will not, without the
written consent of the Bank:
(a) sell, lease, transfer, or otherwise dispose of the Collateral,
except in connection with the transactions contemplated or permitted herein and
in the Bank Documents;
(b) create or permit to exist any lien, security interest or other
charge or encumbrance, or any other type of preferential arrangement, upon or
with respect to the Collateral, except as permitted under the Bank Documents;
(c) enter into or consent to any amendment or modification of the
Indenture;
(d) request a conversion of interest on the Bonds to the Fixed
Interest Rate; or
(e) issue or incur, as the case may be, any bond, note, loan, advance
or other indebtedness or obligation (including lease and installment sale
obligations) having a lien senior to or on a parity with the Bank's lien on all
or any portion of the Collateral, except as permitted under the Bank Documents.
ARTICLE VI
ADDITIONAL PROVISIONS RELATING TO COLLATERAL
SECTION 6.1 Exercise of Rights with Respect to Collateral. Upon the
occurrence and during the continuance of any Event of Default hereunder, the
Bank is authorized to (a) apply the Collateral in satisfaction of the
Obligations; and (b) in the name of the Bank or in the name of the Borrower, (i)
exercise all other rights and remedies provided for herein, in any Related
Document or otherwise available to it in respect of the Collateral and to
exercise all the rights and remedies of a secured party under the Uniform
Commercial Code and other laws in effect in the State of California, (ii)
without notice, retain the Collateral or any part thereof, and (iii) dispose of
the Collateral in any manner permitted by law; provided, however, that the Bank
shall not be obligated to make any sale of Collateral or the proceeds thereof
regardless of any notice of sale having been given. The Bank may adjourn any
public or private sale from time to time by announcement at the time and place
fixed therefor, and such sale may, without further notice, be made at the time
and place to which it was so adjourned.
SECTION 6.2 Bank to Exercise Reasonable Care. The Bank shall be deemed to
have exercised reasonable care in the custody and preservation of any Collateral
in its possession if such Collateral is accorded treatment substantially equal
to that which the Bank accords its own property of similar nature, it being
understood that the Bank shall not have any responsibility for taking any
necessary steps to preserve rights against any parties with respect to any
Collateral.
SECTION 6.3 Further Assurances. The Borrower agrees that at any time, and
from time to time, at the expense of the Borrower, the Borrower will promptly
execute and deliver all further instruments and documents, and take all further
action, that may be necessary or reasonably desirable, as the Bank may request,
in order to protect any security interest granted or
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<PAGE> 11
purported to be granted hereby or by any Related Document or to enable the Bank
to exercise and enforce its rights and remedies hereunder or under any Bank
Document with respect to any Collateral.
ARTICLE VII
EVENTS OF DEFAULT
SECTION 7.1 Events of Default. The occurrence of any of the following
events shall be an "Event of Default" hereunder:
(a) the Borrower shall fail to pay any amount payable by it under
this Agreement or any Related Document when due; or
(b) any representation or warranty made, or deemed made, by the
Borrower under or in connection with this Agreement or any Related Document
shall prove to have been incorrect in any material respect when made, or
(c) the Borrower shall fail to perform or observe its covenant
contained in Section 5.l(f) or the Bonds shall otherwise not be redeemed on or
prior to the dates and in the minimum principal amounts set forth on Schedule 1
hereto; or
(d) the Borrower shall fail to perform or observe any other term,
covenant, or agreement contained in this Agreement on its part to be performed
or observed and any such failure shall remain unremedied for 30 days after
written notice thereof shall have been given to the Borrower by the Bank; or
(e) the Borrower shall generally not pay its debts as such debts
become due, or shall admit in writing its inability to pay its debts generally,
or shall make a general assignment for the benefit of creditors; or any
proceeding shall be instituted by or against the Borrower seeking to adjudicate
it a bankrupt or insolvent or seeking liquidation, winding up, reorganization,
arrangement, adjustment, protection, relief or composition of it or its debts
under any law relating to bankruptcy, insolvency, or reorganization or relief of
debtors, or seeking the entry of an order for relief or the appointment of a
receiver, trustee, or other similar official for it or for any substantial part
of its property (and, in the case of an involuntary proceeding, such proceeding
shall remain undismissed or unstayed for a period of 60 days); or the Borrower
shall take any action to authorize any of the actions set forth above in this
subsection (e); or
(f) any provision of this Agreement or any Related Document to which
the Borrower is a party shall at any time for any reason cease to be valid and
binding on the Borrower or shall be declared to be null and void, or the
validity of any provision of this Agreement or any such Related Document shall
be contested by the Borrower or the enforceability of any provision of this
Agreement or any such Related Document shall be contested by the Borrower, or a
proceeding shall be commenced by any governmental agency or authority having
jurisdiction over the Borrower seeking to establish the invalidity of this
Agreement or any such Related Document or the unenforceability in any respect
thereof; or
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(g) any event of default under any Related Document shall have
occurred.
SECTION 7.2 Upon an Event of Default. If any Event of Default shall have
occurred and be continuing, the Bank may do any, all, or none of the following:
(i) declare that all amounts available for drawing under the Letter of Credit
are due and payable, (ii) give notice to the Trustee to demand the immediate
prepayment of the Bonds as contemplated in Section 7.01(e) of the Indenture, and
(iii) exercise in respect of the Collateral any or all rights and remedies as if
a draft representing the full amount then available under the Letter of Credit
had been presented to the Bank and paid by it.
ARTICLE VIII
FEES AND PAYMENTS
SECTION 8.1 Fees.
(a) Annual Letter of Credit Fee. The Borrower shall pay to the Bank
commencing on the Closing Date, an annual fee (the "Annual Letter of Credit
Fee") for providing the Letter of Credit in an amount equal to one and
one-quarter percent (1.25%) per annum calculated on the basis of a 360-day year
and actual days elapsed, based on the actual daily amount of the Letter of
Credit available to be drawn upon in such year. Such fee shall be due and
payable to the Bank annually in advance on the Closing Date and on each
anniversary thereof.
(b) The Letter of Credit Origination Fee. The Borrower shall pay to
the Bank a fee (the "Letter of Credit Origination Fee") for providing the Letter
of Credit in an amount equal to one-half of one percent (.50%) of the
Commitment. Such fee shall be due and payable upon the issuance of the Letter of
Credit.
ARTICLE IX
MISCELLANEOUS
SECTION 9.1 Amendments, Etc. No amendment or waiver of any provision of
this Agreement, nor consent to any departure by the Borrower therefrom, shall in
any event be effective unless the same shall be in writing and signed by the
Bank and then such waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given.
SECTION 9.2 Notices, Etc. All notices and other communications provided for
hereunder shall be in writing and mailed by registered mail, return receipt
requested, or delivered, or shall be by facsimile transmission promptly
confirmed in writing, addressed as follows:
To the Trustee:
Harris Trust Company of California
601 South Figueroa Street, 49th Floor
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Los Angeles, CA 90017
Attention: Corporate Trust Department
Facsimile: (213) 239-0631
To the Borrower:
American Xtal Technology, Inc.
4311 Solar Way
Fremont, CA 94538
Attention: Guy D. Atwood
Facsimile: (510) 683-5901
To the Bank:
U.S. Bank National Association
Fremont Business Banking
39510 Paseo Padre Parkway
Fremont, CA 94538
Attention: Jason A. Floyd
Facsimile: (510) 791-1340
or, as to each party, to such other person or at such other address as shall be
designated by such party in a written notice to the other party. All such
notices and communications shall be effective (i) if delivered by hand, when
delivered; (ii) if sent by mail, upon the earlier of the date of receipt or five
Business Days after deposit in the mail, first class (or air mail, with respect
to communications to be sent to or from the United States), postage prepaid; and
(iii) if sent by facsimile transmission, when sent, except that notices to the
Bank pursuant to the provisions of Article II hereof shall not be effective
until received by the Bank.
SECTION 9.3 No Waiver; Remedies. No failure on the part of any party hereto
to exercise, and no delay in exercising, any right hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any right hereunder
preclude any other or further exercise thereof or the exercise of any other
right. The remedies herein provided are cumulative and not exclusive of any
remedies provided by law.
SECTION 9.4 Indemnification.
(a) The Borrower hereby indemnifies and holds the Bank harmless from
and against any and all claims, damages, losses, liabilities, costs, or expenses
which the Bank may incur or which may be claimed against the Bank by reason of
(i) any conditions, occupancy, use, possession, conduct or management of, or
work done in or about, or from the planning, design, acquisition, installation,
or construction of the Property, or any part thereof, or (ii) carrying out of
any of the transactions contemplated by this Agreement and the Related
Documents, including, but not limited to, any certifications or representations
made by the Borrower in connection therewith; provided, however, that the
Borrower shall not be obligated to indemnify the Bank for
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<PAGE> 14
claims, damages, losses, liabilities, costs and expenses resulting solely from
the Bank's gross negligence or willful misconduct.
(b) Nothing in this Section 9.4 is intended to limit the Borrower's
obligations contained in Article II hereof. Without prejudice to the survival of
any other obligation of the Borrower hereunder, the indemnities and obligations
of the Borrower contained in this Section 9.4 shall survive the payment in full
of amounts payable pursuant to Article II hereof and the termination of the
Letter of Credit.
(c) In the event that any applicable law, order, regulation, treaty
or directive issued by any central bank or other governmental authority, agency
or instrumentality or any governmental or judicial interpretation or application
thereof, or compliance by the Bank with any request or directive (whether or not
having the force of law) issued by any central bank or other governmental
authority, agency or instrumentality:
(1) does or shall subject the Bank to any tax of any kind
whatsoever with respect to this Agreement or the Letter of Credit, or change the
basis of taxation of payments to the Bank of any reimbursement, fee, interest or
any other amount payable hereunder (except for change in the rate of tax on the
overall net income of the Bank);
(2) does or shall impose, modify or hold applicable any reserve,
capital requirement, special deposit, compulsory loan or similar requirements
against assets held by, or deposits or other liabilities in or for the account
of, advances or loans by, or other credit extended by, or any other acquisition
of funds by, any office of the Bank which is not otherwise included in the
determination of interest payable on the Obligations; or
(3) does or shall impose on the Bank any other condition;
and the result of any of the foregoing is to increase the cost to the Bank of
issuing, renewing or maintaining the Letter of Credit or to reduce any amount
receivable in respect thereof or the rate of return on the capital of the Bank
or any corporation controlling the Bank, then, in any such case, the Borrower
agrees to promptly pay to the Bank, upon its written demand, any additional
amounts necessary to compensate the Bank for such additional cost or reduced
amounts receivable or rate of return as determined by the Bank with respect to
this Agreement or the Letter of Credit. If the Bank becomes entitled to claim
any additional amounts pursuant to this subparagraph (c), it shall promptly
notify the Borrower of the event by reason of which it has become so entitled. A
certificate as to any additional amounts payable pursuant to the foregoing
sentence containing the calculation thereof in reasonable detail submitted by
the Bank to the Borrower shall be conclusive in the absence of manifest error.
The provisions hereof shall survive the termination of this Agreement and
payment of the Obligations and all other amounts payable hereunder.
SECTION 9.5 Liability of the Bank. As between the Borrower and the Bank,
the Borrower assumes all risks of the acts or omissions of the Trustee and any
other beneficiary or transferee of the Letter of Credit with respect to its use
of the Letter of Credit. Neither the Bank nor any of its officers or directors
shall be liable or responsible for: (a) the use which may be
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<PAGE> 15
made of the Letter of Credit or any acts or omissions of the Trustee and any
other beneficiary or transferee in connection therewith; (b) the validity,
sufficiency, or genuineness of documents presented to the Bank, or of any
endorsements thereon, even if such documents should prove to be in any or all
respects invalid, insufficient, fraudulent, or forged; (c) payment by the Bank
against presentation of documents which do not comply with the terms of the
Letter of Credit, including failure of any documents to bear any reference or
adequate reference to the Letter of Credit; or (d) any damage, deficiency, loss,
cost, or expense arising out of any action, claim, or other circumstance of any
nature whatsoever relating to the payment or failure to make payment under the
Letter of Credit, except that the Borrower shall have a claim against the Bank,
and the Bank shall be liable to the Borrower, to the extent of any direct, as
opposed to consequential, damages suffered by the Borrower which the Borrower
proves were caused by (i) the Bank's willful misconduct or gross negligence in
determining whether documents presented under the Letter of Credit comply with
the terms of the Letter of Credit or (ii) the Bank's willful failure to make
lawful payment under the Letter of Credit after the presentation to it by the
Trustee or a successor trustee under the Indenture of a draft and certificate
strictly complying with the terms and conditions of the Letter of Credit. In
furtherance and not in limitation of the foregoing, the Bank may accept
documents that appear on their face to be in order, without responsibility for
further investigation, regardless of any notice or information to the contrary,
unless acceptance of such documents after receipt of such notice constitutes
gross negligence or willful misconduct.
SECTION 9.6 Costs, Expenses, and Taxes. The Borrower agrees to pay
immediately following demand therefor all reasonable costs and expenses in
connection with the preparation, execution, delivery, filing, and recording of
this Agreement, the Bank Documents, and any other documents which may be
delivered in connection with this Agreement, including, without limitation, the
reasonable fees and out-of-pocket expenses of counsel for the Bank with respect
thereto and with respect to advising the Bank as to its rights and
responsibilities under this Agreement and the Related Documents, the costs of
substituting a letter of credit or other credit enhancement, and any and all
other costs, expenses, fees, liabilities, and claims of any nature whatsoever
(including reasonable counsel fees and expenses) arising out of or in connection
with (i) the enforcement of this Agreement, the Related Documents and such other
documents as may be delivered in connection therewith, (ii) any action or
proceeding relating to a court order, injunction, or other process or decree
restraining or seeking to restrain the Bank from paying any amount under the
Letter of Credit and (iii) amending or supplementing this Agreement or the
Related Documents for any purpose. In addition, the Borrower shall pay any and
all stamp and other taxes and fees payable or determined to be payable in
connection with the execution, delivery, filing, and recording of all
instruments required by the Bank to be filed in connection with the transactions
contemplated hereby, and, to the extent permitted by law, agrees to hold the
Bank harmless from and against any and all liabilities with respect to or
resulting from any delay in paying or omission to pay such taxes and fees. The
Borrower shall be furnished with copies of bills relating to the foregoing upon
request.
SECTION 9.7 Participations, Etc. The Borrower acknowledges that the Bank
may elect to sell, assign and otherwise transfer to other persons (each, a
"Transferee") all or portions of, and participations in, the Bank's interests
hereunder and under the Related Documents from time to time and expressly agrees
that each Transferee shall be entitled to the rights of the
15
<PAGE> 16
"Bank" hereunder. For purposes of this Section 9.7, the Bank may disclose to a
potential or actual Transferee any and all information supplied to the Bank by
or on behalf of the Borrower. The Borrower agrees to execute and deliver to the
Bank such documents, instruments and agreements, including, without limitation,
amendments to the Related Documents, deemed necessary or desirable by the Bank
to effect such transfers.
SECTION 9.8 Binding Effect. This Agreement shall become effective when it
shall have been executed by the parties hereto and thereafter shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and assigns (including Transferees, as described in Section 9.7
hereof.
SECTION 9.9 Assignments. The Borrower may not assign its rights or
obligations under this Agreement without the prior written consent of the Bank
in its sole discretion. Subject to the foregoing, all provisions contained in
this Agreement or any document or agreement referred to herein or relating
hereto shall inure to the benefit of the Bank, its successors and assigns, and
shall be binding upon the Borrower and its successors and assigns.
SECTION 9.10 Severability. Any provision of this Agreement which is
prohibited, unenforceable, or not authorized in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition,
unenforceability, or nonauthorization without invalidating the remaining
provisions hereof or affecting the validity, enforceability or legality of such
provision in any other jurisdiction.
SECTION 9.11 Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of California (without
giving effect to principles of conflict of laws).
SECTION 9.12 Headings. Section headings in this Agreement shall have no
substantive or interpretative effect, are included herein for convenience of
reference only and shall not constitute a part of this Agreement for any other
purpose.
SECTION 9.13 Counterparts. This Agreement may be executed in several
counterparts, each of which shall be regarded as the original and all of which
shall constitute one and the same Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their respective officers thereunto duly
authorized as of the date first above written.
16
<PAGE> 17
AMERICAN XTAL TECHNOLOGY, INC.
By: /s/ GUY ATWOOD
-------------------------------------
Its: Vice President
------------------------------------
U.S. BANK NATIONAL ASSOCIATION
By: /s/ GLEN V. GUGLIELIMINA
-------------------------------------
Its: Senior Vice President
------------------------------------
17
<PAGE> 18
EXHIBIT A
TO LETTER OF CREDIT AND
REIMBURSEMENT AGREEMENT
Irrevocable Letter of Credit
U.S. Bank National Association
980 Ninth Street, Suite 1200
Sacramento, California 95814
Date: [________________]
CREDIT No. [_________________]
Harris Trust Company of California
601 South Figueroa Street, 49th Fl.
Los Angeles, CA 90077
Attention: Corporate Trust Department
Ladies & Gentlemen:
You, as Trustee under that certain Indenture dated as of December 1, 1998
(the "Indenture"), between you and American Xtal Technology, Inc. (the
"Borrower"), pursuant to which the Borrower has executed and delivered U.S.
$11,615,000 in aggregate principal amount of its Variable Rate Taxable Demand
Revenue Bonds Series 1998 (Xtal Project) (the "Bonds"), are hereby irrevocably
authorized to draw on this Irrevocable Letter of Credit No. [__________] issued
by U.S. Bank National Association (the "Bank"), for the account of the Borrower,
available by your drafts at sight upon the terms and conditions hereinafter set
forth, an aggregate amount that does not exceed the sum of the Principal
Component and the Interest Component as set forth below, which in no event will
exceed U.S. $11,986,680 (such sum, subject to such maximum amount, being herein
referred to as the "Stated Amount"). This Letter of Credit is effective
immediately and expires on the close of business at the Bank's Office (as
defined below) on December 1, 2008 (the "Expiration Date").
The amount available under Principal Drawings (as defined in paragraph (A)
below) and Principal Purchase Drawings (as defined in paragraph (C) below) shall
not exceed, in the aggregate, U.S. $11,615,000, as such amount shall be
decreased as hereinafter provided (the "Principal Component"). The amount
available under Interest Drawings (as defined in paragraph (B) below) and
Interest Purchase Drawings (as defined in paragraph (D) below) shall not exceed
U.S. $371,680, representing payment of up to 96 days' interest accrued on the
Bonds at or prior to the Expiration Date, calculated at the rate of twelve
percent (12%) per annum on the basis of a 360-day year (actual days elapsed), as
such amount may be decreased and/or increased as hereinafter provided (the
"Interest Component"). At no time may the aggregate drawing outstanding
hereunder exceed the Stated Amount.
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<PAGE> 19
Funds under this Letter of Credit are available to you against your sight
drafts drawn on us, stating on their face: "Drawn under Irrevocable Letter of
Credit No. [__________] issued by U.S. Bank National Association, 980 Ninth
Street, Suite 1200, Sacramento, California 95814."
(A) Subject to paragraph (C) below, if the drawing is being made with
respect to any payment of principal with respect to the Bonds (a "Principal
Drawing"), the sight draft shall be accompanied by your written certificate
purporting to be signed by you in the form of Exhibit A attached hereto
appropriately completed.
(B) If the drawing is being made with respect to a payment of interest
with respect to the Bonds (an "Interest Drawing"), the sight draft shall be
accompanied by your written certificate purporting to be signed by you in the
form of Exhibit B hereto appropriately completed.
(C) If the drawing is being made in accordance with Section 2.04 of the
Indenture with respect to payment of the portion of the purchase price of Bonds
delivered to the Trustee or the Tender Agent appointed pursuant to the Indenture
(the "Tender Agent") equal to the principal amount of such Bonds (a "Principal
Purchase Drawing"), the sight draft shall be accompanied by your written
certificate purporting to be signed by you in the form of Exhibit C attached
hereto appropriately completed.
(D) If the drawing is being made with respect to payment of the portion of
the purchase price of Bonds referred to in paragraph (C) above equal to the
amount of accrued and unpaid interest with respect to such Bonds to the date of
purchase of such Bonds (an "Interest Purchase Drawing"), the sight draft shall
be accompanied by your written certificate purporting to be signed by you in the
form of Exhibit D attached hereto appropriately completed, and such Interest
Purchase Drawing shall be made simultaneously with the related Principal
Purchase Drawing.
Presentation of such draft(s) and certificate(s) shall be made at the
Bank's office located at 980 Ninth Street, Suite 1200, Sacramento, California
95814, Attention: International Department, Fax No. (916) 556-5763 or at any
other office in the United States that may be designated by us by written notice
delivered to you (the "Bank's Office").
We hereby agree that all drafts drawn under and in compliance with the
terms of this Letter of Credit will be duly honored by us upon delivery of the
certificate(s) as specified herein if presented at such office on or before the
Expiration Date. Provided that in each case the documents presented in
connection with a drawing conform to the terms and conditions hereof, the
following time schedule shall prevail:
(A) If a drawing is made by you hereunder and received by us at or prior
to 9:00 a.m. Pacific time, on a Business Day (as hereinafter defined), payment
shall be made to you or to your order of the amount specified, in immediately
available funds, at or prior to 1:00 p.m. Pacific time, on the same Business
Day.
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<PAGE> 20
(B) If a drawing is made by you hereunder and received by us after 9:00
a.m. Pacific time, on a Business Day, payment shall be made to you or to your
order of the amount specified, in immediately available funds, at or prior to
9:30 a.m. Pacific time, on the following Business Day.
If requested by you, payment under this Letter of Credit shall be made by
deposit of immediately available funds into an account designated by you.
As used herein, "Business Day" shall mean a day other than (i) a Saturday,
or a Sunday or (ii) a day on which banks located in Sacramento, California, or
banks located in the city in which your principal office or the principal office
of the Tender Agent is located are authorized or obligated by law or executive
order to close or (iii) a day on which the New York Stock Exchange is closed.
All payments hereunder shall be made with our own funds.
Each drawing honored by the Bank under this Letter of Credit shall
immediately reduce the Principal Component or the Interest Component (as the
case may be) by the amount of such drawing, and the Stated Amount shall be
correspondingly reduced. The Principal Component shall also be decreased without
amendment and without notice to you by the amount specified by the Trustee from
time to time pursuant to a notice to the Bank in the form attached hereto as
Exhibit E, such decrease to be effective upon receipt by the Bank of such
notice. The Principal Component and the Interest Component (and correspondingly,
the Stated Amount) so reduced shall be reinstated only as follows:
(A) The Interest Component (and correspondingly the Stated Amount) so
reduced shall be reinstated, in the case of a reduction resulting from an
Interest Drawing only, automatically as of the Bank's close of business in
Sacramento, California, on the day the Bank honors such Interest Drawing, to an
amount equal to 96 days' interest on the Bonds Outstanding, calculated at the
rate of Twelve Percent (12%) per annum on the basis of a 360-day year (actual
days elapsed).
(B) The Interest Component and the Principal Component (and
correspondingly the Stated Amount) so reduced shall be reinstated, in the case
of a reduction resulting from an Interest Purchase Drawing or a Principal
Purchase Drawing pursuant to Section 2.04 of the Indenture only, automatically
upon and to the extent the Bank has received from you notice of the
reimbursement of such payment in immediately available funds pursuant to your
certificate in the form of Exhibit F; in such case, the Principal Component
shall be reinstated in an amount equal to the portion of such payment
attributable to reimbursement of the Principal Purchase Drawing and the Interest
Component shall be reinstated to an amount equal to 96 days' interest on the
Bonds Outstanding, calculated at the rate of Twelve Percent (12%) per annum on
the basis of a 360-day year (actual days elapsed).
If the amount available under this Letter of Credit has been decreased
pursuant to a Principal Drawing, the Bank shall have the right to amend this
Letter of Credit or the right to require you to surrender this Letter of Credit
to the Bank, and to accept a substitute Letter of Credit which has an express
Principal
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<PAGE> 21
Component and Interest Component equal to the Principal Component and Interest
Component as so decreased, but otherwise in a form and having terms identical to
this Letter of Credit.
Only you as Trustee may make a drawing under this Letter of Credit. Upon
the payment to you or to your order of the amount specified in a sight draft
drawn hereunder, we shall be fully discharged on our obligation under this
Letter of Credit with respect to such sight draft, and we shall not thereafter
be obligated to make any further payments under this Letter of Credit in respect
of such sight draft to you or any other person who may have made to you or makes
to you a demand for payment of principal of, purchase price of, or interest on,
any Bond.
Upon the earliest of (i) the making by you of the final drawing available
to be made hereunder, (ii) our receipt of a certificate purporting to be signed
by your duly authorized officer and a duly authorized officer of the Borrower
stating that: "(a) the conditions precedent to the acceptance of an Alternate
Letter of Credit set forth in the Indenture have been satisfied, (b) the Trustee
has accepted the Alternate Letter of Credit, and (c) upon receipt by U.S. Bank
National Association of this certificate, Irrevocable Letter of Credit No.
[__________] issued by U.S. Bank National Association, shall terminate," or
(iii) the Expiration Date, this Letter of Credit shall automatically terminate
and be delivered to the Bank for cancellation.
This Letter of Credit is subject to the Uniform Customs and Practice for
Documentary Credits (1993 Revision), International Chamber of Commerce,
Publication No. 500 (the "Uniform Customs"), excluding Article 41 thereof. In
addition, the Bank agrees that, notwithstanding the second sentence of Article
17 of the Uniform Customs, if the Expiration Date occurs on a Business Day upon
which the Bank's Office is closed by virtue of an interruption of the nature
described in Article 17, the Expiration Date will be extended to the next
Business Day upon which the Bank's Office is open. As to matters not governed by
the Uniform Customs, this Letter of Credit shall be governed by and construed in
accordance with the laws of the State of California, without giving effect to
conflicts of law principles. Communications with respect to this Letter of
Credit shall be in writing and shall be addressed to the Bank's Office,
specifically referring thereon to "Irrevocable Letter of Credit No. [_________]
issued by U.S. Bank National Association, 980 Ninth Street, Suite 1200,
Sacramento, California 95814."
This Letter of Credit may be transferred more than once, but only in the
amount of the full utilized balance hereof and only after receipt from the
Borrower of the Bank's then applicable transfer fee, to any single transferee
who has succeeded Harris Trust Company of California as trustee under the
Indenture. Transfers may be effected only through ourselves and only upon
presentation to us of a duly executed instrument of transfer in the form
attached hereto as Exhibit G. Any transfer of this Letter of Credit as aforesaid
must be endorsed by us on the reverse hereof and may not change the place of
presentation from our Letter of Credit office in Sacramento, California.
This Letter of Credit sets forth in full our undertaking, and such
undertaking shall not in any way be modified, amended, amplified or limited by
reference to any document, instrument or agreement referred to herein
(including, without limitation, the Bonds), except only
4
<PAGE> 22
the certificate(s) and the sight draft(s) referred to herein; and any such
reference shall not be deemed to incorporate herein by reference any document,
instrument or agreement except for such certificate(s) and such sight draft(s).
Very truly yours,
U.S. BANK NATIONAL ASSOCIATION
By: _____________________________________
Name: _______________________________
Title: ______________________________
By: _____________________________________
Name: _______________________________
Title: ______________________________
5
<PAGE> 23
CERTIFICATE FOR PRINCIPAL DRAWING
EXHIBIT A TO IRREVOCABLE LETTER OF CREDIT NO. [_________________]
CERTIFICATE FOR PRINCIPAL DRAWING
The undersigned, [Insert Name of Beneficiary] (the "Trustee") hereby
certifies to U.S. Bank National Association (the "Bank"), with reference to
Irrevocable Letter of Credit No. [_________________] (the "Letter of Credit";
any capitalized term used herein and not defined shall have its respective
meaning as set forth in the Letter of Credit) issued by the Bank in favor of the
Trustee, that:
1. The Trustee is the Trustee under the Indenture for the holders of the
Bonds.
2. The Trustee is making a drawing under the Letter of Credit with
respect to the payment of the principal amount with respect to all or a portion
of the Bonds by reason of acceleration or prepayment pursuant to the terms of
the Indenture or by their maturity.
3. The amount of the sight draft accompanying this Certificate does not
exceed the Principal Component under the Letter of Credit.
4. The amount of the sight draft accompanying this Certificate was
computed in accordance with the terms and conditions of the Bonds and the
Indenture.
IN WITNESS WHEREOF, the Trustee has executed and delivered this Certificate
as of the ___________ day of _________________.
Very truly yours,
_________________________________________________
[Insert Name], as Trustee
By: _____________________________________________
[Insert Name and Title of Authorized Officer]
6
<PAGE> 24
CERTIFICATE FOR INTEREST DRAWING
EXHIBIT B TO IRREVOCABLE LETTER OF CREDIT NO. [_________________]
CERTIFICATE FOR INTEREST DRAWING
The undersigned, [Insert Name of Beneficiary] (the "Trustee") hereby
certifies to U.S. Bank National Association (the "Bank"), with reference to
Irrevocable Letter of Credit No. [_________________] (the "Letter of Credit";
any capitalized term used herein and not defined shall have its respective
meaning as set forth in the Letter of Credit) issued by the Bank in favor of the
Trustee, that:
1. The Trustee is the Trustee under the Indenture for the holders of the
Bonds.
2. The Trustee is making a drawing under the Letter of Credit with
respect to the payment of interest accrued with respect to the Bonds that is due
and payable and that has accrued on or before the Expiration Date.
3. The amount of the sight draft accompanying this Certificate does not
exceed the Interest Component under the Letter of Credit.
4. The amount of the sight draft accompanying this Certificate was
computed in accordance with the terms and conditions of the Bonds and the
Indenture.
IN WITNESS WHEREOF, the Trustee has executed and delivered this Certificate
as of the ___________ day of _________________.
Very truly yours,
_________________________________________________
[Insert Name], as Trustee
By: _____________________________________________
[Insert Name and Title of Authorized Officer]
7
<PAGE> 25
CERTIFICATE FOR PRINCIPAL PURCHASE DRAWING
EXHIBIT C TO IRREVOCABLE LETTER OF CREDIT NO. [_________________]
CERTIFICATE FOR PRINCIPAL PURCHASE DRAWING
The undersigned, [Insert Name of Beneficiary] (the "Trustee") hereby
certifies to U.S. Bank National Association (the "Bank"), with reference to
Irrevocable Letter of Credit No. [_________________] (the "Letter of Credit";
any capitalized term used herein and not defined shall have its respective
meaning as set forth in the Letter of Credit) issued by the Bank in favor of the
Trustee, that:
1. The Trustee is the Trustee under the Indenture for the holders of the
Bonds.
2. The Trustee is making a drawing under the Letter of Credit to pay the
portion of the purchase price of Bonds delivered to the Trustee or the Tender
Agent, as the case may be, pursuant to Section 2.04 of the Indenture equal to
the principal amount with respect to such Bonds.
3. The principal amount with respect to the purchased Bonds for which
this drawing is made is $[insert Amount], and the Trustee has not heretofore
made a drawing which has been honored under the Letter of Credit with respect to
the principal amount, or any portion thereof, of the Bonds for such purchase.
The amount of the sight draft accompanying this Certificate does not exceed such
amount.
4. The amount of the sight draft accompanying this Certificate does not
exceed the Principal Component under the Letter of Credit.
5. The amount of the sight draft accompanying this Certificate was
computed in accordance with the terms and conditions of the Bonds and the
Indenture.
IN WITNESS WHEREOF, the Trustee has executed and delivered this Certificate
as of the ___________ day of _________________.
Very truly yours,
_________________________________________________
[Insert Name], as Trustee
By: _____________________________________________
[Insert Name and Title of Authorized Officer]
8
<PAGE> 26
CERTIFICATE FOR INTEREST PURCHASE DRAWING
EXHIBIT D TO IRREVOCABLE LETTER OF CREDIT NO. [_________________]
CERTIFICATE FOR INTEREST PURCHASE DRAWING
The undersigned, [Insert Name of Beneficiary] (the "Trustee") hereby
certifies to U.S. Bank National Association (the "Bank"), with reference to
Irrevocable Letter of Credit No. [_________________] (the "Letter of Credit";
any capitalized term used herein and not defined shall have its respective
meaning as set forth in the Letter of Credit) issued by the Bank in favor of the
Trustee, that:
1. The Trustee is the Trustee under the Indenture for the holders of the
Bonds.
2. The Trustee is making a drawing under the Letter of Credit to pay the
portion of the purchase price of Bonds delivered to the Trustee or the Tender
Agent, as the case may be, pursuant to Section 2.04 of the Indenture equal to
the amount of accrued and unpaid interest with respect to such Bonds to the date
of purchase thereof.
3. The amount of accrued and unpaid interest with respect to the
purchased Bonds for which this drawing is made is $[Insert Amount], and the
Trustee has not heretofore made a drawing which has been honored under this
Letter of Credit for the accrued and unpaid interest, or any portion thereof,
with respect to the purchased Bonds for such purchase. The amount of the sight
draft accompanying this certificate does not exceed the amount of interest
accrued and unpaid with respect to such Bonds to the date of purchase thereof.
4. The amount of the sight draft accompanying this Certificate does not
exceed the Interest Component under the Letter of Credit.
5. The amount of the sight draft accompanying this Certificate was
computed in accordance with the terms and conditions of the Bonds and the
Indenture.
IN WITNESS WHEREOF, the Trustee has executed and delivered this Certificate
as of the ___________ day of _________________.
Very truly yours,
_________________________________________________
[Insert Name], as Trustee
By: _____________________________________________
[Insert Name and Title of Authorized Officer]
9
<PAGE> 27
CERTIFICATE FOR REDUCTION OF STATED AMOUNT
EXHIBIT E TO IRREVOCABLE LETTER OF CREDIT NO. [_________________]
U.S. Bank National Association
980 9th Street
Suite 1100
Sacramento, California 95814
Re: Irrevocable Letter of Credit No. [_________________]
issued by U.S. Bank National Association
Ladies & Gentlemen:
The undersigned (the "Trustee"), as beneficiary under the Irrevocable
Letter of Credit No. [_________________] (the "Letter of Credit"; any
capitalized term used herein and not defined shall have its respective meaning
as set forth in the Letter of Credit), hereby consents to a reduction of the
[Principal Component to $_______________] [AND/OR] [Interest Component to
$_______________].
IN WITNESS WHEREOF, the Trustee has executed and delivered this Certificate
as of the ___________ day of _________________.
Very truly yours,
_________________________________________________
[Insert Name], as Trustee
By: _____________________________________________
[Insert Name and Title of Authorized Officer]
10
<PAGE> 28
REIMBURSEMENT CERTIFICATE
EXHIBIT F TO IRREVOCABLE LETTER OF CREDIT NO. [_________________]
U.S. Bank National Association
980 9th Street
Suite 1100
Sacramento, California 95814
Re: Irrevocable Letter of Credit No. [_________________]
issued by U.S. Bank National Association
Ladies & Gentlemen:
The undersigned, [Insert Name of Beneficiary] (the "Trustee") hereby
certifies to U.S. Bank National Association (the "Bank"), with reference to
Irrevocable Letter of Credit No. [_________________] (the "Letter of Credit";
any capitalized term used herein and not defined shall have its respective
meaning as set forth in the Letter of Credit) issued by the Bank in favor of the
Trustee, that:
1. The Trustee is the Trustee under the Indenture for the holders of the
Bonds.
2. The Trustee has today paid to you by wire transfer of immediately
available funds the amount of $__________, for the reimbursement to you of
[$__________ of unpaid principal with respect to the Bonds in connection with a
Principal Purchase Drawing and] $ __________ of accrued interest with respect to
the Bonds in connection with an Interest Purchase Drawing [, in each case]
honored pursuant to the Trustee's draft dated __________ in the aggregate amount
of $__________.
IN WITNESS WHEREOF, the Trustee has executed and delivered this Certificate
as of the __________ day of __________________.
Very truly yours,
_________________________________________________
[Insert Name], as Trustee
11
<PAGE> 29
TRANSFER CERTIFICATE
EXHIBIT G TO IRREVOCABLE LETTER OF CREDIT NO. [_________________]
[Date]
U.S. Bank National Association
980 9th Street
Suite 1100
Sacramento, California 95814
Re: Irrevocable Letter of Credit No. [_________________]
issued by U.S. Bank National Association
Ladies & Gentlemen:
For value received, the undersigned beneficiary hereby irrevocably
transfers to:
[Insert Name and Address of Transferee]
all rights of the undersigned beneficiary to draw under the above Letter of
Credit in its entirety.
By this transfer, all rights of the undersigned beneficiary in such Letter
of Credit are transferred to the transferee, and the transferee shall have the
sole rights as beneficiary thereof, including sole rights relating to any
amendments, whether increases or extensions or other amendments and whether now
existing or hereafter made. The Letter of Credit may hereafter be amended,
extended or increased without necessity of any consent of or notice to the
undersigned beneficiary, and you will give notice thereof directly to the
transferee.
The advice of such Letter of Credit is returned herewith, and we ask you to
endorse the transfer on the reverse thereof and forward it directly to the
transferee with your customary notice of transfer.
SIGNATURE AUTHENTICATED Yours very truly,
__________________________________ _________________________________________
(Bank) Signature of Beneficiary
12
<PAGE> 30
SCHEDULE 1
TO LETTER OF CREDIT AND REIMBURSEMENT AGREEMENT
[See attached.]
<PAGE> 1
EXHIBIT 10.10
BOND PURCHASE CONTRACT
$11,615,000
AMERICAN XTAL TECHNOLOGY, INC.
VARIABLE RATE TAXABLE DEMAND REVENUE BONDS
SERIES 1998
(XTAL PROJECT)
dated
December 1, 1998
among
AMERICAN XTAL TECHNOLOGY, INC., Issuer
and
DAIN RAUSCHER INCORPORATED, Underwriter
<PAGE> 2
BOND PURCHASE CONTRACT
$11,615,000
AMERICAN XTAL TECHNOLOGY, INC.
VARIABLE RATE TAXABLE DEMAND REVENUE BONDS SERIES 1998
(XTAL PROJECT)
December 1, 1998
American Xtal Technology, Inc
Attn: Mr. Guy D. Atwood
4311 Solar Way
Fremont, California 94538
Dear Mr. Atwood:
Dain Rauscher Incorporated (the "Underwriter") hereby offers to enter into
this Bond Purchase Contract (the "Purchase Contract") with American Xtal
Technology, Inc. (the "Issuer"). The offer is hereby made subject to acceptance
by the Issuer (by the execution and delivery of this Purchase Contract to the
Underwriter) on or before 8:00 a.m., Pacific Standard Time, on December 1, 1998
and upon such acceptance, this Purchase Contract shall be in full force and
effect in accordance with its terms and shall be binding upon the Issuer and the
Underwriter. Capitalized terms used herein and not otherwise defined have the
meaning set forth in the Official Statement hereinafter defined.
The Issuer is entering into this Purchase Contract in order to induce the
Underwriter to enter into this Purchase Contract and to purchase the $11,615,000
aggregate principal amount of American Xtal Technology, Inc. Variable Rate
Taxable Demand Revenue Bonds Series 1998 (Xtal Project) (the "Bonds") on the
terms set forth herein. The Issuer, by its acceptance of the offer made herein,
requests the Underwriter to purchase the Bonds.
The Bonds are issued pursuant to an Indenture, dated as of December 1,
1998 (the "Indenture"), by and between the Issuer and Harris Trust Company of
California, as trustee (the "Trustee"), in the form heretofore delivered to us
authorizing the Bonds.
The Issuer will enter into a Letter of Credit and Reimbursement Agreement
dated December 1, 1998 (the "Reimbursement Agreement") with U.S. Bank National
Association (the "Bank"), pursuant to which the Bank will issue on or before the
Date of Delivery of the Bonds (the "Bond Issuance Date") to the Trustee for the
account of the Issuer, an irrevocable direct-pay letter of credit (the "Letter
of Credit"), which will permit the Trustee to draw an amount equal to the
principal and up to 96 days' interest on the Bonds at a maximum rate of twelve
percent (12%) per annum. The Reimbursement Agreement will provide for
reimbursement by the Issuer to the Bank in the event of drawings under the
Letter of Credit. The Indenture, this Purchase Contract and the Reimbursement
Agreement are herein referred to as the "Program Documents." References in this
Purchase Contract to the authorization, execution and delivery of and
performance under the Program Documents by a person or an entity shall be deemed
to refer only to those Program Documents to which such person or entity is a
party.
The Issuer's obligation under the Reimbursement Agreement will be secured
by a first lien and third lien Deed of Trust, Security Agreement, Assignment of
Leases and Rents and Fixture Filing, a Security Agreement and other security as
set forth in the Reimbursement Agreement.
SECTION 1. PURCHASE AND PURCHASE PRICE. Under the terms and conditions and
in reliance upon the representations, warranties and agreements set forth
herein, the Issuer agrees to execute and deliver $11,615,000 aggregate principal
amount of the Bonds and the Underwriter agrees to purchase all (but not less
than all) of said Bonds at an aggregate Purchase Price of par.
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The Bonds will bear interest as provided in the Indenture.
SECTION 2. OFFICIAL STATEMENT. The Issuer shall deliver or cause to be
delivered to the Underwriter, promptly after acceptance hereof and prior to the
Closing, copies of the Official Statement dated November 23, 1998, relating to
the Bonds and approved for distribution by the Issuer (which Official Statement,
including the cover page and all appendices, exhibits, reports and statements
included therein or attached thereto being herein called the "Official
Statement"), signed on behalf of the Issuer by a duly authorized officer of the
Issuer.
The Issuer hereby ratifies, approves and authorizes the use by the
Underwriter, prior to the date hereof, in connection with the offer and sale of
the Bonds, of the Program Documents, the Letter of Credit and all information
contained herein and therein of all other documents, certificates or statements
furnished by the Issuer to the Underwriter in connection with the transactions
contemplated by this Purchase Contract. The Underwriter agrees that it will not
confirm the sale of any Bonds unless the settlement of such sale is accompanied
by or preceded by the delivery of a copy of the final Official Statement.
In the event that the Bonds, or the remarketing of the Bonds, should
become subject to the continuing disclosure requirements of Rule 15c2-12 under
the Securities Exchange Act of 1934 (the "Rule"), the Issuer will furnish to the
Underwriter all information reasonably required by the Underwriter to comply
with the Rule. To the extent necessary to comply with the Rule, if applicable,
the Issuer will notify the Underwriter if it becomes aware of any fact or event
which might or would cause the Official Statement, as then supplemented or
amended, to contain any untrue statement of a material fact or to omit to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading, and the Issuer will cooperate with the
Underwriter by furnishing such information as is reasonably required to amend or
supplement the Official Statement, and prepare or file any other papers, in
compliance with the Rule.
SECTION 3. CLOSING; BONDS. At 8:00 a.m., Pacific Standard Time, December
1, 1998, or at such other time or on such earlier or later date as the
Underwriter and the Issuer mutually agree upon, the Issuer will deliver or cause
to be delivered to the Underwriter the Bonds in definitive form, duly executed,
and authenticated together with the other documents hereinabove mentioned, and
the Underwriter will accept such delivery and pay the Purchase Price of the
Bonds set forth in Section 1 hereof in federal funds payable to the order of the
Trustee for the account of the Issuer. Delivery and payment shall be
simultaneously, as aforesaid, made at such place in New York, New York as the
Underwriter shall designate or in such other city as the Underwriter and the
Issuer mutually agree upon. This payment and delivery shall be called the
"Closing." The Bonds shall be in fully registered form, registered in such names
as the Underwriter shall submit to the Trustee prior to the Closing and shall be
in denominations of One Hundred Thousand Dollars ($100,000) or any integral
multiple of $5,000 above such amount, except as otherwise provided in the
Indenture. The Bonds shall be made available to the Underwriter for checking at
least one (1) Business Day prior to the Closing. Notwithstanding the foregoing
and any other references in this Purchase Contract to delivery of Bonds, or
similar statements, the Bonds are registered in the name of Cede & Co. as
nominee of the Depository Trust Company ("DTC") and DTC procedures will be
followed and take precedence over any conflicting procedures or provisions.
SECTION 4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE ISSUER. The
Issuer represents warrants and covenants to the Underwriter that:
(a) The Issuer is a Delaware corporation and is duly qualified to
transact business in California. The Issuer has full power and authority to own
its property (including, without limitation, the Project), to carry on its
business as presently being conducted and as contemplated to be conducted by the
Program Documents and to execute, deliver and perform its obligations under the
Program Documents.
(b) Both at the date of the Official Statement and at the date of
Closing, the statements and information in the Official Statement (as the same
may be supplemented or amended with the written approval of the Underwriter), to
the extent they relate or pertain to the Issuer, do not contain any untrue
statement of material fact or omit to state any fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which such statements were made, not misleading in any
material respect. The Issuer makes no
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representation with respect to information in the Official Statement relating to
the Underwriter, the Trustee, the Bank or any other party.
(c) The execution, delivery and performance of the Program
Documents and the taking of any and all other actions and the execution,
delivery and performance of all such documents as may be required of it pursuant
to the provisions of the Program Documents including, without limitation, the
authorization of the use by the Underwriter of the Official Statement in
connection with the offering, sale and distribution of the Bonds, have been duly
authorized by the Issuer.
(d) This Purchase Contract has been duly executed and delivered by
the Issuer and when executed and delivered by the other parties hereto will
constitute a legal, valid and binding obligation of the Issuer, enforceable in
accordance with its terms, except as limited by bankruptcy, insolvency,
reorganization, moratorium and other similar laws affecting the rights of
creditors generally. Upon the execution and delivery of the Program Documents by
the Issuer and the other parties thereto, the Program Documents will constitute
legal, valid and binding obligations of the Issuer, enforceable in accordance
with their respective terms, except as limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting creditors' rights
generally.
(e) If at any time the Issuer becomes aware that any event shall
have occurred of which the Issuer believes it has unique knowledge not available
to the Underwriter and which might cause the Official Statement to contain any
untrue statement of material fact or omit to state any fact necessary to make
the statements therein not misleading in any material respect, the Issuer shall
notify the Underwriter. In addition, the Issuer shall promptly advise the
Underwriter of the institution of any action, suit, proceeding, inquiry or
investigation of which it has any knowledge seeking to prohibit, restrain or
otherwise affect the use of the Official Statement in connection with the
offering, sale or distribution of the Bonds. The Issuer promptly shall furnish
the Underwriter any information concerning the Issuer which the Underwriter
might reasonably request in connection with any amendment of or supplement to
the Official Statement.
(f) The execution, delivery and performance of the Program
Documents and the consummation of the transactions contemplated thereby will not
conflict with, or constitute a breach of, or default under any indenture,
mortgage, deed of trust, lease, note, commitment, agreement or other instrument
or obligation to which the Issuer is a party or by which the Issuer or any of
its respective properties is bound, or under any law, rule, regulation,
judgment, order or decree to which the Issuer or any of its respective
properties are bound which breach might have a material adverse effect on the
ability of the Issuer to perform under the Program Documents. The Issuer is not
now and never has been in default under any order or decree of any court or any
order, regulation or demand of any federal, state, municipal or governmental
agency or any document, instrument or commitment to which the Issuer is subject
or in the payment of the principal of, or premium or interest on, or otherwise
in default with respect to, any Bonds, notes or other obligations which it has
issued, assumed or guaranteed, directly or indirectly, as to payment of
principal, premium or interest.
(g) To the Issuer's knowledge, there is no action, suit,
proceeding, inquiry or investigation by or before any court, governmental
agency, public board or body pending, or to the knowledge of the Issuer,
threatened against the Issuer (nor, to the best of its knowledge, is there any
basis therefore), which (i) affects or seeks to prohibit, restrain or enjoin the
issuance, sale or delivery of the Bonds or the issuance of the Letter of Credit
or the use of the Official Statement or the execution and delivery of the
Program Documents or (ii) affects or questions the validity or the
enforceability of the Bonds, (iii) questions the completeness or accuracy of the
Official Statement or (iv) questions the power or authority of the Issuer to
carry out the transactions contemplated by the Program Documents or the power of
the Issuer to acquire, own, construct, equip, operate or lease the Project.
(h) To the Issuer's knowledge, it has made all filings with and
received all approvals, consents and orders of any governmental authority,
legislative body, board, agency or commission having jurisdiction which are
necessary to permit the Issuer to perform its obligations under the Program
Documents, to carry out the transactions contemplated by the Program Documents
and to acquire, own, construct, equip, operate and lease the Project.
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(i) Any certificate signed for the Issuer by an authorized
representative thereof and delivered to the Underwriter or the Issuer in
connection with the transactions contemplated by the Program Documents shall be
deemed to be a representation and warranty by the Issuer to the Underwriter as
to the statements therein.
SECTION 5. CONDITIONS TO THE OBLIGATIONS OF THE UNDERWRITER. The
obligation of the Underwriter to accept delivery of and pay for the Bonds on the
Closing shall be subject, at the option of the Underwriter, to the accuracy in
all material respects of the representations, warranties and agreements on the
part of the Issuer contained herein as of the date hereof and as of the Closing,
to the accuracy in all material respects of the statements of the officers and
other officials of the Trustee, the Bank and the Issuer made in any certificates
or other documents furnished pursuant to the provisions hereof or of the Program
Documents, and to the performance by the Issuer of its obligations, as
applicable, to be performed hereunder and under the Program Documents at or
prior to the Closing and to the following additional conditions:
(a) At the Closing, the Bonds, the Program Documents, the Letter
of Credit and the Official Statement shall have been duly authorized, executed
and delivered by the respective parties thereto, in substantially the forms
heretofore submitted to the Underwriter with any such changes as shall have been
agreed to in writing by the Underwriter, and said agreements shall not have been
amended, modified or supplemented, except as may have been agreed to in writing
by the Underwriter, and there shall have been taken in connection therewith,
with the issuance of the Bonds and with the transactions contemplated thereby
and by this Purchase Contract, all such actions as Bond Counsel and
Underwriter's Counsel shall deem to be necessary and appropriate.
(b) The representations and warranties of the Issuer contained in
this Purchase Contract shall be true, correct and complete in all material
respects on the date hereof and on the Closing, as if made again on the Closing,
and the Official Statement (as the same may be supplemented or amended with the
written approval of the Underwriter) shall be true, correct and complete in all
material respects and shall not contain any untrue statement of fact or omit to
state any fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which such statements were
made, not misleading.
(c) Between the date hereof and the Closing, the market price or
marketability, at the initial offering prices set forth in the Official
Statement, of the Bonds shall not have been materially adversely affected, in
the reasonable judgment of the Underwriter by reason of any of the following:
(1) legislation enacted or introduced in the Congress or
recommended for passage by the President of the United States, or a decision
rendered by a court established under Article III of the Constitution of the
United States, or an order, ruling, regulation (final, temporary or proposed) or
official statement issued or made:
(i) [RESERVED]
(ii) by or on behalf of the Securities and Exchange
Commission, or any other governmental agency having jurisdiction of the subject
matter, to the effect that the Bonds, as secured by the Letter of Credit,
including any or all underlying arrangements, are not exempt from registration
under the Securities Act of 1933, as amended or that the Indenture is not exempt
from qualification under the Trust Indenture Act of 1939, as amended;
(2) the declaration of war or engagement in major military
hostilities by the United States or the occurrence of any other national
emergency or calamity relating to the effective operation of the government of,
or the financial community in, the United States;
(3) the declaration of a general banking moratorium by
federal, New York or California authorities, or the general suspension of
trading on any national securities exchange;
(4) the imposition by the New York Stock Exchange or other
national securities exchange, or any governmental authority, of any material
restrictions not now in force with respect to the Bonds or obligations of the
general character of the Bonds or securities generally, or the material increase
of any such restrictions now in force, including those relating to the extension
of credit by, or the charge to the net capital requirements of, underwriters;
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(5) an order, decree or injunction of any court of competent
jurisdiction, or order, filing, regulation or official statement by the
Securities and Exchange Commission, or any other governmental agency having
jurisdiction of the subject matter, issued or made to the effect that the
issuance, offering or sale of obligations of the general character of the Bonds,
or the issuance, offering or sale of the Bonds, including any or all underlying
obligations, as contemplated hereby or by the Official Statement, is or would be
in violation of the federal securities laws as amended and then in effect;
(6) the withdrawal or downgrading of any rating of the Bonds
by a national rating agency or any rating of the Bank by a nationally recognized
rating service;
(7) the occurrence of any adverse change of a material
nature in the business, financial condition, results of operation or properties
of the Bank, the Issuer, or of any change or development in, or affecting
particularly, the economy or the Issuer generally; or
(8) any event occurring, or information becoming known
which, in the reasonable judgment of the Underwriter, makes untrue in any
material respect any statement or information contained in the Official
Statement, or has the effect that the Official Statement contains any untrue
statement of material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(d) At or prior to the Closing, the Underwriter shall have
received the following documents, in each case satisfactory in form and
substance to the Underwriter:
(1) the Program Documents, duly executed and delivered by
the respective parties thereto, with such amendments, modifications or
supplements as may have been agreed to in writing by the Underwriter, the
Official Statement, duly executed by a duly authorized officer of the Issuer,
and a copy of the Letter of Credit;
(2) a final opinion, dated the date of the Closing, of Bond
Counsel, in the form attached as Appendix A to the Official Statement and
addressed to the Issuer, and a separate letter addressed to the Underwriter (or
a comparable statement in the supplemental opinion) to the effect that the final
opinion may be relied upon by the Underwriter to the same extent as if it had
been addressed to it, together with supplemental opinion dated the date of the
Closing and addressed to the Underwriter substantially in the form of Exhibit A
hereto;
(3) the opinion of counsel to the Bank dated the date of the
Closing and addressed to the Issuer, the Rating Agency and the Underwriter,
substantially in the form of Exhibit B hereto;
(4) the opinion of counsel to the Issuer, dated the date of
Closing and addressed to the Issuer, the Bank, Bond Counsel and the Underwriter,
substantially in the form of Exhibit C hereto;
(5) [RESERVED];
(6) the opinion of Underwriter's Counsel, dated the date of
Closing, addressed to the Underwriter, substantially in the form of Exhibit D
hereto;
(7) a certificate of the Issuer, dated the date of Closing,
signed by the Issuer, confirming the representations set forth in Section 5
hereof as if given on the Closing;
(8) a certificate of the Trustee dated the date of Closing,
signed by a duly authorized officer of the Trustee, to the effect that:
(i) such officer is a duly authorized officer of the
Trustee;
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(ii) the Trustee is a trust company and is duly
organized and in good standing and qualified to do business in the
State of California, is authorized to carry out corporate trust
powers and has all necessary power and authority to enter into and
perform its duties under the Indenture and upon the execution and
delivery thereof by the Trustee, the same shall constitute legally
valid and binding obligations of the Trustee, enforceable in
accordance with their respective terms;
(iii) the trusts, duties and obligations of the Trustee
under the Indenture have been duly accepted by the Trustee;
(iv) the Trustee is duly authorized to enter into the
Indenture and to authenticate and deliver the Bonds to the
Underwriter under instruction by the Issuer pursuant to the terms of
the Indenture, and the Indenture constitutes a legally binding
obligation of the Trustee, enforceable in accordance with its
respective terms;
(v) to the best knowledge of such officer, the
acceptance by the Trustee of the duties and obligations under the
Indenture and the execution and delivery of the Indenture and
compliance with provisions thereof, will not conflict with, or
constitute a breach of or default under, the Trustee's duties under
said documents or any law, administrative regulation, court decree,
resolution, charter, bylaws or other agreement to which the Trustee
is subject or by which it is bound;
(vi) the representations and agreements of the Trustee
in the Indenture are true, complete and correct in all material
respects as of the Closing;
(vii) to the best of such officer's knowledge, no
litigation is pending or threatened (either in state or federal
courts) against the Trustee (A) to restrain or enjoin the execution
or delivery of any of the Bonds or the collection of Revenues (as
defined in the Indenture) pledged under the Indenture, or (B) in any
way contesting or affecting any authority for the authentication or
delivery of the Bonds or the validity or enforceability of the Bonds
or the Indenture; and
(viii) the Bonds in the principal amount of $11,615,000
have been validly authenticated, registered and delivered by the
Trustee;
(9) the opinion of counsel to the Trustee, dated the date of
Closing and addressed to the Issuer, the Bank and the Underwriter, substantially
in the form of Exhibit E hereto;
(10) a certificate of the Issuer, dated the date of Closing,
signed by an authorized representative as is acceptable to the Underwriter, to
the effect that:
(i) the representations and agreements of the Issuer
contained in the Program Documents are true and correct in all
material respects as of the Closing;
(ii) the Issuer has complied with all agreements,
covenants and conditions to be complied with by the Issuer at or
prior to the Closing under the Program Documents;
(iii) to the best of such official's knowledge, no event
affecting the Issuer has occurred since the date of the Official
Statement which either makes untrue or incorrect in any material
respect as of the Closing the statements or information concerning
the Issuer contained in the Official Statement or is not reflected
in the Official Statement but should be reflected therein in order
to make the statements and information concerning the Issuer therein
not misleading in any material respect; and
(iv) except as set forth in the Official Statement, to
the best knowledge of the Issuer after reasonable investigation, no
litigation is pending or, to the knowledge of the Issuer, threatened
in any court in any way affecting the existence of the Issuer, or in
any way challenging the respective
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powers of the several offices of the officials holding those
respective offices, or seeking to restrain or to enjoin the
issuance, sale or delivery of the Bonds, or the collection of
Revenues (as defined in the Indenture) pledged under the Indenture,
or the pledge thereof, or in any way contesting or affecting the
validity or enforceability of the Bonds or the Program Documents or
contesting in any way the completeness or accuracy of the Official
Statement, or contesting the powers of the Issuer or its authority
with respect to the Bonds or the Program Documents (but in lieu of
or in conjunction with such certificate, the Underwriter may, in its
sole discretion accept certificates or opinions of counsel to the
Issuer, acceptable to the Underwriter, that in the opinion of such
counsel the issues raised in any such pending or threatened
litigation are without substance or that the contentions of all
plaintiffs therein are without merit);
(11) a certificate of the Bank dated the date of Closing,
signed by an authorized representative thereof, to the effect that:
(i) all conditions precedent to the issuance of the
Letter of Credit, including those specified in the Reimbursement
Agreement, have been satisfied or have been waived by the Bank;
(ii) to the actual knowledge of such authorized
representative, there is no action, suit, litigation, proceeding,
inquiry or investigation at law or in equity or by or before any
judicial or administrative court, agency, body or other entity,
pending or threatened against the Bank or any of its properties,
wherein an unfavorable decision, ruling or finding (A) would
adversely affect the validity or enforceability of the Letter of
Credit or (B) would otherwise adversely affect the legal ability of
the Bank to comply with its obligations under the Letter of Credit;
and
(iii) the information contained in the Official
Statement under the heading "THE BANK" and the sub-heading "Letter
of Credit", is true and correct in all material respects and such
information does not contain any untrue or misleading statement of a
material fact necessary to make the statements therein, in the light
of the circumstances under which they were make, not misleading;
(12) [RESERVED];
(13) evidence satisfactory to the Underwriter to the effect
that the Bonds have received a rating satisfactory to the Underwriter from
Standard & Poor's; and
(14) such additional legal opinions, certificates,
proceedings, instruments and other documents as the Underwriter, Bond Counsel or
Underwriter's Counsel may reasonably request to evidence compliance by the Bank,
the Trustee and the Issuer with legal requirements, the truth and accuracy, as
of the Closing, of the representations of the Issuer, the Bank and the Trustee,
and the due performance or satisfaction by the Issuer, the Bank and the Trustee
at or prior to such time of all agreements then to be performed and all
conditions then to be satisfied by the Issuer, the Bank and the Trustee.
SECTION 6. AMENDMENT OF OFFICIAL STATEMENT. After the Closing, (1) the
Issuer will not adopt any amendment of or supplement to the Official Statement
to which, after having been furnished with a copy, the Underwriter shall object
in writing and (2) if any event relating to or affecting the Issuer or the Bank
shall occur as a result of which it is necessary, in the opinion of the
Underwriter, to amend or supplement the Official Statement in order to make the
Official Statement not misleading in the light of the circumstances existing at
the time it is delivered to the Underwriter, the Issuer shall cause to be
forthwith prepared and furnished to the Underwriter (at the expense of the
Issuer for ninety (90) days from the Closing and otherwise at the expense of the
Underwriter) a reasonable number of copies of an amendment of or supplement to
the Official Statement (in form and substance satisfactory to the Underwriter)
that will amend or supplement the Official Statement so that it will not contain
an untrue statement of material fact or omit to state a material fact necessary
in order to make the statements therein, in the light of the circumstances
existing at the time it is delivered to the Underwriter, not misleading.
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SECTION 7. OBLIGATIONS OF ISSUER. The Issuer's obligations hereunder shall
be subject to (i) there being no order, decree, injunction, ruling or regulation
of any court or the enactment of any legislation with the purpose or effect of
prohibiting the issuance, offering or sale of the Bonds, (ii) receipt of the
documents listed above other than those documents delivered by the Issuer and
those documents specifically addressed solely to the Underwriter and (iii) the
performance by the Issuer and the Underwriter of their obligations to be
performed hereunder at or prior to the Closing.
SECTION 8. INDEMNIFICATION.
(a) The Issuer shall indemnify, protect, defend and hold harmless
the Underwriter and each person who controls the Underwriter, within the meaning
of the Securities Act of 1933, as amended, or the Securities Act of 1934, as
amended (collectively, the "Securities Acts"), against any and all losses,
claims, damages, liabilities, costs and expenses (including, without limitation,
fees and disbursements of counsel and other expenses) incurred by them or any of
them in connection with defending any loss, claim, damage, liability or any
suit, action or proceeding, joint or several, to which they or any of them may
become subject under the Securities Acts, or any other federal or state law or
regulation, at common law or otherwise, insofar as such losses, claims, damages,
liabilities, costs and expenses (or any suit, action or proceeding in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained in the Official Statement or in any
amendment or supplement thereto approved by the Issuer (which approval shall not
be unreasonably withheld) or arise out of or are based upon the omission or
alleged omission to state therein a fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; provided, however, that the Issuer
shall not be liable in any such case to the extent that any such loss, claim,
damage, liability or action arises out of, or is based upon, any untrue
statement or alleged untrue statement of a material fact contained in that
particular part of the Official Statement, or any amendment thereof or
supplement thereto, under the captions "THE BOOK-ENTRY ONLY SYSTEM" or "THE
BANK." Notwithstanding the foregoing, this indemnity shall not cover any losses,
claims, damages or liabilities caused solely by the gross negligence of the
indemnified party or solely by breach of this agreement by the indemnified
party.
(b) The Underwriter shall indemnify, protect, defend and hold
harmless the Issuer against any and all losses, claims, damages, liabilities,
costs and expenses (including, without limitation, fees and disbursements of
counsel and other expenses) incurred by them or any of them in connection with
defending any loss, claim, damage, liability or any suit, action or proceeding,
joint or several, to which they or any of them may become subject under the
Securities Acts, or any other federal or state law or regulation, at common law
or otherwise, insofar as such losses, claims, damages, liabilities, costs and
expenses (or any suit, action or proceeding in respect thereof) arise out of or
are based upon any untrue statement or alleged untrue statement of a material
fact contained in the "THE UNDERWRITER" caption of the Official Statement or in
the "THE UNDERWRITER" caption of any amendment or supplement thereto approved by
the Issuer (which approval shall not be unreasonably withheld), or arise out of
or are based upon the omission or alleged omission to state therein a fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading.
Notwithstanding the foregoing, this indemnity shall not cover any losses,
claims, damages or liabilities caused solely by the negligence of the
indemnified party or solely by breach of this agreement by the indemnified
party.
(c) Promptly after receipt by any party entitled to
indemnification under this Section 8 of notice of the commencement of any suit,
action or proceeding, such indemnified party shall, if a claim in respect
thereof is to be made against the indemnifying party under this Section 8,
notify the indemnifying party in writing of the commencement thereof; but the
omission so to notify the indemnifying party shall not relieve it from any
liability which it may have to any indemnified party otherwise than under this
Section 8 or from any liability under this Section 8 unless the failure to
provide notice prejudices the defense of such suit, action or proceeding. In
case any such action is brought against any indemnified party, and it notifies
the indemnifying party, the indemnifying party shall be entitled to participate
in, and to the extent that it may elect by written notice delivered to the
indemnified party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof, with counsel satisfactory to
such indemnified party; provided, however, if the defendants in any such action
include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be legal
defenses available to it and/or other indemnified parties which are different
from or additional to those available to the indemnifying party, the indemnified
party or parties shall have the right to select separate counsel to
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<PAGE> 10
assert such legal defenses and to otherwise participate in the defense of such
action on behalf of such indemnified party or parties. Upon receipt of notice
from the indemnifying party to such indemnified party of its election so to
assume the defense of such action and approval by the indemnified party of
counsel, the indemnifying party shall not be liable to such indemnified party
under this Section 8 for any legal or other expenses subsequently incurred by
such indemnified party in connection with defense thereof unless (i) the
indemnified party shall have employed separate counsel in connection with the
assertion of legal defenses in accordance with the proviso to the next preceding
sentence (it being understood, however, that the indemnifying party shall not be
liable for the expenses of more than one separate counsel, approved by the
Underwriter, the Issuer in the case of the subparagraph (a), representing the
indemnified parties under the subparagraph (a) who are parties to such action),
(ii) the indemnifying party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a reasonable time
after notice of commencement of the action or (iii) the indemnifying party has
authorized the employment of counsel for the indemnified party at the expense of
the indemnifying party; and except that, if clause (i) or (iii) is applicable,
such liability shall be only in respect of the counsel referred to in such
clause (i) or (iii).
(d) The Issuer shall not be liable for any settlement of any such
action effected without its consent by any indemnified party, but if settled
with the consent of the Issuer or if there be a final judgment for the plaintiff
in any such action against the Issuer or any indemnified party, with or without
the consent of the Issuer, then the Issuer agrees to indemnify and hold harmless
such indemnified party to the extent provided herein.
SECTION 9. EXPENSES. Whether or not the sale of the Bonds by the Issuer to
the Underwriter is consummated, the Underwriter shall be under no obligation to
pay any costs or expenses incident to the performance of the obligations of the
Issuer hereunder. All costs and expenses to effect the authorization,
preparation (including word processing and printing costs), issuance, sale and
delivery, as the case may be, of the Official Statement (together with any
amendments or supplements thereof), the Bonds, the Program Documents, the Letter
of Credit, any rating agency fees, Trustee's fees and expenses, Trustee's
counsel fees and disbursements, financial consultant fees and disbursements, the
fees and disbursements of Bond Counsel, fees and disbursements of counsel for
the Issuer and the amount to be paid to the Underwriter pursuant to Section 1 of
this Purchase Contract, shall be paid out of the sources provided therefor in
the Indenture, or if the Bonds are not delivered by the Issuer to the
Underwriter, such costs and expenses shall be paid by the Issuer. All
out-of-pocket expenses of the Underwriter, including fees and expenses of its
counsel (except for word processing costs incurred in the production of the
Official Statement), Blue Sky expenses and the cost of obtaining federal funds
for the Purchase Price of the Bonds hereunder shall be paid by the Underwriter.
In the event that, for any reason, the Issuer fails to deliver the Bonds
as provided herein by 10:00 a.m. Pacific Standard time, on December 1, 1998, the
Issuer will pay to the Underwriter any losses resulting from the Underwriter
being required to hold Bonds prior to delivery to ultimate purchasers thereof.
This preceding sentence shall not be construed as a waiver of any condition to
the Underwriter's obligations under the Purchase Contract.
SECTION 10. SURVIVAL OF CERTAIN REPRESENTATIONS AND OBLIGATIONS. The
respective agreements, covenants, representations, warranties and other
statements of the Issuer and each of their respective officials or officers set
forth in or made pursuant to this Purchase Contract shall remain in full force
and effect, regardless of any investigation, or statements as to the results
thereof, made by or on behalf of the Underwriter and will survive delivery of
and payment for the Bonds.
SECTION 11. NOTICES. Any notice or other communication hereunder shall be
in writing, and, if sent to the Underwriter, will be mailed, delivered or
telecopied and confirmed to the Underwriter care of Dain Rauscher Incorporated,
One Market Plaza, 1100 Steuart Street Tower, San Francisco, California 94105,
and if sent to the Issuer shall be mailed, delivered, or telecopied and
confirmed at its address respectively set forth above.
SECTION 12. GOVERNING LAW. This Purchase Contract shall be governed by and
construed in accordance with the laws of the State of California, without giving
effect to the principles of conflict of laws in the State of California.
SECTION 13. COUNTERPARTS. This Purchase Contract may be executed in
several counterparts, each of which shall be an original and all of which shall
constitute but one and the same instrument.
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SECTION 14. SUCCESSORS. This Purchase Contract shall be binding upon and
inure to the benefit of the parties hereto and their respective successors, and
no other person shall acquire or have any right or obligation under or by virtue
of this Purchase Contract.
Very truly yours,
Dain Rauscher Incorporated,
as Underwriter
By: /s/ John Geesman
------------------------------------
John Geesman
Managing Director
By: /s/ Pamela Becker
------------------------------------
Pamela Becker
Vice President
THE FOREGOING SHALL BE EFFECTIVE AND IS HEREBY ACCEPTED AND AGREED TO AS OF THIS
1ST DAY OF DECEMBER, 1998:
AMERICAN XTAL TECHNOLOGY, INC.
By: /s/ Guy Atwood, V.P.
--------------------------------
Authorized Representative
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EXHIBIT A
TO BOND PURCHASE CONTRACT
FORM OF SUPPLEMENTAL OPINION
BOND COUNSEL
The supplemental opinion of Bond Counsel should be dated the date of the
Closing and addressed to the Underwriter, and opine that:
(i) the Bonds are not subject to the registration
requirements of the Securities Act of 1933, as amended (the
"Securities Act") pursuant to Section 3(a)(2) of the Securities Act.
The Indenture is exempt from qualification pursuant to the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act") in
reliance upon an exemption contained in the Trust Indenture Act. No
opinion is expressed with respect to the Letter of Credit;
(ii) the Purchase Contract has been duly authorized,
executed and delivered by the Issuer and (assuming due
authorization, execution and delivery by and validity against the
other party thereto) is a valid and binding agreement of the Issuer;
and
(iii) the statements contained in the Official
Statement, dated November 23, 1998, with respect to the Bonds, under
the captions "THE BONDS," "SECURITY AND SOURCES OF PAYMENT FOR THE
BONDS" and "SUMMARY OF THE INDENTURE," insofar as such statements
expressly summarize certain provisions of the Bonds and the
Indenture are accurate in all material respects.
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EXHIBIT B
TO BOND PURCHASE CONTRACT
FORM OF OPINION
COUNSEL TO THE BANK
The opinion of counsel to the Bank should be dated the date of the Closing
and addressed to the Issuer, the Rating Agency and the Underwriter, and opine
that:
(i) the Bank is a corporation duly organized, validly
existing and in good standing under the laws of the State of
California;
(ii) the Bank is qualified to conduct a commercial
banking business in California, and, as part of such commercial
banking business, has the power and authority to execute and deliver
the Reimbursement Agreement and the Letter of Credit;
(iii) the Letter of Credit constitutes the legal, valid
and binding obligation of the Bank, enforceable against the Bank in
accordance with its terms, except (i) as limited by bankruptcy,
insolvency, reorganization, moratorium and other laws relating to or
affecting generally the enforcement of creditors' rights and
remedies against the Bank as the same may be applied in the event of
the bankruptcy, insolvency, liquidation, reorganization, or similar
situation or moratorium applicable to the Bank; and (ii) general
principles of equity including, without limitation, concepts of
materiality, reasonableness, good faith and fair dealing, and
limitation upon the specific enforceability of any remedies,
covenants or other provisions of relevant documents and upon the
availability of injunctive relief or other equitable remedies,
regardless of whether considered in a proceeding in equity or in
law;
(iv) the issuance of the Letter of Credit by the Bank
is exempt from the registration requirements of the Securities Act
of 1933, as amended (the "Act") pursuant to Section 3(a)(2) of the
Act; and
(v) the statements contained in the Official Statement
under the Captions "SECURITY AND SOURCES OF PAYMENT FOR THE BONDS -
The Letter of Credit" and "SUMMARY OF THE REIMBURSEMENT AGREEMENT,"
insofar as such statements purport to summarize certain provisions
of the Letter of Credit and Reimbursement Agreement, present an
accurate summary of such provisions in all material respects.
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EXHIBIT C
TO BOND PURCHASE CONTRACT
FORM OF OPINION
COUNSEL TO THE ISSUER
The opinion of counsel to the Issuer should be dated the date of the
Closing and addressed to the Bond Counsel and the Underwriter, and opine that:
(i) the Issuer is a corporation duly organized and
validly existing under the laws of the state of Delaware and has
full legal rights, power and authority to (a) execute and deliver
and to perform its obligations under the Program Documents and (b)
transact in the State of California the business in which the Issuer
is now engaged;
(ii) the Program Documents have been duly authorized,
executed and delivered by the Issuer and, assuming proper
authorization, execution and delivery by the other parties thereto,
constitute legal, valid and binding obligations of the Issuer
enforceable against Issuer in accordance with their respective terms
except to the extent the enforceability thereof may be limited by
bankruptcy, insolvency, moratorium, reorganization, other laws
affecting or relating to the rights of creditors generally, the
application of equitable principles and judicial discretion, and by
the implied covenant of good faith and fair dealing;
(iii) the execution and delivery by the Issuer of the
Program Documents and performance by the Issuer of its obligations
thereunder will not result in a violation of, a breach of, or a
default under the bylaws and articles of incorporation of the Issuer
or any statute, indenture, mortgage, deed of trust, note agreement,
other agreement or instrument to which the Issuer is a party or by
which it is bound and no approval or other action by any
governmental authority or agency of the State of California or the
United States of America is required in connection therewith;
provided however that no opinion concerning compliance with the
federal securities laws or securities or "Blue Sky" laws of the
various states is expressed; and
(iv) except as disclosed in the Official Statement, no
action, suit, proceeding, inquiry, or investigation at law or in
equity before or by any judicial or administrative court or agency
is pending or threatened against the Issuer or its assets,
properties or operations, which if determined adversely to the
Issuer would likely materially adversely affect the transactions
contemplated by the Program Documents.
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EXHIBIT D
TO BOND PURCHASE CONTRACT
FORM OF OPINION
COUNSEL TO THE UNDERWRITER
The opinion of counsel to the Underwriter should be dated the date of the
Closing and addressed to the Underwriter, and opine that:
(i) under existing laws, the Bonds may be offered and
sold without registration under the Securities Act of 1933, as
amended, and the Indenture is not required to be qualified under the
Trust Indenture Act of 1939, as amended; and
(ii) because the primary purpose of their professional
engagement was not to establish factual matters and because of the
wholly or partially non-legal character of any determinations
involved in the preparation of the Official Statement as counsel to
the Underwriter, they are not passing upon and do not assume any
responsibility for the accuracy, completeness or fairness of any of
the statements contained in the Official Statement and make no
representation that they independently verified the accuracy,
completeness or fairness of the statements contained in the Official
Statement; however, on the basis of their conferences with the
representatives of the Issuer, representatives of the Bank and
representatives of the Underwriter and in reliance thereon and on
the certificates, opinions and other documents they have examined,
no information has come to their attention which would cause them to
believe that the Official Statement as of its date and as of the
date of their opinion contains any untrue statement of a material
fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
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EXHIBIT E
FORM OF OPINION
COUNSEL TO THE TRUSTEE
The opinion of counsel to the Trustee should be dated the date of Closing
and addressed to the Issuer, the Bank and the Underwriter and opine that:
(i) the Trustee has been duly organized and is a
lawfully existing trust company and is qualified to do business in
the State of California and has full corporate power to undertake
the trust of the Indenture;
(ii) the Trustee has duly authorized, executed and
delivered the Indenture and by all necessary corporate action has
authorized the acceptance of the trust of the Indenture; and
(iii) assuming the due authorization, execution and
delivery by the other parties thereto, the Indenture constitutes a
valid and binding obligation of the Trustee, enforceable against the
Trustee in accordance with its terms except as enforcement may be
limited by bankruptcy, insolvency, moratorium or other similar laws,
or equitable principles relating to or limiting creditors' rights
generally.
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EXHIBIT 10.11
REMARKETING AGREEMENT
AMERICAN XTAL TECHNOLOGY, INC. PROJECT
REMARKETING AGREEMENT, dated and effective as of December 1, 1998, between
AMERICAN XTAL TECHNOLOGY, INC., a Delaware corporation (the "Issuer"), and DAIN
RAUSCHER INCORPORATED (the "Remarketing Agent").
WHEREAS, on December 1, the Issuer issued its Variable Rate Taxable Demand
Revenue Bonds Series 1998 in the aggregate principal amount of $11,615,000 (the
"Bonds"), pursuant to that certain Trust Indenture dated as of December 1, 1998
(the "Indenture"), between the Issuer and Harris Trust Company of California, as
trustee (the "Trustee"); and
WHEREAS, to support the payment of the principal of, interest on and
Purchase Price of the Bonds, U.S. Bank National Association, Fremont, California
(the "Bank"), issued its irrevocable direct pay letter of credit (the "Letter of
Credit") to the Trustee; and
WHEREAS, the outstanding Bonds are subject to purchase upon notice and
delivery to the Trustee or the Tender Agent (as such term is defined in the
Indenture) as provided in the Indenture; and
WHEREAS, the Issuer and the Remarketing Agent desire to make contract
provisions regarding the Remarketing Agent's role as the remarketing agent for
the Bonds, in addition to those set forth in the Indenture.
NOW, THEREFORE, for and in consideration of the covenants herein made, the
Issuer and the Remarketing Agent hereby agree as follows:
SECTION 1. DEFINITIONS. All capitalized terms used in this Remarketing
Agreement, which are not otherwise defined herein, shall have the meanings
ascribed to them in the Indenture.
SECTION 2. DUTIES. In reliance upon the representations and agreements,
but subject to the terms and conditions contained in the Indenture and in this
Remarketing Agreement, the Issuer hereby appoints the Remarketing Agent, and the
Remarketing Agent hereby accepts the appointment, as exclusive remarketing agent
in connection with the offering and sale of the Bonds from time to time in the
secondary market, subsequent to the initial offering, issuance and sale of the
Bonds. The Issuer and Remarketing Agent acknowledge that this appointment of the
Remarketing Agent is made with the approval of the Issuer and the Bank.
The Remarketing Agent will perform the duties specified for the
Remarketing Agent under the Indenture, all of which are incorporated herein by
reference, and this Remarketing Agreement. In acting as Remarketing Agent, the
Remarketing Agent will act as agent and not as principal except as expressly
provided in this Section.
The Remarketing Agent may, if it determines to do so in its sole
discretion, buy as principal any Bonds but it will not in any event be obligated
to do so.
SECTION 3. DISCLOSURE STATEMENT.
(a) If the Remarketing Agent determines that it is necessary or
desirable to use a disclosure statement ("Disclosure Statement") in connection
with its offering of the Bonds, the Remarketing Agent will notify the Issuer and
the Issuer will provide the Remarketing Agent with a Disclosure Statement
satisfactory to the Remarketing Agent and its counsel in respect of the Bonds.
The Issuer will supply the Remarketing Agent with the number of copies of the
Disclosure Statement and documents related thereto as the Remarketing Agent
requests from time to time and will amend the Disclosure Statement (and/or the
documents incorporated by reference in it) so that at all times the Disclosure
Statement and any documents related thereto will not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements in such documents, in the light of the circumstances under which
they were made, not misleading. In addition, the Issuer will take all steps
reasonably
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requested by the Remarketing Agent which the Remarketing Agent or its counsel
may consider necessary or desirable to register the sale of the Bonds by the
Remarketing Agent under any Federal or state securities law or to qualify the
Indenture under the Trust Indenture Act of 1939, as amended, and will provide
the Remarketing Agent such officers' certificates, counsel opinions,
accountants' letters and other documents as may be customary in similar
transactions. If the Issuer does not perform its obligations under this Section,
the Remarketing Agent may immediately cease remarketing efforts.
(b) The Issuer has authorized the use by the Remarketing Agent of
the Official Statement in connection with the remarketing of Bonds. For purposes
of this Remarketing Agreement, the Official Statement and any other documents
provided to the Remarketing Agent pursuant to paragraph (a) of this Section
shall be considered to be the Disclosure Statement.
SECTION 4. REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS OF THE
REMARKETING AGENT. The Remarketing Agent, by its acceptance hereof, represents,
warrants, covenants and agrees with the Issuer as follows:
(a) It is authorized by law to perform all of the duties required
of it by the Indenture and this Remarketing Agreement.
(b) The execution and delivery of this Remarketing Agreement and
the consummation of the transactions contemplated herein and in the Indenture
will not conflict with or constitute on the part of the Remarketing Agent a
breach of or a default under its charter documents, its by-laws, or any statute,
indenture, mortgage, deed of trust, lease, note agreement or other agreement or
instrument to which the Remarketing Agent is a party or by which it or its
properties are bound, or any order, rule or regulation of any court or
governmental agency or body having jurisdiction over the Remarketing Agent or
any of its activities or properties.
(c) This Remarketing Agreement has been duly authorized, executed
and delivered by the Remarketing Agent.
(d) It has full power and authority to take all actions required
or permitted to be taken by it or under, and to perform and observe the
covenants and agreements on its part contained in, this Remarketing Agreement
and any other instrument or agreement relating thereto to which it is a party.
(e) It has, on or before the date hereof, duly taken all action
necessary to be taken by it prior to such date for: (i) the execution, delivery
and performance of this Remarketing Agreement and any other instrument or
agreement relating thereto to which it is a party and which have been executed
by the Remarketing Agent in connection with the transactions contemplated by the
foregoing documents, and (ii) the carrying out, giving effect to, consummation
and performance of the transactions and obligations contemplated hereby and by
the Official Statement.
(f) This Remarketing Agreement and any other instrument or
agreement relating thereto to which it is a party which have been executed by
the Remarketing Agent in connection with the consummation of the transactions
contemplated hereby and by the Official Statement will constitute its legal,
valid and binding obligations, enforceable against it in accordance with their
respective terms, except as enforcement may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws, or equitable principles
relating to or limiting creditors' rights generally.
(g) The Remarketing Agent will use its best efforts to remarket
the Bonds pursuant to the Indenture.
SECTION 5. REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS OF THE
ISSUER. The Issuer, by its acceptance hereof, represents, warrants, covenants,
and agrees with the Remarketing Agent as follows:
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<PAGE> 3
(a) It has full power and authority to take all actions required
or permitted to be taken by it or under, and to perform and observe the
covenants and agreements on its part contained in, the Program Documents (as
that term is defined in the Bond Purchase Contract) and any other instrument or
agreement relating thereto to which it is a party (collectively, the "Closing
Documents").
(b) It has, on or before the date hereof, duly taken all action
necessary to be taken by it prior to such date for: (i) the execution, delivery
and performance of the Closing Documents, which have been executed by the Issuer
in connection with the transactions contemplated thereby, and (ii) the carrying
out, giving effect to, consummation and performance of the transactions and
obligations contemplated hereby and by the Official Statement; provided that no
representation is made with respect to compliance with the securities or Blue
Sky laws of the various states of the United States.
(c) The Closing Documents which have been executed by the Issuer
in connection with the consummation of the transactions contemplated hereby and
by the Official Statement will constitute its legal, valid and binding
obligations, enforceable against it in accordance with their respective terms,
except as enforcement may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws, or equitable principles relating to or limiting
creditors' rights generally.
(d) The execution and delivery of the Closing Documents which have
been executed in connection with the consummation of the transactions
contemplated hereby and by the Official Statement, the compliance with the
terms, conditions or provisions thereof, and the consummation of the
transactions therein contemplated do not and will not violate any law,
regulation, order, writ, injunction or decree of any court or governmental body
or result in a breach of any of the terms, conditions or provisions of, or
constitute a default under, or result in the creation or imposition of any
mortgage, lien, charge or encumbrance of any nature whatsoever upon any of the
properties or assets of the Issuer pursuant to any mortgage, resolution,
agreement or instrument to which the Issuer is a party or by which it or any of
its properties is bound other than those provided for in the Closing Documents
or contemplated by the parties.
(e) All authorizations, consents and approvals of, notices to,
registrations or filings with, or actions in respect of any governmental body,
agency or other instrumentality or court required in connection with the
execution, delivery and performance by the Issuer of the Closing Documents and
which have been executed in connection with the consummation of the transactions
contemplated hereby and by the Official Statement have been obtained, given or
taken and are in full force and effect; provided that no representation is made
with respect to compliance with the securities or Blue Sky laws of the various
states of the United States.
(f) To the knowledge of the Issuer, other than as described in the
Official Statement, there is no action, suit, proceeding, inquiry or
investigation before or by any court, public board or body pending or threatened
against or affecting him wherein an unfavorable decision, ruling or finding is
likely to have a materially adverse effect on the financial condition or
solvency of the Issuer or the ability of the Issuer to perform its obligations
under the Closing Documents or any other agreement or instrument to which it is
a party and which is used or contemplated for use in consummation of the
transactions contemplated hereby or by the Official Statement.
(g) The Issuer will cooperate with the Remarketing Agent in the
qualification of the Bonds for offering and sale and the determination of the
eligibility of the Bonds for investment under the laws of such jurisdictions as
the Remarketing Agent shall designate and will use its best efforts to continue
any such qualifications in effect so long as required for the distribution of
all the Bonds by the Remarketing Agent; provided that the Issuer shall not be
required to incur any expense, consent to service of process in any such
jurisdiction or qualify to do business in any jurisdiction where it is not now
so subject.
SECTION 6. CONDITIONS TO REMARKETING AGENT'S OBLIGATIONS. The obligations
of the Remarketing Agent under this Remarketing Agreement have been undertaken
in reliance on, and shall be subject to, the due performance by the Issuer of
its obligations and agreements to be performed hereunder and to the accuracy of
and compliance with the representations, warranties, covenants and agreements of
the Issuer contained herein, on and as of the Date of Delivery of this
Remarketing Agreement. The obligations of the Remarketing Agent on and as of
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each date on which Bonds are to be offered and sold pursuant to this Remarketing
Agreement are also subject to the following further conditions:
(a) Each of the Closing Documents shall be in full force and
effect and shall not have been amended, modified or supplemented in any way
which would materially adversely affect the Bonds, except as may have been
agreed to in writing by the Remarketing Agent, and there shall be in full force
and effect such additional resolutions, agreements, certificates and opinions,
which resolutions, agreements, certificates and opinions shall be satisfactory
in form and substance to the Remarketing Agent; and
(b) No Event of Default (as such term is defined in any of the
Closing Documents) shall have occurred and be continuing and no event shall have
occurred and be continuing which, with the passage of time or giving of notice
or both, would constitute such an Event of Default.
SECTION 7. INDEMNIFICATION AND CONTRIBUTION.
(a) The Issuer will indemnify, protect, defend and hold harmless
the Remarketing Agent, each of its directors, officers, agents and employees and
each person who controls the Remarketing Agent within the meaning of Section 15
of the Securities Act of 1933, as amended (such Act being herein called the
"Act" and any such person being herein sometimes called an "Indemnified Party"),
against any and all losses, claims, damages or liabilities, joint or several, to
which such Indemnified Party may become subject under any statute or at law or
in equity or otherwise, and shall reimburse any such Indemnified Party for any
legal or other expenses incurred by it in connection with defending any actions,
but only to the extent that such losses, claims, damages, liabilities or actions
arise out of or are based upon (i) an allegation or determination that the
Bonds, the obligations of the Issuer under the Indenture or this Remarketing
Agreement, or the obligations of the Bank under the Letter of Credit should have
been registered under the Act or the Indenture should have been qualified under
the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"), or (ii)
any untrue statement or alleged untrue statement of a material fact contained in
any Disclosure Statement or any amendment thereof or supplement thereto, or the
omission or alleged omission to state therein a material fact necessary to make
the statements therein not misleading, but the Issuer shall not be liable in any
such case to the extent that any such loss, claim, damage, liability or action
arises out of, or is based upon, any such untrue statement or alleged untrue
statement or omission or alleged omission made therein in reliance upon and in
conformity with written information furnished to the Issuer by the Remarketing
Agent specifically for use in connection with the preparation thereof, or if the
person asserting any such loss, claim, damage or liability purchased Bonds from
the Remarketing Agent, if delivery to such person of the Disclosure Statement or
any amendment or supplement to it would have been a valid defense to the action
from which such loss, claim, damage or liability arose and if the same was not
delivered to such person by or on behalf of the Remarketing Agent. This
indemnity agreement shall not be construed as a limitation on any other
liability which the Issuer may have to any Indemnified Party. Notwithstanding
the foregoing, this indemnification shall not cover any losses, claims, damages
or liabilities caused solely by the negligence of the Indemnified Party or
solely by breach of this agreement by the Indemnified Party.
(b) The Remarketing Agent shall indemnify, protect, defend and
hold harmless the Issuer, and each of its directors, officers, agents or
employees and each person who controls the Issuer within the meaning of Section
15 of the Act (for purposes of this paragraph (b), an "Indemnified Party")
against all losses, damages or liabilities, joint or several, to which such
Indemnified Party may become subject under any statute or at law or in equity or
otherwise, and will reimburse any such Indemnified Party for any legal or other
expenses incurred by it in connection with defending any actions, insofar as
such losses, damages, liabilities or actions arise out of or are based upon any
untrue statement or alleged untrue statement of a material fact contained in a
Disclosure Statement or any amendment thereof or supplement thereto, or the
omission or alleged omission to state therein a material fact necessary to make
the statements therein not misleading, but only with reference to written
information, if any, relating to the Remarketing Agent furnished to the Issuer
by the Remarketing Agent specifically for use in the preparation of a Disclosure
Statement. The Issuer and the Remarketing Agent agree that any statements set
forth in the Official Statement or a future Disclosure Statement furnished in
writing by or on behalf of the Remarketing Agent for inclusion in such documents
shall be contained in a subsection entitled "Remarketing of Bonds" and that the
Remarketing Agent's indemnification pursuant to this paragraph (b) shall be
limited to such Section. This
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indemnity agreement shall not be construed as a limitation on any other
liability which the Remarketing Agent may otherwise have to any Indemnified
Party, but in no event shall the Remarketing Agent be obligated for double
indemnification. Notwithstanding the foregoing, this indemnity shall not cover
any losses, claims, damages or liabilities caused solely by the negligence of
the Indemnified Party or solely by breach of this agreement by the Indemnified
Party.
(c) An Indemnified Party (as defined in paragraph (a) or paragraph
(b) of this Section 7) shall, promptly after the receipt of notice of the
commencement of any action against such Indemnified Party in respect of which
indemnification may be sought against the Remarketing Agent or the Issuer, as
the case may be (in either case the "Indemnifying Party"), notify the
Indemnifying Party in writing of the commencement thereof. In case any such
action shall be brought against an Indemnified Party and such Indemnified Party
shall notify the Indemnifying Party, the Indemnifying Party may, or if so
requested by such Indemnified Party shall, participate therein or assume the
defense thereof, with counsel reasonably satisfactory to such Indemnified Party,
and after notice from the Indemnifying Party to such Indemnified Party of an
election so as to assume the defense thereof, such Indemnified Party shall
reasonably cooperate in the defense thereof, including without limitation, the
settlement of outstanding claims, and the Indemnifying Party will not be liable
to such Indemnified Party under this Section 7 for any legal or other expenses
subsequently incurred by such Indemnified Party in connection with the defense
thereof other than reasonable costs of investigation incurred with the consent
of the Indemnifying Party, which consent shall not be unreasonably withheld;
provided, however, that unless and until the Indemnifying Party assumes the
defense of any such action at the request of such Indemnified Party, the
Indemnifying Party shall have the right to participate at its own expense in the
defense of any such action. If the Indemnifying Party shall not have employed
counsel to have charge of the defense of any such action or if any Indemnified
Party shall have reasonably concluded that there may be defenses available to it
or them which are different from or additional to those available to the
Indemnifying Party (in which case the Indemnifying Party shall not have the
right to direct the defense of such action on behalf of such Indemnified Party),
legal and other expenses incurred by such Indemnified Party shall be borne by
the Indemnifying Party. Notwithstanding the foregoing, the Indemnifying Party
shall not be liable for any settlement of any action or claim affected without
its consent, which consent shall not be unreasonably withheld.
(d) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in paragraph (a) or (b)
of this Section 7 is due in accordance with its terms but is for any reason held
by a court to be unavailable from the Issuer or the Remarketing Agent on grounds
of policy or otherwise, the Issuer and the Remarketing Agent shall contribute to
the aggregate losses, claims, damages and liabilities (including legal or other
expenses reasonably incurred in connection with investigating or defending same)
to which the Issuer and the Remarketing Agent may be subject (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Issuer on the one hand and the Remarketing Agent on the other from the
remarketing of the Bonds or (ii) if the allocation provided by clause (i) above
is not permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative benefits referred to in clause (i) above but also
the relative fault of the Issuer and the Remarketing Agent in connection with
the failure to register or qualify certain instruments as described in Section
7(a)(i) or in connection with the statements or omissions which resulted in such
losses, claims, damages or liabilities, as well as any other relevant equitable
considerations. The relative benefits received by the Issuer on the one hand and
the Remarketing Agent on the other shall be deemed to be in the same proportion
as the aggregate principal amount of the Bonds remarketed pursuant to this
Agreement bear to the total remarketing fees received by the Remarketing Agent.
The relative fault of the Issuer on the one hand and of the Remarketing Agent on
the other shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied and
opportunity to correct or prevent such statement or omission. The amount paid or
payable by a party as a result of the losses, claims, damages and liabilities
referred to above shall be deemed to include any legal or other fees or expenses
reasonably incurred by such party in connection with investigating or defending
any action or claim.
(e) The Issuer and the Remarketing Agent agree that it would not
be just and equitable if contribution pursuant to this Section 7 were determined
by pro rata allocation or by any other method of allocation which does not take
account of the equitable considerations referred to in the immediately preceding
paragraph.
5
<PAGE> 6
Notwithstanding the provisions of this Section 7, (i) the Remarketing Agent
shall not be required to contribute any amount in excess of the remarketing fee
applicable to the Bonds remarketed pursuant to this Remarketing Agreement; and
(ii) no person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Act) shall be entitled to contribution from any person who
is not guilty of such fraudulent misrepresentation.
(f) The indemnification and contribution obligations of all
parties to this Remarketing Agreement contained in this Section 7 shall remain
operative and in full force and effect, regardless of (i) any investigation made
by or on behalf of the Remarketing Agent, by or on behalf of any person
controlling the Remarketing Agent or by or on behalf of the Issuer or (ii) any
termination of this Remarketing Agreement.
(g) For purposes of this Section 7, each person who controls the
Remarketing Agent within the meaning of Section 15 of the Act shall have the
same rights as the Remarketing Agent and each person who controls the Issuer
within the meaning of Section 15 of the Act shall have the same rights as the
Issuer. Any party entitled to contribution shall, promptly after receipt of
notice of commencement of any action, suit or proceeding against such party in
respect of which a claim for contribution may be made against another party or
parties notify such party or parties from whom contribution may be sought, but
the omission so to notify such party or parties shall not relieve the party or
parties from whom contribution may be sought from any other obligation it or
they may have hereunder.
SECTION 8. FEES AND EXPENSES. In consideration of the Remarketing Agent's
services under this Remarketing Agreement, the Issuer will pay the Remarketing
Agent an annual amount equal to one eighth of one percent (1/8 of 1%) of the
aggregate principal amount of Bonds outstanding under the Indenture, payable
semi-annually in arrears on the first Business Day of each January and July
commencing in July, 1999, and computed on the basis of the aggregate principal
amount of the Bonds then outstanding. The Issuer also will pay all expenses in
connection with the preparation of any Disclosure Statement and the registration
of the Bonds and any other documents relating to the Bonds under any securities
laws, qualifying the Indenture under the Trust Indenture Act and will reimburse
the Remarketing Agent for all its direct out of pocket expenses incurred by it
as Remarketing Agent under this Remarketing Agreement and the Indenture,
including counsel fees and disbursements. This expense reimbursement obligation
shall not be construed as covering the expenses of the initial issuance of the
Bonds.
SECTION 9. DEALING IN BONDS BY TENDER AGENT, BANK AND REMARKETING AGENT.
The Tender Agent, the Bank or the Remarketing Agent, in their respective
individual capacities may in good faith buy, sell, own, hold and deal in any of
the Bonds, and may join in any action which any Bond owners may be entitled to
take with like effect as if it did not act in any capacity hereunder. The Tender
Agent or the Remarketing Agent, in their respective individual capacities,
either as principal or agent, may also engage in or be interested in any
financial or other transaction with the Issuer, and may act as depository,
trustee or agent for other obligations of the Issuer as freely as if it did not
act in any capacity hereunder.
SECTION 10. INTENTION OF PARTIES. It is the intention of the parties
hereto that no purchase, sale or transfer of any Bonds, as herein provided and
provided in the Indenture, shall constitute or be construed to be extinguishment
of any Bonds or the indebtedness represented thereby or the reissuance of any
Bonds.
SECTION 11. FAILURES. The Remarketing Agent will not be liable to the
Issuer, the Trustee, the Tender Agent or the Bank on account of the failure of
any person to whom the Remarketing Agent has sold a Bond to pay for such Bond or
to deliver any document in respect of the sale. It is understood and agreed that
the Remarketing Agent shall not be obligated to advance its own funds to
purchase, or to effect the purchase of, any Bonds.
SECTION 12. REMARKETING AGENT'S PERFORMANCE.
(a) The duties and obligations of the Remarketing Agent as
Remarketing Agent shall be determined solely by the express provisions of this
Remarketing Agreement and the Indenture, and the Remarketing Agent shall not be
responsible for the performance of any other duties and obligations than as are
specifically set
6
<PAGE> 7
forth in this Remarketing Agreement and the Indenture, and no implied covenants
or obligations shall be read into this Remarketing Agreement or the Indenture
against the Remarketing Agent.
(b) The Remarketing Agent may conclusively rely upon any notice or
document given or furnished to the Remarketing Agent and conforming to the
requirements of this Remarketing Agreement or the Indenture and shall be
protected in acting upon any such notice or document reasonably believed by it
to be genuine and to have been given, signed or presented by the proper party or
parties.
(c) The Remarketing Agent shall not be liable for any actions
taken or omitted to be taken pursuant to this Remarketing Agreement, except for
its own gross negligence or willful misconduct.
SECTION 13. TERMINATION. This Remarketing Agreement will terminate upon
the retirement of the Bonds or the effective resignation or removal of the
Remarketing Agent as Remarketing Agent in accordance with the Indenture. The
Remarketing Agent will resign as Remarketing Agent under the Remarketing
Agreement if requested to do so by the Issuer in writing and may resign at any
time. Following termination, the provisions of Section 7 hereof will continue in
effect, and each party will pay the other any amounts owing at the time of
termination.
SECTION 14. MISCELLANEOUS.
(a) Except as otherwise provided, any notice or other
communication herein required or permitted to be given shall be in writing or by
telex or facsimile transmission or by telephone with subsequent written
confirmation and may be personally served or sent by United States mail, first
class postage prepaid, and shall be deemed to have been given upon receipt by
the party notified. For the purposes hereof, the address of the parties (until
notice of a change thereof is delivered as provided in this section shall be as
follows:
Remarketing Agent: DAIN RAUSCHER INCORPORATED
Short-Term Department
115 Broadway, 17th Floor
New York, NY 10006
Tel: (212) 669-5528
Fax: (212) 669-5535
Issuer: AMERICAN XTAL TECHNOLOGY, INC.
Mr. Guy D. Atwood
4311 Solar Way
Fremont, CA 94538
Tel: (510) 683-5900 ext. 192
Fax: (510) 683-5901
The Remarketing Agent and the Issuer may, by notice given under this
Remarketing Agreement, designate other addresses to which notices or other
communications shall be directed.
(b) This Remarketing Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors and assigns. The
terms "successors" and "assigns" shall not include any purchaser of any of the
Bonds merely because of such purchase.
(c) All of the representations, warranties and covenants made in
this Remarketing Agreement shall remain operative and in full force and effect,
regardless of (i) any investigation made by or on behalf of any party hereto,
(ii) delivery of and any payment for any Bonds hereunder, or (iii) termination
or cancellation of this Remarketing Agreement.
7
<PAGE> 8
(d) Section headings have been inserted in this Remarketing
Agreement as a matter of convenience of reference only, and it is agreed that
the section headings are not a part of this Remarketing Agreement and will not
be used in the interpretation of any provisions of this Remarketing Agreement.
(e) If any provision of this Remarketing Agreement shall be held
or deemed to be or shall, in fact, be invalid, inoperative or unenforceable as
applied in any particular case in any jurisdiction or jurisdictions, or in all
jurisdictions because it conflicts with any provisions of any constitution,
statute, rule or public policy, or any other reason, such circumstances shall
not have the effect of rendering the provisions in question invalid, inoperative
or unenforceable in any other case or circumstance, or of rendering any other
provisions of this Remarketing Agreement invalid, inoperative or unenforceable
to any extent whatsoever.
(f) This Remarketing Agreement may be executed in several
counterparts, each of which shall be regarded as an original and all of which
shall constitute one and the same document.
(g) The terms of this Remarketing Agreement shall not be waived,
altered, modified, amended or supplemented in any manner whatsoever except by
written instrument signed by all of the parties hereto.
(h) This Remarketing Agreement shall be governed by and construed
in accordance with the laws of the State of California.
IN WITNESS WHEREOF, the Remarketing Agent and the Issuer have caused
this Remarketing Agreement to be signed in their names by the undersigned
officers, hereunto duly authorized, all as of the day and year first above
written.
REMARKETING AGENT:
DAIN RAUSCHER INCORPORATED
By: /s/ Pamela Becker
--------------------------------------
Authorized Representative
ISSUER:
AMERICAN XTAL TECHNOLOGY, INC.,
By: /s/ Guy Atwood
--------------------------------------
Authorized Representative
8
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 filed with the Securities and Exchange Commission on
November 13, 1998 of American Xtal Technology Inc. of our report dated January
28, 1999 appearing on page 37 of this Annual Report on Form 10-K.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
March 30, 1999
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 16,122
<SECURITIES> 0
<RECEIVABLES> 9,452
<ALLOWANCES> 550
<INVENTORY> 20,579
<CURRENT-ASSETS> 48,576
<PP&E> 32,378
<DEPRECIATION> 5,931
<TOTAL-ASSETS> 75,023
<CURRENT-LIABILITIES> 7,508
<BONDS> 16,347
0
0
<COMMON> 16
<OTHER-SE> 51,152
<TOTAL-LIABILITY-AND-EQUITY> 75,023
<SALES> 41,493
<TOTAL-REVENUES> 43,290
<CGS> 24,550
<TOTAL-COSTS> 25,354
<OTHER-EXPENSES> 7,520
<LOSS-PROVISION> 450
<INTEREST-EXPENSE> 781
<INCOME-PRETAX> 10,203
<INCOME-TAX> 3,877
<INCOME-CONTINUING> 6,326
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<NET-INCOME> 6,326
<EPS-PRIMARY> 0.42
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</TABLE>
