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As filed with the Securities and Exchange Commission on October 8, 1997
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
QUANTUM EPITAXIAL DESIGNS, INC.
(Exact Name of Registrant as Specified in its Charter)
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<S> <C> <C>
PENNSYLVANIA 3674 23-2566613
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
119 Technology Drive, Bethlehem, Pennsylvania 18015
(Address, including zip code, of principal executive offices)
Thomas L. Hierl
President and Chief Executive Officer
Quantum Epitaxial Designs, Inc.
119 Technology Drive
Bethlehem, Pennsylvania 18015
(Name and address of agent for service)
(610) 861-6930
(Telephone number, including area code, of agent for service)
---------------------
With copies to:
Jeffrey P. Libson, Esq. Charles C. Zall, Esq.
Pepper, Hamilton & Scheetz LLP Saul, Ewing, Remick & Saul LLP
3000 Two Logan Square 3800 Centre Square West
Philadelphia, PA 19103-2799 Philadelphia, PA 19102
(215) 981-4000 (215) 972-7777
---------------------
Approximate Date of Commencement of Proposed Sale to the Public: As soon
as practicable after this Registration Statement becomes effective.
---------------------
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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CALCULATION OF REGISTRATION FEE
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Title of Each Class of Securities Proposed Maximum Aggregate
to be Registered Offering Price (1) Amount of Registration Fee
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Common Stock, par value $.001 per share $25,875,000 $7,841
=====================================================================================================
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(1) Estimated solely for purposes of determining the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
================================================================================
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED OCTOBER 8, 1997
PROSPECTUS
2,250,000 Shares
QUANTUM EPITAXIAL DESIGNS, INC.
Common Stock
----------------
Of the 2,250,000 shares of Common Stock offered hereby, 2,000,000 shares
are being sold by Quantum Epitaxial Designs, Inc. ("QED" or the "Company") and
250,000 shares are being sold by certain shareholders of the Company (the
"Selling Shareholders"). The Company will not receive any of the proceeds from
the sale of any shares by the Selling Shareholders. See "Principal and Selling
Shareholders." Prior to the Offering, there has been no public market for the
Common Stock of the Company. It is currently estimated that the initial public
offering price will be between $8.00 and $10.00 per share. See "Underwriting"
for a discussion of factors to be considered in determining the initial public
offering price. Application has been made for inclusion of the Common Stock on
the Nasdaq National Market under the symbol "QEDI."
----------------
These securities involve a high degree of risk. See "Risk Factors"
beginning on page 7 for a discussion of certain factors that should be
considered by prospective purchasers of the Common Stock offered hereby.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
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=======================================================================================
Underwriting
Price to Discounts and Proceeds to Proceeds to
Public Commissions(1) Company(2) Selling Shareholders
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share ...... $ $ $ $
- ---------------------------------------------------------------------------------------
Total (3) ...... $ $ $ $
=======================================================================================
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(1) In addition to paying the underwriting discounts and commissions, the
Company has agreed to issue to the Representatives five-year warrants to
purchase a total of shares of Common Stock (the "Representatives'
Warrants" at an exercise price of $ per share. The Company and the
Selling Shareholders have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company, estimated at $ .
(3) The Company and the Selling Shareholders have granted the Underwriters a
30-day option to purchase up to an additional 87,500 and 250,000 shares,
respectively, of Common Stock solely to cover over-allotments, if any. If
the Underwriters exercise this option in full, the total Price to Public,
Underwriting Discounts and Commissions, Proceeds to Company and Proceeds
to Selling Shareholders will be $ , $ , $ , and $ ,
respectively. See "Underwriting."
----------------
The shares of Common Stock offered by this Prospectus are offered by the
several Underwriters, subject to prior sale, when, as and if delivered to and
accepted by them, and subject to the right of the Underwriters to reject orders
in whole or in part. It is expected that delivery of the shares of Common Stock
will be made in New York, New York, on or about , 1997.
Needham & Company, Inc. Janney Montgomery Scott Inc.
The date of this Prospectus is , 1997.
<PAGE>
[INSERT GRAPHICS]
The Company has applied for a trademark on its corporate name, the acronym
"QED" and its logo. This Prospectus also includes trademarks of companies other
than the Company.
---------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON
STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M UNDER
THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial data appearing elsewhere in this Prospectus. Except
as otherwise specified, all information in this Prospectus assumes no exercise
of the Underwriters' over-allotment option. See "Underwriting."
The Company
Quantum Epitaxial Designs, Inc. ("QED" or the "Company") designs, develops
and manufactures compound semiconductor materials using molecular beam epitaxy
("MBE") and is a leading producer of gallium arsenide ("GaAs") based epitaxial
wafers supplied to the semiconductor device manufacturing industry. Compound
semiconductors, which provide higher performance than silicon semiconductors,
are used in a broad range of applications in wireless communications, fiber
optic telecommunications, computers, and consumer and automotive electronics.
The Company utilizes compound semiconductor materials (such as GaAs, AlGaAs,
InGaAs, InAlAs, InSb and InP) that are a combination of elements found in each
of columns III and V of the periodic table to produce MBE epitaxial wafers. MBE
is generally used for the most advanced, high performance applications. Since
January 1996, the Company's significant customers have included Alpha Industries
Inc., Hughes Aircraft, Inc., M/A-COM, Inc., a subsidiary of AMP Incorporated,
Motorola, Inc., Raytheon Company, Texas Instruments Incorporated and Watkins
Johnson Company.
Recent developments in advanced information systems have created a growing
need for power efficient, high-performance electronic devices that operate at
very high frequencies, have increased storage capacity and computational and
display capabilities, and can be produced cost-effectively in commercial
volumes. Compound semiconductors produced from epitaxial wafers have emerged as
an enabling technology to meet the complex requirements of applications in
wireless communications, fiber optic telecommunications, computer, and consumer
and automotive electronics. The growth in these markets has increased the
demand for GaAs based epitaxial wafers. According to published industry
estimates, the market for GaAs epitaxial wafers in the electronics market
segment is expected to grow from approximately $72.5 million in 1996 to $178.8
million in 2000.
Compound semiconductors are composed of two or more elements that are
found in each of columns III and V of the periodic table and usually consist of
a metal such as gallium, aluminum or indium and a non-metal such as arsenic,
phosphorous, antimony or nitrogen. Many compound semiconductor materials have
unique physical properties that allow electrons to move many times faster than
through silicon. This higher electron mobility enables a compound semiconductor
device to operate at much higher speeds than silicon devices with lower power
consumption and less noise and distortion. In addition, unlike silicon-based
devices, compound semiconductor devices have opto-electronic capabilities that
enable them to emit and detect light.
The Company utilizes MBE technology to produce compound semiconductor
wafers. MBE is an epitaxial crystal growth process by which thin layers of
compound semiconductor materials are grown on top of a crystal material called
the substrate. The Company believes that the MBE production process allows for
the precise control, uniformity and high-quality which is essential to produce
the electronic results required of semiconductors and integrated circuits used
in high performance radio frequency, microwave and opto-electronic
applications.
The Company's goal is to become the leading supplier of MBE based
semiconductor materials. To attain this goal, the Company intends to increase
its capacity to serve growing, high volume commercial markets, maintain its
technological leadership, maintain its customer relationships, ensure quality
performance, and continue to penetrate the captive market.
3
<PAGE>
The Company was incorporated in Pennsylvania in 1988. The Company's
executive offices, production facilities and development facilities are located
at 119 Technology Drive, Bethlehem, Pennsylvania 18015, its telephone number is
(610) 861-6930.
4
<PAGE>
The Offering
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<S> <C>
Common Stock offered:
By the Company ....................................... 2,000,000 shares
By the Selling Shareholders ........................... 250,000 shares
---------
Total ............................................. 2,250,000 shares
Common Stock to be outstanding after the Offering ...... 5,423,424 shares(1)
Use of proceeds ....................................... To repay bank debt, purchase capital equip-
ment, and for general corporate purposes
including working capital and possible
acquisitions. See "Use of Proceeds."
Proposed Nasdaq National Market symbol .................. "QEDI"
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Summary Financial Data
(in thousands, except per share data)
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Six Months Ended
Year Ended December 31, June 30,
--------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Total revenues ........................... $2,249 $2,553 $3,633 $5,253 $ 6,902 $2,672 $ 4,142
Operating income (loss) .................. 435 754 867 1,153 115 (305) (279)
Income (loss) before income taxes ......... 545 674 788 1,088 (98) (371) (527)
Pro forma net income (loss)(2) ............ $ 332 $ 411 $ 481 $ 664 $ (62) $(233) $ (325)
Pro forma net loss per share(2) ......... $ (0.03) $ (0.14)
Shares used in computing pro forma net
loss per share(2) ..................... 1,979 1,979
Supplemental pro forma net income
(loss) per share(3)....................... $ 0.02 $ (0.08)
Shares used in computing supplemental
pro forma net income (loss) per share(3) . 4,083 2,418
</TABLE>
<TABLE>
<CAPTION>
June 30, 1997
-------------------------------------------
Pro Forma
Actual Pro Forma(4) As Adjusted(4)(5)
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Balance Sheet Data:
Working capital (deficit) .................. $(321) $ (208) $14,538
Total assets ................................. 9,390 9,396 21,262
Short-term debt .............................. 1,555 1,555 81
Long-term debt, less current portion ......... 3,027 3,027 175
Convertible subordinated notes payable ...... 2,100 -- --
Shareholders' equity ........................ 1,701 3,054 19,245
</TABLE>
- ----------------
(1) Excludes shares of Common Stock issuable upon the exercise of outstanding
options. As of the date of this Prospectus, there were 463,890 shares of
Common Stock reserved for issuance upon the exercise of outstanding
options with a weighted average exercise price of $0.68 per share and
167,000 shares of Common Stock reserved for future issuance under the
Company's stock option plans. See "Management--Executive Compensation,"
"--Stock Option Plans" and Note 10 of Notes to Financial Statements.
(2) The Company has operated as a corporation subject to taxation under
Subchapter S of the Internal Revenue Code of 1986, as amended (an "S
Corporation"), for income tax purposes since its inception
5
<PAGE>
in 1988 and will terminate such status in connection with the Offering.
Upon termination of the Company's S Corporation status, the Company will
record a net deferred tax liability and corresponding income tax expense.
This amount would have been approximately $648,000 if the termination
occurred on June 30, 1997. Such expense amount is excluded from the above
data. See "S Corporation Termination." See Note 3 of Notes to Financial
Statements for information concerning the computation of pro forma net
income (loss) and pro forma net loss per share.
(3) See Note 3 of Notes to Financial Statements for information concerning the
computation of supplemental pro forma net income (loss) per share.
(4) Reflects the effects of the (i) termination of the Company's S Corporation
status, including the Deferred Tax Liability of $648,000 described in "S
Corporation Termination," (ii) conversion of convertible subordinated
notes payable in the principal aggregate amount of $100,000 into 143,245
shares of Class A Preferred Stock and subsequent conversion into 1,432,459
shares of Common Stock, and the conversion of a convertible subordinated
note payable in the principal amount of $2,000,000 less deferred financing
costs of $106,668 into 269,905 shares of Class B Preferred Stock and
subsequent conversion into 269,905 shares of Common Stock (collectively,
the "Convertible Subordinated Notes"), and (iii) exercise of a warrant to
purchase 135,710 shares of Common Stock (the "NEPA Warrant") at a total
exercise price of $7,886. See "S Corporation Termination," "Certain
Transactions" and Note 3 of Notes to Financial Statements.
(5) Adjusted to give effect to the sale by the Company of 2,000,000 shares of
Common Stock offered hereby (at an assumed initial public offering price
of $9.00 per share) and the application of the net proceeds as set forth
in "Use of Proceeds."
Risk Factors
An investment in the Common Stock offered by this Prospectus involves a
high degree of risk. Risks involved in an investment in the Common Stock
include, without limitation management of growth, changes in business
conditions, changes in the compound semiconductor industry and the economy
generally, complexity of MBE production systems, adoption of MBE technology,
competition, continuing capital requirements, substantial reliance on key
customers, dependence on a limited number of equipment manufacturers,
dependence on key source materials, limited protection of proprietary
technology, and dependence on key personnel. No assurance can be given that the
future results will be achieved; actual events or results may differ materially
as a result of risks facing the Company. See "Risk Factors."
---------------------
This Prospectus contains certain statements of a forward-looking nature
relating to future events, such as developments of processes and commencement
of production, or the future financial performance of the Company. Such
statements can be identified by the use of forward-looking terminology such as
"believes," "expects," "may," "will," "should" or "anticipates" or the negative
thereof or other variations thereon or comparable terminology, or by
discussions of strategy that involve risks and uncertainties. In addition, from
time to time, the Company or its representatives have made or may make
forward-looking statements, orally or in writing. Such forward-looking
statements may be included in, but are not limited to, various filings made by
the Company with the Commission, or press releases or oral statements made by
or with the approval of an authorized executive officer of any of the Company.
Prospective investors are cautioned that such statements are only projections
and that actual events or results may differ materially. In evaluating such
statements, prospective investors should specifically consider the various
factors identified in this Prospectus, including the matters set forth under
the heading "Risk Factors" beginning on page 7 which could cause actual results
to differ materially from those indicated by such forward-looking statements.
6
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered by this Prospectus
involves a high degree of risk. In addition to the other matters described in
this Prospectus, prospective investors should carefully consider the following
factors before making a decision to purchase the Common Stock offered hereby.
Management of Growth
The Company has experienced substantial growth and expanded operations
during the past five years. This growth has placed significant and increasing
demands on the Company's management, operational, technical and financial
resources. The MBE production process is a leading edge technology and, as
such, the Company's growth may continue to challenge the Company's senior
management, as well as its technical and manufacturing personnel. The Company's
future performance will depend in part on its ability to manage expanding
operations and to adapt its operational systems as the Company's business and
technology change. In addition, the Company's decisions to incur additional
fixed costs with the purchase of MBE systems is based, in large part, on the
Company's forecast of future growth of demand for its products and related
revenues. The failure of the Company to manage its growth effectively could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Factors Affecting Operating Results; Potential Fluctuations in Quarterly
Results
Fluctuations in the Company's quarterly operating results have and will
result from the timing, quantity and pricing of orders, scheduled and
unscheduled maintenance, variations in manufacturing yields, and other factors.
Many of these factors are beyond the Company's control. Typically, customers
require short lead times for the delivery of MBE wafers which has made, and may
continue to make it difficult for the Company to estimate accurately the demand
for any given period of time. In addition, some of the Company's customers
maintain a supply of wafers in inventory and may periodically reduce or
eliminate orders given their current supply and demand requirements. A
significant portion of the Company's expenses are fixed. Therefore, the factors
affecting revenues described above will have the effect of causing fluctuations
in the Company's quarterly results. In addition, the timing of increases in
fixed expenses is based, in large part, on the Company's forecast of future
revenues. If such revenues do not meet the Company's expectations, the Company
will be unable to quickly adjust expenses to appropriate levels for actual
revenues, which could have a material adverse effect on the Company's business,
operating results and financial condition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Substantial Capital Expenditures; Continuing Capital Requirements
To meet the market demand for MBE wafers anticipated by the Company, the
Company plans to purchase additional multi-wafer MBE systems and related
equipment in late 1998 and 1999. This capital acquisition and the related
increase in staffing will increase fixed costs and may adversely affect the
Company's short term operating results prior to the realization of the
anticipated future benefits of such increased capacity. If the anticipated
market demand for the Company's MBE products does not occur, or if the revenues
do not increase sufficiently to cover the additional costs of expansion, the
Company's business, financial condition and results of operations will be
adversely affected. Investments in new technology or sales growth beyond
currently planned capacity will require further expenditures. As a result, the
Company anticipates that it may be required to raise additional capital in the
future in order to finance expansion of its manufacturing capacity and its
research and development programs. There can be no assurance that additional
capital will be available on acceptable terms, if at all. If additional funds
are raised by issuing equity securities, dilution to the Company's then
existing shareholders may result. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business--Facilities and
Equipment."
Substantial Reliance on Key Customers
The Company's customer base has been and continues to be highly
concentrated. The Company's largest customers based on revenues for 1996 and
the six month period ended June 30, 1997 are Alpha Industries Inc.,
7
<PAGE>
Hughes Aircraft, Inc., M/A-COM, Inc., Motorola, Inc., Raytheon Company, Texas
Instruments Incorporated and Watkins Johnson Company. For the years ended
December 31, 1995 and 1996 and for the six months ended June 30, 1997, three
customers accounted for approximately 52%, 63% and 52%, respectively, of the
Company's total revenues and the ten largest customers accounted for
approximately 85%, 88% and 78%, respectively, of the Company's total revenues
in each such period. Generally, the Company does not have ongoing written
commitments from such customers to purchase its products. However, based upon
historical results and the long-term relationships with most customers, the
Company believes that a substantial portion of its revenues will continue to be
derived from sales to the Company's largest customers. There can be no
assurance that the Company's current customers will continue to place orders
with the Company or that the Company will be able to obtain orders from new
customers. The loss of any one or more significant customers could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Results of Operations" and "Business--
Customers."
MBE Production System Complexity
The operation of MBE production systems is extremely complex and requires
highly trained technicians and a controlled operating environment. The redesign
or introduction of new MBE production systems by MBE equipment suppliers
historically has resulted in unanticipated problems associated with new and
unproven designs and the relative unfamiliarity of the Company's technical
staff with such designs. Due to the complexity of the manufacturing process,
minute impurities, deviations from operating parameters of temperature and
pressure, operator error and other factors, the Company has experienced, and
may in the future experience lower than expected production throughput and
yields. These experiences have substantially affected the Company's results of
operations. The inability to produce sufficient MBE wafers to meet customer
demand on a timely basis could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business--Technology and Manufacturing," "--Backlog" and "--Facilities and
Equipment."
Adoption of MBE Technology
MBE is one of several competing technologies used to produce compound
semiconductor materials. The Company believes that MBE technology offers
performance advantages over other process technologies, but in some cases at a
higher cost. There can be no assurance that other technologies will not develop
further and diminish or eliminate the performance advantages of MBE, that
end-product manufacturers will require the performance levels attainable only
by using MBE-based wafers , or that MBE-based products will achieve broader
market acceptance. See "Business--Industry Overview," "--MBE Technology,"
"--Products" and "--Competition."
Competition
The market for the Company's products is highly competitive and has been
characterized by rapid and significant technological advances. In connection
with the production of MBE wafers for the semiconductor and integrated circuit
market, the Company competes with both merchant suppliers and the in-house
capabilities of device manufacturers, many of which have substantially greater
financial, technical and other resources than the Company. There can be no
assurance that the Company's competitors or others, will not succeed in
developing technologies and products that are equal to or more effective than
any which are being developed by the Company or which would render the
Company's technologies obsolete or noncompetitive. In addition, device
manufacturers may install new or increase existing internal capacity which
could result in fewer orders for the Company's products. The Company believes
that the primary competitive factors in the markets in which the Company's
products compete are quality, reliability of delivery, accessibility of
support, and price. In addition, increased competitive pressure could lead to
intensified price-based competition, resulting in lower prices and margins,
which would materially adversely affect the Company's business, financial
condition and results of operations. See "Business--Industry Overview" and
"--Competition."
Dependence on a Limited Number of Equipment Manufacturers
There are few manufacturers of MBE wafer manufacturing systems. The
increased demand for MBE systems could increase future costs of MBE systems and
cause delays in increasing capacity to meet customer
8
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demand. Based on the Company's experience, the time from the ordering of a new
MBE system until installation and testing are complete can be as long as one
year. There can be no assurance that this order lead time will not increase in
the future. Any or all of these factors could have a material adverse effect on
the Company's business, financial condition and results of operations.
Dependence on Key Materials
The Company manufactures its MBE wafers from GaAs substrates that are
supplied by only a limited number of vendors. In addition, a single entity has
significant control over commercial sources of gallium. Although the Company
has not experienced production delays due to unavailability, delay in
procurement or increased cost of raw materials to date, there can be no
assurance that a disruption of supply or price fluctuation will not occur and
any such disruption or fluctuation could have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
production of MBE wafers requires high purity supplies of source materials, and
as a result minor impurities could adversely affect an entire production run.
The Company seeks to purchase source materials with the requisite purity
levels, but there can be no assurance that the source materials received by the
Company will meet the specified purity levels because such levels of purity
exceed that which can be detected using current technology. See "Business--Raw
Materials and Suppliers."
Limited Protection of Proprietary Technology; Risks of Infringement
The Company seeks to protect its technology, proprietary rights and other
written materials principally under trade secret and copyright laws, which
afford only limited protection. The Company does not have any patents on its
proprietary technology. The Company routinely enters into non-disclosure and
confidentiality agreements with employees, contractors, consultants and
customers. Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to utilize aspects of the Company's technology
or to obtain and use information that the Company regards as proprietary. There
can be no assurance that the Company's means of protecting its proprietary
rights will be adequate or that the Company's competitors will not
independently develop similar technologies. In addition, the laws of some
foreign countries do not protect the Company's proprietary rights to as great
an extent as the laws of the United States. The Company does not believe that
any of its products infringe on the proprietary rights of third parties. There
can be no assurance, however, that third parties will not claim infringement by
the Company with respect to current or future activities. Any such claim, with
or without merit, could be time-consuming, result in costly litigation, cause
delays or require the Company to enter into royalty or licensing agreements.
Such royalty or licensing agreements, if required, may not be available on
terms acceptable to the Company or at all, which could have a material adverse
effect on the business, results of operations and financial condition of the
Company. See "Business--Proprietary Information."
Dependence on Key Personnel
The Company is dependent on the efforts of a number of key management and
technical personnel, including its President and Chief Executive Officer,
Thomas L. Hierl. The loss of services of one or more of these key individuals,
particularly Mr. Hierl, could materially and adversely affect the business of
the Company and its future prospects. The Company's success may also depend on
its ability to attract and retain other qualified technical, marketing,
manufacturing and other key management personnel. The Company faces competition
for such personnel and there can be no assurance that the Company will be
successful in attracting and retaining such personnel. See
"Management--Executive Officers and Directors."
Centralization of Manufacturing Facilities
The Company manufactures all of its products at its facility in Bethlehem,
Pennsylvania. Due to this centralization of its manufacturing equipment, the
Company is susceptible to business interruptions resulting from power outages,
natural disasters, equipment failures and other localized conditions. Prolonged
business interruptions would have a material adverse effect on the Company's
business, financial condition and its results of operations. See
"Business--Facilities and Equipment."
9
<PAGE>
Environmental Regulations
Although the Company is largely unregulated at present, generally due to
the small volume of hazardous materials handled or hazardous wastes generated,
the Company may in the future become subject to federal, state and local
environmental regulations related to the storage, treatment, discharge or
disposal of chemicals used in its operations and exposure of its personnel to
occupational hazards. Such regulations could require the Company to acquire
significant equipment or to incur other substantial expenses to comply with
regulations. Any failure by the Company to control the use of, or to restrict
adequately the discharge of, regulated substances or properly control other
occupational hazards as required by applicable regulations could subject it to
substantial financial liabilities or result in a suspension of production or a
cessation of operations. See "Business--Environmental Regulation."
Absence of Public Market and Possible Volatility of Stock Price
There has been no public market for the Common Stock prior to the Offering
and, although application has been made for listing the Common Stock on the
Nasdaq National Market, there can be no assurance that an active trading market
in the Common Stock will develop or be sustained. The initial public offering
price of the Common Stock, will be determined through negotiations between the
Company, the Selling Shareholders and the representatives of the Underwriters,
and will not necessarily be related to the Company's book value, net worth or
any other established criteria of value. See "Underwriting" for a discussion of
factors to be considered in determining the initial public offering price of
the Common Stock. The market price of the Common Stock is likely to be highly
volatile, and there can be no assurance that the price of the Common Stock will
not decline below the initial public offering price following the completion of
the Offering. The Company believes factors such as actual or anticipated
quarterly fluctuations in financial results, changes in earnings estimates by
securities analysts and announcements of material events by the Company, its
major customers or its competitors, as well as general industry or economic
conditions, may cause the market price of the Common Stock to fluctuate,
perhaps substantially. The stock market has experienced extreme price and
volume fluctuations which have affected the market prices of many technology
companies and small capitalization stocks in particular, and which have often
been unrelated to the operating performance of these companies. See
"Underwriting."
Effect of Shares Eligible for Future Sale on Market Price
Future sales of Common Stock by existing shareholders could adversely
affect the prevailing market price for the Common Stock after the Offering and
the Company's ability to raise additional capital. Upon consummation of the
Offering, the Company will have 5,423,424 shares of Common Stock outstanding
(assuming no exercise of options to purchase Common Stock). Of such shares, the
2,250,000 shares sold in the Offering generally will be freely tradeable without
restriction or further registration under the Securities Act of 1933, as amended
(the "Securities Act"). All of the remaining shares of Common Stock are
"restricted securities" within the meaning of Rule 144 and are eligible for sale
under Rule 144 subject to volume limitations and other conditions, if
applicable. The beneficial owners of approximately 3,458,018 shares of Common
Stock have agreed not to sell or otherwise dispose of their shares for a period
ending 180 days after the date of this Prospectus (the "lock-up period"),
without the prior written consent of Needham & Company, Inc. No prediction can
be made as to the effect, if any, that market sales of such shares or the
availability of such shares for future sale will have on the market price of
shares of Common Stock prevailing from time to time. See "Shares Eligible for
Future Sale."
Following the Offering and after the expiration of the lock-up period, the
holders of up to approximately 1,618,254 shares of Common Stock will be
entitled to certain registration rights with respect to such shares. If such
holders, by exercising their registration rights, cause a large number of
shares to be registered and sold in the public market, such sales may have an
adverse effect on the market price for the Common Stock. In addition, if the
Company is required to include in a Company-initiated registration shares held
by such holders pursuant to the exercise of their "piggyback" registration
rights, such sales may have an adverse effect on the Company's ability to raise
needed capital. See "Risk Factors--Anti-takeover Effect of Certain Provisions
of the Company's Articles of Incorporation and Pennsylvania Law," "Description
of Securities--Registration Rights" and "Underwriting."
10
<PAGE>
Anti-takeover Effect of Certain Provisions of the Company's Articles of
Incorporation and Pennsylvania Law
Certain provisions of the Company's Restated Articles of Incorporation
(the "Articles") and Amended and Restated Bylaws (the "Bylaws") could delay or
frustrate the removal of incumbent directors, discourage potential acquisition
proposals and proxy contests and delay, defer or prevent a change in control of
the Company, even if such events could be beneficial, in the short term, to the
interests of the shareholders. In addition, the Bylaws provide for the Board of
Directors to be divided into three classes of directors serving three-year
staggered terms, a mechanism for the Company's shareholders to call a special
meeting of shareholders upon a request of shareholders owning at least 50% of
the Company's capital stock and the elimination of shareholder action by
written consent. See "Management--Classified Board of Directors" and
"Description of Capital Stock."
The Articles authorize the issuance of up to 25,000,000 shares of Common
Stock and 5,420,000 shares of preferred stock, par value $.01 per share (the
"Preferred Stock"). The Board of Directors has the power to determine the price
and terms under which any such Preferred Stock may be issued and to fix the
terms thereof. The ability of the Board of Directors to issue one or more
series of Preferred Stock without shareholder approval, as well as certain
applicable statutory provisions under the Pennsylvania Business Corporation
Law, could deter or delay unsolicited changes in control of the Company by
discouraging open market purchases of the Common Stock or non-negotiated tender
or exchange offers for such stock, which may be disadvantageous to the
Company's shareholders who may otherwise desire to participate in such
transaction and receive a premium for their shares.
The Pennsylvania Business Corporation Law of 1988, as amended (the "BCL"),
contains a number of statutory "anti-takeover" provisions applicable to the
Company. One such BCL provision prohibits, subject to certain exceptions, a
"business combination" with a shareholder or group of shareholders (and certain
affiliates and associates of such shareholders) beneficially owning more than
20% of the voting power of a public corporation (an "interested shareholder")
for a five-year period following the date on which the holder became an
interested shareholder. This provision may discourage open market purchases of
a corporation's stock or a non-negotiated tender or exchange offer for such
stock and, accordingly, may be considered disadvantageous by a shareholder who
would desire to participate in any such transaction. The BCL also provides that
directors may, in discharging their duties, consider the interests of a number
of different constituencies, including shareholders, employees, suppliers,
customers, creditors and the community in which it is located. Directors are
not required to consider the interests of shareholders to a greater degree than
other constituencies' interests. The BCL expressly provides that directors do
not violate their fiduciary duties solely by relying on poison pills or the
anti-takeover provisions of the BCL. See "Description of Capital Stock."
Concentration of Stock Ownership
The present directors, executive officers and 5% shareholders of the
Company and their respective affiliates will, in the aggregate, beneficially
own 55.5% (50.3% if the over-allotment option is exercised) of the Company's
outstanding Common Stock upon completion of the Offering. As a result, these
shareholders, if they act as a group, would be able to exercise significant
influence over all matters requiring shareholder approval, including the
election of directors and approval of significant corporate transactions. There
are no voting arrangements, agreements or understandings in place among any of
such shareholders. See "Principal and Selling Shareholders."
Dilution
Purchasers of shares of Common Stock in the Offering will experience
immediate and substantial dilution of the net tangible book value per share of
Common Stock in the amount of $5.45 per share. See "Dilution."
11
<PAGE>
USE OF PROCEEDS
The proceeds from the sale of the Common Stock offered by the Company
hereby will be approximately $16.2 million after deducting estimated
underwriting discounts and commissions and estimated offering expenses payable
by the Company. The Company will not receive any of the net proceeds from the
shares of Common Stock sold by the Selling Shareholders.
The Company will use approximately $3.7 million of the net proceeds from
the Offering to repay outstanding long-term bank debt bearing interest at a
weighted average rate of 8.5% per annum as of June 30, 1997. The Company plans
to use approximately $1.0 million of the net proceeds to repay amounts
outstanding under the Company's bank line of credit, approximately $4.0 million
of the net proceeds for capital equipment purchases in 1998 and approximately
$4.0 million for capital equipment purchases in 1999. The remainder of the net
proceeds will be used for general corporate purposes which may include working
capital, capital expenditures and potential acquisitions of businesses. At the
present time, the Company is not engaged in any negotiations with third parties
and has no specific agreements or plans with respect to any acquisitions, and
there can be no assurance the Company will consummate any acquisition. Pending
such uses, the net proceeds of the Offering will be invested in short-term,
investment grade, interest-bearing securities. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
DIVIDEND POLICY
The Company has not declared or paid any cash dividends or distributions
on its capital stock, other than S Corporation distributions discussed below.
The Company's current intention is to retain any future earnings for use in its
business. Accordingly, the Company does not anticipate paying any cash
dividends on the Common Stock in the foreseeable future.
S CORPORATION TERMINATION
Prior to the Offering, Company has been a corporation subject to taxation
under Subchapter S of the Internal Revenue Code of 1986, as amended (an "S
Corporation"). As a result, the net income of the Company has been taxed, for
federal and state income tax purposes, directly to the Company's shareholders
rather than to the Company. Accordingly, the Company made distributions to its
shareholders to cover the estimated income tax liabilities attributable on
their proportionate share of the Company's taxable income.
The Company will terminate its S Corporation status on a date (the
"Termination Date") immediately prior to the consummation of the Offering. As a
result of the termination of its S Corporation status, the Company will record a
net deferred income tax liability and corresponding income tax expense (the
"Deferred Tax Liability"), effective upon the Termination Date. The amount of
the net Deferred Tax Liability would have been approximately $648,000 if the
Termination Date had been June 30, 1997, but the actual amount will be adjusted
to reflect the effect of the Company's actual operating results through the
Termination Date. The Company does not intend to make any distributions to its
shareholders in connection with the termination. See "Certain Transactions--Tax
Agreements."
12
<PAGE>
CAPITALIZATION
The following table sets forth, as of June 30, 1997, (i) the actual
capitalization of the Company, (ii) the pro forma capitalization of the Company,
and (iii) the proforma as adjusted capitalization of the Company after giving
effect to the sale of 2,000,000 shares of Common Stock offered by the Company
hereby (at an assumed initial public offering price of $9.00 per share) and the
application of the estimated net proceeds therefrom. The information set forth
below should be read in conjunction with the Financial Statements and Notes
thereto and Management's Discussion and Analysis of Financial Condition and
Results of Operations appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
June 30, 1997
----------------------------------------------
Pro Forma
Actual Pro Forma(1) As Adjusted(1)(2)
-------- -------------- ------------------
(in thousands, except share data)
<S> <C> <C> <C>
Short-term debt(3) .............................. $1,555 $1,555 $ 81
======= ======= ========
Long-term debt, less current portion(3) ......... 3,027 3,027 175
------- ------- --------
Convertible subordinated notes payable(3) ...... 2,100 -- --
------- ------- --------
Shareholders' equity:
Preferred Stock, $0.01 par value, 5,420,000 shares
authorized; none issued and outstanding ...... -- -- --
Common Stock, $0.001 par value, 25,000,000
shares authorized, 1,585,350 shares issued and
outstanding, actual; 3,423,424 shares issued and
outstanding, pro forma; and 5,423,424 shares
issued and outstanding, as adjusted(4) ......... 2 3 5
Additional paid-in capital ..................... 73 3,051 19,240
Retained earnings .............................. 1,626 -- --
------- ------- --------
Total shareholders' equity ..................... 1,701 3,054 19,245
------- ------- --------
Total capitalization ........................ $6,828 $6,081 $19,420
======= ======= ========
</TABLE>
- ------------
(1) Reflects the effects of the (i) termination of the Company's S Corporation
status, including the Deferred Tax Liability described in "S Corporation
Termination," and the reclassification of the retained earnings balance to
additional paid-in capital, (ii) conversion of the Convertible
Subordinated Notes into shares of Common Stock, and (iii) exercise of the
NEPA Warrant to purchase Common Stock. See "S Corporation Termination,"
"Certain Transactions" and Note 3 of Notes to Financial Statements.
(2) Adjusted to give effect to the sale by the Company of 2,000,000 shares of
Common Stock offered (at an assumed initial public offering price of $9.00
per share) and the application of the net proceeds as set forth in "Use of
Proceeds."
(3) See Notes 7, 8 and 9 of Notes to Financial Statements for information
concerning the Company's line of credit, long-term debt and convertible
subordinated notes payable.
(4) Excludes shares of Common Stock issuable upon the exercise of outstanding
options. As of the date of this Prospectus, there were 463,890 shares of
Common Stock reserved for issuance upon the exercise of outstanding
options with a weighted average exercise price of $0.68 per share and
167,000 shares of Common Stock reserved for future issuance under the
Company's stock plans. See "Management--Executive Compensation," "--Stock
Option Plans" and Note 10 of Notes to Financial Statements.
13
<PAGE>
DILUTION
The net tangible book value of the Company as of June 30, 1997 was
approximately $1,701,000, or $1.07 per share of Common Stock. Net tangible book
value per share is equal to the total tangible assets of the Company less total
liabilities, divided by the number of shares of Common Stock outstanding. After
giving effect to the (i) termination of the Company's S Corporation status,
including the Deferred Tax Liability described in "S Corporation Termination,"
(ii) conversion of the Convertible Subordinated Notes into shares of Common
Stock, and (iii) exercise of the NEPA Warrant to purchase Common Stock the pro
forma net tangible book value of the Company as of June 30, 1997 would have
been approximately $3,054,000, or $0.89 per share. After giving effect to the
sale by the Company of 2,000,000 shares of Common Stock offered hereby (at an
assumed initial public offering price of $9.00 per share) and after deduction
of estimated underwriting discounts and commissions and estimated offering
expenses payable by the Company, the pro forma, as adjusted, net tangible book
value of the Company as of June 30, 1997 would have been approximately
$19,245,000, or $3.55 per share. This represents an immediate increase in pro
forma, as adjusted, net tangible book value of $2.66 per share to existing
shareholders and an immediate dilution in pro forma, as adjusted, net tangible
book value of $5.45 per share to new shareholders purchasing Common Stock in
the Offering. The following table illustrates this per-share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share ...... $ 9.00
Net tangible book value per share as of June 30,
1997 ............................................. $ 1.07
Decrease attributable to the termination of the
Company's S Corporation status, the conversion
of the Convertible Subordinated Notes, and the
exercise of the NEPA Warrant ..................... (0.18)
--------
Pro forma net tangible book value per share before
the Offering .................................... 0.89
Increase attributable to new shareholders ......... 2.66
--------
Pro forma, as adjusted, net tangible book value per
share after the Offering ........................ 3.55
--------
Dilution per share to new shareholders ............... $ 5.45
========
</TABLE>
As of August 31, 1997, options to purchase 463,890 shares of Common Stock
were outstanding with a weighted average exercise price of $0.68 per share. If
all such options were exercised, the dilution per share to new investors would
be $5.50. See "Capitalization," "Description of Capital Stock" and Note 10 of
Notes to Financial Statements.
The following table sets forth, as of June 30, 1997 on a pro forma basis
and after giving effect to the Offering, the number of shares of Common Stock
purchased from the Company, the total consideration paid to the Company, the
average price per share paid by existing shareholders, and the average price
per share to be paid by new investors purchasing shares of Common Stock from
the Company in the Offering:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
----------------------- ------------------------- Average Price
Number Percent Amount Percent Per Share
----------- --------- ------------- --------- --------------
<S> <C> <C> <C> <C> <C>
Existing shareholders(1)(2) ....... 3,423,424 63.1% $ 2,075,588 10.3% $0.61
New investors(2) .................. 2,000,000 36.9 18,000,000 89.7 9.00
--------- ------ ------------ ------
Total .............................. 5,423,424 100.0% $20,075,588 100.0%
========= ====== ============ ======
</TABLE>
- ------------
(1) Assumes no exercise of options outstanding as of August 31, 1997 to
purchase 463,890 shares of Common Stock at exercise prices of $0.05 to
$1.75 and a weighted average exercise price of $0.68 per share. If any of
these options are exercised, there will be further dilution to new
investors. Does not reflect the sale of 250,000 shares by Selling
Shareholders in the Offering. Sales by Selling Shareholders in the
Offering will reduce the number of shares held by existing shareholders to
3,173,424, or 58.5% of the total shares of Common Stock outstanding after
the Offering (2,923,424 shares, or 53.0%, of the total shares if the
Underwriters' over-allotment option is exercised).
(2) Sales by Selling Shareholders in the Offering will increase the number of
shares held by new investors to 2,250,000, or 41.5%, of the total shares
of Common Stock outstanding after the Offering (2,587,500 shares, or
47.0%, of the total shares if the Underwriters' over-allotment option is
exercised).
14
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below as of December 31, 1995 and
1996 and for each of the three years in the period ended December 31, 1996 have
been derived from the audited Financial Statements of the Company included
elsewhere in this Prospectus. The selected financial data as of December 31,
1992, 1993 and 1994 and for each of the two years in the period ended December
31, 1993 are derived from audited financial statements not included herein. The
selected financial data as of June 30, 1997 and for the six months ended June
30, 1996 and 1997 are derived from the unaudited financial statements of the
Company, which, in management's opinion, include all adjustments (consisting of
only normal recurring adjustments) necessary for a fair presentation of the
information set forth therein. The results of operations for prior periods,
including the six months ended June 30, 1996 and 1997, are not necessarily
indicative of the results that may be expected for 1997 or future years. The
information set forth below should be read in conjunction with the Company's
Financial Statements and the Notes thereto, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
--------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- ----------- -------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Product ............................................. $2,176 $2,515 $3,229 $4,644 $ 6,312 $2,447 $ 3,733
Contract research and development .................. 73 38 404 609 590 225 409
------- ------- ------- ------- ------- ------ -------
Total revenues ................................. 2,249 2,553 3,633 5,253 6,902 2,672 4,142
------- ------- ------- ------- ------- ------ -------
Operating expenses:
Cost of product, excluding depreciation ............ 607 837 1,331 2,221 3,799 1,625 2,449
Cost of product-depreciation ........................ 212 230 424 599 892 380 595
------- ------- ------- ------- ------- ------ -------
Total cost of product ........................... 819 1,067 1,755 2,820 4,691 2,005 3,044
Research and development ........................... 159 72 277 416 576 242 440
Selling, general and administrative ............... 613 660 734 864 1,520 730 937
------- ------- ------- ------- ------- ------ -------
Operating income (loss) .............................. 658 754 867 1,153 115 (305) (279)
Interest expense .................................... 113 80 79 65 213 66 248
------- ------- ------- ------- ------- ------ -------
Net income (loss) before income taxes ............... 545 674 788 1,088 (98) (371) (527)
Pro forma provision (benefit) for income taxes(1) ... 213 263 307 424 (36) (138) (202)
------- ------- ------- ------- ------- ------ -------
Pro forma net income (loss)(1) ........................ $ 332 $ 411 $ 481 $ 664 $ (62) $(233) $ (325)
======= ======= ======= ======= ======= ====== =======
Pro forma net loss per share(1) ..................... $ (0.03) $ (0.14)
======= =======
Shares used in computing pro forma net loss per
share(1) ............................................. 1,979 1,979
======= =======
Supplemental pro forma net income (loss) per share(2) . $ 0.02 $ (0.08)
======= =======
Shares used in computing supplemental pro forma
net income (loss) per share(2)......................... 4,083 2,418
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31, June 30, 1997
------------------------------------------------------- -----------------------
1992 1993 1994 1995 1996 Actual Pro Forma(3)
-------- ---------- -------- --------- ------------ -------- -------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital (deficit) .................. $ 385 $ (564) $ 333 $ (22) $ (1,967) $(321) $ (208)
Total assets ................................. 2,044 3,002 3,309 5,537 8,481 9,390 9,396
Short-term debt .............................. 287 327 334 483 3,039 1,555 1,555
Long-term debt, less current portion ......... 776 647 795 1,235 2,054 3,027 3,027
Convertible subordinated notes payable ...... 100 100 100 100 100 2,100 --
Shareholders' equity ........................ 725 1,150 1,665 2,355 2,228 1,701 3,054
</TABLE>
- ----------------
(1) The Company has operated as an S Corporation for income tax purposes since
its inception in 1988 and will terminate such status in connection with
the Offering. See Note 3 of Notes to Financial Statements for information
concerning the computation of the pro forma provision (benefit) for income
taxes, pro forma net income (loss) and pro forma net loss per share. Upon
termination of the Company's S Corporation status, the Company will record
a net deferred tax liability and corresponding income tax expense. This
amount would have been approximately $648,000 if the termination occurred
on June 30, 1997. Such expense amount is excluded from the above data. See
"S Corporation Termination."
(2) See Note 3 of Notes to Financial Statements for information concerning the
computation of supplemental pro forma net income (loss) per share.
(3) Reflects the effects of the (i) termination of the Company's S Corporation
status, including the Deferred Tax Liability described in "S Corporation
Termination," (ii) conversion of the Convertible Subordinated Notes into
1,702,364 shares of Common Stock and (iii) exercise of the NEPA Warrant to
purchase 135,710 shares of Common Stock. See "S Corporation Termination,"
"Certain Transactions" and Note 3 of Notes to Financial Statements.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company designs, develops and manufactures compound semiconductor
materials using MBE technology and is a leading producer of GaAs based MBE
wafers supplied to the semiconductor device manufacturing industry. In
addition, the Company conducts contract research and development principally
for agencies of the United States government. The products and services of the
Company range from preliminary design to volume production of compound
semiconductor materials, primarily GaAs MBE wafers. The Company has experienced
rapid sales growth, and from 1994 to 1996, the Company's total revenues
increased from $3.6 million to $6.9 million, or a compound annual growth rate
of approximately 38%. Since January 1996, the Company's significant customers
have included Alpha Industries Inc., Hughes Aircraft, Inc., M/A-COM, Inc.,
Motorola, Inc., Raytheon Company, Texas Instruments Incorporated and Watkins
Johnson Company.
The Company earns revenues from the sale of compound semiconductors wafers
and from government funded contract research and development. Product revenues,
which primarily result from the sale of wafers, are recognized upon the
shipment of wafers. Product revenues from wafers shipped in a quarterly
reporting period may vary substantially depending on several factors, including
customer order size and timing, production capacity and the price for each
wafer. Wafer prices and manufacturing costs will vary depending on wafer
diameter, substrate material, wafer growth complexity, order size, yields and
other factors. The Company also earns revenues from contracts with various
federal governmental agencies to conduct research on advanced electronic and
opto-electronic materials and devices. Generally, these contracts last between
six and 24 months and are funded through the Small Business Innovative Research
("SBIR") program of the federal government. The Company recognizes research and
development revenues as related expenses are incurred.
During the past few years, the Company has experienced a transition in
customer demand for compound semiconductor materials from lower developmental
quantities to larger commercial quantities that support high volume production.
Generally, such larger order quantities have enabled the Company to reduce the
average cost of manufacturing. Similarly, the average selling prices for wafers
have decreased as the Company has achieved economies of scale and reduced unit
costs due to MBE systems advancements, such as the introduction of multi-wafer
systems and other process improvements.
Since 1992, the Company has generally operated at or near practicable
manufacturing capacity. In 1995, based on an expected increase in demand for
compound semiconductor materials being driven largely by consumer demand in the
commercial wireless communications industry, the Company embarked on a major
expansion of its production capacity. Three multi-wafer MBE systems were added
in 1995, 1996 and 1997. Manufacturing and support facilities were doubled in
1996 to provide sufficient clean room manufacturing space to accommodate the
Company's current plans for adding two multi-wafer MBE systems by the end of
1999. To support the Company's expansion, in 1996 and 1997, the Company also
expanded its staff of technical personnel and invested in on-site training and
proprietary process improvements. Although these improvements have increased
the level of the Company's fixed costs, the Company believes that such
expenditures will enable it to increase manufacturing throughput and yields and
continue to reduce unit costs.
Due to the complexity of MBE systems, the Company has experienced certain
manufacturing problems resulting from bringing new MBE systems on-line. The
Company believes that it has resolved these manufacturing problems and has
developed effective testing methods and operating procedures to minimize the
impact of such problems on future operations.
Generally, the Company's MBE systems require approximately two to three
weeks of scheduled maintenance to, among other things, replenish source
materials and to clean and repair parts. The Company's MBE systems typically
operate for a period of 12 to 14 weeks before requiring such scheduled
maintenance. Unscheduled maintenance due to equipment failure and human error
can reduce and has reduced this period. Accordingly, wafer production capacity
may be constrained in periods in which the scheduled and unscheduled
maintenance cycles of several MBE systems coincide. Since mid-1996, the Company
has increased the length
16
<PAGE>
of production cycles and reduced the frequency of unscheduled production
interruptions. This has been accomplished by increasing the capacity of
consumable source materials in each MBE system and improving the level of
operator proficiency in addition to other factors. Further, with high fixed
costs, moderate fluctuations in wafer production, shipping and sales have
resulted, and may in the future result, in large fluctuations in the Company's
quarterly gross margins (product revenues less total cost of product) and
operating results. For example, during the first six months of 1996, the
Company's wafer production and revenues were lower than expected because the
Company experienced unusually long periods of MBE system downtime due to
unscheduled maintenance and unanticipated manufacturing problems with its second
multi-wafer MBE system. During the same period, the Company's manufacturing
costs increased as a result of additional staffing to support the new MBE
system and increased maintenance. This production volume sensitivity is
expected to continue in the future. See "Risk Factors--Factors Affecting
Operating Results; Potential Fluctuations in Quarterly Results."
Results of Operations
The following table sets forth selected financial data and data as a
percentage of total revenues for the periods indicated.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
--------------------------------------------------------- -----------------------------------
1994 1995 1996 1996 1997
------------------ ------------------ ----------------- ----------------- ----------------
Amount % Amount % Amount % Amount % Amount %
-------- -------- -------- -------- -------- ------- --------- ------ --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Product ..................... $3,229 89% $4,644 88% 6,312 91% $ 2,447 92% $ 3,733 90%
Contract research and
development ............... 404 11 609 12 590 9 225 8 409 10
------- ---- ------- ---- ------ ---- ------- ---- ------- ----
Total revenues ............ 3,633 100 5,253 100 6,902 100 2,672 100 4,142 100
------- ---- ------- ---- ------ ---- ------- ---- ------- ----
Operating Expenses:
Cost of product, excluding
depreciation ............... 1,331 36 2,221 42 3,799 55 1,625 61 2,449 59
Cost of product-
depreciation ............... 424 12 599 12 892 13 380 14 595 14
------- ---- ------- ---- ------ ---- ------- ---- ------- ----
Total cost of product ...... 1,755 48 2,820 54 4,691 68 2,005 75 3,044 73
Research and develop-
ment 277 8 416 8 576 8 242 9 440 11
Selling, general and
administrative ............ 734 20 864 16 1,520 22 730 27 937 23
------- ---- ------- ---- ------ ---- ------- ---- ------- ----
Total operating
expenses .................. 2,766 76 4,100 78 6,787 98 2,977 111 4,421 107
------- ---- ------- ---- ------ ---- ------- ---- ------- ----
Operating income (loss) ...... 867 24 1,153 22 115 2 (305) (11) (279) (7)
Interest expense ............ 79 2 65 1 213 3 66 3 248 6
------- ---- ------- ---- ------ ---- ------- ---- ------- ----
Net income (loss) before
income taxes ............... 788 22 1,088 21 (98) (1) (371) (14) (527) (13)
Pro forma provision (benefit)
for income taxes(1) ......... 307 9 424 8 (36) -- (138) (5) (202) (5)
------- ---- ------- ---- ------ ---- ------- ---- ------- ----
Pro forma net income
(loss)(1) .................. $ 481 13% $ 664 13% $ (62) (1)% $ (233) (9)% $ (325) (8)%
======= ==== ======= ==== ====== ==== ======= ==== ======= ====
</TABLE>
<PAGE>
- ------------
(1) See Note 3 of Notes to Financial Statements for information concerning the
computation of the pro forma provision (benefit) for income taxes and pro
forma net income (loss).
Six Months Ended June 30, 1997 and 1996.
Product Revenues. Product revenues increased 53% to $3.7 million in the
six month period ended June 30, 1997 from $2.4 million in the six month period
ended June 30, 1996. The increase in product revenues results from increased
customer shipments due to increased orders, increased manufacturing capacity
and improved manufacturing efficiencies offset by lower average selling prices.
Contract Research and Development Revenues. Contract research and
development revenues increased 82% to $409,000 in the six month period ended
June 30, 1997 from $225,000 in the six month period ended June 30, 1996. The
increase is not attributable to the significant addition of new contracts but
is a result of the timing of the completion of SBIR contract milestones.
17
<PAGE>
Cost of Product. Cost of product increased 52% to $3.0 million in the six
month period ended June 30, 1997 from $2.0 million in the six month period ended
June 30, 1996. As a percentage of total revenues, cost of product decreased to
73% in the six month period ended June 30, 1997. This increase in cost of
product resulted from additional costs associated with the addition of the
fourth multi-wafer MBE system offset by improved manufacturing efficiencies.
This was primarily due to fewer production interruptions for unscheduled
maintenance, longer average production cycles and higher wafer throughput.
Research and Development Expenses. Research and development expenses
increased by 82% to $440,000 in the six month period ended June 30, 1997 from
$242,000 in the six month period ended June 30, 1996. As a percentage of total
revenues, research and development expenses increased to 11% in the period
ended June 30, 1997, from 9% in the corresponding period in 1996. Research and
development expenses increased due to a higher level of internal and externally
funded research and development activity in the six month period ended June 30,
1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by 28% to $937,000 in the six month period
ended June 30, 1997 from $730,000 in the six month period ended June 30, 1996.
The increase resulted principally from additional compensation expenses for
finance and administrative personnel.
Interest Expense. Interest expense increased by 276% to $248,000 in the
six month period ended June 30, 1997 from $66,000 in the six month period ended
June 30, 1996. The increase resulted primarily from additional long-term
borrowing (including the subordinated convertible note payable to AMP) to
finance the Company's two newest multi-wafer MBE systems and expanded borrowing
under the Company's line of credit to fund working capital requirements.
Pro Forma Benefit for Income Taxes. For both the six month period ended
June 30, 1997 and the six month period ended June 30, 1996, pro forma income
tax benefit has been calculated to demonstrate the effect of incurring income
taxes as a C Corporation on the taxable loss in such period, which in all prior
periods has been taxed to shareholders because of the Company's S Corporation
status. For the six month periods ended June 30, 1997 and 1996, the effective
pro forma income tax rate was 38% and 37%, respectively.
Years Ended December 31, 1996 and 1995.
Product Revenues. Product revenues increased 36% to $6.3 million in 1996
from $4.6 million in 1995. Product revenues increased primarily due to an
increase in the number of wafers that were manufactured and shipped to
customers. The additional wafers manufactured and sold resulted from additional
manufacturing capacity provided by bringing the second and third multi-wafer
MBE systems on-line and increased customer orders reflecting a higher
percentage of wafers ordered for commercial (as opposed to defense)
applications. Average selling prices remained relatively constant between 1995
and 1996.
Contract Research and Development Revenues. Contract research and
development revenues decreased by 3% to $590,000 in 1996 from $609,000 in 1995.
As a percentage of total revenues, contract research and development revenues
decreased to 9% in 1996 from 12% in 1995 due to the growth in product revenues.
Cost of Product. Cost of product increased by 66% to $4.7 million in 1996
from $2.8 million in 1995. As a percentage of total revenues, the cost of
product increased to 68% in 1996 from 54% in 1995. The increase in cost of
product reflects an increase in the number of wafers produced and sold to
customers, costs associated with additional multi-wafer MBE systems and related
facilities, the costs associated with resolving anticipated and unanticipated
problems related to bringing two multi-wafer MBE systems on-line, and the costs
associated with unscheduled maintenance.
Research and Development Expenses. Research and development expenses
increased by 38% to $576,000 in 1996 from $416,000 in 1995. The increase was
primarily due to a higher level of internal and externally funded research and
development activity and the employment of personnel and other resources for
such activities.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by 76% to $1,520,000 in 1996 from $864,000 in
1995. As a percentage of total revenues, such expenses were 22%
18
<PAGE>
in 1996 and 16% in 1995. The increase resulted from the continued expansion of
the Company to meet current and anticipated growth in demand for the Company's
products, including additional costs associated with an increase in personnel
to support the Company's sales and marketing activities and financial
administration.
Interest Expense. Interest expense increased by 228% to $213,000 in 1996
from $66,000 in 1995. The primary reason for the increase is the additional
long-term borrowing incurred to finance the Company's second and third
multi-wafer MBE systems and increased borrowing on the line of credit that was
used to finance deposits on the fourth multi-wafer MBE system that was
installed in early 1997 and to fund working capital.
Pro Forma Provision (Benefit) for Income Taxes. For both 1996 and 1995,
pro forma income tax expense (benefit) has been calculated to demonstrate the
effect of incurring income taxes as a C Corporation on the taxable income
(loss) in such periods, which in all prior periods has been taxed to
shareholders because of the Company's S Corporation status. In 1996 and 1995,
the effective pro forma income tax rate was 37% and 39%, respectively.
Years Ended December 31, 1995 and 1994.
Product Revenues. Product revenues increased 44% to $4.6 million in 1995
from $3.2 million in 1994. Product revenues increased primarily due to an
increase in the number of wafers that were shipped to customers in 1995. The
additional wafers manufactured and sold resulted from increased customer orders
and the installation and qualification of the Company's first multi-wafer
system in 1994 which became fully operational in 1995.
Contract Research and Development Revenues. Contract research and
development revenues increased by 51% to $609,000 in 1995 from $404,000 in
1994. The increase was primarily due to a higher level of research activities
associated with several new SBIR contracts in 1995 as compared to 1994.
Cost of Product. Cost of product increased by 61% to $2.8 million in 1995
from $1.8 million in 1994. As a percentage of total revenues, the cost of
product increased to 54% in 1995 from 48% in 1994. The increase was primarily
due to higher volume orders shipped for commercial applications that generated
lower gross margins than lower volume orders associated with Department of
Defense applications.
Research and Development Expenses. Research and development expenses
increased by 50% to $416,000 in 1995 from $277,000 in 1994. As a percentage of
total revenues, research and development expenses were 8% in 1994 and 1995. The
increase was primarily due to a higher level of research activity associated
with the increase in the number of SBIR contracts.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by 18% to $864,000 in 1995 from $734,000 in
1994. As a percentage of total revenues, such expenses were 16% in 1995 and 20%
in 1994. The increase in selling, general and administrative expenses was
principally due to the additional sales and marketing, personnel and related
costs.
Interest Expense. Interest expense decreased by 18% to $66,000 in 1995
from $79,000 in 1994 as a result of scheduled payments on long-term debt.
Pro Forma Provision for Income Taxes. For both 1995 and 1994, pro forma
income tax expense has been calculated to demonstrate the effect of incurring
income taxes as a C Corporation on the taxable income in such periods, which in
all prior periods has been taxed to shareholders because of the Company's S
Corporation status. The effective pro forma income tax rate was 39% for both
1995 and 1994.
19
<PAGE>
Quarterly Results and Seasonality
The following tables represent the unaudited quarterly results in dollar
amounts (in thousands) and as a percentage of total revenues for the past ten
quarters from June 30, 1997, the latest quarter for which data is available.
The information has been prepared by the Company on a basis consistent with the
Company's annual audited financial statements and includes all adjustments,
consisting only of normal recurring adjustments, which management considers
necessary for a fair presentation of the information for the periods presented.
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31,
1995 1995 1995 1995
---------- ---------- ----------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Product ........................... $1,432 $ 927 $1,234 $1,051
Contract research and
development ..................... 102 150 202 155
------- -------- ------- -------
Total revenues .................. 1,534 1,077 1,436 1,206
------- -------- ------- -------
Operating Expenses:
Cost of product, excluding
depreciation ..................... 557 555 585 524
Cost of product-depreciation ...... 134 136 154 175
------- -------- ------- -------
Total cost of product ......... 691 691 739 699
Research and development ............ 68 91 131 126
Selling, general and
administrative .................. 237 225 191 211
------- -------- ------- -------
Total operating expenses ......... 996 1,007 1,061 1,036
------- -------- ------- -------
Operating income (loss) ............ 538 70 375 170
Interest expense ..................... 17 16 14 18
------- -------- ------- -------
Income (loss) before income
taxes ........................... 521 54 361 152
Pro forma provision (benefit) for
income taxes(1) ..................... 198 21 137 57
------- -------- ------- -------
Pro forma net income (loss)(1) ...... $ 323 $ 33 $ 224 $ 95
======= ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30,
1996 1996 1996 1996 1997 1997
---------- ---------- ----------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Product ........................... $1,215 $1,232 $1,597 $2,268 $2,219 $1,514
Contract research and
development ..................... 146 79 113 252 204 205
------ ------ ------ ------- ------- ------
Total revenues .................. 1,361 1,311 1,710 2,520 2,423 1,719
------ ------ ------ ------- ------- ------
Operating Expenses:
Cost of product, excluding
depreciation ..................... 764 857 1,007 1,171 1,257 1,192
Cost of product-depreciation ...... 177 207 224 284 302 293
------ ------ ------ ------- ------- ------
Total cost of product ......... 941 1,064 1,231 1,455 1,559 1,485
Research and development ............ 122 120 113 221 210 230
Selling, general and
administrative .................. 311 419 360 430 498 439
------ ------ ------ ------- ------- ------
Total operating expenses ......... 1,374 1,603 1,704 2,106 2,267 2,154
------ ------ ------ ------- ------- ------
Operating income (loss) ............ (13) (292) 6 414 156 (435)
Interest expense ..................... 32 34 49 98 108 140
------ ------ ------ ------- ------- ------
Income (loss) before income
taxes ........................... (45) (326) (43) 316 48 (575)
Pro forma provision (benefit) for
income taxes(1) ..................... (17) (121) (16) 118 18 (220)
------ ------ ------ ------- ------- ------
Pro forma net income (loss)(1) ...... $ (28) $ (205) $ (27) $ 198 $ 30 $ (355)
====== ====== ====== ======= ======= ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
As a Percentage of Total Revenues
-----------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31,
1995 1995 1995 1995
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Product ........................... 93% 86% 86% 87%
Contract research and
development ..................... 7 14 14 13
---- ---- ---- ----
Total revenues .................. 100 100 100 100
---- ---- ---- ----
Operating Expenses:
Cost of product, excluding
depreciation ..................... 36 51 41 43
Cost of product-depreciation ...... 9 13 11 15
---- ---- ---- ----
Total cost of product ......... 45 64 52 58
Research and development ......... 4 8 9 11
Selling, general and
administrative .................. 16 21 13 17
---- ---- ---- ----
Total operating expenses ......... 65 93 74 86
---- ---- ---- ----
Operating income (loss) ............ 35 7 26 14
Interest expense ..................... 1 2 1 1
---- ---- ---- ----
Income (loss) before income
taxes ........................... 34 5 25 13
Pro forma provision (benefit) for
income taxes(1) ..................... 13 2 9 5
---- ---- ---- ----
Pro forma net income (loss)(1) ...... 21% 3% 16% 8%
==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30,
1996 1996 1996 1996 1997 1997
---------- ---------- ----------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Product ........................... 89% 94% 93% 90% 92% 88%
Contract research and
development ..................... 11 6 7 10 8 12
---- ------ ---- ---- ---- -------
Total revenues .................. 100 100 100 100 100 100
---- ------ ---- ---- ---- -------
Operating Expenses:
Cost of product, excluding
depreciation ..................... 56 65 59 47 52 69
Cost of product-depreciation ...... 13 16 13 11 12 17
---- ------ ---- ---- ---- -------
Total cost of product ......... 69 81 72 58 64 86
Research and development ......... 9 9 7 9 9 13
Selling, general and
administrative .................. 23 32 21 17 21 26
---- ------ ---- ---- ---- -------
Total operating expenses ......... 101 122 100 84 94 125
---- ------ ---- ---- ---- -------
Operating income (loss) ............ (1) (22) 0 16 6 (25)
Interest expense ..................... 2 3 3 4 4 8
---- ------ ---- ---- ---- -------
Income (loss) before income
taxes ........................... (3) (25) (3) 12 2 (33)
Pro forma provision (benefit) for
income taxes(1) ..................... (1) (9) (1) 4 1 (12)
---- ------ ---- ---- ---- -------
Pro forma net income (loss)(1) ...... (2)% (16)% (2)% 8% 1% (21)%
==== ====== ==== ==== ==== =======
</TABLE>
- ------------
(1) See Note 3 of Notes to Financial Statements for information concerning the
computation of the pro forma provision (benefit) for income taxes and pro
forma net income (loss).
20
<PAGE>
The Company has experienced substantial revenue growth during the past
five years and has experienced, and expects to continue to experience,
fluctuations in its quarterly operating results. Such fluctuations are due to
the Company's fixed cost structure, the timing of orders, variations in
manufacturing yields, scheduled and unscheduled maintenance activities, and
other factors, many of which are beyond the Company's control. Substantially
all of the Company's costs are fixed, with variable costs limited primarily to
the compound semiconductor substrate, the source materials utilized in the
production process and electricity. Due to the Company's high fixed costs,
moderate fluctuations in wafer production, shipping and sales have resulted,
and may in the future result, in relatively large fluctuations in the Company's
quarterly gross margin and operating results. This production volume
sensitivity, especially for quarterly financial reporting periods, is expected
to continue in the future. There has not been any seasonality in the Company's
operations.
The Company experienced few significant problems with its MBE systems
until the last quarter of 1995, when it experienced a series of unrelated
problems with its multi-wafer MBE systems leading to unscheduled system down
time, higher maintenance costs, and a substantial increase in the number of
wafers returned by customers in the first and second quarters of 1996 (relating
to bringing a new multi-waver MBE system on-line). These problems resulted in
significant changes in the Company's training and quality assurance programs
and a restructuring of the Company's operating procedures. With the
manufacturing problems largely resolved, the Company produced a record number
of wafers and record product revenues in both the third and fourth quarters of
1996.
In anticipation of increased customer demand for wafers, the Company
continued to expand its facilities, increased the number of senior technical
manufacturing personnel, and installed its fourth multi-wafer MBE system in the
second quarter of 1997, significantly increasing the Company's fixed costs.
This increase in fixed costs coincided with a reduction in the rate of
customer's orders, most notably the rescheduling of orders from the Company's
largest customer from the second quarter to the third and fourth quarters of
1997. As a consequence of these factors, the Company experienced lower revenues
and increased expenses in the second quarter of 1997.
The operating results for any quarter are not necessarily indicative of
results for any subsequent period or of the Company's overall performance. The
Company's quarterly operating results have varied in the past and are expected
to vary in the future for the reasons described above. See "Risk
Factors--Factors Affecting Operating Results; Potential Fluctuations in
Quarterly Results."
Liquidity and Capital Resources
The Company raised its initial capital through the issuance of common
stock, notes and related warrants at formation in 1988. Since then, the Company
has funded its operations and capital expenditures principally with cash flow
from operating activities and through the issuance of long-term debt
obligations. The following table presents a summary of the Company's cash flows
for each of the three years ended December 31, 1996 and the two six month
periods ended June 30, 1996 and 1997. See "Statements of Cash Flow" in the
Company's Financial Statements.
<TABLE>
<CAPTION>
Six Months Ended June
Years Ended December 31, 30,
------------------------------------- -----------------------
1994 1995 1996 1996 1997
--------- ----------- ----------- --------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating activities . $ 265 $ 2,114 $ 303 $ 481 $ 230
Net cash (used in) investing activities ............ (248) (2,208) (3,488) (892) (1,382)
Net cash provided by (used in) financing activities . (78) 477 2,816 46 1,415
------ -------- -------- ------- --------
Net increase (decrease) in cash ..................... $ (61) $ 383 $ (369) $ (365) $ 263
====== ======== ======== ======= ========
</TABLE>
From 1994 through June 30, 1997, the Company generated approximately $2.9
million in net cash from operating activities, $1.2 million of which was
generated from net income and $2.7 million of which was non-cash depreciation
expense offset by $1.0 million from other changes in elements of working
capital. These changes principally related to the increased accounts receivable
and inventories, offset by increased accounts payable and accrued expenses that
resulted primarily from the growth of the Company and increased sales and
manufacturing activities.
21
<PAGE>
Net cash used in investing activities resulted from the purchase of, or
deposits to manufacturers for, property and equipment, principally MBE systems,
to support the growth in the Company's production capacity. The Company's
capital expenditures totaled $248,000, $2.2 million, $3.5 million and $1.4
million in 1994, 1995, 1996 and the six month period ended June 30, 1997,
respectively. These capital expenditures include the acquisition of three
multi-wafer MBE systems plus related test and measurement equipment and the
expansion of the Company's facilities. The Company anticipates continued
expansion of its MBE production capacity, and contemplates placing an order for
an additional multi-wafer MBE system before the end of 1997. Although the
Company has no current commitments to make such capital expenditures, the
Company anticipates using approximately $8.0 million of the net proceeds of the
Offering to finance the purchase of two additional multi-wafer MBE systems and
certain related equipment. The Company believes delivery and installation of
these additional systems could occur as early as the fourth quarter of 1998 and
1999, respectively. See "Use of Proceeds."
Financing activities primarily include borrowing under various long-term
debt arrangements and distributions to shareholders for the payment of S
Corporation income taxes. The Company borrowed $487,000, $1.0 million, $1.5
million and $1.6 million in 1994, 1995, 1996 and the six month period ended
June 30, 1997, respectively, pursuant to several secured financings, and in
1996, $2.4 million on a line of credit. The proceeds of these loans were used
primarily to finance the Company's capital expenditures during these periods.
In addition, during the six month period ended June 30, 1997, the Company
issued a $2.0 million convertible subordinated note payable to the parent
company of a significant customer which will be converted to Common Stock upon
completion of the Offering. The proceeds of the subordinated note were used to
repay a portion of the line of credit. At September 30, 1997, the Company had
an outstanding balance of approximately $3.5 million of long-term debt due to a
commercial bank and $900,000 under a $1.0 million line of credit. The Company
anticipates using a portion of the net proceeds to repay the long-term bank
debt and the balance outstanding on the bank line of credit. See "Use of
Proceeds." Shareholder distributions totaled $222,000, $212,000, $481,000 and
$0 in 1994, 1995, 1996 and the six month period ended June 30, 1997,
respectively. See "Dividend Policy."
The Company's executive offices, production facilities and research and
development facilities are situated in one leased building in Bethlehem,
Pennsylvania. In 1996, the Company expanded its facility from approximately
10,000 to 20,000 square feet. The Company's present facility provides
manufacturing space adequate for up to five additional multi-wafer MBE systems,
related test and measurement equipment, and general corporate functions. The
Company expects these facilities will be sufficient to satisfy its requirements
through 1999. In connection with the expansion of its present facility in 1996,
the Company incurred $560,000 for leasehold improvements. In addition, in 1997,
the Company leased approximately 6,500 square feet of undeveloped space
adjacent to its present facility and secured options on approximately 13,500
square feet of space that is currently under lease to others, a portion of
which will be available in 1998 if additional space is required. The Company's
plans regarding this space are not sufficiently firm to reasonably estimate the
cost to develop this space for its use. See "Facilities and Equipment."
The Company believes that cash generated from operations and its current
cash balance and line of credit, when combined with the net proceeds to be
generated from the Offering, will be sufficient to satisfy the Company's
projected working capital and planned capital expenditure requirements for the
next 24 months. However, there can be no assurance that the Company's
operations will generate positive cash flow. Accordingly, the current cash
balances, line of credit, and proceeds of the Offering may not be adequate to
fund the Company's continued growth, including the increase in manufacturing
capacity and the consequent increased requirements for working capital. See
"Risk Factors--Factors Affecting Operating Results; Potential Fluctuations in
Quarterly Results."
The Company may, from time to time, seek additional funding through public
or private financing. Adequate funding may not be available when needed or on
terms acceptable to the Company. If additional funds are raised by issuing
equity securities, existing shareholders may suffer additional dilution.
Effects of Inflation and Foreign Exchange Rates
The Company has not been adversely nor beneficially affected by inflation
or changes in foreign exchange rates.
22
<PAGE>
BUSINESS
The Company designs, develops and manufacturers compound semiconductor
materials using molecular beam epitaxy ("MBE") and is a leading producer of
gallium arsenide ("GaAs") based epitaxial wafers supplied to the semiconductor
device manufacturing industry. Compound semiconductors, which provide better
performance than silicon semiconductors, are used in a broad range of
applications in wireless communications, fiber optic telecommunications,
computers, and consumer and automotive electronics. The Company utilizes
compound semiconductor materials (such as GaAs, AlGaAs, InGaAs, InAlAs, InSb and
InP) that are a combination of elements found in each of columns III and V of
the periodic table to produce MBE epitaxial wafers. MBE is generally used for
the most advanced, high performance applications. Since January 1996, the
Company's significant customers have included Alpha Industries Inc., Hughes
Aircraft, Inc., M/A-COM, Inc., a subsidiary of AMP Incorporated, Motorola, Inc.,
Raytheon Company, Texas Instruments Incorporated and Watkins Johnson Company.
Industry Background
Recent advances in information technologies have created a growing need
for power efficient, high-performance electronic systems that operate at very
high frequencies, have increased storage capacity and computational and display
capabilities, and can be produced cost-effectively in commercial volumes. For
example, new high frequency and broadband communication systems require
transmitters and receivers that are capable of operating at ultra-high
frequencies, are very sensitive to receive weak signals with minimal
"background noise," have low distortion in order to amplify multiple signals
with clarity and, in a battery operated system, are power efficient. An
illustration of the trend to higher frequency operation in commercial
applications is illustrated in the chart below:
[INSERT TABLE]
In the past, electronic systems manufacturers have relied on advances in
silicon semiconductor technology to meet many of the requirements of lower
frequency applications. However, the newest generation of high-performance
electronic and opto-electronic applications require certain functions which are
generally not achievable using silicon-based components. To address the
increasing market demand for these applications, electronic system
manufacturers are increasingly incorporating new electronic and opto-electronic
devices into their products in order to improve performance or enable new
applications.
Compound semiconductors have emerged as an enabling technology to meet the
complex requirements of today's advanced information systems. For example,
compound semiconductors can be used as integrated circuits, such as
transmitters, receivers and alpha-numeric displays, or as discrete devices,
such as high-brightness LEDs and lasers. Compound semiconductors are composed
of two or more elements found in each of columns III and V of the periodic
table and usually consist of a metal such as gallium, aluminum or indium and a
non-metal such as arsenic, phosphorous, antimony or nitrogen. The resulting
compounds include gallium arsenide, indium phosphide, gallium nitride, indium
antimonide and indium aluminum phosphide. The performance characteristics of
compound semiconductors are uniquely dependent on the composition of these
compounds.
Many compound semiconductor materials have unique physical properties that
allow electrons to move many times faster than through silicon. This higher
electron mobility enables a compound semiconductor device to operate at much
higher speeds with lower power consumption and less noise and distortion than
silicon devices. In addition, unlike silicon-based devices, compound
semiconductor devices have opto-electronic capabilities that enable them to
emit and detect light.
MBE compound semiconductors are generally used for the most advanced, high
performance applications, including wireless communications, computers, and
consumer and automotive electronics. For example, compound semiconductor devices
are used in: wireless communication products (including cellular
23
<PAGE>
telephones, pagers, PCS handsets, DBS systems and global positioning systems)
that require high frequency transmitters, receivers and power amplifiers to
increase capacity and lower power consumption; satellite communications which
use ultra-high frequency satellite up-converters and down-converters to
cost-effectively deliver information to fixed and mobile users over wide
geographic areas; fiber optic networks of communications companies and Internet
service providers; computer applications requiring higher processing speeds,
transmission rates and storage capabilities; consumer electronic products
(including compact disc players and high density digital versatile discs);
automotive applications (including brushless motors, ignition control and
collision avoidance radar); and military applications (including smart weapons,
radar, advanced satellite communications and electronic
counter-countermeasures).
MBE Technology
MBE is an epitaxial crystal growth process by which thin layers of
semiconductor materials are grown on top of a crystal material called the
substrate. Thickness of these epitaxial layers is measured on the atomic level.
Although the substrate is generally GaAs, other compound semiconductors formed
from elements in each of columns III and V of the periodic table (such as
AlGaAs, InGaAs, InAlAs, InSb and InP) may be utilized as epitaxial layers. The
epitaxial growth may consist of multiple layers consisting of one or more of
these compounds. Since the substrate is typically non-conducting, the epitaxial
layers determine the electrical characteristics of the device. The thicknesses
and compositions of these layers are determined by the type of device to be
constructed from the epitaxial layers.
The MBE process takes place in an ultra-high vacuum where the various
column III and V elements are thermally evaporated onto the substrate. Because
the substrate is heated during the growth process, there is sufficient kinetic
energy for the atoms to arrange themselves in a single crystal structure
replicating that of the starting substrate material. As shown in the diagram
below, the source materials such as gallium, aluminum, indium and arsenic are
placed in high purity crucibles which are resistively heated causing them to
evaporate. These evaporating source materials create a molecular beam
depositing epitaxial layers on the substrate.
[INSERT DIAGRAM DEPICTING MBE PRODUCTION, EQUIPMENT AND PROCESS]
The wafers are rotated during the growth procedure to ensure optimal
uniformity of epitaxial thickness. Precise control over the growth process is
achieved by placing mechanical, computer operated, shutters between the source
material and substrate. Closing the shutter stops the molecular beam from
reaching the substrate which results in abrupt transitions between layers of
different material compositions. This is an important advantage of MBE compared
to other epitaxial techniques because many of the current high performance
device designs require thin atomic layers with abrupt transitions.
The actual elemental composition and thickness of the various epitaxial
layers vary according to the device type and end-use application. The
sequencing of shutter positions and the temperatures of the crucibles are
controlled via computer with each customer wafer type having its own individual
specifications. Once a customer's specifications have been entered into the
computer, the process may be replicated for subsequent orders.
The key advantages of the MBE process are:
Precise Control. The high level of process control provides the ability
to grow different compositions in atomic layers and maintain uniformity
across the wafer. The ability to produce abrupt transitions between layers
of different compound materials is essential to produce the electronic
results desired by manufacturers of state-of-the-art semiconductors and
integrated circuits used in high performance applications.
Uniformity of Layers. The MBE process is able to produce material
uniformities on a wafer which the Company believes offers superior
manufacturing efficiencies for compound semiconductor device manufacturers.
This has allowed customers to achieve higher yields of finished devices
from each wafer.
24
<PAGE>
Monitoring Mechanisms. The ultra-high vacuum environment allows for a
number of electronic probes to be used in the production process. As a
result, both the chemical and structural properties of the epitaxial layers
can be monitored, both before and during the growth cycle. This provides a
highly accurate process and quality control mechanism that is monitored
throughout the growing cycle.
Manufacturing Flexibility. The super-cooled wafer growing environment
utilized in MBE speeds removal of chemical contamination upon completion of
a growing cycle, thereby decreasing the amount of time between growing
cycles. This allows the MBE process to rapidly shift between varied
customer orders with minimal set-up time.
Once the MBE layers have been grown, they are evaluated to ensure
compliance with customer specifications. The Company has actively developed a
series of non-destructive techniques to measure layer thickness and elemental
composition as a part of its quality assurance program. These techniques
include high resolution x-ray diffraction, photoluminescence and non-contacting
resistivity measurements. The Company believes that it is more effective to
perform these measurements prior to shipping thereby affording the customer
greater manufacturing efficiencies and yields.
Other methods of producing compound semiconductor wafers include ion
implantation and metal organic chemical vapor deposition ("MOCVD"). With ion
implantation, silicon (a dopant which promotes conductivity) is injected into
the GaAs substrate. Because no additional crystal growth is involved, ion
implantation is limited to GaAs (no additional elements) and wafers with
multiple layers of different compounds cannot be produced. An epitaxial process
affords greater flexibility regarding the distribution of the dopant. Ion
implantation GaAs wafers do not have the performance characteristics of MBE
wafers and are not being used for applications requiring higher frequency, a
high degree of linearity or power added efficiencies. In MOCVD, the source
materials are transported to the substrate in a viscous gas which flows over the
wafer as opposed to molecular beams. Since the MOCVD process is dependent on
adjustments of gas flow, it limits the ability to realize abrupt transitions
desirable for high performance electronic applications.
During the past four years, the demand for MBE compound semiconductors has
grown very rapidly, while capacity, with the associated high capital costs, long
lead time to acquire and install MBE equipment and shortage of technically
experienced personnel, has been lagging. Some device manufacturers have no
in-house (captive) research and development or production capacity. Others
produce wafers for research and development purposes but do not have any
in-house production capacity. Finally, some captive suppliers have in-house
production capacity but either cannot produce a sufficient volume of MBE wafers
to meet their demands or desire a second source supplier. Merchant suppliers
such as the Company provide MBE wafers to meet the varying needs of each type of
compound semiconductor device manufacturer.
QED Solution
The Company, with its expertise in the design and development of compound
semiconductor materials, MBE production process experience, and high-volume
quick throughput wafer production capacity, provides semiconductor device
manufacturers with high-performance compound semiconductor wafers that enable
the technology of some of today's fastest growing commercial applications. The
Company believes that its MBE production process allows for the precise
control, uniformity and high-quality which is essential to produce the
electronic results required of semiconductors and integrated circuits used in
high performance radio frequency, microwave and opto-electronic applications.
In addition, the Company's MBE process offers manufacturing flexibility
allowing the Company to produce wafers in production volumes and rapidly shift
between customer orders with minimal set-up time.
In the case of a device manufacturer that lacks an internal MBE
capability, the Company utilizes its technical expertise to provide support to
the manufacturer for joint development of the customized MBE wafers. As the
market for the manufacturer's device matures, initial development wafer
quantities progress to higher levels of production. The initial co-development
stages are critical due to the fact that the manufacturer's process is designed
around the characteristics of the material supplied by the Company. In the case
of a manufacturer that
25
<PAGE>
only produces wafers for its research and development effort, the Company works
closely with the manufacturer's research and development team to transition its
volume production to the Company. This allows the manufacturer to focus on its
core competency, product development. In the case of a manufacturer that has
in-house production capacity, opportunities arise as the manufacturer looks to
supplement wafer production with wafers that duplicate the characteristics of
those being supplied internally.
The Company believes that its experience, technical expertise, high
quality compound semiconductor wafer products, customer relationships and high
volume production capacity, position it to be a sole or second source of
compound semiconductor wafers.
QED Strategy
The Company's goal is to become the leading supplier of compound
semiconductor materials to the semiconductor device manufacturing industry. The
key elements of the Company's strategy include:
Focus on High Volume Commercial Markets. The Company focuses on high volume
commercial markets such as wireless communications, fiber optic communications,
computers and consumer and automotive electronics. To meet the high compound
semiconductor wafer requirements for these large rapidly growing markets, the
Company will continue to invest in MBE production equipment and add technical
support personnel. In addition, by increasing production capacity and focusing
its production on higher volume quantities, the Company believes that it can
reduce its cost per wafer and thereby accelerate the adoption of MBE based
wafers in existing and new high volume markets.
Maintain Technological Leadership. Based upon the MBE wafer design and
production experience of the Company's founders and management, many of whom
have worked in the MBE field since its inception, and the technical proficiency
of its staff, the Company continually seeks to maintain its technological
leadership through the design and development of new technologies, products and
refinement of its processes, and is expanding its epitaxial growth capabilities
with the expectation of offering additional products. The Company also
selectively pursues contract research programs to help fund the development of
new technical capabilities and products. In addition, to further increase
production efficiencies and reduce unit costs, the Company is actively
consulting with MBE equipment suppliers to develop the next generation of MBE
equipment.
Maintain Customer Relationships and Ensure Quality Performance. The
Company seeks to develop multi-level working relationships during the early
stages of the product development cycle with industry leaders in each target
market. This strategy allows the Company to become an integral participant in
the customers' device manufacturing process and make the Company's expertise a
critical step of the design process. In an effort to maintain its customer
relationships, the Company is committed to quality to satisfy its customers'
evolving requirements and expectations. The Company's quality assurance program
includes wafer evaluation using non-destructive measurement techniques and the
incorporation of customers' quality assurance techniques and specifications to
ensure that the Company maintains the consistent delivery of high quality
products.
Continue to Penetrate Captive Market. The Company believes that it can
increase its market share and broaden its customer base by further penetrating
the captive MBE wafer market. The Company estimates that approximately
two-thirds of GaAs MBE wafers are manufactured by captive (in-house/vertically
integrated) suppliers and the balance are manufactured by merchant suppliers.
Due to the significant costs of developing and maintaining a captive MBE
production capacity, the Company believes that manufacturers utilizing MBE
wafers will increasingly rely on outsourcing for technical expertise to aid in
development, to fulfill production requirements and to provide consistent
quality at a low cost, each of which can be provided by the Company.
Products
Current Products. The Company is a leading producer of GaAs based epitaxial
wafers to the semiconductor device manufacturing industry. GaAs based epitaxial
wafers are used to produce discrete devices and integrated circuits that enable
radio frequency and microwave frequency products to achieve the performance
characteristics that are either necessary or desirable for many of today's
commercial and military applications. The Company designs, develops and
manufactures GaAs based epitaxial wafers to its customers' specifications
utilizing MBE. GaAs MBE based devices offer significant performance advantages
compared to both conventional silicon based devices and GaAs
26
<PAGE>
based devices fabricated from wafers produced by non-MBE processes, including:
(i) greater capacity to transmit and receive high frequencies, which permits
handling of broader bandwidths, (ii) reduced distortion, which reduces
interference and allows for more efficient use of the available bandwidth,
(iii) enhanced sensitivity, which provides greater amplification, and (iv)
greater power efficiencies, which allows for longer battery life, the use of
smaller batteries or lower voltages.
According to published industry estimates, the market for GaAs based
epitaxial wafers in the electronics market segment is expected to grow from
approximately $72.5 million in 1996 to $178.8 million in 2000. This is occurring
for several reasons: (i) technological applications utilizing GaAs based
epitaxial wafers are continuing to expand from the military to the commercial
arena; (ii) commercial demand for product performance is growing for devices
that can only be made from GaAs based epitaxial wafers; and (iii) the
development and installation of multi-wafer MBE production systems have resulted
in price reductions for epitaxial materials, enhancing the price/performance
ratios achieved by users of GaAs based epitaxial wafers.
GaAs based epitaxial wafers are currently used in many segments of the
wireless communications markets, including high performance power and switch
devices for cellular phone handsets, uplink/downlink, transmit/receive functions
in satellite based telecommunications systems and for power devices for PCS
systems. Although the Company believes that GaAs epitaxial wafers provide
superior performance characteristics in such products, other wafer materials and
production methods can sometimes be utilized to produce devices for such
applications.
[INSERT CHART DEPICTING QED PRODUCTS AND END-USE APPLICATIONS (e.g.,
Analog and Digital Portable Cellular Telephony, Global Satellite
Communications Systems, Personal Communications Services)]
As technology continues to develop, the Company and its customers are
exploring the use of other combinations and layers of column III and V elements
in their advanced devices. Although a significant portion of the Company's
product revenue is from MBE GaAs based wafers, the Company has applied its MBE
expertise to produce other column III and V based MBE wafers.
Products in Development. MBE can be adapted to other applications. The
Company is currently developing opto-electronic devices such as diode lasers.
The Company believes that MBE offers many advantages over MOCVD technology
which currently is being used to produce such products. The enhanced uniformity
and greater growth control as well as the ability to offer larger wafer
diameters provides significant advantages to the opto-electronic device
manufacturers. The Company has supplied MBE wafers which have been successfully
processed into solid state diode lasers to be used for fiber optic
communications. Though such wafers are currently being produced in
developmental quantities, the Company expects this to become a viable product
and progress to higher levels of production in the future.
The Company has developed, through internal research and development the
ability to manufacture epitaxial layers containing phosphorous, which is
advantageous for several electronic and opto-electronic device types. The
Company also is negotiating a Cooperative Research and Development Agreement
with Wright Patterson Air Force Base to jointly develop compound semiconductor
technologies using antimony. Antimony increases the performance of sensors and
allows lasers to operate at longer wavelengths.
The Company is currently funded by the United States Air Force to develop
carbon doping for use with heterojunction bipolar transistors (HBTs), and has
developed in conjunction with Pennsylvania State University and M/A-COM a
gaseous source of carbon for MBE. The United States Air Force has committed
approximately $750,000 over a two-year period to support the project. The
Company has successfully produced prototypes which are currently undergoing
reliability testing. The Company believes this technology will enable it to
compete in the device market currently dominated by MOCVD.
Research and Development
The Company selectively pursues contract research programs funded by third
parties to help support the development of new technical capabilities and
products. These programs have
27
<PAGE>
been selected to complement and enhance the Company's long-term development
strategy under conditions that permit the Company to retain the technology it
develops. During the years ended 1994, 1995 and 1996, and for the six month
period ended June 30, 1997, third-party contract revenue was $404,000, $609,000,
$590,000 and $409,000, or approximately 11%, 12%, 9% and 10%, respectively, of
the Company's total revenues. As an outgrowth of this strategy, the Company is
currently performing under three Phase II and two Phase I SBIR contracts which
provide government funding for leading-edge technology development. The Company
retains the right to all technology developed under the SBIR contracts, subject
to the federal government's right to the royalty free use of such technology in
non-commercial applications and, after four years from the date of development,
the federal government's right to license such technology to third parties in
connection with a valid federal government program. In addition to third-party
research and development, the Company also supports internally funded projects.
Such internal research and development projects are aimed at process
improvements leading to greater throughput, higher quality products, better
manufacturing yield, increased production uptime and new product development.
Sales and Marketing
The Company markets its products worldwide through direct sales and sales
representatives. Its efforts are directed toward high volume suppliers of radio
frequency and microwave devices. Unlike non-epitaxial wafers which, in many
instances, are mass produced based on industry standards, GaAs MBE wafers are
manufactured to customized design and composition specifications based on a
specific customer's device requirements. The Company supports its customers with
technically proficient sales personnel and representatives and skilled
engineers. The Company is an integral part of its customer's design and
development effort.
The sales cycles for a new customer or new customer application require as
long as six to twelve months for initial development of the epitaxial wafer and
device designs to be finalized and longer for the wafer production volumes to
become significant. The initial contact is often with a device manufacturer's
design and development, or production group. Initially, the Company engages in a
specification review during which the Company's engineers offer suggestions or
modifications regarding the wafer design. If this phase is successful, the
customer may place a "qualification order" of wafer samples for performance
evaluation. The Company continues to assist the customer to refine the technical
specifications of the wafers. After acceptance of the initial wafers, several
iterative lots of wafers are supplied to fully adjust the characteristics of the
Company's wafers to the customers' device fabrication process. During this
phase, the customer typically invests resources to create a manufacturing
process which will utilize the Company's wafers. Once the customer's process is
determined to be stable, a production order is issued. The Company also has the
ability to shorten this cycle to three to six months when it is engaged as a
second source for a customer's well established product. The Company believes
that this sales process and ongoing customer interaction assist in the
development of long-term customer relationships and facilitate preferred
supplier status.
The Company has five employees dedicated to marketing and sales (not
including the engineering staff involved in the sales qualification cycle).
Additionally, the Company's Chief Executive Officer devotes a significant
amount of time developing and maintaining relations with customers.
The Company has had relationships with most of its manufacturer's
representative firms for sales and service since its inception. The Company has
sales representatives in France, Germany, Italy, Japan, South Korea, Sweden,
Taiwan and the United Kingdom.
To further promote the Company's expertise and manufacturing capabilities,
the Company's personnel actively participate in trade shows. Its employees also
speak at technical conferences, publish technical research and collaborate with
customers on published research and development projects.
Customers
The Company's customers represent many industries including semiconductor
manufacturers, microwave component suppliers, electronics systems integrators,
computer manufacturers, defense contractors, research and
28
<PAGE>
development laboratories and consumer electronics manufacturers. The Company's
customers include:
Alpha Industries NASA's Jet Propulsion Laboratory
ANADIGICS NEC
General Motors Northrop Grumman
Hughes Aircraft Raytheon
Lockheed Martin Texas Instruments
M/A-COM TriQuint
Motorola Watkins Johnson
The United States government is also a significant customer, as it sponsors of
research and development projects through the SBIR program.
For the years ended December 31, 1995 and 1996 and for the six months
ended June 30, 1997, three customers accounted for approximately 52%, 63% and
52%, respectively, of the Company's total revenues and the ten largest
customers accounted for approximately 85%, 88% and 78%, respectively, of the
Company's total revenues in each such period. Generally, the Company does not
have ongoing written commitments from its customers and usually sells products
pursuant to customer purchase orders. The loss of certain of these customers
could have a material adverse effect on the Company. See "Risk
Factors--Substantial Reliance on Key Customers."
International sales in 1995, 1996, and for the six months ended June 30,
1997, were 11%, 7% and 8%, respectively, of total revenues in those periods.
Competition
The market for the Company's products is highly competitive. In connection
with the production of MBE wafers for the high performance discrete
semiconductor and integrated circuit market where performance requirements of
the end product generally dictate that the MBE process be utilized, the Company
competes with captive producers, which are generally well-established domestic
and foreign companies and other merchant suppliers. Many of the semiconductor
manufacturers have some internal capacity to produce MBE wafers. Some of these
manufacturers have substantial in-house capacity and use the Company as a
second source for GaAs MBE wafers. Other semiconductor manufacturers only have
captive capacity on a research and development basis. The Company also competes
with other merchant suppliers, some of which possess greater financial,
marketing, personnel and other resources than the Company, and have established
reputations for success in the production and sale of MBE wafers. Picogiga
(France), MBE Technology (Singapore) and Sumitomo Electric Industries (Japan)
are the Company's primary MBE merchant competitors.
The Company's primary non-MBE competitors include merchant suppliers of
GaAs MOCVD wafers such as Kopin Corporation (U.S.), Advanced Technology
Materials (U.S.), Furukawa Electric (Japan), Hitachi Cable (Japan), and
Epitaxial Products International (U.K.). While the market for MOCVD wafers has
been segmented from that serviced by MBE, the Company expects more future
overlap as it expands its product offerings to cover HBTs, lasers and sensors.
Another level of competition comes from competing technologies not relying
on GaAs epitaxy which provide lower performance characteristics such as ion
implantation. While these technologies offer cost advantages as compared with
MBE, the Company believes that it will become more competitive in these lower
performance markets as technological developments reduce MBE manufacturing
costs. See "Risk Factors Adoption of MBE Technology" and "--Competition."
Quality Assurance
The Company is committed to quality to satisfy its customers' evolving
requirements and expectations. As the Company has grown, it has instituted a
formal quality assurance program, including wafer evaluation using
non-destructive measurement techniques and the incorporation of customers'
quality assurance techniques and
29
<PAGE>
specifications, to ensure that it maintains the consistent delivery of high
quality products. In preparation for its ISO certification, the Company has
documented and is auditing its procedures. The Company expects to make formal
application for ISO 9002 certification during the first quarter of 1998.
As the MBE wafer industry matures, customers increasingly require
consistency in delivered product. In order to ensure that quality and
consistency are provided on an individual customer basis, the Company
coordinates with its customers' quality assurance programs to ensure that all
requirements and expectations are understood prior to order execution. In
general, in order to qualify as a preferred supplier to many of the Company's
customers, the Company's quality assurance procedures are subject to audit by
such customers. These quality assurance procedures include statistical process
control for both MBE wafers and the equipment that is used to monitor and
verify exact specifications of the MBE wafers. The combination of these
characterization tools, their implementation and the interpretation of the data
from such process controls is unique to the Company. The Company believes that
the ability to implement its quality assurance program on a consistent basis is
a significant competitive advantage.
As part of its quality assurance program, the Company has implemented a
Process Ready Epitaxial Wafer program. This program incorporates customers'
incoming quality assurance procedures and practices into the Company's standard
quality control process, so that the Company is able to ship wafers that meet
predetermined specifications and require no further analysis and testing by the
customer.
Raw Materials and Suppliers
The Company purchases the substrate upon which it grows epitaxial layers
from third party suppliers. These substrates are the Company's principal raw
material. There are a limited number of GaAs substrate suppliers in the world.
Although the Company has never experienced any unavailability of substrates,
the limited number of suppliers suggests a potential risk of shortage and/or
price increases. In addition, a single entity has gained significant control
over commercial sources of gallium and, as a result, substrate price increases
and supply shortages may occur. The Company's other raw materials, such as
aluminum, arsenic, silicon and indium are available from multiple sources. See
"Risk Factors--Dependence on Key Materials."
Backlog
The Company includes in product revenue backlog only those customer orders
which have been accepted by the Company and for which shipment is expected
within four months. Also included in backlog are orders by customers who have
made a commitment to accept delivery of wafers shipped (subject to certain
limitations) before the end of the year. As of August 31, 1997, the Company's
product revenue backlog was approximately $1.3 million. This is compared with
backlog of approximately $2.2 million at August 31, 1996. Recent history
demonstrates that the Company's backlog seldom exceeds one and one-half months
production. Backlog can fluctuate greatly based upon, among other matters, the
timing of orders. Therefore, variations in backlog may not represent a fair
indication of future business trends.
Some purchase orders from the Company's customers provide for cancellation
without penalty, reduction in size, and/or rescheduling delivery dates, all at
the option of the customer. The Company has suffered cancellation, reductions
and/or rescheduled delivery of orders in its backlog.
Facilities and Equipment
The Company's executive offices, production facilities and research and
development facilities are situated in one leased building in Bethlehem,
Pennsylvania. In 1996, the Company expanded its facility from approximately
10,000 to 20,000 square feet to provide manufacturing space adequate for up to
five additional multi-wafer MBE systems, collateral test and measurement
equipment, and general corporate functions. The Company expects these
facilities will be sufficient to satisfy its requirements through 1999. In
addition, in 1997, the Company leased approximately 6,500 square feet of
undeveloped space adjacent to the present facility, and secured options on
approximately 13,500 square feet of space that is currently under lease to
others, a portion of which will be available in 1998, if additional space is
required.
30
<PAGE>
The Company owns and operates four V.G. Semicon V-100 MBE systems, which
are capable of simultaneously producing twelve two-inch wafers, five three-inch
wafers, three four-inch wafers or one six-inch wafer. The next generation of
MBE equipment has been designed and will have the capability of producing nine
four-inch wafers or four six-inch wafers. The Company expects the first of this
new generation system to be delivered during the fourth quarter of 1998 and the
second to be delivered one year later. Approximately $8.0 million of the
proceeds from the Offering will be utilized for the acquisition of additional
manufacturing capacity in 1998 and 1999. See "Use of Proceeds."
[INSERT TIME LINE DEPICTING HISTORY OF MBE EQUIPMENT PURCHASES
AND BRINGING OF NEW SYSTEMS ON-LINE]
In addition, the Company currently operates two Varian GEN II Modular MBE
systems which are capable of producing a single three-inch wafer. One of these
systems is dedicated to support the Company's research and development efforts
and the other system produces small quantity orders required by customers in
connection with their device development efforts.
Proprietary Information
The Company believes that the success of its business depends primarily on
its proprietary technology, information, processes and know-how, rather than on
patents, trademarks and copyrights. Nevertheless, the Company will attempt to
protect its intellectual property rights with respect to its products and
manufacturing processes through copyrights and trademarks, when appropriate.
The Company also relies upon trade secret protection for its confidential and
proprietary information. The Company routinely enters into confidentiality and
non-competition agreements with its employees, consultants and others,
including certain customers, who may gain access to such confidential and
proprietary information.
The Company has trademark applications pending for its name, the acronym
"QED" and the logo of the Company.
Environmental Regulation
Federal, state and local regulations impose various environmental controls
on the types of chemicals used in the Company's manufacturing processes and
other development activities. However, the Company is largely unregulated at
present, generally due to the small volume of hazardous materials handled or
hazardous wastes generated. While the Company has not experienced any material
adverse effects on its operations from government regulations, there can be no
assurance that changes in such regulations or changes in the Company's
manufacturing processes and other development activities, including an
expansion thereof, will not impose the need for additional capital equipment or
other requirements. Any failure of the Company to adequately restrict the
discharge of regulated substances could subject it to future liabilities. See
"Risk Factors--Environmental Regulations."
Employees
As of September 30, 1997, the Company had 48 full-time employees.
Thirty-five employees are in production, four are in research and development,
five are in sales, marketing and customer support, and four are in
administration. Of the Company's employees, 12 hold advanced degrees including
five employees with PhDs. The Company's ability to attract and retain qualified
personnel is essential to its continued success. The Company requires that all
new employees execute confidentiality and non-compete agreements as a condition
of employment by the Company. None of the Company's employees is represented by
a collective bargaining agreement, and the Company has never experienced any
work stoppage or slowdown. The Company considers its relations with its
employees to be good.
Legal Proceedings
There are no material pending legal proceedings to which the Company is a
party or to which any of its property is subject.
31
<PAGE>
MANAGEMENT
Directors and Executive Officers
The names, ages and positions of the executive officers and directors of
the Company are as follows:
<TABLE>
<CAPTION>
Year of Expiration
Name Age Position of Term as Director
- ------------------------------------ ----- -------------------------------------- --------------------
<S> <C> <C> <C>
Thomas L. Hierl .................. 45 Chairman of the Board of Directors, 2000
President and Chief Executive Officer
William J. Burg .................. 56 Vice President Finance and Chief N/A
Financial Officer
William H. Weisbecker ............ 34 Vice President Sales and Marketing N/A
Scott T. Massie .................. 35 Vice President Operations N/A
James C. M. Hwang, Ph.D.(1) ...... 49 Director 2000
Gregory H. Olsen(1)(2) ............ 52 Director 1999
Michael G. Bolton(1)(2) ............ 54 Director 1999
Stephen N. Bretsen(2) ............ 36 Director 1998
</TABLE>
- ------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
Thomas L. Hierl has served as Chairman of the Board of Directors, President
and Chief Executive Officer of the Company since its founding in 1988. From 1986
to 1988, Mr. Hierl was Manager of Semiconductor Materials for GAIN Electronics,
a manufacturer of GaAs integrated circuits, where he established the first
domestic source of MBE wafers for the merchant market. Mr. Hierl has over 20
years of experience in the GaAs semiconductor industry and was Senior Engineer
at Varian Associates Corporation, a manufacturer of MBE equipment. Mr. Hierl
holds a B.S. and an M.S. in Electrical Engineering from Cornell University.
William J. Burg has served as Vice President Finance and Chief Financial
Officer of the Company since 1996. From 1994 through 1995, Mr. Burg was
employed as Chief Financial Officer by Mattei & Associates, a private
underwriter of property and casualty insurance. From 1988 until 1994, Mr. Burg
was employed as Chief Executive Officer and Chief Financial Officer of Advanced
Composites Inc., a private manufacturer and distributor of composite materials
for the anti-corrosion industry. Mr. Burg holds a B.A. in Economics and an
M.B.A. from the University of Washington.
William H. Weisbecker has served as Vice President Sales and Marketing of
the Company since its founding in 1988. During 1988, Mr. Weisbecker was employed
as the Manager of Material Sales for GAIN Electronics. From 1985 to 1987, Mr.
Weisbecker was employed as a sales engineer for the Compound Semiconductor
Division of Sumitomo Electric Industries, a manufacturer of compound
semiconductor materials. Mr. Weisbecker has 12 years experience in compound
semiconductor materials sales and holds a B.S. in Physics from Wagner College.
Scott T. Massie has served as Vice President Operations of the Company
since January 1996 and was Director of Contract Research from 1993 through
1995. Mr. Massie is currently responsible for manufacturing and contract
research and has been responsible for obtaining a number of government funded
development programs. Mr. Massie has over 8 years of experience with the growth
and characterization of MBE materials. Mr. Massie holds a B.S. in Mathematics
and a B.S. and an M.S. in Physics from Virginia Polytechnic Institute and State
University. Mr. Massie has completed his doctoral studies in Physics and is a
candidate for Ph.D. at Virginia Polytechnic Institute and State University.
James C.M. Hwang, Ph.D. has served as a director of the Company since its
founding. Dr. Hwang has been Professor of Electrical Engineering and Director
of the Compound Semiconductor Technology Laboratory at Lehigh University since
1988. Dr. Hwang was selected for the Fellow Award in 1994 by the Institute of
Electrical and Electronic Engineers for his contributions to the development of
MBE manufacturing and heterojunction semiconductor materials and devices. Dr.
Hwang holds a B.S. in Physics from the National Taiwan University and an M.S.
and Ph.D. in Materials Science from Cornell University.
32
<PAGE>
Gregory H. Olsen, Ph.D. has served as a director of the Company since
1992. Dr. Olsen is President and the founder of Sensors Unlimited, Inc., a high
technology manufacturer of infrared detector arrays, cameras and diode lasers.
Dr. Olsen also founded EPITAXX, Inc., a manufacturer of opto-electronic
components, in 1983 after 10 years with RCA Labs. Dr. Olsen also serves on the
Advisory Board of Electron Transfer Technology, a Princeton, New Jersey based
manufacturer of on-site arsine generators for the GaAs epitaxy industry. Dr.
Olsen holds a B.S. in Engineering and an M.S. in Physics from Fairleigh
Dickinson University, and a Ph.D. in Material Science from the University of
Virginia.
Michael G. Bolton has served as a director of the Company since 1989. Mr.
Bolton is the Managing Director of Safeguard Scientifics, Inc.'s Pennsylvania
Early Stage Partners Venture Fund and serves on the boards of Technology
Systems Corporation, Competitive Technologies, Inc. and NEPA Venture Funds,
Inc. Prior to joining Safeguard Scientifics, Mr. Bolton served Lehigh
University in various technology transfer, entrepreneurial assistance, fund
raising and public relations positions. Mr. Bolton holds a B.S. in Economics
and an M.B.A. from Lehigh University.
Stephen N. Bretsen has served as a director of the Company since 1997.
Since 1996, Mr. Bretsen has been Director of Corporate Development for AMP
Incorporated, a global manufacturer of electrical and electronic connection
devices headquartered in Harrisburg, Pennsylvania, and is responsible for all
merger, acquisition and equity investment activity for AMP Incorporated in the
Americas and the Asia/Pacific region. From 1989 to 1996, Mr. Bretsen was an
attorney in AMP Incorporated's Legal Department. Mr. Bretsen holds a B.A. in
Government from the College of William and Mary and a J.D. from the University
of Colorado.
Classified Board of Directors
The Board of Directors of the Company currently consists of five persons
divided into three classes of directors each containing, as nearly as possible,
an equal number of directors. Directors within each class are elected to serve
three-year terms and approximately one-third of the directors sit for election
at each annual meeting of the Company's shareholders. The classified Board of
Directors may have the effect of deterring or delaying any attempt by any group
to obtain control of the Company by a proxy contest since such third party
would be required to have its nominees elected at two separate annual meetings
of the Board of Directors in order to elect a majority of the members of the
Board of Directors. Directors who are elected to fill a vacancy (including
vacancies created by an increase in the number of directors) must be confirmed
by the shareholders at the next annual meeting of shareholders whether or not
such director's term expires at such annual meeting. See "Risk
Factors--Anti-takeover Effect of Certain Provisions of the Company's Articles
of Incorporation and Pennsylvania Law."
Director Compensation
Upon completion of this Offering, each director who is not also an
employee of the Company will receive a one-time grant of an option to purchase
1,000 shares of Common Stock. Thereafter, all non-employee directors will
receive a one-time grant of an option to purchase 1,000 shares of Common Stock
when first elected to the Board of Directors and a yearly grant of an option to
purchase 1,000 shares of Common Stock pursuant to the Company's 1996 Stock
Option Plan. In addition, the travel expenses of such Directors related to
meetings of the Board of Directors may be reimbursed by the Company. See
"--Stock Option Plans."
Committees of the Board
The Company's Board of Directors has appointed an Audit Committee and a
Compensation Committee.
Audit Committee. The Audit Committee is composed of Dr. Hwang, Dr. Olsen
and Mr. Bolton, and is chaired by Dr. Hwang. It was formed in April 1996 and
its principal functions include making recommendations to the Board of
Directors regarding the annual selection of independent public accountants and
review of the recommendations of the independent public accountants as a result
of their audit of the Company's financial statements.
Compensation Committee. The Compensation Committee is composed of Dr.
Olsen and Messrs. Bolton and Bretsen and is chaired by Dr. Olsen. It was formed
in April 1996 and its principal function is to establish the compensation of
the officers of the Company and to administer the Company's stock option plans.
33
<PAGE>
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the Company's Board of Directors was formed
in April 1996. Dr. Olsen, Mr. Bolton and Mr. Bretsen, who were not at any time
during 1996 or at any other time officers or employees of the Company, are the
only members of the Compensation Committee. No executive officer of the Company
serves as a member of the Board of Directors or Compensation Committee of
another entity which has one or more executive officers serving as a member of
the Company's Board of Directors or Compensation Committee.
Executive Compensation
The following table sets forth certain compensation information with
respect to the Company's Chief Executive Officer and the other executive
officer of the Company whose salary and bonus exceeded $100,000 for the year
ended December 31, 1996 (the "Named Executive Officers"):
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
-------------------------------------------------------
Annual
Other All Other
Name and Principal Position Year Salary($) Bonus($) Compensation($) Compensation($)(1)
- ------------------------------ ------ ----------- ----------- ------------------ -------------------
<S> <C> <C> <C> <C> <C>
Thomas L. Hierl ............ 1996 $150,000 -- $ -- $84
President and Chief Executive
Officer
William H. Weisbecker ...... 1996 110,000 -- 9,143(2) 84
Vice President Sales and
Marketing
</TABLE>
- ------------
(1) Reflects life insurance premium of $84 paid in connection with the
Company's group life insurance plan.
(2) Reflects commissions paid in 1996.
Stock Option Plans
1996 Stock Option Plan. The Company adopted the Quantum Epitaxial Designs,
Inc. 1996 Stock Option Plan (the "1996 Stock Option Plan") which provides for
the grant of stock options to purchase up to an aggregate of 320,000 shares of
the Company's Common Stock to employees, directors and consultants of the
Company. The Company believes that the 1996 Stock Option Plan is an important
incentive in attracting, maintaining and motivating employees, directors and
consultants of the Company. The 1996 Stock Option Plan is administered by the
Compensation Committee of the Board of Directors (the "Committee"). The persons
eligible to receive discretionary awards of stock options under the 1996 Stock
Option Plan are those employees, directors and consultants of the Company
selected by the Committee in its discretion from time to time.
All terms and conditions of discretionary awards of options awarded under
the 1996 Stock Option Plan are determined by the Committee, including the
selection of participants to whom options will be granted, the number of shares
of Common Stock subject to each option, the exercise price of each option, the
expiration date of each option (subject to a maximum of ten years from the date
of the grant), the vesting schedule and any other material provisions.
In the event of any stock dividend, stock split, recapitalization, or
other similar change affecting the Common Stock, appropriate proportional
adjustments will be made in the number of shares reserved for issuance under
the 1996 Stock Option Plan, the number of shares subject to outstanding options
and the option prices thereof, subject to required action by the shareholders
of the Company, if any. The 1996 Stock Option Plan also provides for the
ability of the Committee to accelerate or terminate the exercisability of
options, and provides discretion to the Committee to take whatever other
actions it deems necessary or desirable with respect to all outstanding options
upon the occurrence of a "Change of Control," as such term is defined in the
1996 Stock
34
<PAGE>
Option Plan, and a provision for the cancellation of options and a cash payment
to the holders of such canceled options upon the occurrence of certain of the
events constituting a Change of Control. Options may not be exercised more than
ten years after the date of grant (five years after the date of grant with
respect to an incentive stock option ("ISO") granted to any person who owns
stock of the Company possessing 10% or more of the total voting power of all
the Company's stock), and options granted under the 1996 Stock Option Plan are
not transferable other than by will or the laws of descent and distribution.
The Committee has the discretion to award options to participants who are
employees as incentive stock options or as non-qualified stock options
("NQSOs"). Options awarded to participants who are not employees are
non-qualified stock options. The exercise price of an ISO must be not less than
the fair market value of the Company's Common Stock, on the date the option is
granted (110% of fair market value with respect to an ISO granted to any person
who owns stock of the Company possessing 10% or more of the total voting power
of all the Company's stock), and is payable upon the exercise of the option.
The exercise price of an NQSO may be less than fair market value. The number of
shares covered by ISOs granted to any optionee is limited such that the
aggregate fair market value of stock (determined as of the date of the grant)
with respect to which ISOs are exercisable for the first time by such optionee
in any calendar year shall not exceed a yearly limitation according to the
provisions of the Internal Revenue Code of 1986, as amended. Any options in
excess of such limits would be treated as NQSOs.
Subject to forfeiture provisions in the event of termination for cause, as
defined in the 1996 Stock Option Plan, if an optionee's employment with the
Company is terminated for any other reason other than death or disability, the
option terminates three months after the optionee's employment is terminated.
If an optionee dies or becomes disabled while employed by the Company, any
unexercised option terminates one year after the date of his death or
disability. An option may be exercised by a disabled optionee or an optionee
whose employment is terminated, or by the executors or administrators of a
deceased optionee or any person who acquires the option directly from an
optionee by bequest or inheritance, to the extent the option could have been
exercised on the date of such disability, termination or death.
Upon completion of the Offering, non-employee directors will receive NQSOs
pursuant to formula grants under the 1996 Stock Option Plan. According to the
formula grants, each non-employee director who is a member of the Board of
Directors as of the effective date of the 1996 Stock Option Plan will receive a
grant of a NQSO to purchase 1,000 shares of Common Stock at a price equal to
the initial public offering price in the Offering. Thereafter, on each date on
which the Company holds its annual meeting of shareholders, each non-employee
director in office immediately before and after the annual election of
directors will receive a grant of a NQSO to purchase 1,000 shares of Common
Stock at an exercise price equal to the closing price per share on the Nasdaq
National Market on the date of grant. Each non-employee director who first
becomes a member of the Board of Directors after the effective date of the 1996
Stock Option Plan will receive a grant of a NQSO to purchase 1,000 shares of
Common Stock on the date he or she becomes a member of the Board of Directors,
at an exercise price equal to the closing price on the Nasdaq National Market
on the date of grant. The term of each such option shall be ten years and each
such option shall be fully and immediately exercisable upon the date of grant,
subject to forfeiture upon a finding that the optionee has engaged in activity
that would be grounds for termination for cause if the optionee were an
employee.
As of the date hereof, options to purchase 153,000 shares of Common Stock
are outstanding under the 1996 Stock Option Plan with a weighted average
exercise price of $1.75 per share. These options, which were granted in July
1997, vest ratably and annually over four years, however, the Company is
considering accelerating the vesting upon completion of the Offering. The
Company has not yet determined the amount of deferred compensation, if any,
which would be recorded in connection with outstanding stock options.
Amended and Restated Non-Qualified Stock Option Plan. In 1991, the Company
adopted the Quantum Epitaxial Designs, Inc. Employee Non-Qualified Stock Option
Plan, which has been amended and restated (the "Employee NQSO Plan"). In 1996,
the Board of Directors approved the termination of the Employee NQSO Plan. The
Employee NQSO Plan permits the grant of NQSOs and is designed to serve as an
incentive for retaining qualified and competent key executive employees. All
employees of the Company are eligible participants under the Employee NQSO Plan.
The Compensation Committee of the Board of Directors administers the Employee
NQSO Plan.
35
<PAGE>
As of the date hereof, options to purchase 260,890 shares of Common Stock
are outstanding under the Employee NQSO Plan at a weighted average exercise
price of $0.16 per share. An optionee may exercise an option as to twenty
percent of the shares on the first anniversary of its grant and an additional
1/48th of such shares monthly thereafter. The options granted under the
Employee NQSO Plan, which expire between 1999 and 2006, will continue in effect
until exercised, surrendered or canceled. No additional grants will be made
under the Employee NQSO Plan.
Simplified Employee Pension/401(k) Plan
Until December 1996, the Company maintained an informal simplified
employee pension plan pursuant to which the Company contributed to individual
employee retirement accounts. In December 1996, the Company adopted and
executed a 401(k) Profit-Sharing Plan and Trust (the "401(k) Plan" or the
"Plan") for the benefit of its employees and their beneficiaries effective
January 1, 1997. The 401(k) Plan, which is intended to be qualified under the
Internal Revenue Code, is available to all employees of the Corporation
employed on or after the effective date of the Plan.
An employee may elect to defer, within the limits of deferable
compensation allowed by law, a certain percentage of his or her salary. For
employees who were actively employed on the last day of a Plan year, or who
were not actively employed but had a minimum of 500 hours of service, the
Company may match the employee contribution or a portion thereof. Additionally,
the Plan permits other discretionary contributions by the Company.
Generally, employees are 100% vested in the amounts contributed to the
Plan through salary reductions and Company contributions. Distributions from
the Plan are permitted at age 59 1/2 subject to provisions related to death,
disability and termination of employment.
Employment Arrangements
The Company has entered into Agreements with Thomas L. Hierl and William
J. Burg (the "Employee Agreements"). In the event Messrs. Hierl or Burg are
terminated for any reason other than such individual's voluntary termination,
death, disability or cause (as defined in the Employee Agreements), the Company
must pay to such individual, during the twelve month period following the date
of such termination, an amount equal to the individual's then annual base
salary. In addition, the Employee Agreements contain a confidentiality
provision and a restriction on competition while the individual is employed by
the Company and for two years thereafter.
Other than the Employee Agreements and the Company's standard form
non-competition and confidentiality agreement which has been executed by
substantially all of the Company's employees, the Company does not presently
have any employment contracts in effect with the executive officers or other
employees of the Company. The Company requires all new employees to execute the
non-competition and confidentiality agreement prior to employment.
36
<PAGE>
CERTAIN TRANSACTIONS
Convertible and Non-Convertible Notes and Warrants
In August 1989, the Company issued (i) Convertible Subordinated Promissory
Notes to NEPA Venture Fund, L.P. ("NEPA") and James C.M. Hwang, a director of
the Company, in the principal amounts of $81,820 and $18,180, respectively (the
"Convertible Notes") and (ii) Non-Convertible Subordinated Promissory Notes to
NEPA and Dr. Hwang in the principal amounts of $143,180 and $31,820,
respectively (the "Non-Convertible Notes"). The Non-Convertible Notes were paid
in full in August 1994 under the scheduled repayment terms. The Convertible
Notes bear interest at a rate of 8% per annum payable quarterly with principal
payments commencing in August 1998 through May 31, 2000 (the "Maturity Date").
The amount outstanding pursuant to these Convertible Notes is convertible into
shares of the Company's Class A Preferred Stock at any time prior to the
Maturity Date or the date paid in full at a rate of $0.6981 per share. Each
share of Class A Preferred Stock of the Corporation outstanding at the time of
the Offering automatically converts to ten shares of Common Stock.
In connection with the issuance of the Convertible Notes, the Company
issued to NEPA and Dr. Hwang warrants exercisable to purchase 135,710 and
30,180 shares, respectively, of Common Stock at a price of $0.05811 per share
(the "Warrants"). The Warrants may be exercised at any time prior to the date
on which the Convertible Note in favor of the Warrant holder has been paid in
full. On August 30, 1994, Dr. Hwang exercised the full amount of his Warrant
and purchased 30,180 shares of Common Stock.
NEPA and Dr. Hwang have agreed to convert the outstanding principal under
the Convertible Notes upon consummation of the Offering into shares of the
Company's Class A Preferred Stock at the rate of $0.6981 per share, each of
which will be immediately converted into ten shares of Common Stock. As of June
30, 1997, $81,820 and $18,180 were outstanding under the Convertible Notes to
NEPA and Dr. Hwang, respectively, which will be converted into 1,172,038 and
260,421 shares of Common Stock, respectively. In addition, NEPA has agreed to
exercise the full amount of its outstanding NEPA Warrant upon consummation of
the Offering.
In the Offering, NEPA and Dr. Hwang will sell a portion of the shares of
Common Stock received upon conversion of the Convertible Notes and exercise of
the Warrants, and will have certain rights with respect to the registration
under the Securities Act for resale to the public of their remaining shares.
See "Description of Capital Stock" and "Principal and Selling Shareholders."
In February 1997, the Company borrowed $2.0 million from AMP Incorporated
("AMP") pursuant to a Note Purchase Agreement (the "AMP Purchase Agreement")
and a Convertible Subordinated Note (the "AMP Note"). The AMP Note accrues
interest, which is payable quarterly, at a rate of prime plus 1% per annum
until the entire principal amount is paid. The AMP Note matures on February 29,
2000 (the "AMP Maturity Date"). The amount outstanding under the AMP Note is
convertible into shares of the Company's Class B Preferred Stock at any time
prior to the AMP Maturity Date at a rate of $7.41 per share. In connection with
the Offering, the AMP Note will automatically convert into shares of Class B
Preferred Stock, which will then automatically convert into a total of 269,905
shares of Common Stock. See "Description of Capital Stock."
Tax Agreements
Prior to the consummation of this Offering, the Company and its current
shareholders will enter into a tax agreements relating to certain of their
respective income tax liabilities. Because the Company will be subject to
corporate income taxation after consummation of this Offering, if there were a
reallocation of income or deductions between the period during which the
Company was treated as an S Corporation ("S years") and the period during which
the Company will be subject to corporate income taxation ("C years"), such
reallocation may increase the taxable income of one party while decreasing that
of another party. Accordingly, the Tax Agreements require any party thereto
whose income is decreased to use reasonable efforts to obtain a refund and to
pay the refund to the other party (up to the amount of additional taxes owed by
the other party), but any shortfall in corporate or individual taxes (including
tax on tax in the case of the current shareholders) will be borne or reimbursed
by the Company, as the case may be. Subject to certain limitations, the Tax
Agreements also provide that
37
<PAGE>
if the Internal Revenue Service were to determine that the Company owed taxes
because it was not an S Corporation prior to the Offering for any year, the
current shareholders would use reasonable efforts to obtain a refund of the
taxes they paid for any such year, at the Company's expense, and pay such
refund to the Company; the Company will pay any amount of corporate taxes due
to any taxing authority. If any taxing authority were to determine that
additional amounts of tax were due for any S year, the Company will provide the
funds to pay the tax net of any refund for C years (and any tax on the tax
payment) owed by the current shareholders. Any payment made by the Company to
the current shareholders pursuant to the Tax Agreements will likely be
considered by the Internal Revenue Service or the applicable state taxing
authorities to be nondeductible by the Company for income tax purposes.
Advances to Shareholders
In early 1996, the Company made advances totaling approximately $140,000
to its shareholders to cover the estimated income tax liabilities attributable
on their proportionate share of the Company's taxable income. In 1996 and in
1997 (through the Termination Date), the Company incurred a loss and the
shareholders consequently had no tax liability. In connection with the
termination of the Company's S Corporation status, the advances to
shareholders, including $115,000 to Mr. Hierl and $25,000 to Dr. Hwang, are
expected to be repaid by the end of 1997.
Director Option Agreement
On May 21, 1992, the Company granted to Gregory H. Olsen, a director of the
Company, an option to purchase 50,000 shares for an exercise price of $.015 per
share. Mr. Olsen's right to exercise the option was 20% vested at the first
anniversary of the date of grant, and vested as to an additional 1/48th of the
shares as of the last day of each month thereafter. Mr. Olsen's option will
expire on May 21, 2002, and will continue in effect until exercised, surrendered
or canceled.
Future Transactions
The Company considers that all transactions with affiliates have been made
on terms at least as favorable to the Company as could have been made for
similar transactions with unrelated third parties. In the future, the Company
will not enter into any transactions with officers, directors or other
affiliates unless the terms are as favorable to the Company as those generally
available from unaffiliated third parties and the transactions are approved by
a majority of disinterested directors.
38
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock at October 1, 1997, assuming
the conversion of the Convertible Notes and the exercise of the NEPA Warrant,
by (i) each person known to the Company to beneficially own more than 5% of the
Common Stock, (ii) each director and Named Executive Officer, (iii) all
directors and executive officers as a group, and (iv) the Selling Shareholders,
both before and after giving effect to the sale by the Company of 2,000,000
shares of Common Stock in the Offering.
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Prior to Owned After
Offering(1)(2) Number of Offering(2)
----------------------- Shares Being ----------------------
Names(2) Number Percent Offered Number Percent
- ------------------------------------- ----------- --------- -------------- ----------- --------
<S> <C> <C> <C> <C> <C>
Thomas L. Hierl(3)(4) ............... 1,398,210 40.8% -- 1,398,210 25.8%
NEPA Venture Fund, L.P.(3)(5) ...... 1,307,748 38.2 204,546 1,103,202 20.3
James C. M. Hwang(3)(6)(7) ......... 445,891 13.0 45,454 401,437 7.4
Amp Incorporated(3)(8) ............ 269,905 7.9 -- 269,905 4.9
Gregory H. Olsen(7)(9) ............ 50,000 1.4 -- 51,000 *
Michael G. Bolton(7) ............... -- -- -- 1,000 *
Stephen N. Bretsen .................. -- -- -- -- *
William H. Weisbecker(10) ......... 165,890 4.6 -- 165,890 3.0
All executive officers and directors
as a group (8 persons)(11) ......... 2,079,365 56.8 45,454 2,036,911 36.0
</TABLE>
- ------------
* Represents less than 1% of the outstanding shares of Common Stock.
(1) As used in this table, "beneficial ownership" means the sole or shared
power to vote or direct the voting of a security, or the sole or shared
investment power with respect to a security (i.e., the power to dispose,
or direct the disposition, of a security). Unless otherwise noted, each
shareholder possesses sole voting and investment power. A person is deemed
as of any date to have "beneficial ownership" of any security that such
person has the right to acquire within 60 days after such date.
(2) Based on 3,423,424 shares outstanding prior to the Offering and 5,423,424
shares outstanding after the Offering, except that shares underlying
options exercisable within 60 days of October 1, 1997 are deemed to be
outstanding for purposes of calculating the number of shares beneficially
owned and percentages owned by the holder of such options.
(3) The address of Mr. Hierl, Dr. Hwang and Mr. Weisbecker is: c/o Quantum
Epitaxial Designs, Inc., 119 Technology Drive, Bethlehem, Pennsylvania
18015. The address of NEPA Venture Fund, L.P. is 125 Goodman Drive,
Bethlehem, Pennsylvania 18015. The address of AMP Incorporated is M.S.
176-34, P.O. Box 3608, Harrisburg, Pennsylvania 17105.
(4) Includes 500,000 shares of Common Stock held in a grantor's trust of which
Mr. Hierl is both the trustee and beneficiary. Includes 135,000 shares of
Common Stock held in several trusts for the benefit of Mr. Hierl's
children.
(5) Includes 1,172,038 shares of Common Stock issuable upon conversion of a
convertible subordinated note payable and 135,710 shares issuable upon
exercise of a warrant, both immediately prior to consummation of the
Offering.
(6) Includes 260,421 shares of Common Stock issuable upon conversion of a
convertible subordinated note payable immediately prior to consummation of
the Offering.
(7) Includes 1,000 shares of Common Stock issuable upon exercise of stock
options to be issued upon consummation of the Offering and exercisable
immediately.
(8) Includes 269,905 shares of Common Stock issuable upon conversion of a
convertible subordinated note payable immediately prior to consummation of
the Offering.
(9) Includes 50,000 shares of Common Stock issuable upon exercise of stock
options granted by the Company which are currently exercisable.
(10) Includes 165,890 shares of Common Stock issuable upon exercise of stock
options granted by the Company which are currently exercisable.
(11) Includes 235,264 shares of Common Stock prior to Offering and 239,264
shares of Common Stock after Offering issuable upon exercise of stock
options granted by the Company which are exercisable within 60 days of
October 1, 1997.
39
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Capital Stock
The Company's authorized capital stock consists of 25,000,000 shares of
Common Stock, par value $0.001 per share, and 5,420,000 shares of Preferred
Stock, par value $0.01 per share.
Common Stock
Holders of Common Stock are entitled to one vote for each share held on
all matters submitted to a vote of shareholders and do not have cumulative
voting rights. Subject to applicable provisions of the Pennsylvania Business
Corporation Law of 1988, as amended (the "BCL"), shareholders holding a
majority of the issued and outstanding shares entitled to vote constitute a
quorum for the purposes of convening a shareholders' meeting. Accordingly, a
majority of the quorum may elect all the directors standing for election.
Holders of Common Stock are entitled to receive ratably such dividends, if any,
as may be declared on the Common Stock by the Board of Directors out of funds
legally available therefor. Upon the liquidation, dissolution or winding up of
the Company, holders of Common Stock are entitled to receive ratably the net
assets of the Company available for distribution after the payment of all debts
and other liabilities of the Company, subject to prior and superior rights of
holders of Preferred Stock. Holders of Common Stock have no preemptive,
subscription, redemption or conversion rights. The outstanding shares of Common
Stock are, and the shares offered hereby, when issued and paid for, will be,
fully paid and nonassessable. The rights, preferences and privileges of holders
of Common Stock will be subject to the rights of the holders of shares of any
series of Preferred Stock that the Company may issue in the future.
Preferred Stock
In connection with the conversion of the Convertible Notes and the AMP
Note, 143,246 shares of Class A Preferred Stock and 269,905 shares of Class B
Preferred Stock (together with the Class A Preferred Stock, the "Preferred
Stock") will be outstanding immediately prior to the closing of the Offering.
The Preferred Stock will be automatically converted into a total of 1,702,364
shares of Common Stock upon the closing of the Offering and such shares of the
Preferred Stock will no longer be outstanding.
Upon or after the closing of the Offering or the conversion of the
Preferred Stock, the Company will have the authority to issue up to 5,420,000
shares of Preferred Stock in one or more series and to fix and determine the
relative rights, preferences and limitations of each class or series so
authorized without any further vote or action by the shareholders. The Board of
Directors may issue Preferred Stock with voting and conversion rights which
could adversely affect the voting power of the holders of Common Stock and have
the effect of delaying or preventing a change in the control of the Company. As
of the date of this Prospectus, no shares of Preferred Stock are outstanding.
The Company has no current intention to issue any shares of Preferred Stock.
Limitation of Liability of Directors and Indemnification of Directors and
Officers
As permitted by the BCL, the Company's Articles of Incorporation and
Bylaws provide that, subject to certain limited exceptions, directors of the
Company shall not be personally liable, as such, for monetary damages for any
action taken unless the director has breached or failed to perform the duties
of his office under the BCL and the breach or failure to perform constitutes
self-dealing, willful misconduct or recklessness. The effect of this provision
is to limit the ability of the Company and its shareholders (through
shareholder derivative suits on behalf of the Company) to recover monetary
damages against a director for the breach of certain fiduciary duties as a
director (including breaches resulting from grossly negligent conduct). In
addition, the Company's Articles of Incorporation and Bylaws provide that the
Company shall, to the full extent permitted by the BCL, indemnify all persons
whom it has the power to indemnify pursuant thereto, including directors and
officers of the Company.
The Company's Bylaws provide that an officer and director shall not be
liable to the Company for monetary damages as such for any action taken or
omitted unless such person did not act in good faith and in a manner he or she
reasonably believed to be in, or not opposed to, the best interests of the
Company, and with respect
40
<PAGE>
to any criminal proceedings, did not have reasonable cause to believe his or
her conduct was unlawful. The Company believes that this provision will assist
it in securing and maintaining the services of directors who are not employees
of the Company. The Company's Bylaws also provide for indemnification of the
Company's directors and officers to the fullest extent permitted by law for
expenses (including attorneys' fees) incurred as a result of the officer's or
director's status as an officer or director of the Company.
The Company plans to procure a directors' and officers' insurance policy
to afford officers and directors coverage for losses arising from claims based
on breaches of duty, negligence, error and other wrongful acts.
Pennsylvania Anti-Takeover Laws
Pennsylvania has adopted certain laws that may be deemed to be
"anti-takeover" in effect. One provision permits directors, in considering the
best interests of the Company, to consider the effects of any action upon its
employees, suppliers, customers, shareholders and creditors and the communities
in which the Company maintains facilities as well as other pertinent factors.
The effect of this provision is to put the considerations of these
constituencies on parity with one another, with the result that no one group,
including shareholders, is required to be the dominant or controlling concern
of directors in determining what is in the best interests of the Company.
In addition, the Company is also subject to certain additional
anti-takeover provisions under Pennsylvania law, including the following:
Control Transactions. This provision generally requires any person or
group that acquires at least 20% of the voting power over shares entitled to
cast votes in an election of directors to provide notice to any holder of
voting shares that they may demand the acquiring person purchase all
outstanding shares for cash at the statutory minimum fair value for their
stock.
Business Combinations. This provision generally prohibits any person or
group that acquires at least 20% of the voting power of a corporation from
effecting a business combination with the corporation, such as a merger, an
asset sale and certain recapitalizations, for a period of up to five years from
the date such control was acquired. A corporation may opt out of this provision
on a case-by-case basis by approving a particular business combination in
compliance with applicable Pennsylvania statutory provisions prior to the date
such person or group acquires 20% of the voting power.
Control-Share Acquisition. This provision generally prevents a person or
group that crosses certain stock ownership thresholds of 20%, 33 1/3% or 50%
for the first time from voting those shares the ownership of which puts that
person over the relevant threshold unless voting power is restored to such
shares by a vote of shareholders as a whole and a vote of disinterested
shareholders at a shareholders meeting. Even if voting rights are restored by
approval of a resolution of shareholders, those rights will lapse and be lost
if any proposed control-share acquisition which is the subject of the
shareholder approval is not consummated within 90 days after shareholder
approval is obtained. Also, any business combinations occurring after the
restoration of voting power may require the acquiring person to pay severance
compensation to Pennsylvania employees of the corporation whose employment is
terminated within 90 days before or 24 months after the restoration of voting
power.
Disgorgement. This provision generally requires any person or group that
acquires 20% or more of the voting power of a corporation to disgorge to the
corporation all profits realized from the sale of equity securities of the
corporation within 18 months after acquiring this control status if the person
or group purchased equity securities of the corporation within 24 months prior
to, or 18 months after, the acquisition of control status.
Each of these provisions will make it difficult and time-consuming for any
person or group to acquire the Company without the consent of the existing
shareholders. The Company may opt out of one or more of these provisions only
by an amendment to the Company's Articles of Incorporation approved by both the
Board of Directors and the shareholders. With respect to the control-share
acquisition and disgorgement provisions, such amendment would be required to be
adopted within 90 days after the date the shares offered hereby are registered
under the Securities and Exchange Act of 1934, as amended (the "Exchange Act").
The Company does not intend to opt out of any of these provisions.
41
<PAGE>
Registration Rights
NEPA and Dr. Hwang (the "Holders") are entitled to specific rights with
respect to the registration under the Securities Act, for resale to the public,
of a total of 1,348,349 shares of Common Stock (the "Registration Stock")
pursuant to the terms of a Note and Warrant Purchase Agreement dated August 30,
1989 as modified by the AMP Purchase Agreement described in the next paragraph
(the "Agreement"). The Agreement provides that, with certain exceptions, in the
event the Company proposes to register any of its securities under the
Securities Act for its own account or otherwise, the Holders are entitled to
include the Registration Stock in such registration, subject to certain
conditions and limitations, which include the right of the underwriters of any
such offering to exclude for marketing reasons all or a portion of the
Registration Stock from such registration. NEPA may once require the Company,
whether or not the Company proposes to register its Common Stock for sale, to
register all or part of its Registration Stock for sale to the public under the
Securities Act, subject to certain conditions and limitations. In addition,
each of the Holders may require the Company to register Registration Stock on a
Form S-2 or S-3, once the Company has qualified for use of such forms,
provided, however, that the Company is only obligated to cause two registration
statements on Form S-2 or S-3 in which Registration Stock is registered. To the
extent permitted by applicable federal and state laws and regulations, the
Company is required to bear the expenses of all such registrations (except
underwriting discounts and commissions attributable to shares sold). The
Company is required to use its best efforts to effect any of the foregoing
registrations, subject to certain conditions and limitations.
After the Offering, AMP will be entitled to specific rights with respect
to the registration under the Securities Act, for resale to the public, of a
total of 269,905 shares of Common Stock (the "AMP Registration Shares")
pursuant to the terms of the AMP Purchase Agreement. The AMP Purchase Agreement
provides that, subsequent to the Offering and subject to certain exceptions, in
the event the Company proposes to register any of its securities under the
Securities Act for its own account or otherwise, AMP will be entitled to
include the AMP Registration Shares in such registration, subject to certain
conditions and limitations, which include the right of the underwriters of any
such offering to exclude for marketing reasons all or a portion of such AMP
Registration Stock from such registration. At any time subsequent to 180 days
after the Offering, AMP may once require the Company, whether or not the
Company proposes to register its Common Stock for sale, to register all or part
of the AMP Registration Shares for sale to the public under the Securities Act,
subject to certain conditions and limitations. At any time following the
Offering, AMP may twice require the Company to register the AMP Registration
Shares on a Form S-2 or S-3, once the Company has qualified for use of such
forms. To the extent permitted by applicable federal and state laws and
regulations, the Company is required to bear the expenses of all such
registrations (except underwriting discounts and commissions attributable to
shares sold). The Company is required to use its best efforts to effect such
registrations, subject to certain conditions and limitations.
See "Underwriting" for a description of the registration rights pertaining
to the warrants that the Company has agreed to sell to the Representatives of
the Underwriters in connection with the Offering.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the Common Stock has not yet been
determined.
42
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
5,423,424 shares of Common Stock. Of these shares, the 2,250,000 shares sold in
the Offering (plus up to 337,500 additional shares if the Underwriters exercise
their over-allotment option) will be freely tradeable without restriction or
further registration (except by affiliates of the Company or persons acting as
underwriters) under the Securities Act. All of the remaining shares of Common
Stock (the "Restricted Shares") will be "restricted securities" as that term is
defined under Rule 144 under the Securities Act and may not be sold unless they
are registered under the Securities Act or are sold pursuant to an exemption
from registration, such as the exemption provided by Rule 144.
In general, commencing 90 days after the completion of the Offering, Rule
144 allows a person who has beneficially owned Restricted Shares for at least
one year, including persons who may be deemed affiliates of the Company, to
sell, within any three-month period, up to the number of Restricted Shares that
does not exceed the greater of (i) one percent of the then outstanding shares
of Common Stock, and (ii) the average weekly trading volume during the four
calendar weeks preceding the date on which notice of the sale is filed with the
Securities and Exchange Commission. A person who is not deemed to have been an
affiliate of the Company at any time during the 90 days preceding a sale and
who has beneficially owned his Restricted Shares for at least two years would
be entitled to sell such Restricted Shares at anytime after completion of the
Offering without regard to the volume limitations described above and the other
conditions of Rule 144.
Notwithstanding the foregoing, the Company and its executive officers,
directors and shareholders owning more than 5% of the Common Stock, which, upon
completion of the Offering, will beneficially own 55.5% of the shares of Common
Stock (50.3%, assuming that the Underwriters' over-allotment option is
exercised), have agreed with the Underwriters not to sell, contract to sell or
otherwise dispose of any shares of Common Stock owned or controlled by them for
a period of 180 days after the date of this Prospectus without permission of the
Representatives of the Underwriters, except for certain issuances by the Company
or such shareholders (the "Lockup Period"). See "Underwriting." In addition, the
Company intends to file a registration statement on Form S-8 to register 630,890
shares subject to the Company's 1996 Stock Option Plan, the Amended and Restated
Non-Qualified Stock Option Plan a certain option agreement with a director of
the Company following the date of this Prospectus. Market sales of a substantial
number of shares of Common Stock, or the availability of such shares for sale in
the public market, could adversely affect prevailing market prices of the Common
Stock.
After the Offering, AMP will be entitled to certain rights with respect to
registration of 269,905 shares of Common Stock under the Securities Act. In
addition, after the Offering, NEPA and Dr. Hwang will be entitled to certain
rights with respect to registration under the Securities Act of the 1,348,349
shares of Common Stock that they will continue to beneficially own.
Registration of such Restricted Shares under the Securities Act would result in
such shares becoming freely tradeable without restriction under the Securities
Act immediately upon the effectiveness of such registration. See "Description
of Capital Stock--Registration Rights."
43
<PAGE>
UNDERWRITING
The Underwriters named below, acting through their Representatives,
Needham & Company, Inc. and Janney Montgomery Scott Inc., have severally
agreed, subject to the terms and conditions of the Underwriting Agreement, to
purchase a total of 2,000,000 shares of Common Stock from the Company and
250,000 shares of Common Stock from the Selling Shareholders. The number of
shares of Common Stock that each Underwriter has agreed to purchase is set
forth opposite its name below. The Underwriters are committed to purchase all
of such shares if any are purchased. Under certain circumstances the
commitments of non-defaulting Underwriters may be increased. The names of the
several Underwriters and the respective number of shares to be purchased by
each of them are as follows:
Number of
Underwriter Shares
------------------------------------- ----------
Needham & Company, Inc. ............
Janney Montgomery Scott Inc. ......
----------
Total ............................ 2,250,000
==========
The Underwriters propose to offer the shares of Common Stock to the public
initially at the offering price per share set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in excess
of $ per share, and the Underwriters may allow, and such dealers may reallow,
a concession not in excess of $ per share on sales to other dealers. After
the initial public offering of the Common Stock, the offering price and the
concessions may be changed.
The Company and the Selling Shareholders have granted an option to the
Underwriters, exercisable during the 30-day period after the date of this
Prospectus, to purchase up to an aggregate of 87,500 shares and 250,000 shares,
respectively, of Common Stock at the same price per share as the initial public
offering price. The Underwriters may exercise such option only to cover
over-allotments in the sale of the shares of Common Stock that the Underwriters
have agreed to purchase. To the extent the Underwriters exercise this option,
each of the Underwriters has a firm commitment, subject to certain conditions,
to purchase on a pro rata basis from the Company and the Selling Shareholders
the same percentage of the option shares as the number of shares to be
purchased and offered by the Underwriter as shown in the above table bears to
the shares of Common Stock initially offered hereby.
The Company and the Selling Shareholders have agreed to indemnify the
several Underwriters against certain liabilities which may be incurred in
connection with the Offering, including liabilities under the Securities Act.
Upon the closing of the Offering, the Company has agreed to issue warrants
to the Representatives to purchase a total of shares of Common Stock at an
exercise price of $ per share (the "Representatives' Warrants"). The
Representatives' Warrants will be exercisable during the four-year period
commencing one year from the date of consummation of the Offering and may not be
transferred for one year, except to the Representatives' officers or partners or
`any member of the selling group. The Representatives are entitled to certain
rights with respect to the registration of the Common Stock issuable upon the
exercise of the Representatives' Warrants (the "Warrant Shares") for offer and
sale to the public under the Securities Act. The Company has agreed to register
the Warrant Shares for resale at the request of the Representatives at any time
during the period when the Representatives' Warrants are exercisable. In
addition, if the Company proposes to register any of its Common Stock for its
own account or the account of others during the aforementioned period, the
Representatives are entitled to include the Warrant Shares therein. To the
extent that the Representatives realize any gain from the resale of the Warrant
Shares, such gain may be deemed additional underwriting compensation.
The price payable upon exercise of the Representatives' Warrants and the
number of Warrant Shares are subject to adjustment in certain events to prevent
dilution. For the life of the Representatives' Warrants, the holders are given,
at nominal cost, the opportunity to profit from a rise in the market price of
the Company's Common Stock, with a resulting dilution in the interest of other
securities holders.
The Company and its executive officers, directors, and shareholders owning
more than 1% of the Common Stock have agreed with the Representatives not to
sell or dispose of any shares without their consent for a period of 180 days
after the date of this Prospectus. See "Shares Eligible for Future Sale."
44
<PAGE>
The Underwriters do not intend to confirm sales of the Common Stock to any
accounts over which they exercise discretionary authority.
There is no public market for the Company's Common Stock. The initial
public offering price for the Common Stock will be determined by negotiation
among the Company, the Selling Shareholders and the Representatives. The
factors to be considered in determining the initial public offering price
include, among other things, the history of and the prospects for the industry
in which the Company competes, the capability of the Company's management, the
past and present operations of the Company, the historical results of
operations of the Company and the trend of its earnings, the prospects for
future earnings of the Company, the general condition of the securities markets
at the time of the offering and the prices of similar securities of generally
comparable companies.
Certain persons participating in the Offering may engage in passive market
making transactions in the Common Stock on the Nasdaq National Market in
accordance with Rule 103 of Regulation M under the Exchange Act. Rule 103
permits, upon satisfaction of certain conditions, underwriting and selling
group members participating in a distribution who are also registered Nasdaq
market makers in the security being distributed (or a related security) to
engage in limited passive market making transactions during the period when
Regulation M would otherwise prohibit such activity. Generally, a passive
market maker may not bid for or purchase a security at a price that exceeds the
highest independent bid for those securities by a person that is not
participating in the distribution, must identify its passive market making bids
on the Nasdaq electronic inter-dealer reporting system and the net daily
purchases made by a passive market maker may not exceed prescribed limits.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby is being passed
upon for the Company by Pepper, Hamilton & Scheetz LLP, Philadelphia,
Pennsylvania. Certain legal matters will be passed upon for the Underwriters by
Saul, Ewing, Remick & Saul LLP, Philadelphia, Pennsylvania.
EXPERTS
The balance sheets of the Company as of December 31, 1995 and 1996 and the
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1996 included in this Prospectus
and in the Registration Statement have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said report.
ADDITIONAL INFORMATION
The Company is not currently subject to the information requirements of
the Exchange Act. As a result of the Offering, the Company will be required to
file reports and other information with the Commission pursuant to the
informational requirements of the Exchange Act.
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act, with respect to the Common Stock offered hereby.
As permitted by the rules and regulations of the Commission, this Prospectus,
which is part of the Registration Statement, omits certain information,
exhibits, schedules and undertakings set forth in the Registration Statement.
For further information pertaining to the Company and the Common Stock,
reference is made to such Registration Statement and the exhibits and schedules
thereto. Statements contained in this Prospectus as to the contents or
provisions of any documents referred to herein are not necessarily complete,
and in each instance, reference is made to the copy of the document filed as an
exhibit to the Registration Statement. The Registration Statement may be
inspected without charge at the office of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549. Copies of the Registration Statement may be
obtained from the Commission at prescribed rates from the Public Reference
Section of the Commission at such address, and at the Commission's regional
offices located at 7 World Trade Center, 13th Floor, New York, New York 10048,
and at Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. In addition, registration statements and certain other
filings made with the Commission through its Electronic
45
<PAGE>
Data Gathering, Analysis and Retrieval ("EDGAR") system are publicly available
through the Commission's site on the Internet's World Wide Web, located at
http://www.sec.gov. The Registration Statement, including all exhibits thereto
and amendments thereof, has been filed with the Commission through EDGAR.
In addition, the Company intends to furnish its shareholders with annual
reports containing financial statements audited by an independent public
accounting firm and quarterly reports containing unaudited financial statements
for the first three quarters of each fiscal year.
46
<PAGE>
QUANTUM EPITAXIAL DESIGNS, INC.
INDEX TO FINANCIAL STATEMENTS
Page
-----
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ...... F-2
BALANCE SHEETS ................................. F-3
STATEMENTS OF OPERATIONS ..................... F-4
STATEMENTS OF SHAREHOLDERS' EQUITY ............ F-5
STATEMENTS OF CASH FLOWS ..................... F-6
NOTES TO FINANCIAL STATEMENTS .................. F-7
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Quantum Epitaxial Designs, Inc.:
We have audited the accompanying balance sheets of Quantum Epitaxial Designs,
Inc. (a Pennsylvania Corporation) as of December 31, 1995 and 1996, and the
related statements of operations, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Quantum Epitaxial Designs,
Inc. as of December 31, 1995 and 1996, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Philadelphia, Pa.,
January 17, 1997
F-2
<PAGE>
QUANTUM EPITAXIAL DESIGNS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31 June 30, 1997
-------------------------------- ------------ --------------------
1995 1996 Actual Pro Forma (Note 3)
--------------- --------------- ------------ --------------------
(unaudited)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS: ..........................................
Cash ................................................... $ 446,307 $ 77,609 $ 341,155 $ 349,041
Accounts receivable .................................... 755,358 1,084,195 845,962 845,962
Advances to shareholders .............................. -- 140,597 140,597 140,597
Inventories ............................................. 602,805 829,952 894,883 894,883
Prepaid expenses and other .............................. 20,872 -- 19,210 19,210
Deferred income taxes ................................. -- -- -- 105,000
------------- ------------- ------------- -------------
Total current assets ................................. 1,825,342 2,132,353 2,241,807 2,354,693
PROPERTY AND EQUIPMENT: .................................
Machinery and equipment ................................. 5,348,726 7,670,609 9,403,488 9,403,488
Furniture and office equipment ........................ 116,954 304,280 369,598 369,598
Leasehold improvements ................................. 84,439 582,915 646,346 646,346
------------- ------------- ------------- -------------
5,550,119 8,557,804 10,419,432 10,419,432
Less- Accumulated depreciation ........................ (1,838,071) (2,765,088) (3,406,136) (3,406,136)
------------- ------------- ------------- -------------
Net property and equipment ........................... 3,712,048 5,792,716 7,013,296 7,013,296
DEFERRED FINANCING COSTS ................................. -- 76,295 135,135 28,467
DEPOSITS ON EQUIPMENT .................................... -- 480,000 -- --
------------- ------------- ------------- -------------
$ 5,537,390 $ 8,481,364 $ 9,390,238 $ 9,396,456
============= ============= ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES: ....................................
Line of credit .......................................... $ -- $ 2,375,000 $ 625,000 $ 625,000
Current portion of long-term debt ..................... 482,636 663,791 929,972 929,972
Accounts payable ....................................... 512,783 845,588 554,464 554,464
Accrued expenses ....................................... 370,834 215,207 453,360 453,360
Distribution payable to shareholders .................. 312,115 -- -- --
Deferred revenues ....................................... 168,875 -- -- --
------------- ------------- ------------- -------------
Total current liabilities ........................... 1,847,243 4,099,586 2,562,796 2,562,796
LONG-TERM DEBT .......................................... 1,235,485 2,053,667 3,026,773 3,026,773
CONVERTIBLE SUBORDINATED NOTES PAYABLE .................. 100,000 100,000 2,100,000 --
DEFERRED INCOME TAXES .................................... -- -- -- 753,000
COMMITMENTS AND CONTINGENCIES (see Note 13) ...............
SHAREHOLDERS' EQUITY: ....................................
Preferred stock, $.01 par value, 1,500,000 (1995 and 1996)
and 5,420,000 (1997) shares authorized, no shares issued
or outstanding ....................................... -- -- -- --
Common stock, $.001 par value, 10,000,000 (1995 and
1996) and 25,000,000 (1997) shares authorized, 1,585,350
(1995, 1996 and 1997 actual) and 3,423,424 (1997 pro
forma) shares issued and outstanding .................. 1,585 1,585 1,585 3,423
Additional paid-in capital .............................. 72,785 72,785 72,785 3,050,464
Retained earnings ....................................... 2,280,292 2,153,741 1,626,299 --
------------- ------------- ------------- -------------
Total shareholders' equity ........................... 2,354,662 2,228,111 1,700,669 3,053,887
------------- ------------- ------------- -------------
$ 5,537,390 $ 8,481,364 $ 9,390,238 $ 9,396,456
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
QUANTUM EPITAXIAL DESIGNS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31 June 30
------------------------------------------- ------------------------------
1994 1995 1996 1996 1997
------------- ------------- ------------- ------------- ---------------
(unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES: .......................................
Product ....................................... $ 3,228,753 $ 4,643,593 $ 6,312,035 $ 2,447,251 $ 3,732,655
Contract research and development ............ 404,417 609,549 590,393 224,735 409,434
------------ ------------ ----------- ----------- -----------
Total revenues .............................. 3,633,170 5,253,142 6,902,428 2,671,986 4,142,089
------------ ------------ ----------- ----------- -----------
OPERATING EXPENSES: ...........................
Cost of product, excluding depreciation ...... 1,330,264 2,221,513 3,799,266 1,625,491 2,448,691
Cost of product-depreciation .................. 424,228 598,698 891,676 379,536 595,135
------------ ------------ ----------- ----------- -----------
Total cost of product ..................... 1,754,492 2,820,211 4,690,942 2,005,027 3,043,826
Research and development ..................... 277,068 416,401 576,390 241,964 439,888
Selling, general and administrative ......... 734,361 863,137 1,519,785 730,062 937,232
------------ ------------ ----------- ----------- -----------
Total operating expenses .................. 2,765,921 4,099,749 6,787,117 2,977,053 4,420,946
------------ ------------ ----------- ----------- -----------
Operating income (loss) .................. 867,249 1,153,393 115,311 (305,067) (278,857)
INTEREST EXPENSE ................................. 79,550 65,576 213,487 66,445 248,585
------------ ------------ ----------- ----------- -----------
NET INCOME (LOSS) .............................. $ 787,699 $ 1,087,817 $ (98,176) $ (371,512) $ (527,442)
============ ============ =========== =========== ===========
PRO FORMA DATA (UNAUDITED) (Note 3): ............
Historical net income (loss) .................. $ 787,699 $ 1,087,817 $ (98,176) $ (371,512) $ (527,442)
Pro forma provision (benefit) for income
taxes ....................................... 307,000 424,000 (36,500) (138,000) (202,000)
------------ ------------ ----------- ----------- -----------
Pro forma net income (loss) .................. $ 480,699 $ 663,817 $ (61,676) $ (233,512) $ (325,442)
============ ============ =========== =========== ===========
Pro forma net loss per share .................. $ (0.03) $ (0.14)
=========== ===========
Shares used in computing pro forma net loss
per share .................................... 1,978,505 1,978,505
=========== ===========
Supplemental pro forma net income (loss) per
share ....................................... $ 0.02 $ (0.08)
=========== ===========
Shares used in computing supplemental pro
forma net income (loss) per share ............ 4,083,174 2,417,949
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
QUANTUM EPITAXIAL DESIGNS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional
----------------------- Paid-in Retained
Shares Amount Capital Earnings Total
----------- --------- ------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993 ..................... 1,553,500 $ 1,553 $ 70,667 $ 1,077,886 $ 1,150,106
Exercise of warrants ........................... 30,180 30 1,724 -- 1,754
Exercise of options ........................... 1,670 2 394 -- 396
Net income .................................... -- -- -- 787,699 787,699
Distributions ................................. -- -- -- (274,964) (274,964)
---------- -------- ------------ ------------ -----------
BALANCE, DECEMBER 31, 1994 ..................... 1,585,350 1,585 72,785 1,590,621 1,664,991
Net income .................................... -- -- -- 1,087,817 1,087,817
Distributions ................................. -- -- -- (398,146) (398,146)
---------- -------- ------------ ------------ -----------
BALANCE, DECEMBER 31, 1995 ..................... 1,585,350 1,585 72,785 2,280,292 2,354,662
Net loss ....................................... -- -- -- (98,176) (98,176)
Distributions ................................. -- -- -- (28,375) (28,375)
---------- -------- ------------ ------------ -----------
BALANCE, DECEMBER 31, 1996 ..................... 1,585,350 1,585 72,785 2,153,741 2,228,111
Net loss (unaudited) ........................... -- -- -- (527,442) (527,442)
---------- -------- ------------ ------------ -----------
BALANCE, JUNE 30, 1997 (UNAUDITED) ............... 1,585,350 1,585 72,785 1,626,299 1,700,669
PRO FORMA DATA (UNAUDITED) (Note 3): ............
Exercise of warrants (unaudited) ............... 135,710 136 7,750 -- 7,886
Conversion of subordinated notes payable
(unaudited) ................................. 1,702,364 1,702 1,991,630 -- 1,993,332
Termination of S Corporation (unaudited) ...... -- -- 978,299 (1,626,299) (648,000)
---------- -------- ------------ ------------ -----------
PRO FORMA BALANCE, JUNE 30, 1997
(UNAUDITED) .................................... 3,423,424 $ 3,423 $ 3,050,464 $ -- $ 3,053,887
========== ======== ============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
QUANTUM EPITAXIAL DESIGNS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31 June 30
--------------------------------------------- -------------------------------
1994 1995 1996 1996 1997
------------- --------------- ------------- --------------- --------------
(unaudited)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES: ..............................
Net income (loss) ................................. $ 787,699 $ 1,087,817 $ (98,176) $ (371,512) $ (527,442)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation .................................... 462,706 622,248 927,017 393,965 641,048
Amortization .................................... 14,400 14,400 4,633 4,134 15,365
Change in assets and liabilities: ...............
(Increase) decrease:
Accounts receivable ........................... (561,165) 126,317 (298,837) 63,984 238,233
Inventories ................................. (13,312) (406,752) (227,147) 14,617 (64,931)
Prepaid expenses and other .................. (10,167) 6,642 16,739 20,872 (19,210)
Increase (decrease): ...........................
Accounts payable .............................. (439,448) 272,269 332,805 577,537 (291,124)
Accrued expenses .............................. (6,026) 252,449 (185,627) (208,250) 238,153
Deferred revenues ........................... 30,075 138,800 (168,875) (14,375) --
----------- ------------- ------------- ----------- -------------
Net cash provided by operating activities ... 264,762 2,114,190 302,532 480,972 230,092
----------- ------------- ------------- ----------- -------------
INVESTING ACTIVITIES: ..............................
Purchases of property and equipment ............... (247,709) (2,207,722) (3,007,685) (399,424) (1,381,628)
Deposits on equipment ........................... -- -- (480,000) (492,607) --
----------- ------------- ------------- ----------- -------------
Net cash used in investing activities ...... (247,709) (2,207,722) (3,487,685) (892,031) (1,381,628)
----------- ------------- ------------- ----------- -------------
FINANCING ACTIVITIES: ..............................
Distributions paid to shareholders ............... (222,032) (211,644) (340,490) (340,490) --
Advances to shareholders ........................ -- -- (140,597) (140,597) --
Net proceeds (repayments) under line of credit ... -- -- 2,375,000 805,000 (1,750,000)
Repayments of long-term debt ..................... (345,583) (311,008) (500,663) (255,894) (360,713)
Proceeds from long-term debt ..................... 486,995 1,000,000 1,500,000 -- 1,600,000
Proceeds from issuance of convertible subordinated
notes payable .................................... -- -- -- -- 2,000,000
Deferred financing costs ........................ -- -- (76,795) (22,010) (74,205)
Proceeds from exercise of warrants ............... 1,754 -- -- -- --
Proceeds from exercise of options ............... 396 -- -- -- --
----------- ------------- ------------- ----------- -------------
Net cash (used in) provided by financing
activities ................................. (78,470) 477,348 2,816,455 46,009 1,415,082
----------- ------------- ------------- ----------- -------------
NET (DECREASE) INCREASE IN CASH .................. (61,417) 383,816 (368,698) (365,050) 263,546
CASH, BEGINNING OF PERIOD ........................ 123,908 62,491 446,307 446,307 77,609
----------- ------------- ------------- ----------- -------------
CASH, END OF PERIOD .............................. $ 62,491 $ 446,307 $ 77,609 $ 81,257 $ 341,155
=========== ============= ============= =========== =============
CASH PAID DURING THE PERIOD FOR INTEREST . $ 79,960 $ 58,722 $ 179,432 $ 66,845 $ 243,690
=========== ============= ============= =========== =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
QUANTUM EPITAXIAL DESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS
(Information as of June 30, 1997 and for the
six months ended June 30, 1996 and 1997 is unaudited)
1. BACKGROUND:
Quantum Epitaxial Designs, Inc. (the "Company") designs and develops
compound semiconductor materials using molecular beam epitaxy and is a leading
producer of gallium arsenide based wafers supplied to the semiconductor device
manufacturing industry (see Note 4). The Company was incorporated in December
1988 and began operating in August 1989.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Pervasiveness 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 those estimates.
Interim Financial Statements
The financial statements as of June 30, 1997 and for the six months ended
June 30, 1996 and 1997 are unaudited and, in the opinion of management of the
Company, include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the results for those interim
periods. The results of operations for the six months ended June 30, 1997 are
not necessarily indicative of the results to be expected for the full year.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash, accounts
receivable, accounts payable, accrued expenses and debt instruments. The book
values of cash, accounts receivable, accounts payable and accrued expenses are
considered to be representative of their respective fair value. None of the
Company's debt instruments that are outstanding as of December 31, 1996 have
readily ascertainable market values; however, the carrying values are
considered to approximate their respective fair values. See Notes 7, 8 and 9
for the terms and carrying values of the Company's various debt instruments.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method)
or market (see Note 6).
Property and Equipment
Property and equipment are carried at cost. Depreciation is calculated
using the straight-line method over the following estimated useful lives:
Machinery and equipment 7 years
Furniture and office equipment 5 years
Leasehold improvements Remaining lease terms
ranging from 5 to 7 years
Significant improvements are capitalized and expenditures for maintenance
and repairs are charged to expense as incurred. Upon the sale or retirement of
these assets, the applicable cost and related accumulated depreciation are
removed from the accounts and any gain or loss is included in the results of
operations.
Depreciation expense was $462,706, $622,248, $927,017, $393,965 and
$641,048 for 1994, 1995, 1996 and for the six months ended June 30, 1996 and
1997, respectively.
F-7
<PAGE>
QUANTUM EPITAXIAL DESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(Information as of June 30, 1997 and for the
six months ended June 30, 1996 and 1997 is unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (Continued)
Long-Lived Assets
During 1996, the Company adopted Statement of Financial Accounting
Standards No. 121 (SFAS No. 121), "Accounting for the Impairment of Long-Lived
Assets and for the Long-Lived Assets to be Disposed of," which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and undiscounted cash flows estimated to
be generated by those assets are less than the assets carrying amount. The
Company continually evaluates whether events and circumstances have occurred
that indicate the remaining estimated useful life of long-lived assets may
warrant revision or the remaining balance may not be recoverable. As of
December 31, 1996, management believes that no revision to the remaining useful
lives or write-down of long-lived assets is required.
Deferred Financing Costs
As of December 31, 1996, the Company has capitalized legal and
professional fees incurred in connection with a financing transaction. These
costs are amortized over the life of the related loan.
Accumulated amortization related to deferred financing costs was $0, $500,
and $15,366 as of December 31, 1995, 1996 and June 30, 1997, respectively.
Advances to Shareholders
In early 1996, the Company made advances of $140,547 to its shareholders.
This amount is expected to be repaid in the fourth quarter of 1997.
Revenue Recognition
The Company recognizes revenues earned on product sales upon shipment of
the product. Contract research and development revenues are recognized as
related expenses are incurred (see Note 11).
Research and Development Expenses
Research and development expenses consist of projects conducted by the
Company for customer-sponsored programs and for future product development. All
research and development costs are expensed as incurred.
Income Taxes
The Company has elected to be treated as an S corporation. As such, the
taxable income or loss of the Company will pass through to the federal and
state income tax returns of its shareholders, and the Company is not subject to
income taxes. The Company makes distributions to its shareholders to cover
their estimated income tax payments due to the Company's taxable income.
The Company reports certain income and expense items for income tax
purposes on a basis different from that reflected in the accompanying financial
statements. The principal difference relates to the Company's use of
accelerated tax depreciation methods. Immediately preceding the Company's
proposed initial public offering (the Offering) the Company will terminate its
S Corporation status and will become subject to federal and state income taxes.
Upon terminating its S Corporation status, the Company will record a tax
provision for the recognition of a net deferred tax liability, estimated at
$648,000 as of June 30, 1997 (see Note 3).
New Accounting Pronouncements
In 1996, the Company adopted Statement of Financial Accounting Standards
No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation". SFAS No. 123
establishes financial accounting and reporting standards for stock-based
compensation plans. This statement also applies to transactions in which an
entity issues its equity instruments to acquire goods and services from
nonemployees. The Company adopted the disclosure requirements of SFAS No. 123
relative to its employee stock compensation plans (see Note 10).
F-8
<PAGE>
QUANTUM EPITAXIAL DESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(Information as of June 30, 1997 and for the
six months ended June 30, 1996 and 1997 is unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (Continued)
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 (SFAS No. 128), "Earnings Per Share".
This statement is effective for fiscal years ending after December 15, 1997
and, when adopted, will require restatement of prior years' earnings per share.
The adoption of SFAS No. 128 will not have a material effect on the pro forma
net income per share reported in the accompanying financial statements.
3. PRO FORMA INFORMATION (UNAUDITED):
Pro Forma Balance Sheet and Statement of Shareholders' Equity
The pro forma balance sheet and statement of shareholders' equity of the
Company as of June 30, 1997 reflects the net deferred income tax liability
calculated in accordance with Statement of Financial Accounting Standards No.
109 (SFAS No. 109), "Accounting for Income Taxes," which will be recorded by
the Company as a result of the termination of its S Corporation status shortly
before the effective date of the Company's Offering (estimated at $648,000 as
of June 30, 1997). The deferred income tax liability will represent the tax
effect of the cumulative differences between the financial reporting and income
tax bases of certain assets and liabilities as of the termination of S
Corporation status, and will be recorded as additional income tax expense in
the quarter in which the Offering is completed. The actual deferred income tax
liability recorded will be adjusted to reflect the effect of operations of the
Company for the period from July 1, 1997 through the termination of its S
Corporation status.
The significant items comprising the Company's pro forma net deferred
income tax liability (see Note 2) as of June 30, 1997 are as follows:
Current deferred income tax assets:
Accruals and reserves not currently deductible for tax ...... $ 99,000
Other ...................................................... 6,000
---------
105,000
---------
Non-current deferred income tax liabilities:
Depreciation methods ....................................... 753,000
---------
Net deferred income tax liabilities ..................... $ 648,000
---------
The pro forma balance sheet and statement of shareholders' equity also
reflects (i) the conversion of $100,000 of convertible subordinated notes
payable (see Notes 9 and 10) into Class A Preferred Stock which will then be
converted into 1,432,459 shares of Common stock, (ii) the conversion of
$2,000,000 of convertible subordinated notes payable (see Notes 9 and 10) into
Class B Preferred Stock which will then be converted into 269,905 shares of
Common Stock, (iii) the exercise of warrants (see Note 10) to purchase 135,710
shares of Common stock at a total exercise price of $7,886 and (iv) the
reclassification of the retained earnings balance to additional paid-in-capital
in connection with the termination of its S Corporation status. These
transactions are expected to occur upon the closing of the Offering.
Pro Forma Statements of Operations
Immediately preceding the effective date of the Offering, the Company will
terminate its status as an S Corporation and will be subject to federal and
state income taxes thereafter. Accordingly, for informational purposes, the
accompanying statements of operations include an unaudited pro forma adjustment
for the income taxes which would have been recorded in accordance with SFAS No.
109 if the Company had not been an S Corporation, based on the tax laws in
effect during the respective periods. The pro forma adjustment for income taxes
does not include a one-time income tax provision related to the recognition of
a net deferred income tax liability which will be recorded by the Company upon
terminating its S Corporation status (estimated at $648,000 as of June 30,
1997).
F-9
<PAGE>
QUANTUM EPITAXIAL DESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(Information as of June 30, 1997 and for the
six months ended June 30, 1996 and 1997 is unaudited)
3. PRO FORMA INFORMATION (UNAUDITED): -- (Continued)
The differences between the federal statutory income tax rate and the pro
forma income tax rate are as follows:
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31 June 30
-------------------------------------- ---------------------------
1994 1995 1996 1996 1997
---------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Federal statutory tax rate ..................... 34.0% 34.0% (34.0)% (34.0)% (34.0)%
State income taxes, net of federal benefit ...... 4.4 4.4 (4.4) (4.4) (4.4)
Expenses not deductible for tax purposes ......... 0.6 0.6 1.2 1.3 0.1
------ ------ --------- --------- ---------
39.0% 39.0% (37.2)% (37.1)% (38.3)%
====== ====== ========= ========= =========
</TABLE>
Pro Forma Net Loss Per Share
Pro forma net loss per share was computed by dividing pro forma net loss
by the weighted average number of shares of common stock outstanding for the
respective periods, adjusted for the dilutive effect of common stock
equivalents, which consist of stock options and warrants, using the treasury
stock method. Pursuant to the requirements of the Securities and Exchange
Commission, common stock equivalents issued by the Company during the 12 months
immediately preceding the Offering (including 153,000 stock options granted in
July 1997 (see Note 10) and the convertible subordinated note payable in the
amount of $2,000,000 (see Note 9)) have been included in the calculation of the
shares used in computing pro forma net loss per share as if they were
outstanding for all periods presented (using the treasury stock method and an
estimated Offering price of $9.00 per share). The calculation of shares used in
computing pro forma net loss per share excludes the Common Stock to be issued
upon the conversion of the convertible subordinated notes payable in the
amounts of $18,180 and $81,820 (see Note 9) and the exercise of the warrant
(see Note 10) immediately preceding the Offering and the dilutive effect of
310,890 stock options since the inclusion of such is antidilutive. For the year
ended December 31, 1996 and the six months ended June 30, 1997, the calculation
of the pro forma net loss per share excludes interest expense of $0 and
$44,000, respectively, on the convertible subordinated note payable in the
amount of $2,000,000 which will be converted into Common Stock upon the closing
of the Offering. For the year ended December 31, 1996 and the six months ended
June 30, 1997, the calculation of the pro forma net loss per share includes
interest expense, net of tax, of $5,000 and $2,000, respectively, on the
convertible subordinated notes payable in the amounts of $18,180 and $81,820
which will be converted into Common Stock upon the closing of the Offering
since the exclusion of such is antidilutive.
Supplemental Pro Forma Net Income (Loss) Per Share
Supplemental pro forma net income (loss) per share is based on the
weighted average number of shares of common stock and common stock equivalents
used in the calculation of pro forma net loss per share plus the number of
shares of Common Stock that would be required to be sold (using an estimated
Offering price of $9.00 per share) to repay the borrowings on the line of
credit and the notes payable to bank ($4,325,714 in the aggregate as of June
30, 1997). These outstanding borrowings will be repaid upon completion of the
Offering. The supplemental pro forma net income per share calculation for the
year ended December 31, 1996 includes the dilutive effect of common stock
equivalents for (i) the conversion of the convertible subordinated notes
payable in the amounts of $18,180 and $81,820 as if the conversion occured on
the original date of issuance (see Note 9); (ii) the exercise of the warrant to
purchase 135,710 shares, using the treasury stock method and (iii) the exercise
of 310,890 stock options, using the treasury stock method. The supplemental pro
forma net loss per share calculation for the six months ended June 30, 1997
excludes the impact of the three items discussed in the preceeding sentence
since the inclusion of such is antidilutive.
F-10
<PAGE>
QUANTUM EPITAXIAL DESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(Information as of June 30, 1997 and for the
six months ended June 30, 1996 and 1997 is unaudited)
3. PRO FORMA INFORMATION (UNAUDITED): -- (Continued)
For the year ended December 31, 1996 and the six months ended June 30,
1997, the calculation of the supplemental pro forma net income (loss) per share
excludes interest expense, net of tax, of $0 and $44,000, respectively, on the
convertible subordinated notes payable in the amount of $2,000,000 which will
be converted into Common Stock upon the completion of the Offering. In
addition, for the year ended December 31, 1996 and the six months ended June
30, 1997, the calculation of the supplemental pro forma net income (loss) per
share excludes interest expense, net of tax, of $123,000 and $87,000,
respectively, on the line of credit and the notes payable to bank. For the year
ended December 31, 1996, the calculation of the supplemental pro forma net
income per share excludes interest expense, net of tax, of $5,000 on the
convertible subordinated notes payable in the amounts of $18,180 and $81,820
which will be converted into Common Stock upon the completion of the Offering.
The supplemental pro forma net loss per share calculation for the six months
ended June 30, 1997 includes the interest expense of $2,000, net of tax, on the
convertible subordinated notes payable in the amounts of $18,180 and $81,820
since the exclusion of such is antidilutive.
4. RISKS AND UNCERTAINTIES:
The Company's future results of operations involve a number of risks and
uncertainties. Factors that could affect the Company's future operating results
and cause actual results to vary materially from expectations include, but are
not limited to, management of growth, fluctuations in quarterly results,
continuing capital requirements, substantial reliance on key customers,
production system complexity, adoption of the Company's technology by
manufacturers, competition, dependence on key raw material vendors, dependence
on a limited number of equipment manufacturers, limited protection of
proprietary technology, dependence on key personnel, centralization of
manufacturing facilities and environmental regulations.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentration of credit risk are accounts receivable. The Company's customer
base (which consists primarily of large multinational companies) is principally
comprised of companies within the semiconductor industry, which historically
has been volatile. The Company does not generally require collateral from its
customers.
Major Customers
The following table summarizes significant customers with product revenues
in excess of 10% of total revenues for any of the periods presented:
Six Months Ended
Year Ended December 31 June 30
------------------------ -----------------
Customer 1994 1995 1996 1996 1997
- ---------- ------ ------ ------ ------ --------
A ...... 17% 23% 41% 38% 20%
B ...... 7 18 14 10 18
C ...... 20 11 8 -- 14
D ...... 2 -- -- -- 11
F-11
<PAGE>
QUANTUM EPITAXIAL DESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(Information as of June 30, 1997 and for the
six months ended June 30, 1996 and 1997 is unaudited)
4. RISKS AND UNCERTAINTIES: -- (Continued)
The loss of one or more of these major customers could have a material
adverse effect on the Company's business.
Total revenues are summarized as a percentage by geographic area as
follows:
Six Months
Ended
Year Ended December 31 June 30
------------------------ --------------
1994 1995 1996 1996 1997
------ ------ ------ ------ -----
Domestic .................. 93% 89% 93% 91% 92%
Foreign: ..................
Far East ............... 5% 8% 6% 7% 7%
Europe and Canada ...... 2% 3% 1% 2% 1%
5. ACCOUNTS RECEIVABLE:
<TABLE>
<CAPTION>
December 31
------------------------- June 30,
1995 1996 1997
--------- ----------- ---------
<S> <C> <C> <C>
Trade receivables ....................................... $ 546,847 $ 824,257 $ 668,650
Allowance for doubtful accounts and returns ............ (30,000) (40,000) (35,000)
--------- ----------- ---------
516,847 784,257 633,650
Billed and unbilled research contract receivables ...... 238,511 299,938 212,312
--------- ----------- ---------
$ 755,358 $ 1,084,195 $ 845,962
========= =========== =========
</TABLE>
6. INVENTORIES:
December 31
------------------------- June 30,
1995 1996 1997
----------- ----------- ----------
Raw materials ............... $ 486,725 $ 588,242 $ 577,639
Finished goods ............... 116,080 19,860 54,405
Manufacturing supplies ...... -- 221,850 262,839
---------- ---------- ----------
$ 602,805 $ 829,952 $ 894,883
========== ========== ==========
7. LINE OF CREDIT:
As of December 31, 1996, the Company had a $4,000,000 line of credit
facility with a bank. Subsequent to yearend, this facility was changed to
$1,000,000 in connection with the Company entering into long-term notes payable
in the amounts of $1,500,000 in December 1996 and $1,600,000 in January 1997.
The line of credit agreement expires on January 31, 1998, subject to renewal.
Outstanding borrowings are payable upon demand by the bank and bear interest at
the bank's National Commercial Rate. Borrowings under the line are secured by
primarily all of the Company's assets, and are guaranteed by the Company's
President up to $100,000. Borrowings under this line were $2,375,000 and
$625,000 as of December 31, 1996 and June 30, 1997, respectively. There were no
borrowings under this line during 1995. The line of credit agreement contains
cross default provisions with the other notes payable to the bank (see Note 8).
F-12
<PAGE>
QUANTUM EPITAXIAL DESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(Information as of June 30, 1997 and for the
six months ended June 30, 1996 and 1997 is unaudited)
8. LONG-TERM DEBT:
<TABLE>
<CAPTION>
December 31
----------------------------- June 30,
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Note payable to bank, due in monthly installments of
$9,917 through March 1997 including interest at 8.25%.
The note is secured by equipment, inventories and
accounts receivable and guaranteed by the Company's
President. ............................................. $ 135,137 $ 23,239 $ --
Note payable to bank, due in monthly installments of
$9,083 through July 1996 including interest at 7.85%.
The note is secured by equipment, inventories and
accounts receivable. ................................. 63,584 -- --
Note payable to bank, due in monthly installments of
$2,381 through January 2001 including interest at 1%
above the bank's National Commercial Rate. The note is
secured by equipment. ................................. 145,238 116,667 102,381
Note payable to bank, due in monthly installments of
$16,667 through December 2000 plus interest at 8.45%.
The note is secured by equipment (see Note 7). ......... 1,000,000 800,000 700,000
Note payable to bank, due in monthly installments of
$25,000 through December 2001 plus interest at the
bank's Prime Rate plus .25%. The note is secured by
equipment (see Note 7). .............................. -- 1,475,000 1,325,000
Note payable to bank, due in monthly installments of
$26,667 through May 2002 plus interest at the bank's
Prime Rate. The note is secured by equipment (see Note
7). ................................................... -- -- 1,573,333
Note payable to Northampton County New Jobs Corp., due
in monthly installments of $2,763 through May 1999
including interest at 4%. The note is secured by equip-
ment and guaranteed by the Company's President and
his wife. ............................................. 103,110 76,056 58,316
Note payable to the Commonwealth of Pennsylvania, due
in monthly installments of $4,468 through May 2001
including interest at 2%. The note is secured by equip-
ment and guaranteed by the Company's President and
his wife. ............................................. 271,052 226,496 197,715
----------- ----------- -----------
1,718,121 2,717,458 3,956,745
Less-Current portion .................................... (482,636) (663,791) (929,972)
----------- ----------- -----------
$ 1,235,485 $ 2,053,667 $ 3,026,773
=========== =========== ===========
</TABLE>
F-13
<PAGE>
QUANTUM EPITAXIAL DESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(Information as of June 30, 1997 and for the
six months ended June 30, 1996 and 1997 is unaudited)
8. LONG-TERM DEBT: -- (Continued)
At December 31, 1996, long-term debt matures as follows:
1997 ...... $ 663,791
1998 ...... 610,918
1999 ...... 586,792
2000 ...... 556,085
2001 ...... 299,872
------------
$ 2,717,458
============
The note payable agreements with Northampton County New Jobs Corp. and
Commonwealth of Pennsylvania require the Company to create a specified number
of new jobs over a three-year period in order to maintain the interest rates of
4% and 2%, respectively. If the Company fails to meet the employment
commitment, the interest rate will increase to a market rate up to 12.5%, as
defined.
9. CONVERTIBLE SUBORDINATED NOTES PAYABLE:
<TABLE>
<CAPTION>
December 31
------------------------- June 30,
1995 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
Convertible subordinated note payable to shareholder, due
in quarterly installments of $2,275 from August 1998 to
May 2000, interest at 8%. The note is convertible into
the Company's Class A Preferred Stock at a price of
$.6981 per share (see Note 10). ........................... $ 18,180 $ 18,180 $ 18,180
Convertible subordinated note payable to venture capital
partnership, due in quarterly installments of $10,227
from August 1998 to May 2000, interest at 8%. The note
is convertible into the Company's Class A Preferred
Stock at a price of $.6981 per share (see Note 10). ...... 81,820 81,820 81,820
Convertible subordinated note payable to parent company
of a significant customer, due in February 2000 with two
year optional renewal, interest payable quarterly at prime
plus 1%. The note is convertible into the Company's
Class B Preferred Stock at a price of $7.41 per share (see
Note 10). ................................................ -- -- 2,000,000
---------- ---------- ------------
$ 100,000 $ 100,000 $ 2,100,000
========== ========== ============
</TABLE>
As of December 31, 1996, convertible subordinated notes payable mature as
follows:
1997 ...... $ --
1998 ...... 25,000
1999 ...... 50,000
2000 ...... 25,000
----------
$ 100,000
----------
F-14
<PAGE>
QUANTUM EPITAXIAL DESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(Information as of June 30, 1997 and for the
six months ended June 30, 1996 and 1997 is unaudited)
9. CONVERTIBLE SUBORDINATED NOTES PAYABLE: -- (Continued)
The Convertible Subordinated Note Payable in the amount of $2,000,000 has
certain rights to the payment of contingent interest, initially at 10% of the
outstanding principal balance for the first year, and thereafter, it accrues at
a simple interest rate of 10% per annum for its duration, upon the occurrence
of certain "Events of Sale" as defined. The holder of the Note is entitled to
one seat on the Company's Board of Directors. The Company expects all of the
convertible subordinated notes payable to be converted into Preferred Stock
which will then be converted into Common Stock upon the closing of the Offering
(see Notes 3 and 10).
10. SHAREHOLDERS' EQUITY:
Common Stock
As of December 31, 1996, the Company's shareholders authorized 10,000,000
shares of Common Stock. In February 1997, the Company's shareholders increased
the authorized shares of Common Stock to 25,000,000.
Preferred Stock
As of December 31, 1996, the Company's shareholders authorized 1,500,000
shares of a Class A Preferred Stock. In February 1997, the Company's
shareholders increased the authorized shares of Preferred Stock to 5,420,000 of
which 150,000 are designated as "Class A" Preferred Stock and 270,000 are
designated "Class B" Preferred Stock
When issued, the Class A and Class B Preferred Stock will be entitled to
certain preferences as to dividends, liquidation and voting rights. The
convertible subordinated notes payable discussed in Note 9 are convertible into
143,245 shares of Class A Preferred Stock and 269,905 shares of Class B
Preferred Stock. The outstanding shares of Class A and Class B Preferred Stock
are convertible into 1,432,459 shares and 269,905 shares, respectively, of
Common Stock. The Company expects the holders of the convertible subordinated
notes payable to convert to Class A and Class B Preferred Stock and which
automatically converts into Common Stock upon the closing of the Offering (see
Notes 3 and 9).
Options
In 1996, the Company adopted a qualified stock option plan (the "1996
Plan"), whereby 320,000 common shares may be issued to employees, directors,
consultants and others at exercise prices determined by the Company's Board of
Directors. The options generally vest over a four-year period and expire ten
years after the date of grant. As of December 31, 1996 and June 30, 1997, no
options were granted under the 1996 Plan.
In 1991, the Company adopted a stock option plan (the "1991 Plan"). Stock
options for 281,780 common shares have been issued to key management personnel
at exercise prices determined by the Company's Board of Directors. The options
vest over a five-year period and expire ten years after the date of grant.
Options granted under the plan have certain cashless exercise features. In 1996,
the Board of Directors approved the termination of the 1991 Plan and no further
options will be granted under the 1991 Plan. The options granted under this plan
will continue in effect until exercised, surrendered or canceled.
In 1992, the Company granted an option to purchase 50,000 shares of common
stock at an exercise price of $0.153 per share to a member of the Board of
Directors. The option vests over a five-year period and expires ten years after
the date of grant. The option has certain cashless exercise features.
F-15
<PAGE>
QUANTUM EPITAXIAL DESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(Information as of June 30, 1997 and for the
six months ended June 30, 1996 and 1997 is unaudited)
10. SHAREHOLDERS' EQUITY: -- (Continued)
The following table summarizes stock option activity:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise Price Exercise
Shares Per Share Price
----------- ---------------- ---------
<S> <C> <C> <C>
Options outstanding at December 31, 1993 ......... 275,890 $0.045-$0.237 $0.082
Exercised ....................................... (1,670) 0.237 0.237
Canceled ....................................... (3,330) 0.237 0.237
--------
Options outstanding at December 31, 1994 ......... 270,890 0.045 -0.183 0.079
Canceled ....................................... (10,000) 0.183 0.183
Granted ....................................... 35,000 0.507 0.507
--------
Options outstanding at December 31, 1995 ......... 295,890 0.045 -0.507 0.127
Granted .......................................... 15,000 0.721 0.721
--------
Options outstanding at December 31, 1996 and June 30,
1997 ............................................. 310,890 $0.045-$0.721 $0.155
========
</TABLE>
As of December 31, 1996, there were 268,540 options vested and exercisable
and 320,000 options were available for grant. As of June 30, 1997, there were
281,540 options vested and exercisable and 320,000 options were available for
grant (all under the 1996 Plan).
In July 1997, the Board of Directors approved the issuance of 153,000
stock options to several employees at an exercise price of $1.75 per share. The
Company has not yet determined the amount of deferred compensation if any,
which would be recorded in connection with these grants. These options vest
over a four year period, however, the Company is considering accelerating the
vesting upon completion of the Offering.
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and the related interpretations in
accounting for its stock option plans. The disclosure requirements of SFAS No.
123 were adopted by the Company in 1996. Had compensation cost for the Plan
been determined based upon the fair value of the options at the date of grant,
as prescribed by SFAS No. 123, the Company's pro forma net loss and pro forma
net loss per share would have been reduced to the following amounts:
<TABLE>
<CAPTION>
Year Six Months
Ended Ended
December 31, June 30,
1996 1997
-------------- ---------------
<S> <C> <C>
Pro forma net loss, as reported ............... $ (61,676) $ (325,442)
Pro forma net loss, as adjusted .................. (62,842) (326,015)
Pro forma net loss, per share, as reported ...... (0.04) (0.21)
Pro forma net loss per share, as adjusted ...... (0.04) (0.21)
</TABLE>
The weighted average fair value of each stock option granted during the
years ended December 31, 1995 and 1996 and for the six months ended June 30,
1997 was $0.178, $0.203 and $0, respectively. As of June 30, 1997, the weighted
average remaining contractual life of each stock option outstanding was 2.92
years. The weighted average remaining contractual life of each stock option
granted during the years ended December 31, 1995 and 1996 and the six months
ended June 30, 1997 was 2.67, 3.50 and 0 years, respectively. 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:
F-16
<PAGE>
QUANTUM EPITAXIAL DESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(Information as of June 30, 1997 and for the
six months ended June 30, 1996 and 1997 is unaudited)
10. SHAREHOLDERS' EQUITY: -- (Continued)
December 31
--------------------
1995 1996
--------- --------
Risk-free interest rate ...... 7.2% 5.5%
Expected dividend yield ...... -- --
Expected life ............... 7 years 7 years
In accordance with SFAS No. 123, no volatility factor was used in these
fair value calculations since the Company is a non-public entity.
Because additional option grants are expected to be made each year, the
above pro forma disclosures are not representative of pro forma effects of
reported net income (loss) for future years.
Warrants
On August 30, 1989, the Company issued warrants to the subordinated
noteholders to purchase 165,890 shares of the Company's common stock at $0.05811
per share. During 1994, a warrant to purchase 30,180 shares of the Company's
common stock at $0.05811 per share was exercised. The outstanding warrant to
purchase 135,710 shares of the Company's common stock at $0.05811 per share
expires when the convertible subordinated note to the venture capital
partnership (see Note 9) has been repaid in full. The Company expects the
warrant to purchase 135,710 shares of Common Stock to be exercised upon the
closing of the Offering (see Note 3).
11. RESEARCH CONTRACTS:
Contract research revenue consists of the following:
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31 June 30
--------------------------------------- ------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Small Business Innovative
Research Grants:
Phase I ........................ $ 151,927 $ 133,767 $ 74,286 $ 46,319 $ 83,272
Phase II ........................ 137,000 321,474 435,675 115,784 326,162
Title III Research Contract ...... 115,490 154,308 80,432 62,632 --
---------- ---------- ---------- ---------- ----------
$ 404,417 $ 609,549 $ 590,393 $ 224,735 $ 409,434
========== ========== ========== ========== ==========
</TABLE>
Northeast Tier Ben Franklin Technology Center ("BFTC")
The Company and a university were awarded combined research grants from
the BFTC in a prior year. The research grants from the BFTC require the Company
to remit royalties up to $693,438 based on product revenues generated from
research performed. In addition, these royalties may be accelerated if the
Company is in default of certain terms and provisions of the grants. The
Company paid $3,407, $2,821, $1,333, $1,333 and $0 of these royalties in 1994,
1995 and 1996 and for the six months ended June 30, 1996 and 1997,
respectively.
12. EMPLOYEE BENEFIT PLANS:
Effective January 1, 1997, the Company adopted a 401(k) Profit Sharing
Plan (the "401(k) Plan") to replace the Simplified Employee Pension Plan (the
"SEP Plan") which expired on December 31, 1996. The 401(k) Plan provides for
voluntary employee contributions and discretionary Company matching
contributions, including profit sharing distributions that may be declared from
time to time by the Board of Directors. There were no Company contributions for
the six months ended June 30, 1997.
F-17
<PAGE>
QUANTUM EPITAXIAL DESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(Information as of June 30, 1997 and for the
six months ended June 30, 1996 and 1997 is unaudited)
12. EMPLOYEE BENEFIT PLANS: -- (Continued)
The SEP Plan provided for the Company to contribute 5% of its income
before SEP Plan expense to the Plan each year. The contributions are credited
directly to each individual employee's retirement account. The contributions
for 1994, 1995, 1996 and for the six months ended June 30, 1996 were $38,881,
$56,022, $0 and $0, respectively.
13. COMMITMENTS AND CONTINGENCIES:
Operating Leases
The Company leases office space under an operating lease. Rent expense in
1994, 1995 and 1996 and for the six months ended June 30, 1996 and 1997 was
$118,189, $122,136, $147,168, $55,539 and $100,069, respectively. Future
minimum rental commitments under this operating lease are as follows at
December 31, 1996:
1997 ..................... $ 192,000
1998 ..................... 198,000
1999 ..................... 173,000
2000 ..................... 178,000
2001 ..................... 184,000
2002 and thereafter ...... 387,000
In May 1997, the Company leased additional undeveloped space in its
facility and secured first options on space that is currently under lease to
others. Future minimum rental commitments for the undeveloped space and
optioned space is $20,000 for fiscal 1998 and 1999.
Executive Agreements
The Company has authorized agreements with two executives that provide for
payment of the individuals' annual base salary, as defined, for a period of 12
months after termination of employment without cause, as defined.
F-18
<PAGE>
================================================================================
No dealer, salesperson or other person has been authorized to give any
information or to make any representation, other than those contained in this
Prospectus in connection with the offering covered by this Prospectus. If given
or made, such information or representation must not be relied upon as having
been authorized by the Company or the Underwriters. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any
securities other than the shares of Common Stock to which this Prospectus
relates, or an offer in any jurisdiction in which such offer or solicitation is
not authorized or in which the person making such offer or solicitation is not
qualified to do so, or to any person to whom it is unlawful to make such offer
or solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that there has
been no change or in the affairs of the Company since the date hereof or that
information contained herein is correct as of any time subsequent to the date
hereof.
TABLE OF CONTENTS
Page
---------
Prospectus Summary ..................... 3
Risk Factors ........................... 7
Use Of Proceeds ........................ 12
Dividend Policy ........................ 12
S Corporation Termination ............... 12
Capitalization ........................... 13
Dilution ................................. 14
Selected Financial Data .................. 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations ........................ 16
Business ................................. 23
Management .............................. 32
Certain Transactions ..................... 37
Principal and Selling Shareholders ...... 39
Description of Capital Stock ............ 40
Shares Eligible for Future Sale ......... 43
Underwriting ........................... 44
Legal Matters ........................... 45
Experts ................................. 45
Additional Information .................. 45
Index to Financial Statements ............ F-1
Until , 1997 (25 days after the date of this Prospectus), all dealers
effecting transactions in the Common Stock, whether or not participating in
this distribution, may be required to deliver a Prospectus. This delivery
requirement is in addition to the obligation of dealers to deliver a Prospectus
when acting as Underwriters and with respect to their unsold allotments or
subscriptions.
================================================================================
<PAGE>
================================================================================
2,250,000 Shares
Quantum Epitaxial Designs, Inc.
Common Stock
----------------------------------------
PROSPECTUS
----------------------------------------
Needham & Company, Inc.
Janney Montgomery Scott Inc.
----------------------------------------
, 1997
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. Other Expenses of Issuance and Distribution.
The following table sets forth an itemization of all estimated expenses,
all of which will be paid by the Company, in connection with the issuance and
distribution of the securities being registered:
SEC Registration Fee ........................ $ 7,841
Nasdaq National Market Listing Fee ......... 16,250
Printing and engraving fees .................. *
Registrant's counsel fees and expenses ...... *
Accounting fees and expenses ............... *
Blue Sky expenses and counsel fees ......... *
Transfer agent and registrar fees ............ *
Director & Officer Liability Insurance ...... *
Miscellaneous .............................. *
--------
TOTAL .................................... $520,000
========
- ------------
* To be supplied by amendment.
Item 14. Indemnification of Directors and Officers.
Sections 1741 through 1750 of Subchapter D, Chapter 17, of the
Pennsylvania Business Corporation Law of 1988, as amended (the "BCL"); contain
provisions for mandatory and discretionary indemnification of a corporation's
directors, officers and other personnel, and related matters.
Under Section 1741, subject to certain limitations, a corporation has the
power to indemnify directors and officers under certain prescribed
circumstances against expenses (including attorney's fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred in connection
with an action or proceeding, whether civil, criminal, administrative or
investigative, to which any of them is a party by reason of his being a
director, officer, employee or agent of the corporation or serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, if he acted
in good faith and in a manner he reasonably believed to be in, or not opposed
to, the best interests of the corporation and, with respect to any criminal
proceeding, has no reasonable cause to believe his conduct was unlawful. Under
Section 1743, indemnification is mandatory to the extent that the director,
officer, employee or agent has been successful on the merits or otherwise in
defense of any action or proceeding relating to third-party or derivative
actions if the appropriate standards of conduct are met.
Section 1742 provides for indemnification in derivative actions except in
respect of any claim, issue or matter as to which the person has been adjudged
to be liable to the corporation unless and only to the extent that the proper
court determines upon application that, despite the adjudication of liability
but in view of all the circumstances of the case, the person is fairly and
reasonably entitled to indemnity for the expenses that the court deems proper.
Section 1744 provides that, unless ordered by a court, any indemnification
under Sections 1741 or 1742 shall be made by the corporation as authorized in
the specific case upon a determination that the representative met the
applicable standard of conduct set forth in those sections and such
determination shall be made by the board of directors by majority vote of a
quorum of directors not parties to the action or proceeding; if a quorum is not
obtainable or if obtainable and a majority of disinterested directors so
directs, by independent legal counsel; or by the shareholders.
Section 1745 provides that expenses incurred by an officer, director,
employee or agent in defending a civil or criminal action or proceeding may be
paid by the corporation in advance of the final disposition of such action or
proceeding upon receipt of an undertaking by or on behalf of such person to
repay such amount if it shall ultimately be determined that he is not entitled
to be indemnified by the corporation.
II-1
<PAGE>
Section 1746 provides generally that except in any case where the act or
failure to act giving rise to the claim for indemnification is determined by
the court to have constituted willful misconduct or recklessness, the
indemnification and advancement of expenses provided by this Subchapter of the
BCL shall not be deemed exclusive of any other rights to which a person seeking
indemnification or advancement of expenses may be entitled under any by-law,
agreement, vote of shareholders or disinterested directors or otherwise, both
as to action in his official capacity and as to action in another capacity
while holding that office.
Section 1747 also grants a corporation the power to purchase and maintain
insurance on behalf of any director or officer against any liability incurred
by him in his capacity as officer or directors, whether or not the corporation
would have the power to indemnify him against the liability under this
Subchapter of the BCL.
Sections 1748 and 1749 extend the indemnification and advancement of
expenses provisions contained in Sections 1741-1750 of the BCL to successor
corporations in fundamental changes and to representatives serving as
fiduciaries of employee benefit plans.
Section 1750 provides that the indemnification and advancement of expenses
provided by, or granted pursuant to, Sections 1741-1750 of the BCL shall,
unless otherwise provided when authorized or ratified, continue as to a person
who has ceased to be a director, officer, employee or agent and shall inure to
the benefit of the heirs and personal representative of such person.
Article XIV of the Company's and Restated Bylaws provides that the Company
shall, in the case of directors and officers, and may, in the case employees
and agents, indemnify any such person who is or was a party (other than a party
acting on his or her own behalf) or who is threatened to be made such a party,
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (including actions brought by
or in the right of the Company where certain standards of conduct have been
met), by reason of the fact that such person is or was a director or officer of
the Company, or is or was serving at the request of the Company on behalf of
another enterprise, against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by him or
her in connection with such action if he or she met certain requisite standards
of conduct. In all such cases, the Company shall indemnify any such person
against all such expenses actually and reasonably incurred by him or her in
connection with any such action to the extent that such person has been
successful on the merits or in defense of any such action. The indemnification
provisions of the Bylaws are non-exclusive.
The Company intends to procure insurance, which would afford officers and
directors insurance coverage for losses arising from claims based on breaches
of duty, negligence, error and other wrongful acts, including liabilities under
the Securities Act.
Item 15. Recent Sales of Unregistered Securities.
On February 21, 1997, the Company entered into a Note Purchase Agreement
with AMP, Incorporated ("AMP"). Pursuant to the agreement, AMP received from
the Company a Convertible Subordinated Note (the "Note") in the amount of
$2.0 million. The Note provides that AMP may, at any time, convert any or all
of the unpaid principal into Class B Preferred Stock of the Company at the
price of $7.41 per share, subject to certain adjustments. Conversion of any
portion of the Note reduces the unpaid principal amount by the appropriate cash
adjustment associated with the conversion. If at least 75% of the Note is
converted, the Company has the option of requiring the holder to convert the
remaining principal into Class B Preferred Stock. The Company must reserve at
all times sufficient authorized Class B Preferred Stock so that upon
conversion, the shares may be promptly issued. Any Class B Preferred Stock held
pursuant to the Note automatically converts to Common Stock upon an initial
public offering of the Common Stock with gross proceeds of or exceeding $15.0
million at the per share price of $7.41, subject to certain adjustments. In
connection with the Offering, the Note will automatically convert, and AMP will
receive 269,905 shares of Common Stock upon such conversion.
The Company believes that the foregoing described issuance of securities
is exempt from registration under the Securities Act by virtue of the exemption
provided by Section 4(2) thereof for transactions not involving a public
offering.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
1.1 Form of Underwriting Agreement *
3.1 Articles of Incorporation of the Company (as amended)
3.2 Amended and Restated By-Laws of the Company
4.1 Specimen Stock Certificate *
5.1 Opinion of Pepper, Hamilton & Scheetz LLP *
10.1 Quantum Epitaxial Designs, Inc. 1996 Stock Option Plan *
10.2 Quantum Epitaxial Designs, Inc. Employee Non-Qualified Stock Option Plan (as amended and
restated)
10.3 Severance Agreement by and between the Company and Thomas L. Hierl
10.4 Severance Agreement by and between the Company and William J. Burg
10.5 Office Lease by and between Northampton County New Jobs Corp. and the Company (as
amended)
10.6 Note and Warrant Purchase Agreement by and among the Company, NEPA Venture Fund, L.P.,
James C.M. Hwang, and Thomas L. Hierl (as amended)
10.7 Note and Warrant Purchase Agreement by and among the Company and AMP Incorporated
10.8 Form of Employee Confidentiality / Non-Compete Agreement
10.9 Form of Tax Agreement with Shareholders (in form executed by Thomas L. Hierl and James C.M. Hwant)*
10.10 Option Agreement by and between the Company and Gregory H. Olsen*
11.1 Statement re Computation of Earnings Per Share
23.1 Consent of Arthur Andersen LLP (included on page II-5 of the Registration Statement)
23.2 Consent of Pepper, Hamilton & Scheetz LLP (included in Exhibit 5.1) *
24.1 Power of Attorney (included on Signature Pages)
27.1 Financial Data Schedule
</TABLE>
- ------------
* To be filed by Amendment.
(b) Financial Statement Schedules:
All schedules have been omitted because they are not applicable, not
required, or the required information is included in the Financial Statements
or the notes thereto.
Item 17. Undertakings.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
II-3
<PAGE>
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreement
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser.
II-4
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report and to all references to our firm included in or made a part of this
Registration Statement.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
October 8, 1997
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Bethlehem, Commonwealth of Pennsylvania, on the 8th
day of October, 1997.
QUANTUM EPITAXIAL DESIGNS, INC.
By: /s/ THOMAS L. HIERL
-----------------------------------
Thomas L. Hierl
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Thomas L. Hierl and William J. Burg, and
each or any of them, his true and lawful attorney-in-fact and agents, with full
power of substitution and resubstitution for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, or any registration
statement for the same offering that is to be effective upon filing pursuant to
Rule 462(b) under the Securities Act of 1933, as amended, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each
and every act and thing requisite or necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their or his substitutes, may lawfully do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------- -------------------------------------- ------------------
<S> <C> <C>
/s/ THOMAS L. HIERL
----------------------- Chief Executive Officer and President; October 8, 1997
Thomas L. Hierl Director (principal executive officer)
/s/ WILLIAM J. BURG
----------------------- Chief Financial Officer and Vice October 8, 1997
William J. Burg President Finance (principal financial
officer and principal accounting officer)
/s/ JAMES C.M. HWANG
----------------------- Director October 8, 1997
James C.M. Hwang
/s/ GREGORY OLSEN
----------------------- Director October 8, 1997
Gregory Olsen
----------------------- Director October 8, 1997
Michael Bolton
/s/ STEPHEN BRETSEN
----------------------- Director October 8, 1997
Stephen Bretsen
</TABLE>
II-6
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit No. Description
- ------------- -----------
<S> <C>
1.1 Form of Underwriting Agreement *
3.1 Articles of Incorporation of the Company (as amended)
3.2 Amended and Restated By-Laws of the Company
4.1 Specimen Stock Certificate *
5.1 Opinion of Pepper, Hamilton & Scheetz LLP *
10.1 Quantum Epitaxial Designs, Inc. 1996 Stock Option Plan *
10.2 Quantum Epitaxial Designs, Inc. Employee Non-Qualified Stock Option Plan
(as amended and restated)
10.3 Severance Agreement by and between the Company and Thomas L. Hierl
10.4 Severance Agreement by and between the Company and William J. Burg
10.5 Office Lease by and between Northampton County New Jobs Corp. and the Company (as amended)
10.6 Note and Warrant Purchase Agreement by and among the Company, NEPA Venture Fund, L.P.,
James C.M. Hwang, and Thomas L. Hierl (as amended)
10.7 Note and Warrant Purchase Agreement by and among the Company and AMP Incorporated
10.8 Form of Employee Confidentiality / Non-Compete Agreement
10.9 Form of Tax Agreement with Shareholders (in form executed by Thomas L. Hierl and James C.M. Hwant)*
10.10 Option Agreement by and between the Company and Gregory H. Olsen*
11.1 Statement re Computation of Earnings Per Share
23.1 Consent of Arthur Andersen LLP (included on page II-5 of the Registration Statement)
23.2 Consent of Pepper, Hamilton & Scheetz LLP (included in Exhibit 5.1) *
24.1 Power of Attorney (included on Signature Pages)
27.1 Financial Data Schedule
</TABLE>
- ------------
* To be filed by Amendment.
<PAGE>
DSCB 204 (Rev. 81)
ARTICLES OF INCORPORATION
COMMONWEALTH OF PENNSYLVANIA
DEPARTMENT OF STATE -- CORPORATION BUREAU
306 NORTH OFFICE BUILDING, HARRISBURG, PA 17120
- --------------------------------------------------------------------------------
PLEASE INDICATE (CHECK ONE) TYPE CORPORATION:
[x] DOMESTIC BUSINESS CORPORATION
[ ] DOMESTIC BUSINESS CORPORATION FEE
???? CORPORATION - COMPLETE BACK $75.00
[ ] DOMESTIC PROFESSIONAL CORPORATION
ENTER BOARD LICENSE NO.
- --------------------------------------------------------------------------------
010 NAME OF CORPORATION (MUST CONTAIN A CORPORATE INDICATOR UNLESS EXEMPT
UNDER 15 P.S. 2908 B)
Quantum Epitaxial Designs, Inc.
- --------------------------------------------------------------------------------
011 ADDRESS OF REGISTERED OFFICE IN PENNSYLVANIA (P.O. BOX NUMBER NOT
ACCEPTABLE)
115 Research Drive
- --------------------------------------------------------------------------------
012 CITY 033 COUNTY 013 STATE 064 ZIP CODE
Bethlehem Northampton PA 18015
- --------------------------------------------------------------------------------
050 EXPLAIN THE PURPOSE OR PURPOSES OF THE CORPORATION
To engage in and to do any lawful act concerning any and all lawful
business for which corporations may be incorporated under the
Pennsylvania Business Corporation Law, Act of May 5, 1933, P.L. 364, as
amended.
(ATTACH 8 1/2 x 11 SHEET IF NECESSARY)
- --------------------------------------------------------------------------------
The Aggregate Number of Shares, Classes of Shares and Par Value of Shares Which
the Corporation Shall Have Authority to Issue:
<TABLE>
<CAPTION>
040 Number and Class of Shares 041 Stated Par Value Per 042 Total Authorized Capital 031 Term of Existence
Share If Any
<S> <C> <C> <C>
100,000 shares of common stock $.01 $1,000.00 Perpetual
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Name and Address of Each Incorporator, and the Number and Class of Shares
Subscribed to by Each Incorporator
<TABLE>
<CAPTION>
061.062
060 Name 063.064 Address (Street, City, State, Zip Code) Number & Class of Shares
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Amy Y. Coral Pepper, Hamilton & Scheetz one (1) share of common stock
1235 Westlakes Drive
Suite 400
Berwyn, PA 19312
See Rider A attached
hereto for Para.065 (ATTACH 8 1/2 x 11 SHEET IF NECESSARY)
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
IN TESTIMONY WHEREOF, THE INCORPORATOR(S) HAS (HAVE) SIGNED AND SEALED THE
ARTICLES OF INCORPORATION THIS 22ND DAY OF DECEMBER, 1988.
/s/ Amy Y. Coral
------------------------------ --------------------------
Amy Y. Coral
------------------------------ --------------------------
- --------------------------------------------------------------------------------
- FOR OFFICE USE ONLY -
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
030 FILED DEC. 23, 1988 002 CODE 003 REV BOX SEQUENTIAL NO. 100 MICROFILM NUMBER
10892 88961598
-----------------------------------------------------------------------------
REVIEWED BY 004 SICC AMOUNT 001 CORPORATION NUMBER
/s/
------------- $75 1068720
DATE APPROVED
/s/ James J. Haggerty
Secretary of the ------------------------------------------------------------------------------
Commonwealth DATE REJECTED CERTIFY TO INPUT BY LOG IN LOG IN (REFILE)
Department of State [ ] REV. /s/
Commonwealth of ------------- [ ] L & I -----------------------------------------
Pennsylvania MAILED BY DATE [ ] OTHER VERIFIED BY LOG OUT LOG OUT (REFILE)
M BURR KEIM COMPANY, PHILADELPHIA
</TABLE>
<PAGE>
88961599
RIDER A
065 Shareholders shall not be entitled to exercise cumulative voting rights in
the election of directors.
<PAGE>
--------------------------------
APPLICANT'S ACC'T NO Filed this Aug 30 day of 1989
Commonwealth of Pennsylvania
DSCB BCL-806 (Rev 8-72) 1068700-002 Department of State
--------------------
(Line for numbering)
/s/ xxxxxxxxxxx
Filing Fee: $40 -----------------------------
AB-2 Secretary of the Commonwealth
-----------------------------
(Box for Certification)
Articles of COMMONWEALTH OF PENNSYLVANIA
Amendment-- DEPARTMENT OF STATE
Domestic Business Corporation CORPORATION BUREAU
In compliance with the requirements of section 806 of the Business
Corporation Law, act of May 5, 1933 (P. L. 364)(15 P. S. Section 1806), the
undersigned corporation, desiring to amend its Articles, does hereby certify
that:
1. The name of the corporation is:
Quantum Epitaxial Designs, Inc.
- -------------------------------------------------------------------------------
2. The location of its registered office in this Commonwealth is (the Department
of State is hereby authorized to correct the following statement to conform to
the records of the Department):
115 Research Drive
- -------------------------------------------------------------------------------
(NUMBER) (STREET)
Bethlehem Pennsylvania 18015
- -------------------------------------------------------------------------------
(CITY) (ZIP CODE)
3. The statute by or under which it was incorporated is:
Business Corporation Law, act of May 5, 1933 (P. L. 364)
- -------------------------------------------------------------------------------
4. The date of its incorporation is December 23, 1988
-------------------------------------------
5. (Check, and if appropriate, complete one of the following):
[ ] The meeting of the shareholders of the corporation at which the
amendment was adopted was held at the time and place and pursuant to the kind
and period of notice herein stated.
Time: The_________________ day of________________, 19___.
Place:__________________________________________________________________
Kind and period of notice_______________________________________________
_______________________________________________________________________________
[X] The amendment was adopted by a consent in writing, setting forth the
action so taken, signed by all of the shareholders entitled to vote thereon and
filed with the Secretary of the corporation.
6. At the time of the action of shareholders:
(a) The total number of shares outstanding was:
13,982.1
- -------------------------------------------------------------------------------
(b) The number of shares entitled to vote was:
13,982.1
- -------------------------------------------------------------------------------
<PAGE>
DSCB BCL -- 806 (Rev 8-72)-2
7. In the action taken by the shareholders:
(a) The number of shares voted in favor of the amendment was:
13,982.1
- --------------------------------------------------------------------------------
(b) The number of shares voted against the amendment was:
-0-
- --------------------------------------------------------------------------------
8. The amendment adopted by the shareholders, set forth in full, is as follows:
The information set forth under the heading "The Aggregate Number of Shares,
Classes of Shares and Par Value of Shares Which the Corporation Shall Have
Authority to Issue" shall be deleted and the following shall be substituted
in its place: The Corporation shall have the authority to issue 1,150,000
shares of capital stock, par value $.01 per share, with a total authorized
capital of $11,500, of which 1,000,000 shares shall be Common Stock, par
value $.01 per share and 150,000 shares shall be Class A Preferred Stock, par
value $.01 per share having such voting rights, designations, preferences,
qualifications, privileges, limitations, conversion and other rights as set
forth in Exhibit A hereto.
IN TESTIMONY WHEREOF, the undersigned corporation has caused these Articles
of Amendment to be signed by a duly authorized officer and its corporate seal,
duly attested by another such officer, to be hereunto affixed this thirtieth day
of August, 1989.
Quantum Epitaxial Designs, Inc.
-----------------------------------
(NAME OF CORPORATION)
Attest:
xxxxxxxxxxxxxxxxxxx By: xxxxxxxxxxxxxxxxxxxxxxxxxx
- -------------------------------------- ------------------------------------
(SIGNATURE) (SIGNATURE)
Secretary President
- -------------------------------------- ------------------------------------
(TITLE SECRETARY ASSISTANT SECRETARY, (TITLE PRESIDENT, VICE PRESIDENT,
ETC.) ETC.)
(CORPORATE SEAL)
INSTRUCTIONS FOR COMPLETION OF FORM
A. Any necessary copies of Form DSCB: 17.2 (Consent to Appropriation of
Name) or Form DSCB: 17.3 (Consent to Use of Similar Name) shall
accompany Articles of Amendment effecting a change of name.
B. Any necessary governmental approvals shall accompany this form.
C. Where action is taken by partial written consent pursuant to the
Articles, the second alternate of Paragraph 5 should be modified
accordingly.
D. If the shares of any class were entitled to vote as a class, the number
of shares of each class so entitled and the number of shares of all
other classes entitled to vote should be set forth in Paragraph 6(b).
E. If the shares of any class were entitled to vote as a class, the number
of shares of such class and the number of shares of all other classes
voted for and against such amendment respectively should be set forth in
Paragraphs 7(a) and 7(b).
F. BCL Section 807 (15 P. S. Section 1807) requires that the corporation
shall advertise its intention to file or the filing of Articles of
Amendment. Proof of publication of such advertising should not be
delivered to the Department, but should be filed with the minutes of the
corporation.
<PAGE>
EXHIBIT A
Amendment to Articles of Incorporation
Class A Preferred Stock. The Corporation shall have the authority to issue
150,000 shares of Class A Preferred Stock, par value $.01 per share, which shall
have the following designations, preferences, relative, participating, optional
or other rights, qualifications, limitatations and restrictions:
1. Dividends. (a) Commencing on the later of July 1, 1992 or the
Original Issuance Date (as defined in Section 6 hereof), the holder of each
share of Class A Preferred Stock shall be entitled to receive cumulative
dividends at the rate of $.0558 per share per annum, payable quarterly on the
last day of each calendar quarter (the "Payment Dates"). Such dividends shall be
paid out of funds legally available for that purpose before any dividends shall
be declared and paid upon or set aside for any shares of the Common Stock or any
other series or class of preferred stock. Such dividends shall be payable in
full in cash on the Payment Dates. The record date for determining holders of
shares of Class A Preferred Stock entitled to such dividends shall be the
fifteenth day preceding the Payment Date. Dividends on shares of Class A
Preferred Stock shall be cumulative from the later of July 1, 1992 or the
Original Issuance Date (whether or not there shall be net profits or net assets
of the Corporation legally available for the payment of such dividends), so
that, if at any time Full Cumulative Dividends (as defined in Section 6 hereof)
upon the Class A Preferred Stock shall not have been paid, or declared and a sum
sufficient for payment set apart, the amount of the deficiency in such dividends
shall be fully paid (but without interest) or dividends in such amount shall
have been declared on the shares of Class A Preferred Stock and a sum sufficient
for the payment thereof shall have been set apart for such payment, before any
dividend shall be declared or paid or any other distribution ordered or made
upon any class of stock, and before any sum or sums shall be set aside for or
applied to the purchase or redemption of any shares of any class of stock. All
dividends declared upon the Class A Preferred Stock shall be declared pro rata
per share. All payments due under this Section 1(a) to any holder of shares of
Class A Preferred Stock shall be made to the nearest cent. If the assets of the
Corporation available for required dividends to the holders of Class A Preferred
Stock shall be insufficient to permit the payment of the full dividends set
forth in this Article, then all of the funds of the Corporation available for
the payment of dividends shall be distributed to the holders of Class A
Preferred Stock pro rata so that each share receives the same percentage of its
respective Full Cumulative Dividends.
(b) In addition, the holder of each share of Class A Preferred Stock
shall be entitled to receive, when and as declared by the Board of Directors of
the Corporation, out of funds legally available for that purpose, dividends in
cash, stock or otherwise; provided, however, that the per share amount of any
dividend for the Class A Preferred Stock pursuant to this subsection (b) in any
fiscal year of the Corporation shall be at least equal to the per share amount,
if any, of any dividend declared for the Common Stock or any other class of
preferred stock during such fiscal year. In connection therewith, each share of
Class A Preferred Stock shall be deemed to be converted into shares of Common
Stock as provided in Section 5 hereof. All dividends declared upon the Class A
Preferred Stock shall be declared pro rata per share.
2. Rights Upon Liquidation, Dissolution or Winding Up. (a) In the event
of any voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, the assets of the Corporation available for distribution to its
shareholders, shall be distributed in the following order of priority:
(i) The holders of Class A Preferred Stock shall be entitled to
receive, prior and in preference to any distribution to the holders of Common
Stock, an amount equal to the Original Issuance Price (as defined in Section 6
hereof) plus an amount equal to the Original Issuance Price multiplied by 10%
per annum from the Inception Date (as defined in Section 6 hereof) per share for
each share of Class A Preferred Stock then outstanding, and, in addition, an
amount equal to any dividends declared but unpaid on the Class A Preferred Stock
and Accrued Dividends (as defined in Section 6). If the assets and funds of the
Corporation available for distribution to the holders of Class A Preferred Stock
shall be insufficient to permit the payment of the full preferential amounts set
forth in this Article, then all of the assets of the Corporation available for
distribution shall be distributed to the holders of Class A Preferred Stock pro
rata so that each share receives the same percentage of its respective
liquidation value.
<PAGE>
(ii) After distribution of the amount set forth in Section 2(a)(i)
hereof, the remaining assets of the Corporation available for distribution, if
any, to the shareholders of the Corporation shall be distributed to the holders
of shares of Common Stock, to the exclusion of the holders of Class A Preferred
Stock, pro rata.
(b) A consolidation or merger of the Corporation with or into any other
corporation or corporations in a transaction in which the shareholders of the
Corporation receive cash, securities or other consideration in exchange for the
shares of capital stock of the Corporation then held by them, or the sale of all
or substantially all of the assets or capital stock of the Corporation, shall,
at the option of the holders representing a majority of the Class A Preferred
Stock, be deemed to be a liquidation, dissolution or winding up of the
Corporation for the purposes of Section 2(a) above.
3. Redemption. (a) Subject to Section 3(d) below and the applicable
provisions of the Pennsylvania Business Corporation law, as amended (provided
the Corporation takes all feasible action to comply with such law including
without limitation recapitalizing its capital stock and authorizing the use of
all legally available funds), (i) on January 1, 1994, and thereafter, so long as
any shares of Class A Preferred Stock shall be outstanding, but only until an
Event of Conversion (as defined in Section 6 hereof) and (ii) during the period
of an Event of Default (as defined in Section 8(a)), the Corporation shall
(unless otherwise prevented by law) redeem, at the option and upon the written
notice of holders of Class A Preferred Stock representing at least 50% of the
Class A Preferred Stock then outstanding, which notice shall state such holder's
intention to exercise the redemption option set forth herein, the number of
shares of Class A Preferred Stock sought to be redeemed and the date for
redemption which for an Event of Default shall be the date of such notice and
otherwise shall be a business day not less than 30 nor more than 45 days after
the date of such notice (the "Redempion Date"), that number of shares of Class A
Preferred Stock then owned by such holders of Class A Preferred Stock which are
subject to the aforesaid written notice. Upon receipt of such notice, the
Corporation shall give prompt written notice to all holders of Class A Preferred
Stock and shall offer to redeem any shares of Class A Preferred Stock which such
holders within 10 days of receipt of such notice elect, by written notice to the
Corporation, to have redeemed. In addition, if 108,000 or more shares (as
presently constituted) of Class A Preferred Stock have been redeemed or
converted into Common Stock, the Corporation at its option may elect to redeem
all remaining outstanding shares of Class A Preferred Stock in accordance with
this Section 3, with not less than 30 nor more than 45 days prior written notice
to the holders thereof, subject to the holders' rights to convert as provided in
Section 3(d).
The amount per share of Class A Preferred Stock at which the shares of
Class A Preferred Stock are to be redeemed pursuant to this Section 3(a) shall
be an amount equal to the greatest of (i) the Original Issuance Price compounded
at the rate of 18% per annum from the Inception Date until the applicable
Redemption Date, (ii) the Corporation's book value (excess of total assets over
total liabilities as determined in accordance with generally accepted accounting
principles, consistently applied) as of the last day of the Corporation's most
recent completed fiscal quarter, divided by the total number of outstanding
shares of capital stock of the Corporation (assuming conversion of all
outstanding Class A Preferred Stock into Common Stock at the then applicable
Conversion Rate and adjusted for any subsequent stock splits, dividends or
combinations), or (iii) the Corporation's average annual after tax net income
(as determined in accordance with generally accepted accounting principles,
consistently applied) over its two most recently completed fiscal years prior to
the applicable Redemption Date, multiplied by 12 and then divided by the total
number of outstanding shares of capital stock of the Corporation (assuming
conversion of all outstanding Class A Preferred Stock into Common Stock at the
then applicable Conversion Rate and adjusted for any subsequent stock splits,
dividends or combinations) as of the last day of the Corporation's most recent
completed fiscal year prior to the Redemption Date; and, in addition, an amount
equal to Accrued Dividends and any dividends declared but unpaid, if any, on or
with respect to such shares of Class A Preferred Stock up to and including the
applicable Redemption Date. The total sum payable per share of Class A Preferred
Stock on any Redemption Date is hereinafter referred to as the "Redemption
Price", and any payment to be made is hereinafter referred to as the "Redemption
Payment".
<PAGE>
(b) On and after any Redemption Date (unless default shall be made by
the Corporation in the payment of the applicable Redemption Price as herein
provided, in which event such rights shall be exercisable until such default is
cured), all rights in respect of the shares of Class A Preferred Stock to be
redeemed pursuant to notices received pursuant to Section 3(a), except the right
to receive the applicable Redemption Price as herein provided, shall cease and
terminate, and such shares shall no longer be deemed to be outstanding, whether
or not the certificates representing such shares have been received by the
Corporation.
(c) At least 45 but not more than 90 days prior to January 1, 1994, the
Corporation shall send notice of the redemption option pursuant to this Section
3 by first-class certified mail, return receipt requested, postage prepaid, to
the holders of record of shares of Class A Preferred Stock at their respective
addresses as the same shall appear on the books of the Corporation. At any time
on or after any Redemption Date, the holders of record of shares of Class A
Preferred Stock to be redeemed on such Redemption Date in accordance with this
Section 3 shall be entitled to receive the applicable Redemption Price upon
actual delivery to the Corporation or its agents of the certificates
representing the shares to be redeemed. Upon such delivery, the Redemption Price
shall be paid in full. Upon request of any holder of Class A Preferred Stock,
the Corporation will provide written notice to such holder of the amount of
legally available funds for redemption. If upon any redemption the assets of the
Corporation available for redemption shall be insufficient to pay the holders of
the shares of Class A Preferred Stock the full amounts to which they shall then
be entitled, the holders of shares of Class A Preferred Stock requesting
redemption shall share ratably in any such redemption according to the
respective amounts which would be payable in respect of such shares requested to
be redeemed by the holders thereof if all amounts payable on or with respect to
such shares were paid in full.
(d) Anything contained in this Section 3 to the contrary
notwithstanding, the holders of shares of Class A Preferred Stock to be redeemed
pursuant to this Section 3 shall have the right, exercisable at any time up to
the close of business on the relevant Redemption Date (unless default shall be
made by the Corporation in the payment of the Redemption Price as herein
provided, in which event such right shall be exercisable with respect to those
shares for which payment is not made until such default is cured), to convert
all or any part of such shares to be redeemed as herein provided into shares of
Common Stock pursuant to Section 5 hereof. If, and to the extent, any shares of
Class A Preferred Stock so entitled to redemption are converted into shares of
Common Stock by the holders thereof prior to the close of business on the
relevant Redemption Date, the total number of shares of Class A Preferred Stock
otherwise to be redeemed on such date shall be reduced by the number of shares
of Class A Preferred Stock so converted.
4. Voting. (a) In addition to the rights specified in Sections 4(b) and
4(c) below, any other rights provided in any agreement between the Corporation
and holders of Class A Preferred Stock, or in the Corporation's By-laws or by
law, each share of Class A Preferred Stock shall entitle the holder thereof to
one vote, and such holders shall be entitled to receive notice of all meetings
of shareholders and to vote acting separately as a class on all matters as to
which holders of Common Stock shall be entitled to vote, except the election of
directors.
(b) In addition to the rights specified above, the holders of the Class
A Preferred Stock then outstanding, acting separately as one class, shall have
the right to elect the following number of directors to the Corporation's Board
of Directors, and from time to time to remove, replace and re-elect such
directors: (i) two directors at such time as neither NEPA Venture Fund, L.P.
(NEPA), nor James C.M. Hwang ("Hwang"), have the right to designate directors
pursuant to Section 9.1 (c) of a Note and Warrant Purchase Agreement dated
August 30, 1989 ("Purchase Agreement") among, inter alia, them and the
Corporation, (ii) one director at such time as one but not both of NEPA and
Hwang have the right to designate a director pursuant to Section 9.1 (c) of the
Purchase Agreement, and (iii) no directors at such time as both NEPA and Hwang
have the right to designate directors pursuant to Section 9.1 (c) of the
Purchase Agreement. The Board of Directors shall consist of up to five
directors, as determined from time to time by then existing Board of
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<PAGE>
Directors. The holders of the Class A Preferred Stock shall not participate in
the election of any other directors during the period in which they elect
directors pursuant to this subparagraph, except as expressly provided in Section
8.
(c) In addition to the rights specified in this Section 4, the holders
of the Class A Preferred Stock shall have the additional voting rights set forth
in Section 8.
5. Conversion. (a) The holder of any shares of Class A Preferred Stock
shall have the right, at such holder's option, at any time or from time to time
to convert any of such shares of Class A Preferred Stock into shares of Common
Stock at the initial rate of one share of Common Stock for each share of Class A
Preferred Stock (the "Conversion Rate"), by surrender of the certificates
representing the shares of Class A Preferred Stock so to be converted in the
manner provided in Section 5(c) hereof. Notwithstanding the foregoing, during
the period a Small Business Administration guaranteed loan dated August 30, 1989
in the principal amount of $600,000 from Meridian Bank to the Corporation is
outstanding, a holder of Class A Preferred Stock shall not be entitled to
convert shares of Class A Preferred Stock into Common Stock if after such
conversion such holder would own 20% or more of the Common Stock of the
Corporation (assuming conversion or exercise of all outstanding securities
convertible into or exerciseable for Common Stock of the Corporation), except
simultaneous with or subsequent to the liquidation, winding-up or dissolution
(whether voluntarily or involuntarily) of the Corporation, the sale of all or
substantially all of the Corporation's assets, the consolidation or merger of
the Corporation, or the issuance of shares of the Corporation's capital stock in
a public offering registered under the Securities Act of 1933, as amended. The
Conversion Rate shall be subject to adjustment as set forth in Section 5(e)
hereof. The holder of any shares of Class A Preferred Stock exercising the
aforesaid right to convert such shares into shares of Common Stock shall be
entitled to payment of all Accrued Dividends and declared but unpaid dividends,
if any, on or with respect to such shares of Class A Preferred Stock up to and
including the Conversion Date (as hereinafter defined).
(b) Upon the occurrence of an Event of Conversion (as defined in
Section 6 hereof), all shares of Class A Preferred Stock then outstanding shall,
by virtue of, and simultaneously with, the occurrence of the Event of Conversion
and without any action on the part of the holder thereof, be deemed
automatically converted into shares of Common Stock at the Conversion Rate as
last adjusted and then in effect for the shares of Class A Preferred Stock being
converted. The holder of any shares of Class A Preferred Stock converted into
shares of Common Stock pursuant to this Section 5(b) shall be entitled to
payment of all Accrued Dividends and all declared but unpaid dividends, if any,
on or with respect to such shares of Class A Preferred Stock up to and including
the Conversion Date.
(c) The holder of any shares of Class A Preferred Stock may exercise
the conversion right pursuant to Section 5(a) hereof as to any part thereof by
delivering to the Corporation during regular business hours, at the office of
any transfer agent of the Corporation for the Class A Preferred Stock or at such
other place as may be designated by the Corporation, the certificate or
certificates for the shares to be converted, duly endorsed or assigned in blank
or to the Corporation (if required by it), accompanied by written notice stating
that the holder elects to convert such shares and stating the name or names
(with address) in which the certificate or certificates for the shares of Common
Stock are to be issued, provided that if the holder designates a name other than
the holder, the Corporation shall receive reasonable assurances that the
issuance of Common Stock in such name shall not constitute a violation of
applicable securities laws. Conversion shall be deemed to have been effected (i)
with respect to conversion under Section 5(a) hereof, on the date when the
aforesaid delivery is made and (ii) with respect to conversion under Section
5(b) hereof, on the date of occurrence of the Event of Conversion, and such
date, in either case, is referred to herein as the "Conversion Date". As
promptly as practicable thereafter, the Corporation shall issue and deliver to
or upon the written order of such holder, to the place designated by such
holder, a certificate or certificates for the number of full shares of Common
Stock as provided in Section 5(d) hereof and a check or cash in payment of all
declared but unpaid dividends (to the extent permissible under law), if any,
with respect to the shares of Class A Preferred Stock so converted up to and
including the Conversion Date. The person in whose name the certificate or
certificates for Common Stock are to be issued shall be deemed to have become a
stockholder of record on the applicable Conversion Date unless the transfer
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<PAGE>
books of the Corporation are closed on that date in which event he shall be
deemed to have become a stockholder of record on the next succeeding date on
which the transfer books are open, but the Class A Preferred Conversion Rate
shall be that in effect on the Conversion Date. Upon conversion of only a
portion of the number of shares covered by a certificate representing shares of
Class A Preferred Stock surrendered for conversion, the Corporation shall issue
and deliver to or upon the written order of the holder of the certificate so
surrendered for conversion, at the expense of the Corporation, a new certificate
covering the number of shares of Class A Preferred Stock representing the
unconverted portion of the certificate so surrendered.
(d) No fractional shares of Common Stock or scrip shall be issued upon
conversion of shares of Class A Preferred Stock. The number of full shares of
Common Stock issuable upon conversion of Class A Preferred Stock surrendered by
a holder thereof for conversion shall be computed on the basis of the aggregate
number of shares of Class A Preferred Stock so surrendered. Instead of any
fractional shares of Common Stock which would otherwise be issuable upon
conversion of any shares of Class A Preferred Stock, the Corporation shall pay a
cash adjustment in respect of such fractional interest in an amount equal to the
then Current Market Price (as hereinafter defined) of a share of Common Stock
multiplied by such fractional interest. Fractional interests shall not be
entitled to dividends, and the holders of fractional interests shall not be
entitled to any rights as stockholders of the Corporation in respect of such
fractional interests.
(e) The Class A Preferred Conversion Rate shall be subject to
adjustment from time to time as follows:
(i) If, at any time after the Inception Date (as defined in
Section 6(d) hereof), the number of shares of Common Stock outstanding is
increased by a stock dividend payable in shares of Common Stock or by a
subdivision or split-up of shares of Common Stock, then, following the record
date fixed for the determination of holders of Common Stock entitled to receive
such stock dividend, subdivision or split-up, the Class A Preferred Conversion
Rate shall be appropriately increased so that the number of shares of Common
Stock issuable on conversion of each share of Class A Preferred Stock shall be
increased in proportion to such increase in outstanding shares.
(ii) If, at any time after the Inception Date, the number of
shares of Common Stock outstanding is decreased by a combination of the
outstanding shares of Common Stock, then, following the record date for such
combination, the Class A Preferred Conversion Rate shall be appropriately
decreased so that the number of shares of Common Stock issuable on conversion of
each share of Class A Preferred Stock shall be decreased in proportion to such
decrease in outstanding shares.
(iii) In case, at any time after the Inception Date, of any
capital reorganization, or any reclassification of the stock of the Corporation
(other than a change in par value or from par value to no par value or from no
par value to par value or as a result of a stock dividend or subdivision,
split-up or combination of shares), or the consolidation or merger of the
Corporation with or into another person (other than a consolidation or merger in
which the Corporation is the continuing corporation and which does not result in
any change in the Common Stock) or of the sale or other disposition of all or
substantially all the properties and assets of the Corporation as an entirety to
any other person, each share of Class A Preferred Stock shall after such
reorganization, reclassification, consolidation, merger, sale or other
disposition be (unless, in the case of a consolidation, merger, sale or other
disposition, payment shall have been made to the holders of all shares of Class
A Preferred Stock of the full amount to which they shall have been entitled
pursuant to Section 2 hereto) convertible into the kind and number of shares of
stock or other securities or property of the Corporation or of the corporation
resulting from such consolidation or surviving such merger or to which such
properties and assets shall have been sold or otherwise disposed to which the
holder of the number of shares of Common Stock deliverable (immediately prior to
the time of such reorganization, reclassification, consolidation, merger, sale
or other disposition) upon conversion of such share would have been entitled
upon such reorganization, reclassification, consolidation, merger, sale or other
disposition. The provisions of this Section 5 shall similarily apply to
successive reorganizations, reclassifications, consolidations, mergers, sales or
other dispositions.
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<PAGE>
(iv) In the event that the Corporation shall, at any time or
from time to time after the Inception Date, issue, sell, or grant any shares of
the capital stock of the Corporation (including treasury shares), or issue, sell
or grant any options, convertible debt or securities, warrants, options or
rights to acquire capital stock of the Corporation (including treasury shares
but excluding up to 16,589 shares of Common Stock issuable pursuant to an
employee stock option plan and/or stock purchase plan as approved by the
Corporation's Board of Directors, up to 20,000 shares of Common Stock reserved
for issuance to a key marketing executive and other newly hired key employees at
a price of at least $.4649 per share as approved by the Corporation's Board of
Directors, and up to 8,295 additional shares of Common Stock subsequently
approved for issuance by the Corporation's Board), for a consideration per share
(initially or upon exercise of a right) less than the Original Issuance Price
divided by the Conversion Rate in effect immediately prior to the time of such
issuance, sale or grant, then, forthwith upon such issuance, sale or grant, the
Conversion Rate shall be increased to a number determined by multiplying the
Conversion Rate in effect immediately prior to such issuance by the following
fraction:
Original Issuance Price/Conversion Rate Immediately Prior
---------------------------------------------------------
New Issuance Price Per Share
The Conversion Rate shall be further increased from time to time thereafter
whenever any shares or rights are so issued, sold, granted or converted for a
price per share lower than the amount of the Original Purchase Price divided by
the then current Conversion Rate, as adjusted prior to that date. In the event
that any shares shall be issued or sold for cash, the consideration received
therefor shall be deemed to be the amount received by the Corporation therefor,
less any expenses incurred or any underwriting commissions or concessions paid
or allowed by the Corporation in connection therewith. In the event that any
shares shall be issued for a consideration other than cash, the amount of the
consideration other than cash received by the Corporation shall be deemed to be
the fair value of such consideration, less any expenses incurred or any
underwriting commissions or concessions paid or allowed by the Corporation in
connection therewith.
(v) All calculations under this paragraph (e) shall be made to
the nearest one tenth (1/10) of a share.
(vi) For the purpose of any computation pursuant to Section
5(d) hereof, the Current Market Price at any date of one share of Common Stock
shall be deemed to be the daily closing price on the day before the day in
question. The closing price shall be the last reported sales price regular way
or, in case no such reported sales took place on such day the average of the
last reported bid and asked prices regular way, in either case on the principal
national securities exchange on which the Common Stock is listed or admitted to
trading (or if the Common Stock is not at the time listed or admitted for
trading on any such exchange, then such price as shall be equal to the last
reported sales price, or if such price is not reported, the average of the last
reported bid and asked prices, as reported by the National Association of
Securities Dealers Automated Quotations System ("NASDAQ") on such day, or if, on
any day in question, the security shall not be quoted on the NASDAQ, then such
price shall be equal to the last reported bid and asked prices on such day as
reported by the National Quotation Bureau, Inc. or any similar reputable
quotation and reporting service, if such quotation is not reported by the
National Quotation Bureau, Inc.; provided, however, that if the Common Stock is
not traded in such manner that the quotations referred to in this clause (v) are
available for the period required hereunder, the Current Market Price shall be
determined in good faith by the Board of Directors of the Corporation.
(vii) In any case in which the provisions of this Section 5(e)
shall require that an adjustment shall become effective immediately after a
recorded date of an event, the Corporation may defer until the occurrence of
such event (i) issuing to the holder of any share of Class A Preferred Stock
converted after such record date and before the occurrence of such event the
additional shares of capital stock issuable upon such conversion by reason of
the adjustment required by such event over and above the shares of capital stock
issuable upon conversion before giving effect to such adjustment and (ii) paying
to such holder any amount in cash in lieu of a fractional share of capital stock
pursuant to Section 5(d); provided, however, that the Corporation shall deliver
to such holder a due bill or other appropriate instrument evidencing such
holder's right to receive such additional shares, and such cash, upon the
occurrence of the event requiring such adjustment, provided further that if such
event does not occur, the adjustment required by such event will be revoked,
effective as of such record date, and will have no effect.
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<PAGE>
(f) Whenever the Class A Preferred Conversion Rate shall be
adjusted as provided in Section 5(e), the Corporation shall forthwith file, at
the office of the transfer agent for the Class A Preferred Stock or at such
other place as may be designated by the Corporation, a statement, approved by
its Board of Directors, showing in detail the facts requiring such adjustments
and the Class A Preferred Conversion Rate that shall be in effect after such
adjustment. The Corporation shall also cause a copy of such statement to be
sent by first class certified mail, return receipt requested and postage
prepaid, to each holder of shares of Class A Preferred Stock at his address
appearing on the Corporation's records. Where appropriate, such copy may be
given in advance and may be included as part of a notice required to be mailed
under the provisions of Section 5(g).
(g) In the event the Corporation shall propose to take any
action of the types described in clauses (i), (ii), (iii), or (iv) of Section
5(e), the Corporation shall give notice to each holder of shares of Class A
Preferred Stock, in the manner set forth in Section 5(f), which notice shall
specify the record date, if any, with respect to any such action and the date on
which such action is to take place. Such notice shall also set forth such facts
with respect thereto as shall be reasonably necessary to indicate the effect of
such action (to the extent such effect may be known at the date of such notice)
on the Class A Preferred Conversion Rate and the number, kind or class of shares
or other securities or property which shall be deliverable or purchaseable upon
the occurrence of such action or deliverable upon conversion of shares of Class
A Preferred Stock. In the case of any action which would require the fixing of a
record date, such notice shall be given at least 20 days prior to the date so
fixed, and in the case of all other action, such notice shall be given at least
30 days prior to the taking of such proposed action. Failure to give such
notice, or any defect therein, shall not affect the legality or validity of any
such action.
(h) The Corporation shall pay all documentary, stamp or other
transactional taxes attributable to the issuance or delivery of shares of
capital stock of the Corporation upon conversion of any such shares of Class A
Preferred Stock; provided, however, that the Corporation shall not be required
to pay any taxes which may be payable in respect of any transfer involved in the
issuance or delivery of any certificate for such shares in a name other than
that of the holder of the shares of Class A Preferred Stock in respect of which
such shares are being issued.
(i) The Corporation shall reserve at all times from and after
the Original Issuance Date keep reserved, free from preemptive rights, out of
its authorized but unissued shares of Common Stock solely for the purpose of
effecting the conversion of the shares of Class A Preferred Stock sufficient
shares to provide for the conversion of all outstanding shares of Class A
Preferred Stock.
(j) All shares of Common Stock which may be issued in
connection with the conversion provisions set forth herein will, upon issuance
by the Corporation, be validly issued, fully paid and nonassessable.
6. Definitions. (a) The term "Event of Conversion" shall mean
the consummation of a public offering of shares of Common Stock of the
Corporation pursuant to the Securities Act of 1933, as amended, (i) at a
selling price per share of Common Stock (as constituted on the Inception Date)
of not less than $3.50 and (ii) which results in aggregate gross proceeds of
not less than $2,500,000.
(b) The term "Original Issuance Date" shall mean the date of
original issuance of such share of Class A Preferred Stock.
(c) The term "Original Issuance Price" shall mean the price
-7-
<PAGE>
paid per share to the Corporation upon the issuance of each share of Class A
Preferred Stock.
(d) The term "Inception Date" shall mean August 30, 1989.
(e) The term "Accrued Dividends" shall mean Full Cumulative
Dividends to date of which Accrued Dividends are to be computed, less the
amount of all dividends paid pursuant to Section 1(a) upon the relevant shares
of stock.
(f) The term "Full Cumulative Dividends" shall mean (whether
or not there shall have been net profits or net assets of the Corporation
legally available for the payment of such dividends) that amount which shall be
equal to dividends at the full rate for the Class A Preferred Stock as provided
in Section 1(a) for the period of time elapsed from the later of July 1, 1992 or
the Original Issuance Date, to the date as of which Full Cumulative Dividends
are to be computed.
7. Purchase Rights. If at any time the Corporation grants,
issues or sells any options, convertible securities or rights to purchase stock,
warrants, securities or other property pro rata to the record holders of Common
Stock (the "Purchase Rights"), then each holder of Class A Preferred Stock will
be entitled to acquire, upon the terms applicable to such Purchase Rights, the
aggregate Purchase Rights which such holder could have acquired if such holder
had held the number of shares of Common Stock acquirable upon conversion of such
holder's Class A Preferred Stock immediately before the date on which a record
is taken for the grant, issuance or sale of such Purchase Rights; or if no such
record is taken, the date as of which the record holders of Common Stock are to
be determined for the grant, issuance or sale of such Purchase Rights.
8. Default. (a) The following events shall constitute events
of default ("Events of Default"):
(i) The failure of the Corporation to make any
payments due under Section 3 hereof regarding redemption, which failure shall
continue for a period of 10 days following notice thereof from any holder of
Class A Preferred Stock;
(ii) The Corporation or any of its Material
Subsidiaries (or any subsidiaries which on a consolidated basis, would
constitute a Material Subsidiary) ("Material Subsidiary" shall mean any
subsidiary that owns ten percent of the consolidated assets of the Corporation
or is responsible for ten percent of the Corporation's consolidated revenues)
shall (A) admit in writing its inability to pay its debts generally as they
become due, (B) file a petition or answer or consent seeking relief under the
federal Bankruptcy Code, as now constituted or hereafter amended, or any other
applicable federal or state bankruptcy or insolvency law or other similar law,
(C) consent to the institution of proceedings under any law referenced in (B)
above, or to the filing of any such petition or to the appointment or taking
possession of a receiver, liquidator, assignee, trustee, custodian (or other
similar official) of the Corporation or any subsidiary or of any substantial
part of their property, (D) fail generally to pay its debts as such debts
become due, or take corporate action in futherance of any such action, or (E)
make an assignment for the benefit of its creditors;
(iii) The entry of a decree or order by a court for
relief in respect of the Corporation or any of its Material Subsidiaries (or
any subsidiaries which, on a consolidated basis, would constitute a Material
Subsidiary) under the federal Bankruptcy Code, as now constituted or hereafter
amended, or any other applicable federal or state bankruptcy or insolvency law
or other similar law, appointing a receiver, liquidator, assignee, trustee (or
similar official) of the Corporation or any Material Subsidiary (or any
subsidiaries which, on a consolidated basis, would constitute a Material
Subsidiary) or of any other substantial part of their property, or ordering the
winding-up for liquidation of their affairs, and such decree or order shall not
be vacated or set aside or stayed within a period of 60 days from the date of
entry thereof;
(iv) At any time the existence of: (A) a cumulative
loss from the Inception Date in excess of $150,000 as of a month end, (B) a
pre-tax loss during any fiscal year in excess of the greater of $150,000 or for
fiscal years commencing after December 31, 1990, 25% of the Corporation's net
worth as of the beginning of such fiscal year; or (C) a cumulative pre-tax loss
during the two most recent consecutive fiscal years in excess of 75% of the
Corporation's net worth as of the beginning of such two year period, all such
losses to be calculated in accordance with generally accepting accounting
principles consistently applied and the Corporation's $100,000 of Convertible
Notes and $175,000 of Non-Convetible Notes being deemed equity rather than debt
for purposes of this calculation only;
-8-
<PAGE>
(v) The default in the performance or observance by the
Corporation of any material term of this Amendment or any material item
contained in a Note and Warrant Purchase Agreement dated August 30, 1989 (the
"Purchase Agreement") among, inter alia, the Corporation and NEPA Venture Fund,
L.P. or contained in any security issued pursuant to such agreement, which
default is not cured within 30 days following written notice thereof from
holders representing a majority of the Class A Preferred Stock; or
(vi) The Company or any Material Subsidiary shall default
beyond any period of grace provided with respect thereto in the payment of
principal of or interest on any Senior Debt (as defined in the Purchase
Agreement) or in the performance or observance of any other material obligation,
term or condition under such Senior Debt or otherwise fail promptly to pay such
Senior Debt when due and payable, unless such holder shall have waived such
default or non-payment after its occurrence or unless such holder shall have
failed to give any notice required to create a default thereunder.
(b) If there shall occur an Event Default, (i) each holder of Class A
Preferred Stock may elect to redeem his shares in accordance with the procedure
provided in Section 3, and (ii) in each and every case the holders of not less
than a majority in interest of the Class A Preferred Stock may, by vote at a
meeting or by written notice to the Corporation, declare the Corporation to be
in default hereunder, whereupon the holders of Class A Preferred Stock shall
have the right, voting together as a class and separately from all other classes
and series, to elect, a number of directors equal to the number of directors
then authorized plus one, regardless of whether such positions are than occupied
or vacant, such that the holders of Class A Preferred Stock shall elect a
majority of the members of the Corporation's Board of Directors (hereinafter
referred to as the "Voting Right"). The remaining directors shall be elected by
the other classes or series of stock entitled to vote therefor excluding the
holders of Class A Preferred Stock. If during the period that the Voting Right
is operative, the office of any director elected pursuant to this Section
becomes vacant by reason of death, resignation, retirement, disqualification,
removal from office or otherwise, the vacancy shall be filled by a person
nominated by the remaining directors designated by the shareholders entitled to
vote for such director.
(c) If and when such Voting Right becomes operative, the maximum
authorized number of members of the Board of Directors of the Corporation shall
automatically be increased to the extent necessary to create any vacancy
required by the provisions of this Section. Whenever such Voting Right shall
become operative, such Voting Right shall be exercised initially either by a
written consent or at a special meeting of the holders of the Class A Preferred
Stock called as provided in Section (e) below or at any annual meeting held for
the purpose of electing directors, and thereafter at such annual meetings. In
electing directors to be elected by the holders of the Class A Preferred Stock,
each holder shall have one vote for each share of Class A Preferred Stock. The
Voting Right shall continue until such time as the Event of Default shall have
been cured, except that, with regard to the Event of Default described in
Section (a)(iv) above, such Voting Right shall continue until such month end
after the occurrence of the Event of Default as the Corporation has positive
pre-tax earnings on a cummulative basis after inception in an amount equal to
$150,000. All such determinations shall be calculated in accordance with
generally accepted accounting principles consistently applied.
(d) At such time as all Events of Default have been cured, the Voting
Right shall become inapplicable, and the maximum authorized number of members of
the Board of Directors of the Corporatin shall automatically be reduced to the
extent that such number was increased at the time when the terminated Voting
Right became operative.
(e) At any time when the Voting Right shall have become
operative and not have been exercised, a proper officer of the Corporation
shall, upon the written request of the holder of
-9-
<PAGE>
record of at least 50% of the shares of Class A Preferred Stock then outstanding
addressed to the Secretary of the Corporation, call a special meeting of the
holders of the Class A Preferred Stock for the purpose of electing the
additional directors to be elected. Such meeting may also be called by the
holders of a majority of the Class A Preferred Stock. Such meeting shall be held
at the earliest practicable date upon the notice required for annual meetings of
shareholders at the principal executive offices of the Corporation. Such
additional directors may be elected by the written consent of the holders of
Class A Preferred Stock in lieu of a meeting.
(f) Upon any termination of the Voting Right, the term of office of any
director then in office shall terminate immediately and the entire Board shall
be re-elected.
-10-
<PAGE>
Microfilm Number
---------------
Filed with the Department of State on June 11, 1996
-------------
Entity Number 1068720
----------------
xxxxxxxxxx
-----------------------------
Secretary of the Commonwealth
ARTICLES OF AMENDMENT-DOMESTIC BUSINESS CORPORATION
DSCB:15-1915 (Rev 91)
In compliance with the requirements of 15 Pa.C.S. Section 1915 (relating to
articles of amendment), the undersigned business corporation, desiring to amend
its Articles, hereby states that:
1. The name of the corportion is: Quantum Epitaxial Designs, Inc.
---------------------------------------------
- -------------------------------------------------------------------------------
2. The (a) address of this corporation's current registered office in this
Commonwealth or (b) name of its commercial registered office provider and
the county of venue is (the Department is hereby authorized to correct the
following information to conform to the records of the Department):
(a) 115 Research Drive Bethlehem PA 18015 Northampton
--------------------------------------------------------------------------
Number and Street City State Zip County
(b) c/o:
---------------------------------------------------------------------
Name of Commercial Registered Office Provider County
For a corporation represented by a commercial registered office provider,
the county in (b) shall be deemed the county in which the corporation is located
for venue and official publication purposes.
3. The statute by or under which it was incorporated is:
Business Corporation Law, Act of May 5, 1933 (P.L. 364)
--------------------------------------------------------------------------
4. The date of its incorporation is: December 23, 1988
--------------------------------------------
5. (Check, and if appropriate complete, one of the following):
The amendment shall be effective upon filing these Articles of Amendment
--- in the Department of State.
The amendment shall be effective on: at
--- --------------- ----------------
Date Hour
6. (Check one of the following):
x The amendment was adopted by the shareholders (or members) pursuant to
--- 15 Pa.C.S. Section 1914(a) and (b).
The amendment was adopted by the board of directors pursuant to 15
--- Pa.C.S. Section 1914(c).
7. (Check, and if appropriate complete, one of the following):
The amendment adopted by the corporation, set forth in full, is as
--- follows:
x The amendment adopted by the corporation as set forth in full in Exhibit
--- A attached hereto and made a part hereof.
<PAGE>
DSCB:15-1915(Rev-91)-2
8. (Check if the amendment restates the Articles):
The restated Articles of Incorporation supersede the original Articles and
--- all amendments thereto.
IN TESTIMONY WHEREOF, the undersigned corporation has caused these
Articles of Amendment to be signed by a duly authorized officer thereof this
10th day of September, 1995.
- ---- --------- ----
Quantum Epitaxial Designs, Inc.
------------------------------------
(Name of Corporation)
BY: xxxxxxxxxxxxx
---------------------------------
(Signature)
TITLE: President
------------------------------
<PAGE>
EXHIBIT A
1. The information set forth in the Corporation's Articles of Incorporation
(the "Articles") under the heading "The Aggregate Number of Shares, Classes of
Shares and Par Value of Shares Which the Corporation Shall Have Authority to
Issue" is amended and restated in its entirety to be and read as follows:
"The Corporation shall have the authority to issue 10,150,000 shares
of capital stock, with a total authorized capital of $11,500, of
which 10,000,000 shares shall be Common Stock, par value $0.001 per
share and 150,000 shares shall be Class A Preferred Stock, par value
$0.01 per share having such voting rights, designations, preferences,
qualifications, privileges, limitations, conversion and other rights
as set forth in Exhibit A attached to the Articles of Amendment filed
with the Department of State on August 30, 1989, as amended from time
to time."
2. Section 5(e)(iv) as set forth in Exhibit A attached to the Articles of
Amendment filed with the Department of State on August 30, 1989 is amended and
restated in its entirety to be and read as follows:
"In the event that the Corporation shall, at any time or from time to
time after the Inception Date, issue, sell, or grant any shares of
the capital stock of the Corporation (including treasury shares), or
issue, sell or grant any options, convertible debt or securities,
warrants, options or rights to acquire capital stock of the
Corporation (including treasury shares but excluding up to 165,890
shares of Common Stock issuable pursuant to an employee stock option
plan and/or stock purchase plan as approved by the Corporation's
Board of Directors, up to 165,890 shares of Common Stock reserved for
issuance to a key marketing executive and other newly hired key
employees at a price of at least $0.04649 per share as approved by
the Corporation's Board of Directors, and up to 82,950 additional
shares of Common Stock subsequently approved for issuance by the
Corporation's Board), for a consideration per share (initially or
upon exercise of a right) less than the Original Issuance Price
divided by the Conversion Rate in effect immediately prior to the
time of such issuance, sale or grant, then, forthwith upon such
issuance, sale or grant, the Conversion Rate shall be increased to a
number determined by multiplying the Conversion Rate in effect
immediately prior to such issuance by the following fraction:
Original Issuance Price/Conversion Rate Immediately Prior
---------------------------------------------------------
New Issuance Price Per Share
<PAGE>
The Conversion Rate shall be further increased from time to time
thereafter whenever any shares or rights are so issued, sold, granted
or converted for a price per share lower than the amount of the
Original Purchase Price divided by the then current Conversion Rate,
as adjusted prior to that date. In the event that any shares shall be
issued or sold for cash, the consideration received therefor shall be
deemed to be the amount received by the Corporation therefor, less
any expenses incurred or any underwriting commissions or concessions
paid or allowed by the Corporation in connection therewith. In the
event that any shares shall be issued for a consideration other than
cash, the amount of the consideration other than cash received by the
Corporation shall be deemed to be the fair value of such
consideration, less any expenses incurred or any underwriting
commissions or concessions paid or allowed by the Corporation in
connection therewith."
<PAGE>
Microfilm Number
---------------
Filed with the Department of State on Feb. 21, 1996
-------------
Entity Number 1068720
----------------
xxxxxxxxxxxxxxx
-----------------------------
Secretary of the Commonwealth
ARTICLES OF AMENDMENT-DOMESTIC BUSINESS CORPORATION
DSCB:15-1915 (Rev 91)
In compliance with the requirements of 15 Pa.C.S. Section 1915 (relating to
articles of amendment), the undersigned business corporation, desiring to amend
its Articles, hereby states that:
1. The name of the corportion is: Quantum Epitaxial Designs, Inc.
-----------------------------------------------
- --------------------------------------------------------------------------------
2. The (a) address of this corporation's current registered office in this
Commonwealth or (b) name of its commercial registered office provider and
the county of venue is (the Department is hereby authorized to correct the
following information to conform to the records of the Department):
(a) 119 Technology Drive Bethlehem PA 18015 Northampton
--------------------------------------------------------------------------
Number and Street City State Zip County
(b) c/o:
---------------------------------------------------------------------
Name of Commercial Registered Office Provider County
For a corporation represented by a commercial registered office provider,
the county in (b) shall be deemed the county in which the corporation is located
for venue and official publication purposes.
3. The statute by or under
which it was incorporated
is: Business Corporation Law, Act of May 5, 1933 (P.L. 364)
--------------------------------------------------------------------------
4. The date of its incorporation is: December 23, 1988
--------------------------------------------
5. (Check, and if appropriate complete, one of the following):
x The amendment shall be effective upon filing these Articles of Amendment
--- in the Department of State.
The amendment shall be effective on: at
--- --------------- ----------------
Date Hour
6. (Check one of the following):
x The amendment was adopted by the shareholders (or members) pursuant to
--- 15 Pa.C.S. Section 1914(a) and (b).
The amendment was adopted by the board of directors pursuant to 15
--- Pa.C.S. Section 1914(c).
7. (Check, and if appropriate complete, one of the following):
The amendment adopted by the corporation, set forth in full, is as
--- follows:
x The amendment adopted by the corporation as set forth in full in Exhibit
--- A attached hereto and made a part hereof.
<PAGE>
DCSB:15-1915 (Rev 91)-2
8. (Check if the amendment restates the Articles):
The restated Articles of Incorporation supersede the original Articles and
--- all amendments thereto.
IN TESTIMONY WHEREOF, the undersigned corporation has caused these
Articles of Amendment to be signed by a duly authorized officer thereof this
19th day of February, 1997.
- ---- -------- ----
Quantum Epitaxial Designs, Inc.
------------------------------------
(Name of Corporation)
BY: xxxxxxxxxxxxxxxxxx
---------------------------------
(Signature)
TITLE: President
------------------------------
EXHIBIT A
1. The information set forth in the Corporation's Articles under the heading
"The Aggregate Number of Shares, Classes of Shares and Par Value of Shares
Which the Corporation Shall Have Authority to Issue" is amended and restated
in its entirety to be and to read as follows:
"The Corporation shall have the authority to issue 30,420,000 shares of
capital stock, with a total authorized capital of $79,200, of which
25,000,000 shares shall be common stock, par value $0.001 per share, and
5,420,000 shall be preferred stock, par value $0.01 per share. The
preferred stock shall be designated as set forth in Exhibit A attached to
these Articles of Amendment and shall have such voting rights,
designations, preferences, qualifications, privileges, limitations,
conversion and other rights as set forth therein, as amended from time to
time."
2. Exhibit A attached to the Articles of Amendment filed with the Department of
State on August 30, 1989 is amended and restated in its entirety to be and to
read as set forth on Exhibit A attached hereto.
<PAGE>
EXHIBIT A
Amendment to Articles of Incorporation
--------------------------------------
1. Authorization, Designation and Amount. The
Corporation shall have the authority to issue 5,420,000 shares of preferred
stock, par value $.01 per share (the "Preferred Stock"), of which 150,000 shares
shall be designated Class A Preferred Stock (the "Class A Preferred Stock") and
270,000 shares shall be designated Class B Preferred Stock (the "Class B
Preferred Stock"). Subject to the provisions of Section 6(c) and Section 6(d)
hereof, as applicable, the Board of Directors shall have the full and complete
power and authority, by resolution or resolutions, from time to time, to
establish and to issue one or more additional series of Preferred Stock and to
fix, determine and vary the voting rights, designations, preferences,
qualifications, privileges, limitations, options, conversion rights, redemption
rights and other special rights of each such series of Preferred Stock
including, without limitation, dividend rates and the manner of payment,
preferential amounts payable upon voluntary or involuntary dissolution or
liquidation of the Corporation, voting rights, conversion rights, redemption
privileges, prices, and terms and conditions, all as shall be stated and
expressed in such resolution or resolutions, and all to the fullest extent now
or hereafter permitted by the law. Without limiting the generality of the
foregoing, and except as otherwise expressly provided in Section 6(c) or Section
6(d), as applicable, the resolution or resolutions providing for issuance of any
series of Preferred Stock may provide that such series shall be superior or rank
equally or be junior to the Preferred Stock of any other series to the extent
permitted by law. Except as otherwise expressly provided in Section 6(c) or
Section 6(d) hereof, as applicable, no vote of the holders of Preferred Stock or
Common Stock shall be a prerequisite to the designation or issuance of any
shares of any series of Preferred Stock authorized by and complying with the
conditions of these Articles of Incorporation.
2. Terms. The designations, preferences, relative,
participating, optional and other rights, qualifications, limitations and
restrictions, if any, of the Class A Preferred Stock and the Class B Preferred
Stock shall be as set forth herein. The Class A Preferred Stock and the Class B
Preferred Stock are together referred to herein as the "Class Preferred Stock".
3. Ranking. The Corporation's Class A and Class B
Preferred Stock shall rank, as to dividends and upon liquidation, equally with
each other (as more fully described below) and senior and prior to the
Corporation's common stock and to all other classes or series of stock issued by
the Corporation, except as otherwise approved by the affirmative vote or consent
of the holders of a majority of shares of Class Preferred Stock calculated in
the manner set forth in Section 6 hereof.
<PAGE>
4. Dividends.
----------
(a) Dividends are payable on the Class Preferred
Stock, when, as and if declared by the Board of Directors. Whenever any dividend
or other distribution is declared on any shares of Class Preferred Stock, the
Board of Directors shall simultaneously declare a dividend or distribution at
the same percentage rate and in the same form on each other share of Class
Preferred Stock, so that all outstanding shares of Class Preferred Stock will
participate equally with each other ratably (on the identical percentage basis
of the applicable Original Issuance Price as defined in Section 8(c)) per share.
(b) Other than in the case of any Permitted
Distributions (as defined in Section 8(f)), if the Board of Directors declares
dividends or other distributions (other than on liquidation) on the Common Stock
of the Corporation, $0.001 par value per share (the "Common Stock") in cash,
property or securities (excluding Common Stock) of the Corporation (or
subscription or other rights to purchase or acquire securities (excluding Common
Stock) of the Corporation), the Board of Directors shall simultaneously declare
a dividend or distribution at the same rate and in the same form on the Class
Preferred Stock, so that all outstanding shares of Class Preferred Stock will
participate ratably with the Common Stock in such dividend or distribution. For
purposes of determining its proportional share of the dividend or distribution,
each share of the Class Preferred Stock shall be deemed to be that number of
shares of Common Stock into which such share of Class Preferred Stock is then
convertible, rounded to the nearest one-tenth of a share.
5. Rights Upon Liquidation, Dissolution or Winding Up.
---------------------------------------------------
(a) In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation, the assets of the
Corporation available for distribution to its shareholders, shall be distributed
in the following order of priority:
(i) The holders of Class Preferred Stock
shall be entitled to receive, prior and in preference to any distribution to the
holders of Common Stock, an amount equal to the Original Issuance Price per
share for each share of Class Preferred Stock then outstanding, and, in
addition, an amount equal to any dividends declared but unpaid on the Class
Preferred Stock. If the assets and funds of the Corporation available for
distribution to the holders of Class Preferred Stock shall be insufficient to
permit the payment of the full preferential amounts set forth in this Article,
then all of the assets of the Corporation available for distribution shall be
distributed to the holders of Class Preferred Stock pro rata so that each share
receives the same percentage of its respective liquidation value.
(ii) After distribution of the amount set
forth in Section 5(a)(i) hereof, the remaining assets of the Corporation
available for distribution, if any, to the shareholders of the Corporation shall
be distributed to the holders of shares of Common Stock, pro rata, to the
exclusion of the holders of Class Preferred Stock.
2
<PAGE>
(b) A consolidation or merger of the Corporation
with or into any other corporation or corporations in a transaction in which the
shareholders of the Corporation receive cash, securities or other consideration
in exchange for the shares of capital stock of the Corporation then held by
them, or the sale of all or substantially all of the assets or capital stock of
the Corporation, at the option of the holders representing a voting majority of
the Class Preferred Stock, determined in the manner set forth in Section 6,
shall be deemed to be a liquidation, dissolution or winding up of the
Corporation for the purposes of Section 5(a) above.
(c) In the event of and concurrently with an
Event of Sale, the holders of Class B Preferred Stock that acquired such Class B
Preferred Stock prior to such Event of Sale by virtue of such holder's
conversion of all or any portion of the AMP Convertible Note at the written
request of the Corporation shall be entitled to receive (in substitution of any
other amounts to which they are entitled under this Article 5) out of the assets
legally available for distribution to the Corporation's shareholders and prior
and in preference to any distribution to any other holders of Class Preferred
Stock or Common Stock then outstanding, an amount per share (assuming for these
purposes the conversion of such shares of Class B Preferred Stock into shares of
Common Stock) equal to the Minimum Per Share Distribution. If the assets and
funds of the Corporation available for distribution to the holders of Class B
Preferred Stock shall be insufficient to permit the payment of the full
preferential amounts set forth in this Section 5(c), then all of the assets of
the Corporation available for distribution shall be distributed to the holders
of the Class B Preferred Stock pro rata so that each share receives the same
percentage to its liquidation value.
6. Voting.
------
(a) In addition to any rights provided in any
agreement between the Corporation and holders of Class Preferred Stock, or in
the Corporation's By-laws or by law, each share of Class Preferred Stock shall
entitle the holder thereof to one vote per share for each share of Common Stock
(including fractional shares) in to which each share of Class Preferred Stock is
then convertible, rounded to the nearest one-tenth of a share, and such holders
shall be entitled to receive notice of all meetings of shareholders and to vote
together with the holders of Common Stock acting as one class, on all matters as
to which holders of Common Stock shall be entitled to vote.
(b) In addition to the rights specified in
Section 6(a) hereof, for so long as at least 35,811 shares of Class A Preferred
Stock and 67,476 shares of the Class B Preferred Stock (in each case, subject to
adjustment for any subdivision or combination affecting any outstanding shares
of the Class Preferred Stock) remain outstanding, the Corporation shall not,
without the vote or written consent of the holders of the shares representing at
least a majority of the voting power of the Class A Preferred Stock and of the
Class B Preferred Stock then outstanding, acting together as a single class:
3
<PAGE>
(i) redeem, purchase, pay any dividends or make
any distributions with respect to the Common Stock, except for (x) acquisitions
of shares of Common Stock by the Corporation pursuant to agreements that permit
the Corporation to repurchase such shares upon termination of services to the
Corporation or pursuant to the exercise of any of the Corporation's rights of
first refusal upon a proposed transfer of such shares or (y) Permitted
Distributions; or
(ii) take any action that results in the payment
or declaration of a dividend on any shares of Common Stock or of Class Preferred
Stock, except for actions relating to Permitted Distributions.
(c) In addition to the rights specified in Section 6(a)
and Section 6(b) hereof, for so long as at least 35,811 shares of the Class A
Preferred Stock (subject to adjustment for any subdivision or combination
affecting any outstanding shares of Class A Preferred Stock) remain outstanding,
the Corporation shall not, without the vote or written consent of the holders of
shares representing at least a majority of the voting power of the Class A
Preferred Stock, acting as a separate class:
(i) amend, alter or repeal any provision of the
Corporation's articles of incorporation or bylaws (including any filing of any
statement of designation) that adversely affects the designations, preferences,
relative, participating, optional or other rights, qualifications, limitations
or restrictions of the Class A Preferred Stock; or
(ii) authorize or designate, whether by
reclassification or otherwise, any new class or series of stock or any other
securities convertible into equity securities of the Corporation ranking on a
parity with or senior to the Class A Preferred Stock in liquidation preference,
voting or the payment of any dividend or distribution.
(d) In addition to the rights specified in Section 6(a)
and Section 6(b) hereof, for so long as at least 67,476 shares of the Class B
Preferred Stock (subject to adjustment for any subdivision or combination
affecting any outstanding shares of Class B Preferred Stock) remain outstanding,
the Corporation shall not, without the vote or written consent of the holders of
shares representing at least a majority of the voting power of the Class B
Preferred Stock, acting as a separate class:
(i) amend, alter or repeal any provision of the
Corporation's articles of incorporation or bylaws (including any filing of any
statement of designation) that adversely affects the designations, preferences,
relative, participating, optional or other rights, qualifications, limitations
or restrictions of the Class B Preferred Stock; or
(ii) authorize or designate, whether by
reclassification or otherwise, any new class or series of stock or any other
securities convertible into equity securities of the Corporation ranking on a
parity with or senior to the Class B Preferred Stock in liquidation preference,
voting or the payment of any dividend or distribution.
4
<PAGE>
7. Conversion.
----------
(a) The holder of any shares of Class Preferred Stock
shall have the right, at such holder's option, at any time or from time to time,
to convert any of such shares of Class Preferred Stock into that number of
shares of Common Stock for each share of Class Preferred Stock so converted
equal to the applicable Original Issuance Price for such share of Class
Preferred Stock divided by the applicable Class Preferred Conversion Price for
that share (as hereinafter defined) as last adjusted and then in effect, rounded
to the nearest one-tenth of a share, by surrender of the certificates
representing the shares of Class Preferred Stock so to be converted in the
manner provided in Section 7(c) hereof. The Class Preferred Conversion Price
shall be subject to adjustment as set forth in Section 7(e) hereof. The holder
of any shares of Class Preferred Stock exercising the aforesaid right to convert
such shares into shares of Common Stock shall be entitled to payment of all
declared but unpaid dividends, if any, on or with respect to such shares of
Class Preferred Stock up to and including the Conversion Date (as hereinafter
defined).
(b) Upon the occurrence of an Event of Conversion (as
defined in Section 8(a) hereof), all shares of Class Preferred Stock then
outstanding shall, by virtue of, and simultaneously with, the occurrence of the
Event of Conversion and without any action on the part of the holder thereof, be
deemed automatically converted into shares of Common Stock in accordance with
Section 7(a) hereof. The holder of any shares of Class Preferred Stock converted
into shares of Common Stock pursuant to this Section 7(b) shall be entitled to
payment of all declared but unpaid dividends, if any, on or with respect to such
shares of Class Preferred Stock up to and including the Conversion Date.
(c) The holder of any shares of Class Preferred Stock may
exercise the conversion right pursuant to Section 7(a) hereof as to any part
thereof by delivering to the Corporation during regular business hours, at the
office of any transfer agent of the Corporation for the Class Preferred Stock or
at such other place as may be designated by the Corporation, the certificate or
certificates for the shares to be converted, duly endorsed or assigned in blank
or to the Corporation (if required by it), accompanied by written notice stating
that the holder elects to convert such shares and stating the name or names
(with address) in which the certificate or certificates for the shares of Common
Stock are to be issued, provided that if the holder designates a name other than
the holder, the Corporation shall receive reasonable assurances that the
issuance of Common Stock in such name shall not constitute a violation of
applicable securities laws. Conversion shall be deemed to have been effected (i)
with respect to conversion under Section 7(a) hereof, on the date when the
aforesaid delivery is made and (ii) with respect to conversion under Section
7(b) hereof, on the date of occurrence of the Event of Conversion, and such
date, in either case, is referred to herein as the "Conversion Date". As
promptly as practicable thereafter, the Corporation shall issue and deliver to
or upon the written order of such holder, to the place designated by such
holder, a certificate or certificates for the number of full shares of Common
Stock as provided in Section 7(d) hereof and a check or cash in payment of all
declared but unpaid dividends (to the extent permissible under law), if any,
with respect to the shares of Class Preferred Stock so converted up to and
including the Conversion Date. The
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<PAGE>
person in whose name the certificate or certificates for Common Stock are to be
issued shall be deemed to have become a stockholder of record on the applicable
Conversion Date unless the transfer books of the Corporation are closed on that
date, in which event he shall be deemed to have become a stockholder of record
on the next succeeding date on which the transfer books are open, but the
applicable Class Preferred Conversion Price shall be that in effect on the
Conversion Date. Upon conversion of only a portion of the number of shares
covered by a certificate representing shares of Class Preferred Stock
surrendered for conversion, the Corporation shall issue and deliver to or upon
the written order of the holder of the certificate so surrendered for
conversion, at the expense of the Corporation, a new certificate covering the
number of shares of Class Preferred Stock representing the unconverted portion
of the certificate so surrendered.
(d) No fractional shares of Common Stock or scrip shall be
issued upon conversion of shares of Class Preferred Stock. The number of full
shares of Common Stock issuable upon conversion of Class Preferred Stock
surrendered by a holder thereof for conversion shall be computed on the basis of
the aggregate number of shares of Class Preferred Stock so surrendered. Instead
of any fractional shares of Common Stock which would otherwise be issuable upon
conversion of any shares of Class Preferred Stock, the Corporation shall pay a
cash adjustment in respect of such fractional interest in an amount equal to the
then Current Market Price (as hereinafter defined) of a share of Common Stock
multiplied by such fractional interest. Fractional interests shall not be
entitled to dividends, and the holders of fractional interests shall not be
entitled to any rights as stockholders of the Corporation in respect of such
fractional interests.
(e) The "Class Preferred Conversion Price" with respect to
the Class Preferred Stock shall initially be equal to the applicable Original
Issuance Price with respect to each such share of Class Preferred Stock, and
shall be subject to adjustment from time to time as follows:
(i) If, at any time after the applicable
Inception Date (as defined in Section 8(d) hereof), the number of shares of
Common Stock outstanding is increased by a stock dividend payable in shares of
Common Stock or by a subdivision or split-up of shares of Common Stock, then,
following the record date fixed for the determination of holders of Common Stock
entitled to receive such stock dividend, subdivision or split-up, the Class
Preferred Conversion Price shall be appropriately decreased so that the number
of shares of Common Stock issuable on conversion of each share of Class
Preferred Stock shall be increased in proportion to such increase in outstanding
shares.
(ii) If, at any time after the applicable
Inception Date, the number of shares of Common Stock outstanding is decreased by
a combination of the outstanding shares of Common Stock then, following the
record date for such combination, the Class Preferred Conversion Price shall be
appropriately increased so that the number of shares of Common Stock issuable on
conversion of each share of Class Preferred Stock shall be decreased in
proportion to such decrease in outstanding shares.
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<PAGE>
(iii) In case, at any time after the applicable
Inception Date, of any capital reorganization, or any reclassification of the
stock of the Corporation (other than a change in par value or from par value to
no par value or from no par value to par value or as a result of a stock
dividend or subdivision, split-up or combination of shares), or the
consolidation or merger of the Corporation with or into another person (other
than a consolidation or merger in which the Corporation is the continuing
corporation and which does not result in any change in the Common Stock) or of
the sale or other disposition of all or substantially all the properties and
assets of the Corporation as an entirety to any other person, each share of
Class Preferred Stock shall after such reorganization, reclassification,
consolidation, merger, sale or other disposition be (unless, in the case of a
consolidation, merger, sale or other disposition, payment shall have been made
to the holders of all shares of Class Preferred Stock of the full amount to
which they shall have been entitled pursuant to Section 5 hereto) convertible
into the kind and number of shares of stock or other securities or property of
the Corporation or of the entity resulting from such consolidation or surviving
such merger or to which such properties and assets shall have been sold or
otherwise disposed to which the holder of the number of shares of Common Stock
deliverable (immediately prior to the time of such reorganization,
reclassification, consolidation, merger, sale or other disposition) upon
conversion of such share would have been entitled upon such reorganization,
reclassification, consolidation, merger, sale or other disposition. The
provisions of this Section 7 shall similarly apply to successive
reorganizations, reclassifications, consolidations, mergers, sales or other
dispositions.
(iv) In the event that the Corporation shall, at
any time or from time to time after the applicable Inception Date, issue, sell
or grant any shares of Common Stock (which term, for purposes of this Section
7(e)(iv), including all subsections hereof, shall be deemed to include all other
securities convertible into, or exchangeable or exercisable for, shares of
Common Stock (including, but not limited to, Class Preferred Stock) or options
to purchase or other rights to subscribe for such convertible or exchangeable
securities), in each case other than Excluded Stock (as defined in Section
8(e)), for a consideration per share less than the applicable Class Preferred
Conversion Price in effect immediately prior to the issuance of such Common
Stock or other securities (a "Dilutive Issuance"), the Class Preferred
Conversion Price for such Class Preferred Stock in effect immediately prior to
each such Dilutive Issuance shall automatically be lowered to a price
(calculated to the nearest cent) determined by multiplying such Class Preferred
Conversion Price by a fraction, (A) the numerator of which shall be (x) the
number of shares of Common Stock outstanding immediately prior to such Dilutive
Issuance plus (y) the number of shares of Common Stock that the aggregate
consideration received or to be received by the Corporation in such Dilutive
Issuance would purchase at such Class Preferred Conversion Price; and (B) the
denominator of which shall be (x) the number of shares of Common Stock
outstanding immediately prior to such Dilutive Issuance plus (y) the number of
such shares of Common Stock so issued in such Dilutive Issuance; provided that,
for the purpose of this Section 7(e)(iv), all shares of Common Stock issuable
upon exercise or conversion of options or convertible securities outstanding
immediately prior to such Dilutive Issuance (other than any additional shares of
Common Stock issuable with respect to shares of Class Preferred Stock,
convertible securities, or outstanding options, warrants or other rights for the
purchase of
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shares of Common Stock or convertible securities, solely as a result of either
(x) the Dilutive Issuance or (y) the adjustment of the respective Class
Preferred Conversion Prices (or other conversion ratios) resulting from the
Dilutive Issuance) shall be deemed to be outstanding immediately prior to such
Dilutive Issuance.
For the purposes of any adjustment of the Class Preferred Conversion Price
pursuant to this Section 7(e)(iv), the following provisions shall be applicable:
(A) In the case of the issuance of Common Stock in whole
or in part for cash, the consideration shall be deemed to be the amount of cash
paid therefor, plus the value of any property other than cash received by the
Corporation as provided in paragraph (B) of this Section 7(e)(iv), less any
discounts, commissions or other expenses allowed, paid or incurred by the
Corporation for any underwriting or otherwise in connection with the issuance
and sale thereof.
(B) In the case of the issuance of Common Stock for
consideration in whole or in part in property or consideration other than cash,
the value of such property or consideration other than cash shall be deemed to
be the fair market value thereof as determined in good faith by the Board of
Directors of the Corporation, irrespective of any accounting treatment.
(C) In the case of the issuance of (I) options to purchase
or rights to subscribe for Common Stock, (II) securities convertible into or
exchangeable for Common Stock or (III) options to purchase or rights to
subscribe for such convertible or exchangeable securities:
(1) the aggregate maximum number of shares of
Common Stock deliverable upon exercise of such options to purchase, or rights to
subscribe for Common Stock shall be deemed to have been issued at the time such
options or rights were issued and for a consideration equal to the consideration
(determined in the manner provided in paragraphs (A) and (B) above), if any,
received by the Corporation upon the issuance of such options or rights plus the
minimum purchase price provided in such options or rights for the Common Stock
covered thereby;
(2) the aggregate maximum number of shares of
Common Stock deliverable upon conversion of, or in exchange for, any such
convertible or exchangeable securities or upon the exercise of options to
purchase, or rights to subscribe for, such convertible or exchangeable
securities and subsequent conversion or exchange thereof shall be deemed to have
been issued at the time such securities were issued or such options or rights
were issued and for a consideration equal to the consideration received by the
Corporation for any such securities and related options or rights (excluding any
cash received on account of accrued interest or accrued dividends), plus the
additional consideration, if any, to be received by the Corporation upon the
conversion or exchange of such securities or the exercise of any related options
or rights (in each case, determined in the manner provided in paragraphs (A) and
(B) above);
8
<PAGE>
(3) if there is any decrease in the conversion
or exercise price of, or any increase in the number of shares to be received
upon exercise, conversion or exchange of any such options, rights or convertible
or exchangeable securities (other than a change resulting from the antidilution
provisions thereof), then the Class Preferred Conversion Price shall be
automatically lowered to reflect such change; and
(4) on the expiration of any right or option
referred to in subsection C(I) or C(III) above, or on the termination of any
right to convert or exchange any convertible or exchangeable securities referred
to in Section C(II) above, the Class Preferred Conversion Price then in effect
shall thereupon be readjusted to the Class Preferred Conversion Price as would
have been in effect had the adjustment made upon the granting or issuance of
such rights or options or convertible or exchangeable securities been made upon
the basis of the issuance or sale of only the number of shares of Common Stock
actually issued upon the exercise of such options or rights or upon the
conversion or exchange of such convertible or exchangeable securities.
(v) The Class Preferred Conversion Price for the Class A
Preferred Stock shall not be increased by reason of the Corporation's issuance
of any shares of Common Stock or of any securities of the type described in
Section 7(e)(iv) for a consideration per share greater than the Class Preferred
Conversion Price for the Class A Preferred Stock, but less than the Class
Preferred Conversion Price for the Class B Preferred Stock.
(vi) All calculations under this paragraph (e) shall be
made to the nearest one tenth (1/10) of a share.
(vii) For the purpose of any computation pursuant to
Section 7(d) hereof, the Current Market Price at any date of one share of Common
Stock shall be deemed to be the daily closing price on the day before the day in
question. The closing price shall be the last reported sales price regular way
or, in case no such reported sales took place on such day, the average of the
last reported bid and asked prices regular way, in either case on the principal
national securities exchange (including for such purpose, the National
Association of Securities Dealers Automated Quotation System ("NASDAQ") National
Market) on which the Common Stock is listed or admitted to trading (or if the
Common Stock is not at the time listed or admitted for trading on any such
exchange, then such price as shall be equal to the last reported sales price, or
if such price is not reported, the average of the last reported bid and asked
prices, as reported by NASDAQ on such day, or if, on any day in question, the
security shall not be quoted on the NASDAQ, then such price shall be equal to
the last reported bid and asked prices on such day as reported by the National
Quotation Bureau, Inc. or any similar reputable quotation and reporting service,
if such quotation is not reported by the National Quotation Bureau, Inc.);
provided. however that if the Common Stock is not traded in such manner that the
quotations referred to in this clause (vi) are available for the period required
hereunder, then the Current Market Price shall be determined in good faith by
the Board of Directors of the Corporation.
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<PAGE>
(viii) In any case in which the provisions of this Section
7(e) shall require that an adjustment shall become effective immediately after a
record date of an event, the Corporation may defer until the occurrence of such
event (i) issuing to the holder of any share of Class Preferred Stock converted
after such record date and before the occurrence of such event the additional
shares of capital stock issuable upon such conversion by reason of the
adjustment required by such event over and above the shares of capital stock
issuable upon such conversion before giving effect to such adjustment and (ii)
paying to such holder any amount in cash in lieu of a fractional share of
capital stock pursuant to Section 7(d); provided, however that the Corporation
shall deliver to such holder a due bill or other appropriate instrument
evidencing such holder's right to receive such additional shares, and such cash,
upon the occurrence of the event requiring such adjustment, provided further
that if such event does not occur, the adjustment required by such event will be
revoked, effective as of such record date, and will have no effect.
(f) Whenever the Class Preferred Stock Conversion Price
shall be adjusted as provided in Section 7(e), the Corporation shall forthwith
file, at the office of the transfer agent for the Class Preferred Stock or at
such other place as may be designated by the Corporation, a statement, approved
by its Board of Directors, showing in detail the facts requiring such adjustment
and the Class Preferred Stock Conversion Price that shall be in effect after
such adjustment. The Corporation shall also cause a copy of such statement to be
sent by first class certified mail, return receipt requested and postage
prepaid, to each holder of shares of Class Preferred Stock at his address
appearing on the Corporation's records. Where appropriate, such copy may be
given in advance and may be included as part of a notice required to be mailed
under the provisions of Section 7(g).
(g) In the event the Corporation shall propose to take any
action of the types described in clauses (i), (ii), (iii) or (iv) of Section
7(e), the Corporation shall give notice to each holder of shares of Class
Preferred Stock, in the manner set forth in Section 7(f), which notice shall
specify the record date, if any, with respect to any such action and the date on
which such action is to take place. Such notice shall also set forth such facts
with respect thereto as shall be reasonably necessary to indicate the effect of
such action (to the extent such effect may be known at the date of such notice)
on the Class Preferred Conversion Price and the number, kind or class of shares
or other securities or property which shall be deliverable or purchasable upon
the occurrence of such action or deliverable upon conversion of shares of Class
Preferred Stock. In the case of any action which would require the fixing of a
record date, such notice shall be given at least 20 days prior to the date so
fixed, and in case of all other action, such notice shall be given at least 30
days prior to the taking of such proposed action. Failure to give such notice,
or any defect therein, shall not affect the legality or validity of any such
action.
(h) The Corporation shall pay all documentary, stamp or
other transactional taxes attributable to the issuance or delivery of shares of
capital stock of the Corporation upon conversion of any shares of Class
Preferred Stock; provided. however, that the Corporation shall not be required
to pay any taxes which may be payable in respect of any transfer involved in the
issuance or delivery of any certificate for such shares in a name other
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<PAGE>
than that of the holder of the shares of Class Preferred Stock in respect of
which such shares are being issued.
(i) The Corporation shall reserve, and at all times from
and after the applicable Inception Date keep reserved, free from preemptive
rights, out of its authorized but unissued shares of Common Stock solely for the
purpose of effecting the conversion of the shares of Class Preferred Stock
sufficient shares to provide for the conversion of all outstanding shares of
Class Preferred Stock.
(j) All shares of Common Stock which may be issued in
connection with the conversion provisions set forth herein will, upon issuance
by the Corporation, be validly issued, fully paid and nonassessable.
8. Definitions.
-----------
(a) The term "Event of Conversion" shall mean the
consummation of a public offering of any shares of Common Stock of the
Corporation pursuant to the Securities Act of 1933, as amended, in which the
gross proceeds (before deducting underwriting commissions and expenses of the
offering) resulting from such offering equal or exceed $15 million and the per
share price equals or exceeds the applicable Original Issuance Price.
(b) The term "Original Issuance Date" shall mean the date
of original issuance of each share of Class Preferred Stock.
(c) The term "Original Issuance Price" shall mean (i) in
the case of each share of Class A Preferred Stock, the per share price at which
such share was obtained through the conversion of all or any portion of the
unpaid principal amount of the NEPA Convertible Note or the Hwang Convertible
Note, as applicable, and (ii) in the case of each share of Class B Preferred
Stock, the per share price at which such share was obtained through the
conversion of all or any portion of the unpaid principal amount of the AMP
Convertible Note.
(d) The term "Inception Date" shall mean August 30,1989
for the Class A Preferred Stock, and February 21, 1997 for the Class B Preferred
Stock.
(e) The term "Excluded Stock" shall mean: (i) Common Stock
issued as a stock dividend or upon any stock split or other subdivision or
combination of shares of Common Stock; (ii) Common Stock issued upon conversion
of Class A Preferred Stock, Class B Preferred Stock or upon exercise of the
warrants issued to NEPA Venture Fund, L.P. ("NEPA") to purchase up to 135,710
shares of Common Stock (as adjusted from time to time) on August 30, 1994; (iii)
Class A Preferred Stock issued upon conversion of either or both of the NEPA
Convertible Note and the Hwang Convertible Note; (iv) Class B Preferred Stock
issued upon conversion of the AMP Convertible Note; (v) options and shares of
Common Stock issued to employees, directors, and/or consultants of the
Corporation pursuant to stock option or stock
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<PAGE>
purchase plans established and approved by the Corporation's Board of Directors
for the general benefit of persons constituting employees, directors or
consultants of the Corporation.
(f) The term "Permitted Distributions" shall mean, as
applicable, (i) dividends or distributions made to provide the holders of shares
of Common Stock with sufficient funds to pay any actual or estimated federal,
state or local income taxes on any of the Corporation's income allocated to such
holders at the prevailing highest tax rates for any of such holders for combined
federal, state and local income tax purposes, and (ii) dividends or
distributions made to holders of shares of Common Stock of an amount
representing the Corporation's previously taxed but undistributed earnings
through the date on which the Corporation terminates its status under Subchapter
S of the Internal Revenue Code of 1986, as amended, and closes its books for
federal income tax purposes.
(g) "Event of Sale" shall mean the consummation of any (i)
merger or consolidation of the Corporation into or with another Person, or the
merger or consolidation of any Person into or with the Corporation (in which
consolidation or merger, the Corporation's shareholders receive distributions of
cash or securities as a result of such merger or consolidation in complete
exchange tor their shares of the Corporation's capital stock) or (ii) sale of
all or substantially all of the Corporation's assets (in which sale of assets,
the Corporation's shareholders receive a distribution of the Corporation's
legally available assets), in either case, in which the holders of the Class B
Preferred Stock would receive (assuming for these purposes the conversion of
such shares of Class B Preferred Stock into, and the conversion or exchange of
any other of the Corporation's securities then directly or indirectly
convertible into or exercisable for, shares of Common Stock) cash or securities
or both having an aggregate Common Stock per share value (as determined in good
faith by the Corporation's board of directors) of less than the Minimum Per
Share Distribution unless, in either case, upon the consummation of such merger,
consolidation or sale of assets, the holders of the Corporation's voting
securities immediately prior to such transaction continue to own, directly or
indirectly, not less than a majority of the voting power of the Person surviving
such transaction.
(h) "Minimum Per Share Distribution" shall mean (i) in the
case of an Event of Sale on or prior to the first anniversary of the Inception
Date for the Class B Preferred Stock, an amount per share equal to the sum of
(x) the Class Preferred Conversion Price for the Class B Preferred Stock plus
(y) an amount equal to ten percent (10%) of such Class Preferred Conversion
Price, and (ii) in the case of an Event of Sale at any time after the first
anniversary of the Inception Date for the Class B Preferred Stock, an amount per
share equal to the sum of (x) the Class Preferred Conversion Price for the Class
B Preferred Stock plus (y) ten percent (10%) per annum thereon computed from the
Inception Date for the Class B Preferred Stock to the date of an Event of Sale
on the basis of a 360-day year of twelve 30-day months.
(i) "Person" shall mean an individual, a corporation, an
association, a joint stock company, a business trust, a partnership, a trust, an
unincorporated organization or other similar organization and a government or
any department, agency or political subdivision thereof.
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(j) "AMP Convertible Note" shall mean that certain
Convertible $2,000,000 Subordinated Note executed by the Corporation in favor of
AMP Incorporated, a Pennsylvania corporation, dated February 21, 1997, as
amended, supplemented or extended from time to time.
(k) "NEPA Convertible Note" shall mean that certain
Convertible $81,820 Subordinated Note executed by the Corporation in favor of
NEPA dated August 30, 1989, as amended, supplemented or extended from time to
time.
(l) "Hwang Convertible Note" shall mean that certain
Convertible $18,180 Subordinated Note executed by the Corporation in favor of
James M. Hwang dated August 30, 1989, as amended, supplemented or extended from
time to time.
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AMENDED AND RESTATED BYLAWS
OF
QUANTUM EPITAXIAL DESIGNS, INC.
ARTICLE I
OFFICES
Section 1.1 Registered Office. The registered office of
QUANTUM EPITAXIAL DESIGNS, INC. (the "Corporation") in the Commonwealth of
Pennsylvania shall be as specified in the Articles of Incorporation of the
Corporation as they may from time to time be amended (the "Articles") or at such
other place as the Board of Directors of the Corporation (the "Board") may
specify in a statement of change of registered office filed with the Department
of State of the Commonwealth of Pennsylvania.
Section 1.2 Other Offices. The Corporation may also have an
office or offices at such other place or places either within or without the
Commonwealth of Pennsylvania as the Board may from time to time determine or the
business of the Corporation requires.
ARTICLE II
MEETINGS OF THE SHAREHOLDERS
Section 2.1 Place. All meetings of the shareholders shall be
held at such places, within or without the Commonwealth of Pennsylvania, as the
Board may from time to time determine.
Section 2.2 Annual Meeting. A meeting of the shareholders for
the election of directors shall be held on such date as the Board shall
determine. If the annual meeting is not
<PAGE>
called and held within six (6) months after the designated time for such
meeting, any shareholder may call the meeting at any time after the expiration
of such six-month period.
Section 2.3 Written Ballot. Unless required by a vote of the
shareholders before the voting begins, elections of directors need not be by
written ballot.
Section 2.4 Special Meetings. Special meetings of the
shareholders, for any purpose or purposes, may be called at any time by the
President of the Corporation, by shareholders entitled to cast at least twenty
percent (20%) of the votes that all shareholders are entitled to cast at the
particular meeting, or by the Board, upon written request delivered to the
Secretary of the Corporation. Any request for a special meeting of shareholders
shall state the purpose or purposes of the proposed meeting. Upon receipt of any
such request, it shall be the duty of the Secretary of the Corporation to give
notice, in a manner consistent with Section 2.6 of these Bylaws, of a special
meeting of the shareholders to be held at such time as the Secretary of the
Corporation may fix, which time may not be, if the meeting is called pursuant to
a statutory right, more than sixty (60) days after receipt of the request. If
the Secretary of the Corporation shall neglect or refuse to fix the date of the
meeting and give notice thereof, the person or persons calling the meeting may
do so.
Section 2.5 Scope of Special Meetings. Business transacted at
any special meeting shall be confined to the business stated in the notice.
Section 2.6 Notice. Written notice of every meeting of the
shareholders, stating the place, the date and hour thereof and, in the case of a
special meeting of the shareholders, the general nature of the business to be
transacted thereat, shall be given in a manner consistent with the provisions of
Section 12.5 of these Bylaws at the direction of the
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Secretary of the Corporation or, in the absence of the Secretary of the
Corporation, any Assistant Secretary of the Corporation, at least ten (10) days
prior to the day named for a meeting called to consider a fundamental change
under Chapter 19 of the Pennsylvania Business Corporation Law of 1988, as it may
from time to time be amended (the "1988 BCL"), or five (5) days prior to the day
named for the meeting in any other case, to each shareholder entitled to vote
thereat on the date fixed as a record date in accordance with Section 8.1 of
these Bylaws or, if no record date be fixed, then of record at the close of
business on the 10th day next preceding the day on which notice is given or, if
notice is waived, at the close of business on the day immediately preceding the
day of the meeting, at such address (or telex, TWX, facsimile or telephone
number), as appears on the transfer books of the Corporation. Any notice of any
meeting of shareholders shall state that, for purposes of any meeting that has
been previously adjourned for one or more periods aggregating at least fifteen
(15) days because of an absence of a quorum, the shareholders entitled to vote
who attend such a meeting, although less than a quorum pursuant to Section 2.7
of these Bylaws, shall nevertheless constitute a quorum for the purpose of
acting upon any matter set forth in the original notice of the meeting that was
so adjourned.
Section 2.7 Quorum. The shareholders present in person or by
proxy, entitled to cast at least a majority of the votes that all shareholders
are entitled to cast on any particular matter to be acted upon at the meeting,
shall constitute a quorum for the purposes of consideration of, and action on,
such matter. The shareholders present in person or by proxy at a duly organized
meeting can continue to do business until the adjournment thereof
notwithstanding the withdrawal of enough shareholders to leave less than a
quorum. If a meeting cannot be organized because a quorum has not attended, the
shareholders present in person or by
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proxy may, except as otherwise provided by the 1988 BCL and subject to the
provisions of Section 2.8 of these Bylaws, adjourn the meeting to such time and
place as they may determine.
Section 2.8 Adjournment. Adjournments of any regular or
special meeting may be taken but any meeting at which directors are to be
elected shall be adjourned only from day to day, or for such longer periods not
exceeding fifteen (15) days as the shareholder present and entitled to vote
shall direct, until the directors have been elected. Other than as provided in
the last sentence of Section 2.6 of these Bylaws, notice of the adjourned
meeting or the business to be transacted thereat need not be given, other than
announcement at the meeting at which adjournment is taken, unless the Board
fixes a new record date for the adjourned meeting or the 1988 BCL requires
notice of the business to be transacted and such notice has not previously been
given. At any adjourned meeting at which a quorum is present, any business may
be transacted that might have been transacted at the meeting as originally
noticed.
The shareholders entitled to vote present in person or by
proxy, although less than a quorum pursuant to Section 2.7 of these Bylaws,
shall nevertheless constitute a quorum for the purpose of (a) electing directors
at a meeting called for the election of directors that has been previously
adjourned for lack of a quorum, and (b) acting, at a meeting that has been
adjourned for one or more periods aggregating fifteen (15) days because of an
absence of a quorum, upon any matter set forth in the original notice of such
adjourned meeting, provided that such original notice shall have complied with
the last sentence of Section 2.6 of these Bylaws.
Section 2.9 Majority Voting. Any matter brought before a duly
organized meeting for a vote of the shareholders shall be decided by a majority
of the votes cast at such meeting by the shareholders present in person or by
proxy and entitled to vote thereon, unless the
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matter is one for which a different vote is required by express provision of the
1988 BCL, the Articles or a bylaw adopted by the shareholders, in any of which
case(s) such express provision shall govern and control the decision on such
matter.
Section 2.10 Voting Rights. Except as otherwise provided in
the Articles, at every meeting of the shareholders, every shareholder entitled
to vote shall have the right to one (1) vote for each share having voting power
standing in his or her name on the books of the Corporation.
Section 2.11 Proxies. Every shareholder entitled to vote at a
meeting of the shareholders or to express consent or dissent to corporate action
in writing may authorize another person to act for him or her by proxy. The
presence of, or vote or other action at a meeting of shareholders, or the
expression of consent or dissent to corporate action in writing, by a proxy of a
shareholder, shall constitute the presence of, or vote or action by, or written
consent or dissent of the shareholder. Every proxy shall be executed in writing
by the shareholder or by the shareholder's duly authorized attorney in fact and
filed with the Secretary of the Corporation. A proxy, unless coupled with an
interest, shall be revocable at will, notwithstanding any other agreement or any
provision in the proxy to the contrary, but the revocation of a proxy shall not
be effective until written notice of revocation has been given to the Secretary
of the Corporation. No unrevoked proxy shall be valid after three (3) years from
the date of its execution, unless a longer time is expressly provided therein. A
proxy shall not be revoked by the death or incapacity of the maker unless,
before the vote is counted or the authority is exercised, written notice of such
death or incapacity is given to the Secretary of the Corporation.
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Section 2.12 Voting Lists. The officer or agent having charge
of the transfer books for securities of the Corporation shall make a complete
list of the shareholders entitled to vote at a meeting of the shareholders,
arranged in alphabetical order, with the address of and the number of shares
held by each shareholder, which list shall be produced and kept open at the time
and place of the meeting and shall be subject to the inspection of any
shareholder during the whole time of the meeting.
Section 2.13 Judges of Election. In advance of any meeting of
the shareholders, the Board may appoint judges of election, who need not be
shareholders, to act at such meeting or any adjournment thereof. If judges of
election are not so appointed, the presiding officer of any such meeting may,
and on the request of any shareholder shall, appoint judges of election at the
meeting. The number of judges shall be one (1) or three (3), as determined by
the Board to be appropriate under the circumstances. No person who is a
candidate for office to be filled at the meeting shall act as a judge at the
meeting. The judges of election shall do all such acts as may be proper to
conduct the election or vote with fairness to all shareholders, and shall make a
written report of any matter determined by them and execute a certificate of any
fact found by them, if requested by the presiding officer of the meeting or any
shareholder or the proxy of any shareholder. If there are three judges of
election, the decision, act or certificate of a majority shall be effective in
all respects as the decision, act or certificate of all.
Section 2.14 Participation by Conference Call. The right of
any shareholder to participate in any shareholders' meeting by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting may hear
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each other, in which event all shareholders so participating shall be deemed
present at such meeting, shall be granted solely in the discretion of the
Board.
ARTICLE III
SHAREHOLDER ACTION BY WRITTEN CONSENT
Section 3.1 Unanimous Written Consent. Any action required or
permitted to be taken at a meeting of the shareholders or of a class of
shareholders may be taken without a meeting if, prior or subsequent to the
action, a consent or consents thereto in writing, setting forth the action so
taken, shall be signed by all of the shareholders who would be entitled to vote
at a meeting for such purpose and filed with the Secretary of the Corporation.
Section 3.2 Partial Written Consent. Any action required or
permitted to be taken at a meeting of the shareholders or of a class of
shareholders may be taken without a meeting upon the written consent of
shareholders who would have been entitled to cast the minimum number of votes
that would be necessary to authorize the action at a meeting at which all
shareholders entitled to vote thereon were present and voting. The consents
shall be filed with the Secretary of the Corporation. An action taken pursuant
to this section shall not become effective until at least ten (10) days' written
notice of the action has been given to each shareholder entitled to vote thereon
who has not consented thereto.
Section 3.3 Record Date -- Consents. Except as otherwise
provided in Section 8.1 of these Bylaws, the record date for determining
shareholders entitled to express consent or dissent to action in writing without
a meeting, when prior action by the Board is not necessary, shall be at the
close of business on the day on which the first written consent or dissent is
filed
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with the Secretary of the Corporation. If prior action by the Board is
necessary, then the record date for determining such shareholders shall be at
the close of business on the day on which the Board adopts the resolution
relating to such action.
ARTICLE IV
DIRECTORS
Section 4.1 Number and Qualifications. The Board shall consist
of one (1) or more directors as determined from time to time by the Board.
Except as provided in Section 4.4 of these Bylaws, in the case of vacancies,
directors shall be elected by the shareholders. Directors shall be natural
persons of full age and need not be residents of the Commonwealth of
Pennsylvania or security holders of the Corporation.
Section 4.2 Term. Each director shall be elected to serve a
term of one (1) year and until a successor is elected and qualified or until the
director's earlier death, resignation or removal.
Section 4.3 Nominations of Directors. Nominees for election to
the Board shall be selected by the Board or a committee of the Board to which
the Board has delegated the authority to make such selections pursuant to
Section 4.12 of these Bylaws. The Board or such committee, as the case may be,
will consider written recommendations from shareholders for nominees for
election to the Board provided such recommendation, together with (a) a written
description of the proposed nominee's qualifications and other relevant
biographical information, (b) a description of any arrangements or
understandings among the recommending shareholder and each nominee and any other
person with respect to such nomination, and (c) the consent of
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each nominee to serve as a director of the Corporation if so elected, is
received by the Secretary of the Corporation not later than the tenth day after
the giving of notice of the meeting at which directors are to be elected. Only
persons duly nominated for election to the Board in accordance with this Section
4.3 shall be eligible for election to the Board.
Section 4.4 Vacancies. Vacancies in the Board, including
vacancies resulting from an increase in the number of directors, shall be filled
by a majority vote of the remaining members of the Board, even though less than
a quorum, or by a sole remaining director, and each person so elected shall
serve as a director for the balance of the unexpired term. If one (1) or more
directors resign from the Board effective at a future date, then the directors
then in office, including those who have resigned, shall have the power to fill
the vacancies by a majority vote, the vote thereon to take effect when the
resignations become effective.
Section 4.5 Removal. The entire Board or any one (1) or more
directors may be removed from office without assigning any cause by the vote of
the shareholders.
Section 4.6 Powers. The business and affairs of the
Corporation shall be managed under the direction of its Board, which may
exercise all powers of the Corporation and do all such lawful acts and things as
are not by statute or by the Articles or these Bylaws directed or required to be
exercised and done by the shareholders.
Section 4.7 Place of Board Meetings. Meetings of the Board may
be held at such place within or without the Commonwealth of Pennsylvania as the
Board may from time to time appoint or as may be designated in the notice of the
meeting.
Section 4.8 First Meeting of Newly Elected Board. The first
meeting of each newly elected Board may be held at the same place and
immediately after the meeting at which
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such directors were elected and no notice shall be required other than
announcement at such meeting. If such first meeting of the newly elected Board
is not so held, then notice of such meeting shall be given in the same manner as
set forth in Section 4.9 of these Bylaws with respect to notice of regular
meetings of the Board.
Section 4.9 Regular Board Meetings; Notice. Regular meetings
of the Board may be held at such times and places as shall be determined from
time to time by resolution of at least a majority of the whole Board at a duly
convened meeting, or by unanimous written consent. The Secretary may, but need
not, provide notice of each regular meeting of the Board, specifying the date,
place and hour of the meeting in a manner consistent with Section 12.5 of these
Bylaws.
Section 4.10 Special Board Meetings; Notice. Special meetings
of the Board may be called by the President of the Corporation on notice to each
director, specifying the date, place and hour of the meeting and given within
the same time and in the same manner provided for notice of regular meetings in
Section 4.9 of these Bylaws. Special meetings shall be called by the Secretary
of the Corporation in like manner and on like notice on the written request of
two (2) or more directors.
Section 4.11 Quorum of the Board. At all meetings of the
Board, the presence of a majority of the directors in office shall constitute a
quorum for the transaction of business, and the acts of a majority of the
directors present and voting at a meeting at which a quorum is present shall be
the acts of the Board. If a quorum shall not be present at any meeting of
directors, then the directors present thereat may adjourn the meeting. It shall
not be necessary to
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give any notice of the adjourned meeting or of the business to be transacted
thereat other than by announcement at the meeting at which such adjournment is
taken.
Section 4.12 Committees of Directors. The Board may, by
resolution adopted by a majority of the directors in office, establish one (1)
or more committees, each committee to consist of one (1) or more of the
directors, and may designate one or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting of
the committee or for the purposes of any written action by the committee. Any
such committee, to the extent provided in such resolution of the Board or in
these Bylaws, shall have and may exercise all of the powers and authority of the
Board; provided, however, that no such committee shall have any power or
authority to (a) submit to the shareholders any action requiring approval of the
shareholders under the 1988 BCL, (b) create or fill vacancies on the Board, (c)
amend or repeal these Bylaws or adopt new bylaws, (d) amend or repeal any
resolution of the Board that by its terms is amendable or repealable only by the
Board, (e) act on any matter committed by these Bylaws or by resolution of the
Board to another committee of the Board, (f) amend the Articles, or (g) adopt a
plan or an agreement of merger or consolidation. In the absence or
disqualification of a member or alternate member or members of a committee, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not a quorum is present, may unanimously appoint another
director to act at the meeting in the place of any absent or disqualified
member. Minutes of all meetings of any committee of the Board shall be kept by
the person designated by such committee to keep such minutes. Copies of such
minutes and any writing setting forth an action taken by written consent without
a meeting
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shall be distributed to each member of the Board promptly after such meeting is
held or such action is taken. Each committee of the Board shall serve at the
pleasure of the Board.
Section 4.13 Participation in Board Meetings by Telephone. One
(1) or more directors may participate in a meeting of the Board or of a
committee of the Board by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and all directors so participating shall be deemed
present at the meeting.
Section 4.14 Action by Consent of Directors. Any action
required or permitted to be taken at a meeting of the Board or of a committee of
the Board may be taken without a meeting if, prior or subsequent to the action,
a consent or consents in writing setting forth the action so taken shall be
signed by all of the directors in office or the members of the committee, as the
case may be, and filed with the Secretary of the Corporation.
Section 4.15 Compensation of Directors. The Board may, by
resolution, fix the compensation of directors for their services as directors. A
director may also serve the Corporation in any other capacity and receive
compensation therefor.
Section 4.16 Directors' Liability. No person who is or was a
director of the Corporation shall be personally liable for monetary damages for
any action taken, or any failure to take any action, unless (a) such director
has breached or failed to perform the duties of his or her office under the 1988
BCL and (b) the breach or failure to perform constitutes self-dealing, willful
misconduct or recklessness, or unless such liability is imposed pursuant to a
criminal statute or for the payment of taxes pursuant to local, state or federal
law.
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ARTICLE V
OFFICERS
Section 5.1 Number and Qualification. The officers of the
Corporation shall be a President, a Secretary, and a Treasurer, or persons who
shall act as such, regardless of the name or title by which they may be
designated, elected or appointed, and, in addition, the Corporation may have one
(1) or more Vice Presidents and such other officers and assistant officers as
the Board may elect. The President, all Vice Presidents and the Secretary shall
be natural persons of full age. The Treasurer may be a corporation, but if a
natural person shall be of full age. Any number of offices may be held by the
same person. Officers may, but need not be, shareholders or members of the
Board.
Section 5.2 Election. The officers and assistant officers
shall be elected or appointed by the Board at its annual meeting, or as soon
thereafter as possible, and shall hold office for a term of one (1) year and
until their successors are selected and qualified or until their earlier death,
resignation or removal.
Section 5.3 Other Officers. The Corporation may have such
other officers, assistant officers, agents and employees as the Board may deem
necessary, each of whom shall hold office for such period, have such authority
and perform such duties as the Board or the President may from time to time
determine. The Board may delegate to the President the power to appoint or
remove, and set the compensation of, any such other officers and any such agents
or employees.
Section 5.4 Compensation. Except as provided in Section 5.3 of
these Bylaws, the salaries of all officers of the Corporation shall be fixed by
the Board.
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Section 5.5 Vacancies. A vacancy by reason of death,
resignation or removal of any officer or assistant officer or by reason of the
creation of a new office may be filled by the Board.
Section 5.6 Removal. Any officer or agent may be removed by
the Board, or by an officer pursuant to Section 5.3 of these Bylaws, with or
without cause, but such removal shall be without prejudice to the contract
rights, if any, of the person so removed. The election or appointment of an
officer or agent shall not of itself create any contract rights.
Section 5.7 General Duties. All officers and assistant
officers, as between themselves and the Corporation, shall have such authority
and perform such duties in the management of the Corporation as may be provided
in these Bylaws and as may be determined by resolution of the Board not
inconsistent with these Bylaws.
Section 5.8 The President. The President shall be the chief
executive officer of the Corporation; he or she shall preside at all meetings of
the shareholders and directors, shall have general and active management of the
business of the Corporation and shall see that all orders and resolutions of the
Board are carried into effect.
Section 5.9 The Vice Presidents. The Vice President, or if
there shall be more than one (1), the Vice Presidents, in the order determined
by the Board, shall, in the absence or disability of the President, perform the
duties and exercise the powers of the President and shall perform such other
duties and have such other powers as the Board may from time to time prescribe
or the President may delegate to them.
Section 5.10 The Secretary. The Secretary shall attend all
sessions of the Board and all meetings of the shareholders and record all the
votes of the Corporation and the
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minutes of all the transactions in a book to be kept for that purpose, and shall
perform like duties for the committees of the Board when required. The Secretary
shall give, or cause to be given, notice of all meetings of the shareholders and
of the Board, and shall perform such other duties as may be prescribed by the
Board or the President, under whose supervision the Secretary shall be. He or
she shall keep in safe custody the corporate seal, if any, of the Corporation.
Section 5.11 The Treasurer.
(a) The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation, and shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositories as shall be designated by the Board.
(b) The Treasurer shall disburse the funds of the
Corporation as may be ordered by the Board, taking proper vouchers for such
disbursements, and shall render to the President and directors, at the regular
meetings of the Board, or whenever they may require it, an account of all his or
her transactions as Treasurer.
Section 5.12 Bonds. If required by the Board, any officer
shall give the Corporation a bond in such sum, and with such surety or sureties
as may be satisfactory to the Board, for the faithful discharge of the duties of
his or her office and for the restoration to the Corporation, in the case of his
or her death, resignation, retirement or removal from office, of all books,
papers, vouchers, money and other property of whatever kind in his or her
possession or under his or her control belonging to the Corporation.
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ARTICLE VI
CERTIFICATES FOR SHARES
Section 6.1 Share Certificates. The certificates representing
shares of the Corporation shall be numbered and registered in a share register
as they are issued. The share register shall exhibit the names and addresses
of all registered holders and the number and class of shares and the series,
if any, held by each.
The Certificate shall state that the Corporation is
incorporated under the laws of the Commonwealth of Pennsylvania, the name of the
registered holder and the number and class of shares and the series, if any,
represented thereby. If, under its Articles, the Corporation is authorized to
issue shares of more than one class or series, then each Certificate shall set
forth, or shall contain a statement that the Corporation will furnish to any
shareholder upon request and without charge, a full or summary statement of the
designations, voting rights, preferences, limitations and special rights of the
shares of each class or series authorized to be issued so far as they have been
fixed and determined and the authority of the Board to fix and determine such
rights.
Section 6.2 Execution of Certificates. Every share certificate
shall be executed, by facsimile or otherwise, by or on behalf of the
Corporation, by the President, by any Vice-President, or by the Secretary. In
case any officer who has signed or whose facsimile signature has been placed
upon any share certificate shall have ceased to be such officer, because of
death, resignation or otherwise, before the certificate is issued, it may be
issued by the corporation with the same effect as if the officer had not ceased
to be such at the time of issue.
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ARTICLE VII
TRANSFER OF SHARES
Section 7.1 Transfer. Upon presentment to the Corporation or
its transfer agent of a share certificate endorsed by the appropriate person or
accompanied by proper evidence of succession, assignment or authority to
transfer, a new certificate shall be issued to the person entitled thereto and
the old certificate canceled and the transfer registered upon the books of the
Corporation, unless either: (a) the Corporation has received a demand from an
appropriate person to make an indorsement on such certificate that the
Corporation not register transfer; or (b) the Corporation has been served with a
restraining order, injunction or other process from a court of competent
jurisdiction enjoining it from registering the transfer. Any demand to the
Corporation not to register transfer shall identify the registered owner and the
issue of which such share is a part and provide an address to send
communications directed to the person making the demand. No demand described in
Section 7.1(a) above shall be effective unless it is received by the Corporation
at a time and in a manner affording the Corporation a reasonable opportunity to
act on it.
Section 7.2 Request to Register Transfer After Demand. If a
share certificate is presented to the Corporation or its transfer agent with a
request to register transfer after a demand that the Corporation not register
transfer of such certificate has become effective pursuant to Section 7.1 of
these Bylaws, then the Corporation shall promptly communicate to each of the
person who initiated the demand and the person who presented the certificate for
registration of transfer a notification stating that: (a) the certificate has
been presented for registration of transfer; (b) a demand that the Corporation
not register transfer of such certificate
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had previously been received; and (c) the Corporation will withhold registration
of transfer of such certificate for a period of thirty (30) days (or such
shorter period of time as stated in the notification that is not manifestly
unreasonable) from the date of the notification in order to provide the person
who initiated the demand an opportunity to obtain legal process or an indemnity
bond.
Section 7.3 Limitation of Liability. The Corporation shall not
be liable to a person who initiated a demand that the Corporation not register
transfer for any loss the person suffers as a result of registration of transfer
if the person who initiated demand does not, within the time stated in the
notification described in Section 7.2 of these Bylaws, either (a) obtain an
appropriate restraining order, injunction or other process from a course of
competent jurisdiction enjoining the Corporation from registering the transfer,
or (b) file with the Corporation an indemnity bond, sufficient in the
Corporation's to protect the Corporation or its transfer agent from any loss it
or they may suffer by refusing to register the transfer.
ARTICLE VIII
RECORD DATE; IDENTITY OF SHAREHOLDERS
Section 8.1 Record Date. The Board may fix a time, prior to
the date of any meeting of the shareholders, as a record date for the
determination of the shareholders entitled to notice of, or to vote at, the
meeting, which time, except in the case of an adjourned meeting, shall not be
more than ninety (90) days prior to the date of the meeting. Except as otherwise
provided in Section 8.2 of these Bylaws, only the shareholders of record at the
close of business on the date so fixed shall be entitled to notice of, or to
vote at, such meeting, notwithstanding any
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transfer of securities on the books of the Corporation after any record date so
fixed. The Board may similarly fix a record date for the determination of
shareholders for any other purpose. When a determination of shareholders of
record has been made as herein provided for purposes of a meeting, the
determination shall apply to any adjournment thereof unless the Board fixes a
new record date for the adjourned meeting.
Section 8.2 Certification of Nominee. The Board may adopt a
procedure whereby a shareholder may certify in writing to the Secretary of the
Corporation that all or a portion of the shares registered in the name of the
shareholder are held for the account of a specified person or persons. The
Board, in adopting such procedure, may specify (a) the classification of
shareholder who may certify, (b) the purpose or purposes for which the
certification may be made, (c) the form of certification and the information to
be contained therein, (d) as to certifications with respect to a record date,
the date after the record date by which the certification must be received by
the Secretary of the Corporation, and (e) such other provisions with respect to
the procedure as the Board deems necessary or desirable. Upon receipt by the
Secretary of the Corporation of a certification complying with the procedure,
the persons specified in the certification shall be deemed, for the purpose or
purposes set forth in the certification, to be the holders of record of the
number of shares specified instead of the persons making the certification.
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ARTICLE IX
REGISTERED SHAREHOLDERS
Section 9.1 Before due presentment for transfer of any shares,
the Corporation shall treat the registered owner thereof as the person
exclusively entitled to vote, to receive notifications and otherwise to
exercise all the rights and powers of an owner, and shall not be bound to
recognize any equitable or other claim or interest in such securities, whether
or not it shall have express or other notice thereof, except as otherwise
provided by the laws of the Commonwealth of Pennsylvania or Section 8.2 of
these Bylaws.
ARTICLE X
LOST CERTIFICATES
Section 10.1 If the owner of a share certificate claims that
it has been lost, destroyed, or wrongfully taken, then the Corporation shall
issue a new certificate in place of the original certificate if the owner so
requests before the Corporation has notice that the certificate has been
acquired by a protected purchaser, and if the owner has filed with the
Corporation an indemnity bond and an affidavit of the facts satisfactory to the
Board or its designated agent, and has complied with such other reasonable
requirements, if any, as the Board may deem appropriate.
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ARTICLE XI
DISTRIBUTIONS
Section 11.1 Distributions. Distributions upon the shares of
the Corporation, whether by dividend, purchase or redemption or other
acquisition of its shares subject to any provisions of the Articles related
thereto, may be authorized by the Board at any regular or special meeting of the
Board and may be paid directly or indirectly in cash, in property or by the
incurrence of indebtedness by the Corporation.
Section 11.2 Reserves. Before the making of any distributions,
there may be set aside out of any funds of the Corporation available for
distributions such sum or sums as the Board from time to time, in its absolute
discretion, deems proper as a reserve fund to meet contingencies, or for
equalizing dividends, or for repairing or maintaining any property of the
Corporation, or for such other purpose as the Board shall deem conducive to the
interests of the Corporation, and the Board may abolish any such reserve in the
manner in which it was created.
Section 11.3 Stock Dividends/Splits. Stock dividends or splits
upon the shares of the corporation, subject to any provisions of the Articles
related thereto, may be authorized by the Board at any regular or special
meeting of the Board.
ARTICLE XII
GENERAL PROVISIONS
Section 12.1 Financial Reports to Shareholders. Unless waived
in a written agreement by the shareholders, separate from the Articles of
Incorporation or these Bylaws, the Corporation shall furnish to its shareholders
annual financial statements, including at least a
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balance sheet as of the end of each fiscal year and a statement of income and
expenses for the fiscal year. The financial statements shall be prepared on the
basis of generally accepted accounting principles, if the Corporation prepares
financial statements for the fiscal year on that basis for any purpose, and may
be consolidated statements of the Corporation and one or more of its
subsidiaries. The financial statements shall be mailed by the Corporation to
each of its shareholders entitled thereto within 120 days after the close of
each fiscal year and, after the mailing and upon written request, shall be
mailed by the Corporation to any shareholder or beneficial owner entitled
thereto to whom a copy of the most recent annual financial statements has not
previously been mailed. Statements that are audited or reviewed by a public
accountant shall be accompanied by the report of the accountant. In other cases,
each copy shall be accompanied by a statement of the person in charge of the
financial records of the Corporation:
(a) stating his reasonable belief as to whether or not
the financial statements were prepared in accordance with generally accepted
accounting principles and, if not, describing the basis of presentation, and
(b) describing any material respects in which the
financial statements were not prepared on a basis consistent with those prepared
for the previous year.
Section 12.2 Checks and Notes. All checks or demands for money
and notes of the Corporation shall be signed by such officer or officers as the
Board may from time to time designate.
Section 12.3 Fiscal Year. The fiscal year of the Corporation
shall be as determined by the Board.
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Section 12.4 Seal. The corporate seal, if any, shall have
inscribed thereon the name of the Corporation, the year of its organization
and the words "Corporate Seal, Pennsylvania." Such seal may be used by causing
it or a facsimile thereof to be impressed or affixed or in any manner
reproduced. The affixation of the corporate seal shall not be necessary to the
valid execution, assignment or endorsement of any instrument or other document
by the Corporation.
Section 12.5 Notices. Whenever, under the provisions of the
1988 BCL or of the Articles or of these Bylaws or otherwise, written notice is
required to be given to any person, it may be given to such person either
personally or by sending a copy thereof by first class or express mail, postage
prepaid, telegram (with messenger service specified), telex, TWX (with
answerback received), courier service (with charges prepaid) or facsimile
transmission, to his or her address, (or to his or her telex, TWX, or facsimile
number), appearing on the books of the Corporation or, in the case of directors,
supplied by the director to the Corporation for the purpose of notice. If the
notice is sent by mail, telegraph or courier service, then it shall be deemed to
have been given to the person entitled thereto when deposited in the United
States mail or with a telegraph office or courier service for delivery to that
person. A notice given by telex or TWX shall be deemed to have been given when
dispatched.
Section 12.6 Waiver of Notice. Whenever any notice is required
to be given by the 1988 BCL or by the Articles or these Bylaws, a waiver thereof
in writing, signed by the person or persons entitled to the notice, whether
before or after the time stated therein, shall be deemed equivalent to the
giving of such notice. Neither the business to be transacted at nor the purpose
of a meeting need be specified in the waiver of notice of the meeting.
Attendance of a
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person at any meeting shall constitute a waiver of notice of the meeting, except
where any person attends a meeting for the express purpose of objecting to the
transaction of any business because the meeting was not lawfully called or
convened, and the person so objects at the beginning of the meeting.
ARTICLE XIII
AMENDMENTS
Section 13.1 Amendments. The Bylaws may be adopted, amended or
repealed by a majority vote of the shareholders entitled to vote thereon at any
regular or special meeting duly convened or, except for a bylaw on a subject
expressly committed to the shareholders by the 1988 BCL, by a majority vote of
the members of the Board at any regular or special meeting duly convened,
subject always to the power of the shareholders to change such action by the
directors. In the case of a meeting of shareholders, written notice shall be
given to each shareholder that the purpose, or one of the purposes, of the
meeting is to consider the adoption, amendment or repeal of the Bylaws. There
shall be included in, or enclosed with the notice, a copy of the proposed
amendment or a summary of the changes to be effected thereby. Any change in the
Bylaws shall take effect when adopted unless otherwise provided in the
resolution effecting the change.
ARTICLE XIV
INDEMNIFICATION
Section XIV. Officers and Directors - Direct Actions. The
Corporation shall indemnify, to the extent permitted under these Bylaws, any
person who was or is a party (other
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than a party plaintiff suing on his or her own behalf), or who is threatened to
be made such a party, to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other than
an action by or in the right of the Corporation) arising out of, or in
connection with, any actual or alleged act or omission or by reason of the fact
that he or she is or was a director or officer of the Corporation, or is or was
serving at the request of the Corporation as a director or officer of another
domestic or foreign corporation for profit or not-for-profit, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him or her in connection with such action, suit or proceeding if he
or she met the standard of conduct of (a) acting in good faith and in a manner
he or she reasonably believed to be in, or not opposed to, the best interests of
the Corporation and (b) with respect to any criminal proceeding, having no
reasonable cause to believe his or her conduct was unlawful. The termination of
any action or proceeding by judgment, order, settlement or conviction or upon a
plea of nolo contendere or its equivalent shall not of itself create a
presumption that the person did not act in good faith and in a manner that he or
she reasonably believed to be in, or not opposed to, the best interests of the
Corporation and, with respect to any criminal proceeding, had reasonable cause
to believe that his or her conduct was unlawful.
Section 14.2 Officers and Directors -- Derivative Actions.
The Corporation shall indemnify any person who was or is a party (other than a
party suing in the right of the Corporation), or is threatened to be made a
party, to any threatened, pending or completed action by or in the right of the
Corporation to procure a judgment in its favor by reason of the fact that the
person is or was a director or officer of the Corporation, or is or was serving
at the request of
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the Corporation as a director or officer of another domestic or foreign
corporation for profit or not-for-profit, partnership, joint venture, trust or
other enterprise against expenses (including attorneys' fees) actually and
reasonably incurred by him or her in connection with the defense or settlement
of the action if he or she met the standard of conduct of acting in good faith
and in a manner he or she reasonably believed to be in, or not opposed to, the
best interests of the Corporation. Indemnification shall not be made in respect
of any claim, issue or matter as to which the person has been adjudged to be
liable to the Corporation unless and only to the extent that the Court of Common
Pleas of the judicial district embracing the county in which the registered
office of the Corporation is located or the court in which the action was
brought determines upon application that, despite the adjudication of liability
but in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for the expenses that the Court of Common Pleas
or other court deems proper.
Section 14.3 Employees and Agents. The Corporation may, to the
extent permitted by the 1988 BCL, indemnify any person who is or was an employee
or agent of the Corporation, other than an officer, or is or was serving at the
request of the Corporation as an employee or agent of another domestic or
foreign corporation for profit or not-for-profit, partnership, joint venture,
trust or other enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him by reason of his service on behalf of the Corporation, provided such
person has met the applicable standard of conduct as would apply in any
particular instance under the 1988 BCL.
Section 14.4 Mandatory Indemnification. To the extent that a
director, officer, employee or agent of the Corporation has been successful on
the merits or otherwise in
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defense of any action or proceeding referred to in Sections 14.1, 14.2 or 14.3
of this Article XIV, or in defense of any claim, issue or matter therein, he or
she shall be indemnified by the Corporation against expenses (including
attorneys' fees) actually and reasonably incurred by him or her in connection
therewith.
Section 14.5 Advancing Expense. Expenses (including attorneys'
fees) incurred by an officer, director, employee or agent in defending any
action or proceeding referred to in this Article XIV may be paid by the
Corporation in advance of the final disposition of the action or proceeding upon
receipt of an undertaking by or on behalf of such person to repay such amount if
it is ultimately determined that he or she is not entitled to be indemnified by
the Corporation as authorized in this Article XIV.
Section 14.6 Procedure.
(a) Unless ordered by a court, any indemnification
under Sections 14.1, 14.2 or 14.3 of this Article XIV shall be made by the
Corporation only as authorized in a specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances because he or she has met the applicable standard of conduct set
forth in Sections 14.1, 14.2 or 14.3.
(b) Expenses shall be advanced by the Corporation to a
director or officer upon a determination that such person has met the applicable
standard of conduct set forth in Sections 14.1 or 14.2 of this Article and has
satisfied the terms set forth in Section 14.5 of this Article.
(c) Expenses may be advanced to an employee or agent
of the Corporation upon a determination that such employee or agent has
satisfied the terms of Sections
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14.3 and 14.5 of this Article and, in view of all the circumstances of the case,
such person is fairly and reasonably entitled to advancement of expenses.
(d) All determinations under this Section 14.6
shall be made:
(1) With respect to indemnification under
Section 14.3 and advancement of expenses under Section 14.6(c), by the
Board by a majority vote; and
(2) With respect to indemnification under
Sections 14.1 or 14.2 and advancement of expenses under Section 14.6(b),
(A) By the Board by a majority vote of a
quorum consisting of directors who were not parties to such action or
proceeding, or
(B) If such a quorum is not obtainable, or, if
obtainable and if a majority vote of a quorum of disinterested directors so
directs, then by independent legal counsel in a written opinion, or
(C) By the shareholders.
Section 14.7 Nonexclusivity of Indemnification.
(a) The indemnification and advancement of
expenses provided by, or granted pursuant to, this Article XIV shall not be
deemed exclusive of any other rights to which a person seeking indemnification
or advancement of expenses may be entitled under any Bylaw, agreement, vote of
shareholders or disinterested directors or otherwise, both as to actions in his
or her official capacity and as to actions in another capacity while holding
that office. Section 1728 (relating to interested directors; quorum) of the 1988
BCL shall be applicable to any Bylaw, contract or transaction authorized by the
directors under this Section 14.7. The Corporation may create a fund of any
nature, which may, but need not be, under the control of a trustee, or
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otherwise secure or insure in any manner its indemnification obligations,
whether arising under or pursuant to this Article XIV or otherwise.
(b) Indemnification pursuant to Section 14.7(a) shall
not be made in any case where the act or failure to act giving rise to the
claim for indemnification is determined by a court to have constituted willful
misconduct or recklessness.
(c) Indemnification pursuant to Section 14.7(a) under
any Bylaw, agreement, vote of shareholders or directors or otherwise, may be
granted for any action taken or any failure to take any action and may be made
whether or not the Corporation would have the power to indemnify the person
under any other provision of law except as provided in this Section 14.7 and
whether or not the indemnified liability arises or arose from any threatened or
pending or completed action by or in the right of the Corporation.
Section 14.8 Insurance. The Corporation shall have power to
purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the Corporation, or is or was serving at
the request of the Corporation as a director, officer, employee or agent of
another domestic or foreign corporation for profit or not-for-profit,
partnership, joint venture, trust or other enterprise against any liability
asserted against such person and incurred by him or her in any such capacity, or
arising out of his or her status as such, whether or not the Corporation would
have the power to indemnify him or her against that liability under the
provisions of this Article XIV.
Section 14.9 Past Officers and Directors. The indemnification
and advancement of expenses provided by, or granted pursuant to, this Article
XIV shall, unless otherwise provided when authorized or ratified, continue as to
a person who has ceased to be a
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director, officer, employee or agent of the Corporation and shall inure to the
benefit of the heirs and personal representatives of that person.
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QUANTUM EPITAXIAL DESIGNS, INC.
EMPLOYEE NON-QUALIFIED STOCK OPTION PLAN
(As Amended and Restated, Effective ____________________, 1996)
Background. This Plan is an amendment and restatement of the
employee stock option plan adopted by Quantum Epitaxial Designs, Inc. (the
"Company") in 1991. All stock options awarded before the effective date of the
amendment and restatement of the Plan shall be subject to the rules of the Plan
as in effect before such effective date.
Section 1. Purposes.
The purposes of the Plan are (a) to recognize and compensate
selected Employees of the Company and its Subsidiaries who contribute to the
development and success of the Company and its Subsidiaries; (b) to maintain the
competitive position of the Company and its Subsidiaries by attracting and
retaining key Employees; and (c) to provide incentive compensation to such key
Employees based upon the Company's performance, as measured by the appreciation
in Common Stock. The Options issued pursuant to the Plan are intended to
constitute non-qualified stock options.
Section 2. Definitions.
(a) "Award" shall mean a grant of Options to an Employee
pursuant to the provisions of this Plan. Each separate grant of Options to an
Employee and each group of Options which matures on a separate date is treated
as a separate Award.
(b) "Board" shall mean the Board of Directors of the Company,
as constituted from time to time.
(c) "Change of Control" shall mean the happening of an event,
which shall be deemed to have occurred upon the earliest to occur of the
following events: (i) the date the stockholders of the Company (or the Board, if
stockholder action is not required) approve a plan or other arrangement pursuant
to which the Company will be dissolved or liquidated, or (ii) the date the
stockholders of the Company (or the Board, if stockholder action is not
required) approve a definitive agreement to sell or otherwise dispose of all or
substantially all of the assets of the Company, or (iii) the date the
stockholders of the Company (or the Board, if stockholder action is not
required) and the stockholders of the other constituent corporations (or their
respective boards of directors, if and to the extent that
<PAGE>
stockholder action is not required) have approved a definitive agreement to
merge or consolidate the Company with or into another corporation, other than,
in either case, a merger or consolidation of the Company in which holders of
shares of the Company's voting capital stock immediately prior to the merger or
consolidation will have at least 50% of the ownership of voting capital stock of
the surviving corporation immediately after the merger or consolidation (on a
fully diluted basis), which voting capital stock is to be held in the same
proportion (on a fully diluted basis) as such holders' ownership of voting
capital stock of the Company immediately before the merger or consolidation, or
(iv) the date any entity, person or group (within the meaning of Section
13(d)(3) or Section 14(d)(2) of the Exchange Act), other than (A) the Company,
or (B) any of its Subsidiaries, or (C) any of the holders of the capital stock
of the Company, as determined on the date that this Plan is adopted by the
Board, or (D) any employee benefit plan (or related trust) sponsored or
maintained by the Company or any of its Subsidiaries or (E) any Affiliate (as
such term is defined in Rule 405 promulgated under the Securities Act) of any of
the foregoing, shall have acquired beneficial ownership of, or shall have
acquired voting control over more than 50% of the outstanding shares of the
Company's voting capital stock (on a fully diluted basis), unless the
transaction pursuant to which such person, entity or group acquired such
beneficial ownership or control resulted from the original issuance by the
Company of shares of its voting capital stock and was approved by at least a
majority of directors who shall have been either members of the Board on the
date that this Plan is adopted by the Board or members of the Board for at least
twelve (12) months prior to the date of such approval, or (v) the first day
after the date of this Plan when directors are elected such that there shall
have been a change in the composition of the Board such that a majority of the
Board shall have been members of the Board for less than twelve (12) months,
unless the nomination for election of each new director who was not a director
at the beginning of such twelve (12) month period was approved by a vote of at
least sixty percent (60%) of the directors then still in office who were
directors at the beginning of such period, or (vi) the date upon which the Board
determines (in its sole discretion) that based on then current available
information, the events described in clause (iv) are reasonably likely to occur.
(d) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
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(e) "Committee" shall mean the Committee appointed by the
Board in accordance with Section 4(a) of the Plan, if one is appointed, in which
event the Committee shall possess the power and authority of the Board.
(f) "Company" shall mean Quantum Epitaxial Designs, Inc., a
Pennsylvania corporation.
(g) "Common Stock" shall mean common stock of the Company,
$.01 per value per share.
(h) "Disinterested Person" shall have the meaning set forth in
Rule 16(b)-3(c)(2)(i), promulgated under Section 16 of the Exchange Act.
(i) "Disability" or "Disabled" shall mean the inability of an
Optionee to perform his or her normal employment duties for the Company, its
Parent, any of its Subsidiaries or its successors, as the case may be, resulting
from a mental or physical illness, impairment or any other similar occurrence
which can be expected to result in death or which has lasted or can be expected
to last for a period of twelve (12) consecutive months, as determined by the
Board.
(j) "Employee" shall mean any person, including officers and
directors, employed by the Company, its Parent, any of its Subsidiaries or its
successors. The payment of directors' fees by the Company, its Parent, any of
its Subsidiaries or its successors, as the case may be, shall not be sufficient
to constitute employment.
(k) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
(l) "Fair Market Value" shall mean the fair market value of a
share of Common Stock, as determined pursuant to Section 8 hereof.
(m) "Option" shall mean a non-qualified stock option to
purchase Shares that is Awarded pursuant to the Plan.
(n) "Option Agreement" shall mean a written agreement in such
form or forms as the Board (subject to the terms and conditions of this Plan)
may from time to time approve evidencing and reflecting the terms of an Option.
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(o) "Optionee" shall mean an Employee to whom an Option is
Awarded.
(p) "Parent" shall mean a "parent corporation" whether now or
hereafter existing, as defined in Sections 424(e) and (g) of the Code.
(q) "Plan" shall mean the Quantum Epitaxial Designs, Inc.
Employee Stock Option Plan, as amended and restated, effective _______________,
1996, or as amended thereafter from time to time.
(r) "Pool" shall mean the pool of shares of Common Stock
subject to the Plan, as described and set forth in Section 6 hereof.
(s) "Securities Act" shall mean the Securities Act of 1933, as
amended.
(t) "Shares" shall mean shares of Common Stock contained in
the Pool, as adjusted in accordance with Section 9 of the Plan.
(u) "Stock Purchase Agreement" shall mean an agreement in such
form as the Board (subject to the terms and conditions of this Plan) may from
time to time approve, which an Optionee may be required to execute as a
condition of purchasing Shares upon the exercise of an Option.
(v) "Subsidiary" shall mean a subsidiary corporation, whether
now or hereafter existing, as defined in Sections 424(f) and (g) of the Code.
Section 3. Participation.
(a) Employees. Participants in the Plan shall be selected by
the Board from the Employees (including Employees who also may be members of the
Board) of the Company, its Parent and its Subsidiaries or their successors. The
Board may make Awards at any time and from time to time to Employees on terms
and conditions described in Section 7. Any Award may include or exclude any
Employee, as the Board shall determine in its sole discretion.
4
<PAGE>
Section 4. Administration.
(a) Procedure. The Plan shall be administered by the Board.
Members of the Board who are eligible for Options or have been Awarded Options
may vote on any matters affecting the administration of the Plan or the Award of
any Options pursuant to the Plan, except that no such member shall act upon the
Award of an Option to himself, but any such member may be counted in determining
the existence of a quorum at any meeting of the Board or Committee during which
action is taken with respect to the Award of Options to him.
The Board may at any time appoint a Committee consisting
of not less than two persons to administer the Plan on behalf of the Board,
subject to such terms and conditions as the Board may prescribe. Members of the
Committee shall serve for such period of time as the Board may determine. From
time to time the Board may increase the size of the Committee and appoint
additional members thereto, remove members (with or without cause) and appoint
new members in substitution therefor, fill vacancies however caused, or remove
all members of the Committee and thereafter directly administer the Plan. In the
event the Company has a class of equity securities registered under Section 12
of the Exchange Act and unless the Board determines otherwise, from the
effective date of such registration until six months after the termination of
such registration, all Awards of Options shall be made solely by the Board, only
if each member is a Disinterested Person, or, otherwise, by a Committee of two
or more directors, each of whom is a Disinterested Person.
(b) Powers of the Board. Subject to the provisions of the
Plan, the Board or its Committee shall have the authority, in its discretion:
(i) to Award Options; (ii) to determine, upon review of relevant information and
in accordance with Section 8 of the Plan, the Fair Market Value per Share; (iii)
to determine the exercise price of the Options to be Awarded in accordance with
Sections 7 and 8 of the Plan; (iv) to determine the Employees to whom, and the
time or times at which, Options shall be Awarded, and the number of Shares to be
subject to each Option; (v) to prescribe, amend and rescind rules and
regulations relating to the Plan; (vi) to determine the terms and provisions of
each Option Awarded under the Plan, each Option Agreement and each Stock
Purchase Agreement (which need not be identical with the terms of other Options,
Option Agreements and Stock Purchase Agreements) and, with the consent of the
Optionee, to modify or amend an outstanding Option, Option Agreement or Stock
Purchase Agreement; (vii) to accelerate the vesting or exercise date of any
Option; (viii) to determine whether any Optionee will be required to execute a
stock repurchase agreement
5
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or other agreement as a condition to the exercise of an Option, and to determine
the terms and provisions of any such agreement (which need not be identical with
the terms of any other such agreement) and, with the consent of the Optionee, to
amend any such agreement; (ix) to interpret the Plan or any agreement entered
into with respect to the Award or exercise of Options; (x) to authorize any
person to execute on behalf of the Company any instrument required to effectuate
the Award of an Option previously Awarded by the Board or to take such other
actions as may be necessary or appropriate with respect to the Company's rights
pursuant to Options or agreements relating to the Award or exercise thereof; and
(xi) to make such other determinations and establish such other procedures as it
deems necessary or advisable for the administration of the Plan.
(c) Effect of the Board's or Committee's Decision. All
decisions, determinations and interpretations of the Board or the Committee
shall be final and binding with respect to all Options and Optionees.
(d) Limitation of Liability. Notwithstanding anything herein
to the contrary (with the exception of Section 31 hereof), no member of the
Board or of the Committee shall be liable for any good faith determination, act
or failure to act in connection with the Plan or any Option Awarded hereunder.
Section 5. Eligibility.
Except as otherwise provided in Section 3(b), Options may be
Awarded only to Employees. An Employee who has been Awarded an Option, if he or
she is otherwise eligible, may be Awarded additional Options.
Section 6. Stock Subject to the Plan.
Subject to the provisions of Section 9 of the Plan, the
maximum aggregate number of Shares which may be Awarded and sold under the Plan
is Three Hundred Twelve Thousand, Five Hundred Sixty (312,560) Shares
(collectively, the "Pool"), less the number of Shares Awarded under the Plan as
in effect immediately before the amendment and restatement of the Plan,
effective ____________________, 1996. Options Awarded from the Pool shall be
non-qualified stock options. Once Awarded pursuant to an Option, no Shares shall
return to the Plan and become available for future Award under the Plan,
regardless of whether an Option should expire or become unexercisable for any
reason without having been exercised in full, or, if Shares are subsequently
repurchased by the Company.
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Section 7. Terms and Conditions of Options Awarded to
Employees.
Each Option Awarded pursuant to the Plan shall be authorized
by the Board and shall be evidenced by an Option Agreement in such form as the
Board may from time to time determine. Each Option Agreement shall incorporate
by reference all other terms and conditions of the Plan, including the following
terms and conditions:
(a) Number of Shares. The number of Shares subject to the
Option, which may not include fractional Shares.
(b) Option Price. The price per Share payable on the exercise
of an Option shall be at least $.01 per Share and shall be stated in the Option
Agreement.
(c) Consideration. The consideration to be paid for the Shares
to be issued upon the exercise of an Option, including the method of payment,
shall be determined by the Board and may consist entirely of cash, check or
shares of Common Stock having a Fair Market Value on the date of surrender equal
to the aggregate exercise price of the Shares as to which said Option shall be
exercised, or any combination of such methods of payment, or such other
consideration and method of payment permitted under any laws to which the
Company is subject and which is approved by the Board, provided that shares of
Common Stock may be surrendered in satisfaction of the exercise price only if
the Optionee has held such shares for more than six months (or such shorter time
as shall not, in the Board's sole discretion have an adverse effect on the
Company's financial statements). In making its determination as to the type of
consideration to accept, the Board shall consider if acceptance of such
consideration may be reasonably expected to benefit the Company. If the
consideration for the exercise of an Option is the surrender of previously
acquired and owned shares of Common Stock, the Optionee will be required to make
representations and warranties satisfactory to the Company regarding his title
to the shares of Common Stock used to effect the purchase, including without
limitation, representations and warranties that the Optionee has good and
marketable title to such shares of Common Stock free and clear of any and all
liens, encumbrances, charges, equities, claims, security interests, options or
restrictions, and has full power to deliver such shares of Common Stock without
obtaining the consent or approval of any person or governmental authority other
than those which have already given consent or approval in a manner satisfactory
to the Company. The value of the shares of Common Stock used to effect the
purchase shall be the Fair Market Value of such shares of Common Stock on the
date of exercise as determined by the Board in its sole discretion, exercised in
good faith.
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(d) Exercise of Options. Any Option Awarded hereunder shall be
exercisable at such times and under such conditions as may be determined by the
Board and as shall be permissible under the terms of the Plan, including
performance criteria with respect to the Company and/or the Optionee, and as
shall be permissible under the terms of the Plan.
An Option may be exercised in accordance with the
provisions of this Plan as to all or any portion of the Shares then exercisable
under an Option from time to time during the term of the Option. An Option may
not be exercised solely for a fraction of a Share.
An Option shall be deemed to be exercised when written
notice of such exercise has been given to the Company at its principal executive
office in accordance with the terms of the Option Agreement by the person
entitled to exercise the Option and full payment for the Shares with respect to
which the Option is exercised has been received by the Company, accompanied by
an executed Stock Purchase Agreement and any other agreements required by the
terms of the Plan and/or Option Agreement. Full payment may consist of such
consideration and method of payment allowable under Section 7 of the Plan. No
adjustment shall be made for a dividend or other right for which the record date
is prior to the date the Option is exercised, except as provided in Section 9 of
the Plan.
As soon as practicable after any proper exercise of an
Option in accordance with the provisions of the Plan, the Company shall, without
transfer or issue tax to the Optionee, deliver to the Optionee at the principal
executive office of the Company or such other place as shall be mutually agreed
upon between the Company and the Optionee, a certificate or certificates
representing the Shares for which the Option shall have been exercised. The time
of issuance and delivery of the certificate(s) representing the Shares for which
the Option shall have been exercised may be postponed by the Company for such
period as may be required by the Company, with reasonable diligence, to comply
with any applicable listing requirements of any national or regional securities
exchange or any law or regulation applicable to the issuance or delivery of such
Shares.
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Exercise of an Option in any manner shall result in a
decrease in the number of Shares which thereafter may be available, both for
Award under the Plan and for sale under the Option, by the number of Shares as
to which the Option is exercised.
(e) Term and Vesting of Options.
(i) Notwithstanding any other provision of this Plan, no
Option shall be (A) Awarded under this Plan after ten (10) years from the date
on which this Plan is adopted by the Board, or (B) exercisable more than ten
(10) years from the date of Award.
(ii) Options Awarded hereunder shall mature and become
exercisable in whole or in part, in accordance with such vesting schedule as the
Board shall determine, which schedule shall be stated in the Option Agreement.
Options may be exercised in any order elected by the Optionee whether or not the
Optionee holds any unexercised Options under this Plan or any other plan of the
Company.
(f) Termination of Options.
(i) Unless sooner terminated as provided in this Plan,
each Option shall be exercisable for the period of time as shall be determined
by the Board and set forth in the Option Agreement, and shall be void and
unexercisable thereafter.
(ii) Except as otherwise provided herein or in the Option
Agreement, upon the termination of the Optionee's employment or other
relationship with the Company for any reason, Options exercisable on the date of
termination of employment or such other relationship shall be exercisable by the
Optionee (or in the case of the Optionee's death subsequent to termination of
employment or such other relationship, by the Optionee's executor(s) or
administrator(s)) for a period of three (3) months from the date of the
Optionee's termination of employment or such other relationship.
(iii) Upon the Disability or death of an Optionee while in
the employ of or engagement by the Company, Options held by such Optionee which
are exercisable on the date of Disability or death shall be exercisable for a
period of twelve (12) months
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commencing on the date of the Optionee's Disability or death, by the Optionee or
his legal guardian or representative or, in the case of death, by his
executor(s) or administrator(s); provided, however, that if such disabled
Optionee shall commence any employment or engagement during such one (1) year
period with or by a competitor of the Company (including, but not limited to,
full or part-time employment or independent consulting work), as determined
solely in the judgment of the Board, all Options held by such Optionee which
have not yet been exercised shall terminate immediately upon the commencement
thereof.
(iv) Options may be terminated at any time by agreement
between the Company and the Optionee.
(g) Forfeiture. Notwithstanding any other provision of this
Plan, if the Optionee's employment or engagement is terminated for "cause" (as
such term is defined in the Optionee's employment agreement or invention and
non-disclosure agreement with the Company, but if the Optionee is not a party to
any such agreement, then, as such term is defined in the Stock Purchase
Agreement) or if the Board makes a determination that the Optionee (i) has
engaged in any type of disloyalty to the Company, including without limitation,
fraud, embezzlement, theft, or dishonesty in the course of his employment or
engagement, or (ii) has been convicted of a felony or (iii) has disclosed trade
secrets or confidential information of the Company or (iv) has breached any
agreement with or duty to the Company in respect of confidentiality,
non-disclosure, non-competition or otherwise, all unexercised Options shall
terminate upon the earlier of the date of termination of employment or
engagement for "cause" or the date of such a finding. In the event of such a
finding, in addition to immediate termination of all unexercised Options, the
Optionee shall forfeit all Shares for which the Company has not yet delivered
share certificates to the Optionee and the Company shall refund to the Optionee
the Option purchase price paid to it. Notwithstanding anything herein to the
contrary, the Company may withhold delivery of share certificates pending the
resolution of any inquiry that could lead to a finding resulting in forfeiture.
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Section 18. Determination of Fair Market Value of Common
Stock.
(a) Except to the extent otherwise provided in this Section 8,
the Fair Market Value of a share of Common Stock shall be determined by the
Board in its sole discretion.
(b) Notwithstanding the provisions of Section 8(a), in the
event that shares of Common Stock are traded in the over-the-counter market, the
Fair Market Value of a share of Common Stock shall be the mean of the bid and
asked prices for a share of Common Stock on the relevant valuation date as
reported in The Wall Street Journal (or, if not so reported, as otherwise
reported by the National Association of Securities Dealers Automated Quotations
("NASDAQ") System), as applicable or, if there is no trading on such date, on
the next trading date. In the event shares of Common Stock are listed on a
national or regional securities exchange or traded through NASDAQ/NMS, the Fair
Market Value of a share of Common Stock shall be the closing price for a share
of Common Stock on the exchange or on NASDAQ/NMS, as reported in The Wall Street
Journal on the relevant valuation date, or if there is no trading on that date,
on the next trading date.
Section 9. Adjustments.
(a) Subject to required action by the stockholders, if any,
the number of Shares as to which Options may be Awarded under this Plan and the
number of Shares subject to outstanding Options and the option prices thereof
shall be adjusted proportionately for any increase or decrease in the number of
outstanding shares of Common Stock of the Company resulting from stock splits,
reverse stock splits, stock dividends, reclassifications and recapitalizations.
(b) No fractional Shares shall be issuable on account of any
action aforesaid, and the aggregate number of Shares into which Shares then
covered by the Option, when changed as the result of such action, shall be
reduced to the number of whole Shares resulting from such action, and any right
to a fractional share shall be satisfied in cash, based on the Fair Market Value
thereof.
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Section 10. Rights as a Stockholder.
The Optionee shall have no rights as a stockholder of the
Company and shall not have the right to vote nor receive dividends with respect
to any Shares subject to an Option until such Option has been exercised and a
certificate with respect to the Shares purchased upon such exercise has been
issued to him.
Section 11. Time of Awarding Options.
The date of Award of an Option shall, for all purposes, be the
date on which the Board makes the determination Awarding such Option. Notice of
the determination shall be given to each Employee to whom an Option is so
Awarded within a reasonable time after the date of such Award.
Section 12. Modification, Extension and Renewal of Option.
Subject to the terms and conditions of the Plan, the Board may
modify, extend or renew an Option, or accept the surrender of an Option (to the
extent not theretofore exercised). Notwithstanding the foregoing, no
modification of an Option which adversely affects the Optionee shall be made
without the consent of the Optionee.
Section 13. Purchase for Investment and Other Restrictions.
The issuance of Shares on the exercise of an Option shall be
conditioned on obtaining such appropriate representations, warranties,
restrictions and agreements of the Optionee as set forth in the applicable Stock
Purchase Agreement. Among other representations, warranties, restrictions and
agreements, the Optionee shall represent and agree that the purchase of Shares
under the applicable Option Agreement shall be for investment, and not with a
view to the public resale or distribution thereof, unless the Shares subject to
the Option are registered under the Securities Act and the transfer or sale of
such Shares complies with all other laws, rules and regulations applicable
thereto. Unless the Shares are registered under the Securities Act, the Optionee
shall acknowledge that the Shares purchased on exercise of the Option are not
registered under the Securities Act and may not be sold or otherwise transferred
unless the Shares have been registered under the Securities Act in connection
with the sale or other transfer
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thereof, or that counsel satisfactory to the Company has issued an opinion
satisfactory to the Company that the sale or other transfer of such Shares is
exempt from registration under the Securities Act, and unless said sale or
transfer is in compliance with all other applicable laws, rules and regulations,
including all applicable federal and state securities laws, rules and
regulations. Additionally, the Shares, when issued upon the exercise of an
Option, shall be subject to other transfer restrictions, rights of first refusal
and rights of repurchase as set forth in or incorporated by reference into the
applicable Stock Purchase Agreement. The certificates representing the Shares
shall contain the following legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED OR ANY
APPLICABLE STATE SECURITIES LAWS. THESE SHARES HAVE NOT BEEN
ACQUIRED WITH A VIEW TO DISTRIBUTION OR RESALE, AND MAY NOT BE
SOLD, ASSIGNED, EXCHANGED, MORTGAGED, PLEDGED, HYPOTHECATED OR
OTHERWISE TRANSFERRED OR DISPOSED OF, BY GIFT OR OTHERWISE, OR
IN ANY WAY ENCUMBERED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT FOR SUCH SHARES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND ANY APPLICABLE STATE SECURITIES LAWS, OR A
SATISFACTORY OPINION OF COUNSEL SATISFACTORY TO QUANTUM
EPITAXIAL DESIGNS, INC. THAT REGISTRATION IS NOT REQUIRED
UNDER SUCH ACT AND UNDER APPLICABLE STATE SECURITIES LAWS.
MOREOVER, THE SHARES REPRESENTED BY THIS CERTIFICATE ARE
SUBJECT TO AND RESTRICTED BY THE PROVISIONS OF A CERTAIN STOCK
PURCHASE AND RESTRICTION AGREEMENT BETWEEN QUANTUM EPITAXIAL
DESIGNS, INC. AND THE STOCKHOLDER, A COPY OF WHICH AGREEMENT
WILL BE FURNISHED BY QUANTUM EPITAXIAL DESIGNS, INC. UPON
WRITTEN REQUEST AND WITHOUT CHARGE, AND ALL OF THE PROVISIONS
OF SUCH AGREEMENT ARE INCORPORATED BY REFERENCE IN THIS
CERTIFICATE.
Section 14. Transferability.
No Option shall be assignable or transferable otherwise than
by will or by the laws of descent and distribution. During the lifetime of the
Optionee, his Options shall be exercisable only by him, or, in the event of his
legal incapacity or Disability by his legal guardian or representative.
Section 15. Other Provisions.
The Option Agreement and Stock Purchase Agreement may contain
such other provisions as the Board in its discretion deems advisable and which
are not inconsistent with the provisions of this Plan, including, without
limitation, restrictions upon or conditions precedent to the exercise of the
Option.
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Section 16. Power of Board in Case of Change of Control.
Notwithstanding anything to the contrary set forth in this
Plan (with the exception of Section 31 hereof), in the event of a Change of
Control, the Board shall have the right, in its sole discretion, to accelerate
the vesting and exercisability of all unmatured Options and/or to establish an
earlier date for the expiration of the exercise of an Option (notwithstanding a
later expiration of exercisability set forth in an Option Agreement). In
addition, in the event of a Change of Control of the Company, the Board shall
have the right, in its sole discretion, subject to and conditioned upon the
consummation of the transactions which result in the Change of Control, to (1)
arrange for the successor company (or other entity) to assume all of the rights
and obligations of the Company under this Plan; or (2) terminate this Plan and
(a) to pay to all Optionees cash with respect to those Options that are vested
as of the date of such consummation in an amount equal to the difference between
the exercise price and the Fair Market Value of a Share of Common Stock
(determined as of the date the Plan is terminated) multiplied by the number of
Options that are vested as of the date of the consummation of the transactions
which result in the Change of Control which are held by the Optionee as of such
date, or (b) to arrange for the exchange of all Options for options to purchase
common stock in the successor corporation, or (c) to distribute to each Optionee
other property in an amount equal to and in the same form as the Optionee would
have received from the successor corporation if the Optionee had owned the
Shares subject to Options that are vested as of the date of the consummation of
the transactions which result in the Change of Control rather than the Option at
the time of such consummation. The form of payment or distribution to the
Optionee pursuant to this Section shall be determined by the Board in its sole
discretion.
Section 17. Amendment of the Plan.
Insofar as permitted by law and the Plan, the Board may from
time to time suspend, terminate or discontinue the Plan or revise or amend it in
any respect whatsoever with respect to any Shares at the time not subject to an
Option; provided, however, that without approval of the stockholders, no such
revision or amendment may change the aggregate number of Shares for which
Options may be Awarded hereunder, change the designation of the class of
Employees eligible to receive Options or decrease the price at which Options may
be Awarded.
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Any other provision of this Section 17 notwithstanding (with
the exception of Section 31 hereof), the Board specifically is authorized to
adopt any amendment to this Plan deemed by the Board to be necessary or
advisable to assure that the non-qualified stock Options available under the
Plan continue to be treated as such, respectively, under all applicable laws.
Section 18. Application of Funds.
The proceeds received by the Company from the sale of Shares
pursuant to the exercise of Options shall be used for general corporate
purposes.
Section 19. No Obligation to Exercise Option.
The Awarding of an Option shall impose no obligation upon the
Optionee to exercise such Option.
Section 20. Conditions Upon Issuance of Shares.
(a) Options Awarded under the Plan are conditioned upon the
Company obtaining any required permit or order from appropriate governmental
agencies, authorizing the Company to issue such Options and Shares issuable upon
the exercise thereof.
(b) Shares shall not be issued pursuant to the exercise of an
Option unless the exercise of such Option and the issuance and delivery of such
Shares pursuant thereto shall comply with all relevant provisions of law,
including, without limitation, the Securities Act, the Exchange Act, the rules
and regulations promulgated thereunder, and the requirements of any stock
exchange upon which the Shares may then be listed, and shall be further subject
to the approval of counsel for the Company with respect to such compliance.
(c) As a condition to the exercise of an Option, the Board may
require the person exercising such Option to execute an agreement with, and/or
may require the person exercising such Option to make any representation and/or
warranty to, the Company as may be, in the judgment of counsel to the Company,
required under applicable law or regulation, including but not limited to a
representation and warranty that the Shares are being purchased only for
investment and without any present intention to sell or distribute such Shares
if, in the opinion of counsel for the Company, such a representation and
warranty is appropriate under any of the aforementioned relevant provisions of
law.
Section 21. Reservation of Shares.
The Company, during the term of this Plan, shall at all times
reserve and keep available such number of Shares as shall be sufficient to
satisfy the requirements of the Plan.
The Company, during the term of this Plan, shall use its best
efforts to seek to obtain from appropriate regulatory agencies any requisite
authorization in order to issue and sell such number of Shares as shall be
sufficient to satisfy the requirements of the Plan. The inability of the Company
to obtain from any such regulatory agency having jurisdiction the requisite
authorization(s) deemed by the Company's counsel to be necessary for the lawful
issuance and sale of any Shares hereunder, or the inability of the Company to
confirm to its satisfaction that any issuance and sale of any Shares hereunder
will meet applicable legal requirements, shall relieve the Company of any
liability in respect to the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.
Section 22. Stock Option and Stock Purchase Agreements.
Options shall be evidenced by an Option Agreement in such form
or forms as the Board shall approve from time to time. Upon the exercise of an
Option, the Optionee shall sign and deliver to the Company a Stock Purchase
Agreement in such form or forms as the Board shall approve from time to time.
Section 23. Taxes, Fees, Expenses and Withholding of Taxes.
(a) The Company shall pay all original issue and transfer
taxes (but not income taxes, if any) with respect to the Award of Options and/or
the issue and transfer of Shares pursuant to the exercise thereof, and all other
fees and expenses necessarily incurred by the Company in connection therewith,
and will from time to time use its best efforts to comply with all laws and
regulations which, in the opinion of counsel for the Company, shall be
applicable thereto.
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(b) The Award of Options hereunder and the issuance of Shares
pursuant to the exercise thereof is conditioned upon the Company's reservation
of the right to withhold in accordance with any applicable law, from any
compensation or other amounts payable to the Optionee, any taxes required to be
withheld under federal, state or local law as a result of the Award or exercise
of such Option or the sale of the Shares issued upon exercise thereof. To the
extent that compensation or other amounts, if any, payable to the Optionee is
insufficient to pay any taxes required to be so withheld, the Company may, in
its sole discretion, require the Optionee (or such other person entitled herein
to exercise the Option), as a condition of the exercise of an Option, to pay in
cash to the Company an amount sufficient to cover such tax liability or
otherwise to make adequate provision for the Company's satisfaction of its
withholding obligations under federal, state and local law.
Section 24. Notices.
Any notice to be given to the Company pursuant to the
provisions of this Plan shall be addressed to the Company in care of its
Secretary (or such other person as the Company may designate from time to time)
at its principal executive office, and any notice to be given to an Optionee
shall be delivered personally or addressed to him or her at the address given
beneath his or her signature on his or her Option Agreement, or at such other
address as such Optionee or his or her permitted transferee (upon the transfer
of the Shares) may hereafter designate in writing to the Company. Any such
notice shall be deemed duly given when enclosed in a properly sealed envelope or
wrapper addressed as aforesaid, registered or certified, and deposited, postage
and registry or certification fee prepaid, in a post office or branch post
office regularly maintained by the United States Postal Service. It shall be the
obligation of each Optionee and each permitted transferee holding Shares
purchased upon exercise of an Option to provide the Secretary of the Company, by
letter mailed as provided herein, with written notice of his or her direct
mailing address.
Section 25. No Enlargement of Employee Rights.
This Plan is purely voluntary on the part of the Company, and
the continuance of the Plan shall not be deemed to constitute a contract between
the Company and any Employee, or to be consideration for or a condition of the
employment or service of any Employee. Nothing contained in this Plan shall be
deemed to give any Employee the right to be retained in the employ or service of
the Company, its Parent, any Subsidiary or a successor corporation, or to
interfere with the right of the Company or any such corporation to discharge or
retire any Employee thereof at any time. No Employee shall have any right to or
interest in Options authorized hereunder prior to the Award thereof to such
Employee, and upon such Award he shall have only such rights and interests as
are expressly provided herein, subject, however, to all applicable provisions of
the Company's Certificate of Incorporation, as the same may be amended from time
to time.
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Section 26. Information to Optionees.
The Company, upon request, shall provide without charge to
each Optionee copies of such annual and periodic reports as are provided by the
Company to its stockholders generally.
Section 27. Availability of Plan.
A copy of this Plan shall be delivered to the Secretary of the
Company and shall be shown by him to any eligible person making reasonable
inquiry concerning it.
Section 28. Invalid Provisions.
In the event that any provision of this Plan is found to be
invalid or otherwise unenforceable under any applicable law, such invalidity or
unenforceability shall not be construed as rendering any other provisions
contained herein as invalid or unenforceable, and all such other provisions
shall be given full force and effect to the same extent as though the invalid or
unenforceable provision was not contained herein.
Section 29. Applicable Law.
This Plan shall be governed by and construed in accordance
with the laws of the Commonwealth of Pennsylvania.
Section 30. Board Action.
Notwithstanding anything to the contrary set forth in this
Plan, any and all actions of the Board or Committee, as the case may be, taken
under or in connection with this Plan and any agreements, instruments,
documents, certificates or other writings entered into, executed, granted,
issued and/or delivered pursuant to the terms hereof, shall be subject to and
limited by any and all votes, consents, approvals, waivers or other actions of
all or certain stockholders of the Company or other persons required pursuant to
(i) the Company's Certificate of Incorporation (as the same may be amended
and/or restated from time to time), (ii) the Company's Bylaws (as the same may
be amended and/or restated from time to time), and (iii) any agreement,
instrument, document or writing now or hereafter existing, between or among the
Company and its stockholders or other persons (as the same may be amended from
time to time).
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ADOPTION AND APPROVAL OF PLAN
Date Plan Originally Adopted By Board: _____________
Date Plan Amendment and Restatement Adopted by Board: ___________
Original Effective Date of Plan:_____________
Effective Date of Plan Amendment and Restatement: _____________
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SEVERANCE AGREEMENT
THIS SEVERANCE AGREEMENT (this "Agreement") is entered into
on this 7th day of February, 1997 by and between THOMAS L. HIERL (the
"Executive") and QUANTUM EPITAXIAL DESIGNS, INC., a Pennsylvania corporation
(the "Company").
Background
The Company currently employs Executive as its President
pursuant to that certain Employment Agreement between Executive and the
Company dated August 30, 1989 (the "Employment Agreement"). The Company and
Executive desire to terminate the Employment Agreement, and in lieu thereof,
the Company desires to offer to Executive severance compensation in the event
that Executive's employment with the Company is terminated for certain
reasons. In consideration thereof, Executive is willing to (i) terminate the
Employment Agreement and to continue his employment with the Company on an "at
will" basis, and (ii) agree to perform and comply with the covenants and
restrictions set forth in Section 3 of this Agreement in exchange for, among
other things, such severance compensation.
IN CONSIDERATION of the foregoing premises and the mutual
promises, covenants and agreements contained in this Agreement, the parties,
intending to be legally bound, hereby agree as follows:
Section 1. Termination of Employment Agreement. The Company
and Executive hereby terminate the Employment Agreement. Accordingly, from and
after the date of this Agreement, neither the Company nor Executive shall have
any further rights, or duties or obligations to the other, under the Employment
Agreement, and Executive's employment with the Company shall be purely "at
will."
Section 2. Severance Benefit. In consideration of Executive's
continued employment with the Company and Executive's performance of and
compliance with the covenants and restrictions set forth in Section 3 of this
Agreement, the Company shall provide Executive with severance compensation in
accordance with and subject to the provisions of this Section 2.
(a) Generally. If Executive's employment with the
Company shall cease or be terminated for any reason other than Executive's
voluntary termination, death, Disability (as defined in Section 2(c)), or for
Cause (as defined in Section 2(c)), then the Company shall pay to Executive,
during the twelve (12) month period following the date of such termination (the
"Severance Period"), an amount equal to Executive's then current annual base
salary (the "Severance Benefit").
<PAGE>
(b) Payment of Severance Benefit.
(i) The Company shall pay the Severance Benefit
in equal installments during the Severance Period in accordance with the
Company's then regular payroll policy for executive employees, as such policy
may be amended from time to time.
(ii) The Company's obligation to pay Executive
any Severance Benefit shall be subject to (x) the withholding of such amounts
including, without limitation, FICA and other payroll taxes and any other
assessments, as the Company determines should be withheld or paid pursuant to
any applicable law or regulation and (y) Executive's continued compliance with
the provisions of Section 3 of this Agreement. The Company's right to cease the
payment of any Severance Benefit because of Executive's non-compliance with such
Section shall be in addition to any rights and remedies to which the Company may
be entitled pursuant to or as otherwise described in Section 4 of this
Agreement.
(c) Certain Definitions.
(i) "Cause" shall mean Executive's felonious
conduct (whether or not related to Executive's employment with the Company),
habitual intoxication, willful misconduct, any repeated violation of express
directions or rules or regulations established the Company's board of directors
(the "Board") from time to time regarding the conduct of the Company's business
after notice and a reasonable cure period, or any violation by Executive of the
provisions of Section 3 of this Agreement after notice and a reasonable cure
period.
(ii) "Disability" shall mean either (x)
Executive's becoming eligible for full benefits under the Company's long-term
disability policy, if any, as a result of Executive's incapacity or (y) the
Board's good faith determination that Executive has been unable, due to physical
or mental illness or incapacity, to perform the essential duties of Executive's
employment with reasonable accommodation for a continuous period of forty-five
(45) days or an aggregate of sixty (60) days during any continuous six (6) month
period.
Section 3. Additional Executive Covenants and Restrictions. In
consideration for Executive's continued employment with the Company and the
Company's agreement to pay to Executive the Severance Benefit during the
Severance Period, Executive shall perform and comply with the covenants and
restrictions contained in this Section 3.
(a) Confidential Information. Without the prior
written consent of the Board, except as shall be necessary in the performance of
Executive's assigned duties, Executive shall not disclose or use for Executive's
direct or indirect benefit or the direct or indirect benefit of any third party,
and Executive shall maintain, both during and after Executive's employment, the
confidentiality of any and all of the Company's Confidential Information.
"Confidential Information" shall mean any information (written, oral or stored
in any information storage
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and/or retrieval medium or device) that the Company treats as confidential or
proprietary, including, but not limited to, any information relating to research
and development plans, methods, efforts and results; manufacturing or production
design, processes, flow-charts and methods; existing and proposed products;
product plans, sketches, and blueprints; computer codes or instructions
(including source and object code listings, program logic algorithms,
subroutines, modules or other subparts of computer programs and related
documentation, including program notation); business studies; business
development plans and efforts; business procedures; financial data (including,
but not limited to cost data); personnel information; marketing and sales data,
methods, plans and efforts; the identities of customers, contractors and
suppliers and prospective customers, contractors and suppliers; the terms of
contracts and agreements with customers, contractors and suppliers; the
Company's relationship with actual and prospective customers, contractors and
suppliers and the needs and requirements of, and the Company's course of dealing
with, any such actual or prospective customers, contractors and suppliers;
customer and vendor credit information; any information or data provided by or
on behalf of independent contractors, customers, prospective customers or others
subject to the terms of a confidentiality, non-disclosure or similar agreement
or the reasonable expectation that such information or data would be treated as
"confidential" or non-public information or data; any information, data or work
product created, developed, prepared, compiled or assembled for or on behalf of
the Company, any independent contractor, customer, prospective customer, or
other person or entity, whether by Executive or by other Company employees,
agents or contractors; and any other information that has not been made
available to the general public. Failure to mark any of the Confidential
Information as confidential or proprietary shall not affect its status as
Confidential Information under the terms of this Agreement.
(b) Property. During the term of this Agreement and
thereafter, Executive shall not remove from the Company's offices or premises
any documents, records, notebooks, files, correspondence, reports, memoranda,
computer tapes, computer disks or similar materials of or containing
Confidential Information of the type identified in Section 3(a) of this
Agreement, or other materials or property of any kind, unless necessary in
accordance with Executive's duties and responsibilities of employment, and in
the event that any of such material or property is removed, all of the foregoing
shall be returned to their proper files or places of safekeeping as promptly as
possible after the removal shall have served its specific purpose; nor shall
Executive make, retain, remove or distribute any copies of any of the foregoing
for any reason whatsoever, except as may be necessary in the discharge of
Executive's assigned duties; and upon the termination of Executive's employment
by the Company, Executive shall return to the Company all originals, copies and
extracts of the foregoing, then in Executive's possession or under Executive's
direct or indirect control, and shall delete or destroy any of the foregoing in
his possession or under his direct or indirect control stored on magnetic or
other media or on any information storage or retrieval device, whether prepared
by Executive or by others.
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(c) Intellectual Property.
(i) Executive acknowledges and agrees that any
and all writings, documents, inventions, discoveries, improvements, computer
programs or instructions (whether in source code, object code, or any other
form), plans, memoranda, tests, research, designs, specifications, models, data,
diagrams, flow charts, and/or techniques (whether reduced to written form or
otherwise) that Executive has made, conceived, discovered, or developed prior to
the date of this Agreement, or may hereafter make, conceive, discover or
develop, in each case, either solely or jointly with any other person, at any
time during the term of Executive's employment (or thereafter, if based upon or
incorporating any Confidential Information), whether during working hours or at
the Company's facility or at any other time or location, and whether upon the
request or suggestion of the Company or otherwise, that relate to or are useful
in any way in connection with any business now or hereafter carried on by the
Company (collectively, "Intellectual Work Product") shall be the sole and
exclusive property of the Company. Executive shall promptly disclose to the
Company all Intellectual Work Product and maintain any and all records thereof.
Executive shall have no claim for additional compensation for the Intellectual
Work Product.
(ii) Executive acknowledges that all the
Intellectual Work Product that is copyrightable shall be considered a work made
for hire under United States Copyright Law. To the extent that any copyrightable
Intellectual Work Product may not be considered a work made for hire under the
applicable provisions of United States Copyright Law, or to the extent that,
notwithstanding the foregoing provisions, Executive may retain an interest in
any Intellectual Work Product that is not copyrightable, Executive hereby
irrevocably assigns and transfers to the Company any and all right, title,
and/or interest that Executive may have in the Intellectual Work Product under
copyright, patent, trade secret and trademark law, in perpetuity or for the
longest period otherwise permitted by law, without the necessity of further
consideration. The Company shall be entitled to obtain and hold in its own name
all copyrights, patents, trade secrets, and trademarks with respect thereto.
(iii) At the request and expense of the Company,
either before or after the cessation of Executive's employment, Executive shall
assist the Company in acquiring and maintaining copyright, patent, trade secret,
and trade mark protection upon, and confirming the Company's title to, any
Intellectual Work Product. Executive's assistance shall include making all
lawful oaths and declarations, executing and delivering all applications for and
other documents prepared in connection with the prosecution, maintenance,
enforcement and or defense of any copyrights, patent rights, trade secret
rights, and trademark rights, cooperating in legal proceedings, and taking any
and all other actions considered necessary or desirable by the Company.
(iv) In the event the Company is unable after
reasonable effort to secure the Executive's signature on any of the documents
referenced in Section 3(c)(iii) above,
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whether because of Executive's physical or mental incapacity or for any other
reason whatsoever, Executive hereby irrevocably designates and appoints the
Company and its duly authorized officers and agents as the Executive's agent and
attorney-in-fact, to act for and in his behalf and stead to execute and file any
such documents and to do all other lawfully permitted acts to further the
prosecution and issuance of any such copyright, patent, trade secret, trade
mark, or other analogous protection, with the same legal force and effect as if
executed by Executive.
(d) Disclosure. Executive shall disclose promptly to
the Company any and all Confidential Information and information relating to all
Intellectual Work Product that Executive may make, conceive, discover or develop
during the period of his employment by the Company (or thereafter, if based upon
or incorporating any Confidential Information).
(e) Covenant Not to Compete.
(i) During the period of Executive's employment
by the Company and for a period of two (2) years thereafter, Executive shall
not, anywhere in the world, directly or indirectly engage or become interested
in (as owner, proprietor, promoter, stockholder, partner, co-venturer, director,
officer, employee, agent, consultant or otherwise) any business which develops,
manufactures, markets or sells gallium arsenide wafers or any other new product
or service marketed or sold by the Company during the period of Executive's
employment by the Company (the "Business of the Company").
(ii) During the period of Executive's employment
by the Company and for a period of two (2) years thereafter, Executive shall
not, directly or indirectly, solicit, call on, or otherwise deal in any way with
any customer, supplier or contractor with whom the Company shall have dealt at
any time during the period of Executive's performance of services to the
Company, for a purpose which is competitive with the Business of the Company, or
influence or attempt to influence any customer, supplier or contractor of the
Company to terminate or modify any written or oral agreement or course of
dealing with the Company.
(iii) For a period of two (2) years after the
cessation of Executive's employment with the Company, Executive shall not
directly or indirectly, employ, engage or retain, or arrange to have any other
person or entity employ, engage or retain any person who is an employee,
contractor, consultant or agent of the Company or shall have been employed,
engaged or retained by the Company as an employee, contractor, consultant or
agent at any time during the one (1) year period preceding the date upon which
Executive's employment with the Company ceases; additionally, Executive shall
not, directly or indirectly, influence or attempt to influence any such person
to terminate or modify his employment arrangement or engagement with the
Company.
(f) Disclosure of Agreement. Executive agrees that
upon and after his termination or cessation of employment with the Company,
until such time as the obligations of Executive to the Company under this
Agreement no longer exist, Executive shall (i) provide a
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complete copy of this Agreement to any prospective employer or other person,
entity or association in the Business of the Company, with whom or which
Executive proposes to be employed, affiliated, engaged, associated or to
establish any business or remunerative relationship prior to the commencement
thereof and (ii) shall notify the Company of the name and address of any such
person, entity or association prior to her employment, affiliation, engagement,
association or the establishment of any business or remunerative relationship.
Executive shall provide the names and addresses of any of such persons or
entities as the Company may from time to time reasonably request.
Section 4. Enforcement. Executive acknowledges that it is
impossible to measure fully, in money, the injury that will be caused to the
Company in the event of a breach or threatened breach of any of the provisions
of Section 3 of this Agreement, and Executive waives the claim or defense that
the Company has an adequate remedy at law. Executive shall not, in any action or
proceeding to enforce any of the provisions of such Section 3, assert the claim
or defense that such an adequate remedy at law exists. The Company shall be
entitled to injunctive relief to enforce the provisions of such Sections,
without prejudice to any other remedy the Company may have at law or in equity,
all of which shall be cumulative. The periods of time set forth in Section 3(e)
of this Agreement shall not include and shall be deemed extended by any time
required for litigation to enforce the relevant covenant periods, provided that
the Company is successful on the merits in any such litigation. The phrase "time
required for litigation" as used in this Section 4 shall mean the period of time
from service of process upon Executive through the expiration of all appeals
related to such litigation. If an action at law or in equity is necessary to
enforce or interpret the terms of this Agreement, then the prevailing party
shall be entitled to recover, in addition to any other relief, reasonable
attorney's fees, costs and disbursements.
Section 5. Miscellaneous.
(a) Assignment; Binding Effect. This Agreement is not
assignable by Executive without the Company's prior written consent, but
otherwise shall be binding upon and insure to the benefit of the parties and to
their successors and assigns.
(b) Entire Agreement; Amendment. This Agreement
constitutes the entire agreement between Executive and the Company with respect
to the subject matter of this Agreement and supersedes all prior agreements,
understandings and negotiations, whether written or oral, with respect to the
subject matter of this Agreement. No amendment of any provision to, or waiver of
any right of Executive or the Company under, this Agreement shall be effective
unless it is in writing and executed by party against whom enforcement of any
such amendment or waiver is sought.
(c) Severability. If any provision of this Agreement
shall be determined to be void, invalid, unenforceable or illegal for any
reason, then the validity and enforceability of all of the remaining provisions
of this Agreement shall not be affected thereby. If any particular
6
<PAGE>
provisions of this Agreement shall be adjudicated to be invalid or
unenforceable, then such provision shall be deemed amended to delete therefrom
the portion thus adjudicated to be invalid or unenforceable, such amendment to
apply only to the operation of such provision in the particular jurisdiction in
which such adjudication is made; provided that, if any one or more of the
provisions contained in this Agreement shall be adjudicated to be invalid or
unenforceable because such provision is held to be excessively broad as to
duration, geographic scope, activity or subject, then such provision shall be
deemed amended by limiting and reducing it so as to be valid and enforceable to
the maximum extent compatible with the applicable laws of such jurisdiction,
such amendment only to apply with respect to the operation of such provision in
the applicable jurisdiction in which the adjudication is made.
(d) No Waiver Of Rights. No failure or delay on the
part of either Executive or the Company in the exercise of any power or right
under this Agreement shall operate as a waiver thereof, nor shall any single or
partial exercise of any such power or right. The waiver by Executive or the
Company of a breach of any provision of this Agreement shall not operate or be
construed as a waiver of any other or subsequent breach under this Agreement.
(e) Notices. All notices and other communications
under this Agreement (collectively, the "Notices") shall be in writing and may
be personally served or sent by certified or registered mail, return receipt
requested, proper postage prepaid, or recognized overnight delivery service,
proper charges prepaid. All Notices shall be delivered to the party to receive
the same at the addresses indicated below (or at such other address(es) as a
party may specify in a written notice):
If to Executive:
Thomas L. Hierl
2054 Hilltop Road
Bethlehem, PA 18015
If to the Company:
Quantum Epitaxial Designs, Inc.
119 Technology Drive
Bethlehem, PA 18015
Attention: Chairman of the Board
All Notices shall be deemed to be received when delivered if
delivered personally, the next business day after the date sent if sent by a
national overnight delivery service with proper charges prepaid, or three (3)
business days after the date mailed if mailed by certified or registered mail,
return receipt requested with proper postage prepaid. Whenever the giving of
notice is required, the giving of such notice may be waived in writing by the
party entitled to receive such notice.
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<PAGE>
(f) Headings. The headings used in this Agreement are
for convenience only and are not intended to define or limit the contents or
substance of any provision of this Agreement.
(g) Counterparts. This Agreement may be executed in
any number of counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same instrument.
(h) Governing Law/Jurisdiction. This Agreement shall
be governed and construed as to its validity, interpretation and effect by the
laws of the Commonwealth of Pennsylvania notwithstanding the choice of law rules
of Pennsylvania or any other jurisdiction. IN ADDITION, IN THE CASE OF ANY
DISPUTE UNDER OR IN CONNECTION WITH THIS AGREEMENT, EACH OF EXECUTIVE AND THE
COMPANY HEREBY CONSENTS TO THE EXCLUSIVE JURISDICTION AND VENUE OF THE COURTS OF
THE COMMONWEALTH OF PENNSYLVANIA IN AND FOR THE COUNTY IN WHICH THE COMPANY
MAINTAINS ITS PRINCIPAL PLACE OF BUSINESS OR THE FEDERAL DISTRICT COURT FOR SUCH
GEOGRAPHIC LOCATION, PROVIDED THAT SUCH FEDERAL COURT HAS SUBJECT MATTER
JURISDICTION OVER SUCH DISPUTE, AND EXECUTIVE HEREBY WAIVES ANY CLAIM HE MAY
HAVE AT ANY TIME AS TO FORUM NON CONVENIENS WITH RESPECT TO SUCH VENUE.
Notwithstanding anything to the contrary set forth in the preceding sentence,
the Company shall have the right to institute any legal action arising out of or
relating to this Agreement in any appropriate court and in any jurisdiction.
IN WITNESS WHEREOF, each of Executive and the Company has
caused this Agreement to be duly executed as of the date set forth above.
QUANTUM EPITAXIAL DESIGNS, INC.
Attest:___________________________ By:____________________________
Title: Print Name:
Title:
Witness:__________________________ _______________________________
Thomas L. Hierl
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<PAGE>
SEVERANCE AGREEMENT
THIS SEVERANCE AGREEMENT (this "Agreement") is entered into
on this 7th day of February, 1997 by and between WILLIAM J. BURG (the
"Executive") and QUANTUM EPITAXIAL DESIGNS, INC., a Pennsylvania corporation
(the "Company").
Background
The Company currently employs Executive as its Chief
Financial Officer on an "at will" basis. The Company desires to offer to
Executive severance compensation in the event that Executive's employment with
the Company is terminated for certain reasons. In consideration thereof,
Executive is willing to (i) continue his "at will" employment with the Company
and (ii) agree to perform and comply with the covenants and restrictions set
forth in Section 3 of this Agreement in exchange for, among other things, such
severance compensation.
IN CONSIDERATION of the foregoing premises and the mutual
promises, covenants and agreements contained in this Agreement, the parties,
intending to be legally bound, hereby agree as follows:
Section 1. "At Will" Employment. The Company and Executive
hereby acknowledge that Executive's employment with the Company is and shall
continue to be purely "at will."
Section 2. Severance Benefit. In consideration of Executive's
continued employment with the Company and Executive's performance of and
compliance with the covenants and restrictions set forth in Section 3 of this
Agreement, the Company shall provide Executive with severance compensation in
accordance with and subject to the provisions of this Section 2.
(a) Generally. If Executive's employment with the Company
shall cease or be terminated for any reason other than Executive's voluntary
termination, death, Disability (as defined in Section 2(c)), or for Cause (as
defined in Section 2(c)), then the Company shall pay to Executive, during the
twelve (12) month period following the date of such termination (the
"Severance Period"), an amount equal to Executive's then current annual base
salary (the "Severance Benefit").
(b) Payment of Severance Benefit.
(i) The Company shall pay the Severance Benefit in equal
installments during the Severance Period in accordance with the Company's then
regular payroll policy for executive employees, as such policy may be amended
from time to time.
<PAGE>
(ii) The Company's obligation to pay Executive any
Severance Benefit shall be subject to (x) the withholding of such amounts
including, without limitation, FICA and other payroll taxes and any other
assessments, as the Company determines should be withheld or paid pursuant to
any applicable law or regulation and (y) Executive's continued compliance with
the provisions of Section 3 of this Agreement. The Company's right to cease
the payment of any Severance Benefit because of Executive's non-compliance
with such Section shall be in addition to any rights and remedies to which the
Company may be entitled pursuant to or as otherwise described in Section 4 of
this Agreement.
(c) Certain Definitions.
(i) "Cause" shall mean any of the following: (A)
Executive's felonious conduct (whether or not related to Executive's
employment with the Company); (B) Executive's intoxication while performing
his employment duties; (C) Executive's act of fraud or dishonesty upon, or
misappropriation of funds of, the Company; (D) Executive's negligence in the
performance of his employment duties or act of misconduct that, in the
Company's board of directors' (the "Board") judgment, has or could have an
adverse effect on the Company's reputation, business, properties or interests;
(E) Executive's failure to comply with a lawful direction of the Board or any
officer to whom Executive reports or failure to comply with the rules,
resolutions or policies established by the Board from time to time; (F)
Executive's appropriation for himself of a Company corporate opportunity
without the express prior written consent of the Board; or (G) any violation
by Executive of the provisions of Section 3 of this Agreement.
(ii) "Disability" shall mean either (x) Executive's
becoming eligible for full benefits under the Company's long-term disability
policy, if any, as a result of Executive's incapacity or (y) the Board's good
faith determination that Executive has been unable, due to physical or mental
illness or incapacity, to perform the essential duties of Executive's
employment with reasonable accommodation for a continuous period of forty-five
(45) days or an aggregate of sixty (60) days during any continuous six (6)
month period.
Section 3. Additional Executive Covenants and Restrictions. In
consideration for Executive's continued employment with the Company and the
Company's agreement to pay to Executive the Severance Benefit during the
Severance Period, Executive shall perform and comply with the covenants and
restrictions contained in this Section 3.
(a) Confidential Information. Without the prior written
consent of the Board, except as shall be necessary in the performance of
Executive's assigned duties, Executive shall not disclose or use for
Executive's direct or indirect benefit or the direct or indirect benefit of
any third party, and Executive shall maintain, both during and after
Executive's employment, the confidentiality of any and all of the Company's
Confidential Information. "Confidential Information" shall mean any
information (written, oral or stored in any information storage and/or
retrieval medium or device) that the Company treats as confidential or
proprietary,
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<PAGE>
including, but not limited to, any information relating to research and
development plans, methods, efforts and results; manufacturing or production
design, processes, flow-charts and methods; existing and proposed products;
product plans, sketches, and blueprints; computer codes or instructions
(including source and object code listings, program logic algorithms,
subroutines, modules or other subparts of computer programs and related
documentation, including program notation); business studies; business
development plans and efforts; business procedures; financial data (including,
but not limited to cost data); personnel information; marketing and sales
data, methods, plans and efforts; the identities of customers, contractors and
suppliers and prospective customers, contractors and suppliers; the terms of
contracts and agreements with customers, contractors and suppliers; the
Company's relationship with actual and prospective customers, contractors and
suppliers and the needs and requirements of, and the Company's course of
dealing with, any such actual or prospective customers, contractors and
suppliers; customer and vendor credit information; any information or data
provided by or on behalf of independent contractors, customers, prospective
customers or others subject to the terms of a confidentiality, non-disclosure
or similar agreement or the reasonable expectation that such information or
data would be treated as "confidential" or non-public information or data; any
information, data or work product created, developed, prepared, compiled or
assembled for or on behalf of the Company, any independent contractor,
customer, prospective customer, or other person or entity, whether by
Executive or by other Company employees, agents or contractors; and any other
information that has not been made available to the general public. Failure to
mark any of the Confidential Information as confidential or proprietary shall
not affect its status as Confidential Information under the terms of this
Agreement.
(b) Property. During the term of this Agreement and
thereafter, Executive shall not remove from the Company's offices or premises
any documents, records, notebooks, files, correspondence, reports, memoranda,
computer tapes, computer disks or similar materials of or containing
Confidential Information of the type identified in Section 3(a) of this
Agreement, or other materials or property of any kind, unless necessary in
accordance with Executive's duties and responsibilities of employment, and in
the event that any of such material or property is removed, all of the
foregoing shall be returned to their proper files or places of safekeeping as
promptly as possible after the removal shall have served its specific purpose;
nor shall Executive make, retain, remove or distribute any copies of any of
the foregoing for any reason whatsoever, except as may be necessary in the
discharge of Executive's assigned duties; and upon the termination of
Executive's employment by the Company, Executive shall return to the Company
all originals, copies and extracts of the foregoing, then in Executive's
possession or under Executive's direct or indirect control, and shall delete
or destroy any of the foregoing in his possession or under his direct or
indirect control stored on magnetic or other media or on any information
storage or retrieval device, whether prepared by Executive or by others.
(c) Intellectual Property.
(i) Executive acknowledges and agrees that any and all
writings, documents, inventions, discoveries, improvements, computer programs
or instructions (whether
3
<PAGE>
in source code, object code, or any other form), plans, memoranda, tests,
research, designs, specifications, models, data, diagrams, flow charts, and/or
techniques (whether reduced to written form or otherwise) that Executive has
made, conceived, discovered, or developed prior to the date of this Agreement,
or may hereafter make, conceive, discover or develop, in each case, either
solely or jointly with any other person, at any time during the term of
Executive's employment (or thereafter, if based upon or incorporating any
Confidential Information), whether during working hours or at the Company's
facility or at any other time or location, and whether upon the request or
suggestion of the Company or otherwise, that relate to or are useful in any
way in connection with any business now or hereafter carried on by the Company
(collectively, "Intellectual Work Product") shall be the sole and exclusive
property of the Company. Executive shall promptly disclose to the Company all
Intellectual Work Product and maintain any and all records thereof. Executive
shall have no claim for additional compensation for the Intellectual Work
Product.
(ii) Executive acknowledges that all the Intellectual
Work Product that is copyrightable shall be considered a work made for hire
under United States Copyright Law. To the extent that any copyrightable
Intellectual Work Product may not be considered a work made for hire under the
applicable provisions of United States Copyright Law, or to the extent that,
notwithstanding the foregoing provisions, Executive may retain an interest in
any Intellectual Work Product that is not copyrightable, Executive hereby
irrevocably assigns and transfers to the Company any and all right, title,
and/or interest that Executive may have in the Intellectual Work Product under
copyright, patent, trade secret and trademark law, in perpetuity or for the
longest period otherwise permitted by law, without the necessity of further
consideration. The Company shall be entitled to obtain and hold in its own
name all copyrights, patents, trade secrets, and trademarks with respect
thereto.
(iii) At the request and expense of the Company, either
before or after the cessation of Executive's employment, Executive shall
assist the Company in acquiring and maintaining copyright, patent, trade
secret, and trade mark protection upon, and confirming the Company's title to,
any Intellectual Work Product. Executive's assistance shall include making all
lawful oaths and declarations, executing and delivering all applications for
and other documents prepared in connection with the prosecution, maintenance,
enforcement and or defense of any copyrights, patent rights, trade secret
rights, and trademark rights, cooperating in legal proceedings, and taking any
and all other actions considered necessary or desirable by the Company.
(iv) In the event the Company is unable after reasonable
effort to secure the Executive's signature on any of the documents referenced
in Section 3(c)(iii) above, whether because of Executive's physical or mental
incapacity or for any other reason whatsoever, Executive hereby irrevocably
designates and appoints the Company and its duly authorized officers and
agents as the Executive's agent and attorney-in-fact, to act for and in his
behalf and stead to execute and file any such documents and to do all other
lawfully permitted acts to further
4
<PAGE>
the prosecution and issuance of any such copyright, patent, trade secret,
trade mark, or other analogous protection, with the same legal force and
effect as if executed by Executive.
(d) Disclosure. Executive shall disclose promptly to the
Company any and all Confidential Information and information relating to all
Intellectual Work Product that Executive may make, conceive, discover or
develop during the period of his employment by the Company (or thereafter, if
based upon or incorporating any Confidential Information).
(e) Covenant Not to Compete.
(i) During the period of Executive's employment by the
Company and for a period of two (2) years thereafter, Executive shall not,
anywhere in the world, directly or indirectly engage or become interested in
(as owner, proprietor, promoter, stockholder, partner, co-venturer, director,
officer, employee, agent, consultant or otherwise) any business which
develops, manufactures, markets or sells gallium arsenide wafers or any other
new product or service marketed or sold by the Company during the period of
Executive's employment by the Company (the "Business of the Company").
(ii) During the period of Executive's employment by the
Company and for a period of two (2) years thereafter, Executive shall not,
directly or indirectly, solicit, call on, or otherwise deal in any way with
any customer, supplier or contractor with whom the Company shall have dealt at
any time during the period of Executive's performance of services to the
Company, for a purpose which is competitive with the Business of the Company,
or influence or attempt to influence any customer, supplier or contractor of
the Company to terminate or modify any written or oral agreement or course of
dealing with the Company.
(iii) For a period of two (2) years after the cessation
of Executive's employment with the Company, Executive shall not directly or
indirectly, employ, engage or retain, or arrange to have any other person or
entity employ, engage or retain any person who is an employee, contractor,
consultant or agent of the Company or shall have been employed, engaged or
retained by the Company as an employee, contractor, consultant or agent at any
time during the one (1) year period preceding the date upon which Executive's
employment with the Company ceases; additionally, Executive shall not,
directly or indirectly, influence or attempt to influence any such person to
terminate or modify his employment arrangement or engagement with the Company.
(f) Disclosure of Agreement. Executive agrees that upon and
after his termination or cessation of employment with the Company, until such
time as the obligations of Executive to the Company under this Agreement no
longer exist, Executive shall (i) provide a complete copy of this Agreement to
any prospective employer or other person, entity or association in the
Business of the Company, with whom or which Executive proposes to be employed,
affiliated, engaged, associated or to establish any business or remunerative
relationship prior to the commencement thereof and (ii) shall notify the
Company of the name
5
<PAGE>
and address of any such person, entity or association prior to her employment,
affiliation, engagement, association or the establishment of any business or
remunerative relationship. Executive shall provide the names and addresses of
any of such persons or entities as the Company may from time to time
reasonably request.
Section 4. Enforcement. Executive acknowledges that it is
impossible to measure fully, in money, the injury that will be caused to the
Company in the event of a breach or threatened breach of any of the provisions
of Section 3 of this Agreement, and Executive waives the claim or defense that
the Company has an adequate remedy at law. Executive shall not, in any action
or proceeding to enforce any of the provisions of such Section 3, assert the
claim or defense that such an adequate remedy at law exists. The Company shall
be entitled to injunctive relief to enforce the provisions of such Sections,
without prejudice to any other remedy the Company may have at law or in
equity, all of which shall be cumulative. The periods of time set forth in
Section 3(e) of this Agreement shall not include and shall be deemed extended
by any time required for litigation to enforce the relevant covenant periods,
provided that the Company is successful on the merits in any such litigation.
The phrase "time required for litigation" as used in this Section 4 shall mean
the period of time from service of process upon Executive through the
expiration of all appeals related to such litigation. If an action at law or
in equity is necessary to enforce or interpret the terms of this Agreement,
then the prevailing party shall be entitled to recover, in addition to any
other relief, reasonable attorney's fees, costs and disbursements.
Section 5. Miscellaneous.
(a) Assignment; Binding Effect. This Agreement is not
assignable by Executive without the Company's prior written consent, but
otherwise shall be binding upon and insure to the benefit of the parties and
to their successors and assigns.
(b) Entire Agreement; Amendment. This Agreement constitutes
the entire agreement between Executive and the Company with respect to the
subject matter of this Agreement and supersedes all prior agreements,
understandings and negotiations, whether written or oral, with respect to the
subject matter of this Agreement. No amendment of any provision to, or waiver
of any right of Executive or the Company under, this Agreement shall be
effective unless it is in writing and executed by party against whom
enforcement of any such amendment or waiver is sought.
(c) Severability. If any provision of this Agreement shall
be determined to be void, invalid, unenforceable or illegal for any reason,
then the validity and enforceability of all of the remaining provisions of
this Agreement shall not be affected thereby. If any particular provisions of
this Agreement shall be adjudicated to be invalid or unenforceable, then such
provision shall be deemed amended to delete therefrom the portion thus
adjudicated to be invalid or unenforceable, such amendment to apply only to
the operation of such provision in the particular jurisdiction in which such
adjudication is made; provided that, if any one or more of
6
<PAGE>
the provisions contained in this Agreement shall be adjudicated to be invalid
or unenforceable because such provision is held to be excessively broad as to
duration, geographic scope, activity or subject, then such provision shall be
deemed amended by limiting and reducing it so as to be valid and enforceable
to the maximum extent compatible with the applicable laws of such
jurisdiction, such amendment only to apply with respect to the operation of
such provision in the applicable jurisdiction in which the adjudication is
made.
(d) No Waiver Of Rights. No failure or delay on the part of
either Executive or the Company in the exercise of any power or right under
this Agreement shall operate as a waiver thereof, nor shall any single or
partial exercise of any such power or right. The waiver by Executive or the
Company of a breach of any provision of this Agreement shall not operate or be
construed as a waiver of any other or subsequent breach under this Agreement.
(e) Notices. All notices and other communications under this
Agreement (collectively, the "Notices") shall be in writing and may be
personally served or sent by certified or registered mail, return receipt
requested, proper postage prepaid, or recognized overnight delivery service,
proper charges prepaid. All Notices shall be delivered to the party to receive
the same at the addresses indicated below (or at such other address(es) as a
party may specify in a written notice):
If to Executive:
William J. Burg
1869 Sunset Drive
Whitehall, PA 18052
If to the Company:
Quantum Epitaxial Designs, Inc.
119 Technology Drive
Bethlehem, PA 18015
Attention: President
All Notices shall be deemed to be received when delivered if
delivered personally, the next business day after the date sent if sent by a
national overnight delivery service with proper charges prepaid, or three (3)
business days after the date mailed if mailed by certified or registered mail,
return receipt requested with proper postage prepaid. Whenever the giving of
notice is required, the giving of such notice may be waived in writing by the
party entitled to receive such notice.
(f) Headings. The headings used in this Agreement are for
convenience only and are not intended to define or limit the contents or
substance of any provision of this Agreement.
7
<PAGE>
(g) Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
(h) Governing Law/Jurisdiction. This Agreement shall be
governed and construed as to its validity, interpretation and effect by the
laws of the Commonwealth of Pennsylvania notwithstanding the choice of law
rules of Pennsylvania or any other jurisdiction. IN ADDITION, IN THE CASE OF
ANY DISPUTE UNDER OR IN CONNECTION WITH THIS AGREEMENT, EACH OF EXECUTIVE AND
THE COMPANY HEREBY CONSENTS TO THE EXCLUSIVE JURISDICTION AND VENUE OF THE
COURTS OF THE COMMONWEALTH OF PENNSYLVANIA IN AND FOR THE COUNTY IN WHICH THE
COMPANY MAINTAINS ITS PRINCIPAL PLACE OF BUSINESS OR THE FEDERAL DISTRICT
COURT FOR SUCH GEOGRAPHIC LOCATION, PROVIDED THAT SUCH FEDERAL COURT HAS
SUBJECT MATTER JURISDICTION OVER SUCH DISPUTE, AND EXECUTIVE HEREBY WAIVES ANY
CLAIM HE MAY HAVE AT ANY TIME AS TO FORUM NON CONVENIENS WITH RESPECT TO SUCH
VENUE. Notwithstanding anything to the contrary set forth in the preceding
sentence, the Company shall have the right to institute any legal action
arising out of or relating to this Agreement in any appropriate court and in
any jurisdiction.
IN WITNESS WHEREOF, each of Executive and the Company has
caused this Agreement to be duly executed as of the date set forth above.
QUANTUM EPITAXIAL DESIGNS, INC.
Attest:___________________________ By:____________________________________
Title: Print Name:
Title:
Witness:__________________________ _______________________________________
William J. Burg
8
<PAGE>
==============================================================================
OFFICE LEASE
BETWEEN
NORTHAMPTON COUNTY NEW JOBS CORP.
AS LANDLORD
AND
QUANTUM EPITAXIAL DESIGNS INC.
DATED MAY 17, 1993
==============================================================================
PREMISES:
A PORTION OF THE FIRST FLOOR
25 EAST SECOND STREET
BETHLEHEM, PENNSYLVANIA
==============================================================================
<PAGE>
TABLE OF CONTENTS
Section DESCRIPTION PAGE
- ------------------------------------------------------------------------------
1. PREMISES ............................................................ 1
2. TERM ................................................................ 1
3. RENT ................................................................ 2
4. ADDITIONAL RENT ..................................................... 3
5. LATE PAYMENT ........................................................ 4
6. USE OF PREMISES; INDEMNIFICATION .................................... 4
7. COMMON AREAS ........................................................ 6
8. ALTERATIONS AND TRADE FIXTURES, REMOVAL ............................. 6
9. MECHANICS' LIENS .................................................... 8
10. BUILDING SERVICES ................................................... 8
11. ASSIGNMENT AND SUBLETTING ........................................... 10
12. ACCESS TO PREMISES .................................................. 12
13. MAINTENANCE AND REPAIRS ............................................. 12
14. INDEMNIFICATION AND LIABILITY INSURANCE ............................. 14
15. QUIET ENJOYMENT ..................................................... 15
16. NEGATIVE COVENANTS OF TENANT ........................................ 15
17. FIRE OR OTHER CASUALTY .............................................. 16
18. SUBORDINATION ....................................................... 17
19. CONDEMNATION ........................................................ 18
20. ESTOPPEL CERTIFICATE ................................................ 19
21. DEFAULT ............................................................. 19
22. REMEDIES ............................................................ 20
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23. REQUIREMENT OF STRICT PERFORMANCE ................................... 23
24. SURRENDER OF PREMISES; HOLDING OVER ................................. 23
25. COMPLIANCE WITH LAWS AND ORDINANCES ................................. 24
26. TENANT DESIGN PROCESS ............................................... 24
27. TENANT FINISH WORK .................................................. 25
28. TENANT'S SEPARATE CONTRACTORS ....................................... 27
29. FURNITURE AND EQUIPMENT SYSTEMS ..................................... 28
30. SUBSTANTIAL COMPLETION .............................................. 29
31. TENANT DELAYS DEFINED ............................................... 30
32. DELAY IN POSSESSION ................................................. 30
33. TENANT'S RIGHT TO TERMINATE LEASE ................................... 30
34. OPTIONS TO RENEW .................................................... 31
35. PROJECT NAME AND SIGNAGE ............................................ 32
36. FIRST OFFER SPACE ................................................... 32
37. TENANT'S RIGHT TO PURCHASE THE BUILDING ........................... 34
38. ARBITRATION ......................................................... 35
39. NOTICES ............................................................. 35
40. BROKERAGE ........................................................... 35
41. FORCE MAJEURE ....................................................... 36
42. SUCCESSORS .......................................................... 36
44. GOVERNING LAW ....................................................... 36
45. SEVERABILITY ........................................................ 36
46. CAPTIONS ............................................................ 37
47. GENDER .............................................................. 37
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<PAGE>
48. EXECUTION ........................................................... 37
49. EXHIBITS ............................................................ 37
50. ENTIRE AGREEMENT .................................................... 37
51. CORPORATE AUTHORITY ................................................. 37
EXHIBITS
Exhibit A - Building/Premises Floor Plans
Exhibit B - Land Description
Exhibit C - Form of Lease Amendment
Exhibit D - Rules and Regulations
Exhibit E - Restrictive Covenants
Exhibit F - Core Shell Work
Exhibit G - Common Area Specifications
Exhibit H - Parking Area
Exhibit I - Option Term Rent
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<PAGE>
L E A S E
This Lease is made this May 17, 1993, by and between NORTHAMPTON
COUNTY NEW JOBS CORP., a Pennsylvania nonprofit corporation, having an office
at 157 South Fourth Street, Easton, Pennsylvania, ("Landlord") and QUANTUM
EPITAXIAL DESIGNS, INC., a Pennsylvania corporation, having its principal
offices at 115 Research Drive, Bethlehem, Pennsylvania 18015 ("Tenant").
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein the parties hereto agree as follows:
Section 1. PREMISES. For and in consideration of the rent to be paid
and the covenants and agreements to be performed by Tenant as hereinafter set
forth, Landlord does hereby lease, demise and let unto Tenant a portion of the
first floor in a building to be constructed with an aggregate of 44,315
rentable square feet ("Building"), as shown on the Floor Plans of the Building
and the Premises annexed as Exhibit A hereto and containing a total of 9,920
rentable square feet ("Premises"), which Building is to be situated on
approximately 4 acres of land more particularly described in Exhibit B annexed
hereto within the City of Bethlehem, Northampton County, Pennsylvania
("Land"), together with the right, in common with other occupants of the
Building, to use the Common Areas (defined below in Section). As used herein,
"rentable square feet" means the usable area measured from the middle of the
demising walls outlining the Premises.
Section 2. TERM. The term of this Lease shall be for five (5) years,
commencing on the date ("Commencement Date") which is the latest to occur of
(i) August 1, 1993, and (ii) the date the Premises are Substantially Complete
(defined below in Section 30) and expiring on the last day ("Expiration Date")
of the fifth Lease Year (defined below), unless renewed or sooner terminated
as hereinafter provided. Landlord and Tenant anticipate that the term of this
Lease will commence on September 1, 1993 ("Anticipated Commencement Date").
As used in this Lease, "Lease Year" means each consecutive twelve
calendar month period beginning with the Commencement Date, except that if the
Commencement Date does not occur on the first day of a calendar month, then
the first Lease Year shall also include the number of days from the
Commencement Date until the last day of the first month of Tenant's occupancy
and the term of this Lease shall be five (5) years plus said number of days
and shall expire on the last day of the 60th full month of the term.
When the Commencement Date and Expiration Date have finally been
determined, Landlord and Tenant shall execute and deliver a Lease amendment, in
the form of the Lease Commencement Date Amendment annexed as Exhibit C hereto,
to confirm said dates.
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Section 3. RENT.
(a) Beginning on the Commencement Date and continuing thereafter
during the entire initial term of this Lease, Tenant shall pay to Landlord, as
yearly rent, the following sums ("Base Rent"), in equal monthly installments,
in advance on the first day of each calendar month, without demand or, notice
(except as set forth herein):
LEASE ANNUALIZED BASE MONTHLY BASE BASE RENT
MONTH RENT RENT RATE/SF
----- ---- ---- -------
1-12 $ 104,656 $ 8,721.33 $ 10.55
13-24 107,136 8,928.00 10.80
25-36 109,616 9,134.66 11.05
37-48 112,294 9,357.86 11.32
49-60 114,972 9,581.06 11.59
(b) In the event that the Commencement Date occurs on a day other
than the first day of a calendar month, Tenant shall pay to Landlord a pro
rata portion of the monthly installment of Base Rent for such partial month,
computed at the annual Base Rent rate of $10.55 per rentable square foot.
(c) Whenever under the terms of this Lease any sum of money is
required to be paid by Tenant in addition to the Base Rent herein reserved,
and said additional sum is not designated as "Additional Rent", then if not
paid when due, said sum shall nevertheless be deemed "Additional Rent" and be
collectible as such with any installment of Base Rent thereafter falling due
hereunder, but nothing herein contained shall be deemed to suspend or delay
the payment of any such sum at the time the same became due and payable
hereunder, or limit any other remedy of Landlord.
(d) All payments of Base Rent and Additional Rent shall be paid when
due at 157 South Fourth Street, Easton, Pennsylvania, or at such other place
as Landlord may from time to time direct by written notice to Tenant. All
checks shall be made payable to the order of Landlord.
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Section 4. ADDITIONAL RENT.
(a) Tenant shall pay to Landlord, as Additional Rent, the following:
(1) All normal and customary electric, water and gas charges
for and with respect to the Premises, without mark-up, as shown on a separate
meter or submeter exclusively for the Premises; provided, that Tenant shall
only be required to pay for charges for water usage in excess of 250,000
gallons in any Lease Year.
(2) The purchase price for HEPA ceiling filters installed
in, and for the exclusive use and benefit of, the Premises of a type, design
and installation acceptable to Tenant, but in no event to exceed $43,000;
(3) The purchase price of the air cooler chiller system
necessary to provide chilled water for the process equipment and cooling and
"clean room" and other work rooms exclusively to the Premises of a type,
design and installation acceptable to Tenant ("Chiller System"), but in no
event to exceed $26,000;
(4) Tenant's Percentage of the Operational Costs (as defined
below).
(b) Tenant shall pay (i) the Additional Rent set forth in (a)(2) and
(a)(3) above within thirty (30) days after the Commencement Date or receipt by
Tenant of paid receipts of invoices showing the proper costs thereof,
whichever is later; (ii) the Additional Rent set forth in (a)(1) above monthly
directly to the applicable utility or reimbursed to Landlord promptly upon
presentation of utility bills therefor; and (iii) the Additional Rent set
forth in (a)(4) above quarterly to Landlord promptly upon presentation of paid
invoices therefor.
(c) "Tenant's Percentage" shall be 22.4%, which is the ratio that the
rentable square foot area of the Premises (i.e. 9,920 rentable square feet)
bears to the total rentable square foot area of office space in the Building
(i.e. 44,315 rentable square feet).
(d) "Operational Costs" shall be normal and customary charges for
trash and recyclables removal actually charged against Landlord and with
respect to the Building and the Common Areas.
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(e) All sums due under this Section shall be appropriately
apportioned and prorated for any portion of a Lease Year, so that Tenant shall
not be obligated to pay any Operation Costs that accrue either prior to the
Commencement Date or following the Expiration Date of the term of this Lease.
In the event that this Lease shall expire at any time other than at the end of
a calendar year, then within thirty (30) days after statements reflecting the
actual Operation Costs for the year in which such expiration occurs are
submitted by Landlord to Tenant (pro-rated on the basis of the number of
calendar year days included within such partial Lease Year divided by 365
days), either Landlord or Tenant shall pay to the other party the adjustment
sum due. The provisions of this paragraph shall survive the expiration of this
Lease.
(f) In the event that less than 100% of the rentable space in the
Building is leased during any calendar year (or part thereof) during the term
of this Lease, Operation Costs for such calendar year shall be increased to
the amount that in Landlord's reasonable judgment would have been incurred had
100% of the rentable space in the Building been leased during such calendar
year.
(g) Any disputes between Landlord and Tenant arising under this
Section shall be decided by binding arbitration in the manner expressed in
Section 42 hereof.
Section 5. LATE PAYMENT. In the event that Tenant shall fail to pay
Base Rent or any Additional Rent within ten (10) days after its due date,
Tenant shall pay an automatic late charge to Landlord of $.05 for each dollar
overdue. Such late charge shall be deemed Additional Rent for all purposes
under this Lease.
Notwithstanding the foregoing, Landlord shall give Tenant, twice each
Lease Year, a notice of late payment and five (5) days to make payment after
notice of such failure before the first and second late charges are imposed
for each Lease Year.
Section 6. USE OF PREMISES; INDEMNIFICATION
(a) Tenant shall use and occupy the Premises as a commercial office
and light industrial facility, together with all appurtenant and incidental
uses relating thereto (but only to the extent permitted by applicable zoning
and similar ordinances and regulations). Tenant shall not use or occupy the
Premises for any other purpose or business, without the prior written consent
of Landlord. Tenant shall observe and comply with the Rules and Regulations
annexed as Exhibit D hereto, as amended,
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modified and supplemented from time to time by Landlord, provided such change
does not conflict with any express provision of this Lease ("Rules and
Regulations") and the Restrictive Covenants on the Land attached hereto as
Exhibit E ("Covenants"). The Rules and Regulations applicable to Tenant shall
not be more restrictive than those applicable to other tenants of the Building
and their respective employees, agents, licensees, invitees, subtenants and
contractors.
(b) Notwithstanding the generality of paragraph (a) above, Tenant
shall conduct all activity in substantial compliance with all federal, state,
and local laws, statutes, ordinances, rules, regulations, orders and
requirements of common law concerning protection of the environment or human
health ("Environmental Laws"). Tenant shall also cause its subtenants,
licensees, invitees, agents, contractors, subcontractors and employees to
comply with all Environmental Laws. Tenant and its subtenants, licensees,
invitees, agents, contractors, and subcontractors shall obtain, maintain, and
comply with all necessary environmental permits, approvals, registrations and
licenses.
In addition to and not in limitation of the foregoing, Tenant, its
subtenants, licensees, invitees, agents, contractors, subcontractors and
employees shall not generate, refine, produce, transfer, process or transport
Hazardous Materials on the Premises except in accordance with all applicable
laws and regulations. As used herein, the term "Hazardous Materials" shall
include, without limitation, all of the following: (I) hazardous substances,
as such term is defined in the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"), 42 U.S.C. Section 9601 (14), as
amended by the Superfund Amendments and Reauthorization Act of 1986, Pub. L.
No. 99-499, 100 Stat. 1613 (Oct. 17, 1986) ("SARA"); (2) regulated substances,
within the meaning of Title I of the Resource Conservation and Recovery Act,
42 U.S.C. Sections 6991-6991(i), as amended by SARA; (3) any element,
compound or material which can pose a threat to the public health or the
environment when released into the environment; (4) hazardous waste as defined
in the Pennsylvania Solid Waste Management Act, Pa. Stat. Ann. title 35
Section 6018.103 (Purdon Supp. 1987); (5) hazardous material designated under
the Pennsylvania Hazardous Materials Transportation Act Pa. Stat. Ann. title
75 Sections 8301 to 8308 (Purdon Supp. 1987); (6) any substance which may be
the subject of liability pursuant to the Pennsylvania Clean Streams Law, Pa.
Stat. Ann. title 35, Sections 691.1 to 691.1001 (Purdon Supp. 1987); (7) an
object or material which is contaminated with any of the foregoing; (8) any
other substance
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designated by any of the Environmental Laws or a federal, state or local
agency as detrimental to public health, safety and the environment.
(c) Tenant, its subtenants, licensees, invitees, agents, contractors,
subcontractors and employees shall not release, spill, pump, pour, emit,
empty, dump or otherwise discharge or allow to escape Hazardous Materials into
the environment, and Tenant shall take all action necessary to remedy the
results of any such release, spillage, pumping, pouring, emission, emptying,
dumping, discharge, or escape.
(d) Tenant shall supply Landlord with copies of any written
communication between Tenant and any governmental agency or instrumentality
concerning or relating to violations or alleged violations of Environmental
Laws.
(e) Tenant agrees to indemnify and hold Landlord harmless from and
against all claims, suits, damages, losses and expenses (including reasonable
attorneys' fees) arising out of or based upon Tenant's breach of subsection
(b) or (c) above.
(f) Landlord agrees to indemnify and hold Tenant harmless from and
against all claims, suits, damages, losses and expenses (including reasonable
attorneys' fees) arising out of or based upon the breach or violation of any
Environmental Laws with respect to any condition of or act on in, under or
near, or existence of any Hazardous Materials on, in or under, the Land or the
Building except to the extent caused by Tenant's acts.
Section 7. COMMON AREAS. All parking areas, walkways, stairs,
driveways, public corridors and fire escapes, and other areas, facilities and
improvements now or hereafter existing in or outside the Building or on the
Land ("Common Areas") which may be provided by Landlord from time to time for
the general use, in common, of Tenant and other tenants, their employees,
agents, invitees, and licensees, shall at all times be subject to the control
and management of Landlord. Landlord shall have the right from time to time to
establish, modify and enforce reasonable rules and regulations with respect to
the Common Areas..
Section 8. ALTERATIONS AND TRADE FIXTURES, REMOVAL.
(a) Except as set forth in Section 29 with respect to the initial
Tenant Finish Work, during the term of this Lease, Tenant shall not make any
alterations or additions to the Premises or the Building that are structural
in nature or
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that affect the Building systems without the prior written consent of
Landlord, which consent shall not be unreasonably withheld or delayed. All
material alterations and additions that are not structural in nature and which
do not affect the Building systems may be made by Tenant without the prior
written consent of Landlord but upon at least five (5) days prior written
notice to Landlord. All such to be done or performed in or about the Building
by Tenant shall be performed (i) at Tenant's sole cost and expense, (ii) with
respect to material alterations, in accordance with the plans and
specifications prepared by and at the expense of Tenant and given to and, if
required, approved by Landlord, (iii) with respect to material alterations, by
contractors, subcontractors and materialmen approved by Landlord, and (iv) in
conformity with all applicable laws, codes and regulations. During the course
of performance of said work, Tenant will carry or cause to be carried
Comprehensive General Liability insurance, in the minimum limit of $1,000,000
naming Landlord as additional insured and further providing that such
insurance cannot be cancelled without at least ten (10) days' prior written
notice to Landlord.
(b) Any consent by Landlord permitting Tenant to do any or cause any
work to be done in or about the Building, and right of Tenant to perform such
work, shall be and hereby is conditioned upon Tenant's work being performed by
workmen and mechanics working in harmony and not interfering with labor
employed by Landlord, Landlord's mechanics or their contractors or any other
tenant or their contractors.
(c) All alterations, interior decorations, improvements or additions
made to the Premises by Tenant, except for movable furniture, equipment and
trade fixtures, shall immediately become Landlord's property. Tenant shall
remove all movable furniture, equipment and trade fixtures installed by Tenant
in the Premises ("Tenant's Property"), and repair any damage caused to the
Premises by said removal; provided that Tenant shall have no right to sell or
dispose of any decorations, improvements or fixtures installed in the Premises
by Landlord as part of the Tenant Finish Work or otherwise except as expressly
provided herein or without the express written consent of Landlord. All of
Tenant's Property remaining on the Premises after the Expiration Date, or
after any sooner termination date due to any default of Tenant, shall be
deemed to be abandoned property and shall, at the option of Landlord, become
the property of Landlord. Landlord shall give Tenant at least thirty (30)
days' prior notice to remove Tenant's Property before it shall be deemed
abandoned by Tenant.
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(d) Notwithstanding anything in subsection (c) above, the HEPA
ceiling filters installed in the Premises shall be conclusively deemed to be
Tenant's Property, and Tenant may remove them (without damage to the Building)
upon expiration or termination of this Lease without payment to Landlord or
duty to replace them with other ceiling tiles.
Section 9. MECHANICS' LIENS. Prior to Tenant performing any
construction or other work in or about the Premises for which a lien could be
filed against the Premises or the Building in an amount in excess of $5,000,
Tenant shall have its contractor execute a Waiver of Mechanics' Lien,
satisfactory to Landlord, and provide Landlord with a copy thereof.
Notwithstanding the foregoing, if any mechanics' or other lien shall be filed
against the Premises or the Building purporting to be for labor or materials
furnished or to be furnished at the request of Tenant, then at its expense,
Tenant shall cause such lien to be removed of record by payment, bond or
otherwise, within thirty (30) days after the filing thereof. If Tenant shall
fail to cause such lien to be removed of record within such thirty (30) day
period, Landlord may cause such lien to be removed of record by payment, bond
or otherwise, without investigation as to the validity thereof or as to any
offsets or defenses thereto, in which event Tenant shall reimburse Landlord in
the amount paid by Landlord, including expenses, within ten (10) days after
Landlord's billing therefor. Tenant shall indemnify and hold Landlord harmless
from and against any and all claims, costs, damages, liabilities and expenses
(including attorney fees) which may be brought or imposed against or incurred
by Landlord by reason of any such lien or removal of record.
Section 10. BUILDING SERVICES.
(a) Landlord shall perform, at Landlord's sole cost and expense, all
Landlord's Core Shell Work (defined in Exhibit F annexed hereto) to the extent
necessary, if any, to provide the following services, systems and facilities
for the Building and Common Areas within the Building ("Building Services"),
subject to and in conformity with the Base Building and Building Services
Specifications annexed as Exhibit F hereto:
(1) Heating, ventilating and air conditioning for the
Premises at all times and the Common Areas within the Building during normal
business hours.
(2) Electricity for office and light industrial use,
including office and light industrial equipment, in the Premises;
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(3) Life safety support systems for the Building;
(4) Structural systems for the Building;
(5) Hot and cold water for Tenant's use at the Premises and
a plumbing system for the Building;
(6) Tenant shall have the right to tie the Premises into the
Building security system, if any, at Tenant's sole cost and expense;
(7) Cleaning and maintenance of Common Areas in or relating
to the Building, including bathroom facilities, if any;
(8) Subject to the terms and conditions of this Lease,
Tenant shall have access to the Building and the Premises at all times (i.e.,
24 hours a day, 365 days a year) during the term of this Lease; subject to
temporary interruption in accordance with the terms hereof for repair work or
in emergencies.
(b) In addition to the services set forth in paragraph (a) above,
Landlord shall provide the following services and facilities for the Common
Areas ("Common Area Services"):
(1) Landscaping, snow removal and lighting services for the
Common Areas in conformity with the Common Area Specifications annexed as
Exhibit G hereto;
(2) Maintenance and repair of the Common Areas.
(c) Subject to the provisions of this Lease, at no expense to Tenant,
Tenant shall have the continuing right during the term of this Lease to
utilize, in common with other tenants within the Building, the parking area
identified on the Plan of Parking Area annexed as Exhibit H hereto ("Parking
Area").
Landlord agrees that during the term of this Lease it shall not
reduce the number of parking spaces within the Parking Area to fewer than 160
unreserved and full size spaces (i.e., nine (9) feet by twenty (20) feet),
without the prior written consent of Tenant.
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(d) Landlord does not warrant that Building Services or Common Area
Services shall be free from any temporary slowdown, interruption or stoppage
caused by the maintenance, repair, replacement or improvement of any of the
equipment involved in the furnishing of any such services, or caused by
strikes, lockouts, fuel shortages, accidents, acts of God or the elements or
any other cause beyond the control of Landlord. Landlord agrees to use its
best efforts to resume the service upon any such slowdown, interruption or
stoppage as soon as possible.
Notwithstanding the foregoing, but subject to Section 41 hereof, in
the event Tenant is deprived of the normal use or occupancy of all or any
material portion of the Premises as a result of the stoppage of any of
Building Services or Common Area Services for a period in excess of ten (10)
days, then, in that event, Base Rent shall abate (pro rata, in the event of
partial loss of occupancy) from and after the eleventh day following the date
on which Tenant gives notice to Landlord advising it of the service
interruption and continuing until the date the service is restored.
Section 11. ASSIGNMENT AND SUBLETTING.
(a) Except as expressly permitted pursuant to this Section, Tenant
shall not assign or hypothecate this Lease or any interest therein or sublet
the Premises or any part thereof. Notwithstanding the foregoing, Landlord
recognizes that Tenant may desire to assign this Lease or sublet all or a
portion of the Premises, and Landlord herewith approves any such transfer
provided that an event of default does not exist at the time in question and,
further provided that (1) Tenant shall have given to Landlord at least thirty
(30) days advance notice of such transfer, which notice shall contain all of
the information and documentation referred to in paragraph (b) below, (2) the
transferee must be involved in light industrial, manufacturing, research and
development, or related activities, (3) Landlord shall have the right to
approve Tenant's transferee, which approval shall not be unreasonably withheld
or delayed (and shall be deemed given if Landlord fails to disapprove within
thirty (30) days after receipt of Tenant's written request and proper notice
thereof), (4) Tenant shall continue to remain fully liable for the performance
of all the terms, covenants, conditions and obligations to be performed by
Tenant under this Lease and (5) Tenant's transferee shall have agreed in
writing with Landlord to assume the obligation to perform all of the terms,
covenants, conditions and obligations to be performed by Tenant under the
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Lease with respect to the portion of the Premises assigned or subleased.
(b) If, at any time or from time to time during the Lease term,
Tenant desires to assign this Lease or sublet all or any portion of the
Premises, Tenant shall give written notice to Landlord thereof, which notice
shall contain (i) the name, address and description of the business of the
proposed assignee or subtenant, (ii) if other than a Permitted Transferee, its
most recent financial statement and other evidence of financial
responsibility, (iii) its intended use of the Premises, and (iv) a true copy
of the Agreement containing the terms and conditions of the proposed
assignment or subletting.
(c) Anything in paragraphs (a) and (b) to the contrary
notwithstanding, (i) upon notice to Landlord but without Landlord's consent or
approval, Tenant may assign this Lease or sublet all or any portion of the
Premises to an entity controlled by, under common control with or controlling
Tenant, or to a person or entity holding a controlling ownership interest in
Tenant (any of the foregoing herein referred to as a "Permitted Transferee");
and (ii) an assignment of this Lease which occurs by operation of law as a
result of merger or consolidation shall not be in violation of this Lease or
require Landlord's consent. Tenant shall give written notice to Landlord
within five (5) days following the occurrence of the event of an assignment
under clause (ii) above.
(d) No sublease or assignment shall be valid and no subtenant or
assignee shall take possession of the premises subleased or assigned until an
executed counterpart of such sublease or assignment of this Lease has been
delivered to Landlord.
(e) No subtenant shall have a further right to sublet and no assignee
shall have a further right to assign the Lease, except in accordance with the
provisions of this Section.
(f) Regardless of Landlord's consent, no subletting-or-assignment
shall release Tenant of Tenant's obligations or alter the primary liability of
Tenant to pay the Base Rent and Additional Rent and to perform all other
obligations to be performed by Tenant under this Lease. The acceptance of rent
by Landlord from any other person shall not be deemed to be a waiver by
Landlord of any provision hereof. Consent to one assignment or subletting
shall not be deemed consent to any subsequent assignment or subletting. In the
event of default by any assignee of Tenant or any successor of Tenant
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in the performance of any of the terms of this Lease, Landlord may proceed
directly against Tenant without the necessity of exhausting remedies against
such assignee or successor.
(g) In the event that the Premises or any part thereof have been
sublet by Tenant and Tenant is in default under this Lease pursuant to the
provisions of Section 22 hereof, then Landlord may collect rent from the
subtenant and apply the amount collected to the Base Rent and Additional Rent
herein reserved, but no such collection shall be deemed a waiver of the
provisions of this Section with respect to subletting or the acceptance of
such subtenant as Tenant hereunder or a release of Tenant under the Lease, or
an election by Landlord of its remedies.
Section 12. ACCESS TO PREMISES. Landlord, its employees and agents
shall have the right to enter the Premises at all reasonable times during
Business Hours and at anytime in case of an emergency for the purpose of
examining or inspecting the Premises, showing the Premises to prospective
purchasers, mortgagees and (during the last year of the Lease term only)
tenants of the Building, and making such alterations, repairs, improvements or
additions to the Premises or to the Building as Landlord may determine to be
necessary. If representatives of Tenant shall not be present to open any
entrance into the Premises at any time when such entry by Landlord is
necessary or permitted hereunder, Landlord may enter by means of a master key
(or forcibly in the event of an emergency) without liability to Tenant and
without such entry constituting an eviction of Tenant or termination of this
Lease. Landlord shall use reasonable efforts not to interfere with the conduct
of Tenant's business when entering the Premises. Except in the case of an
emergency, Landlord shall notify Tenant (which notice may be oral) of
Landlord's intended entry of the Premises at least 24 hours in advance.
Section 13. MAINTENANCE AND REPAIRS.
(a) Subject to the terms hereof, Landlord shall promptly make all
repairs and replacements necessary to maintain or promptly restore (i) all
Building systems including the plumbing, heating, ventilating, air
conditioning and electrical systems (except light fixtures); (ii) roof,
interior and exterior walls, windows, floors (except carpeting) and all other
structural portions of the Building (whether or not including the Premises),
in good repair and operating condition and in order and appearance appropriate
for a building of similar type. Landlord shall also be responsible for the
maintenance and repair of all Common Areas. In no event shall Landlord be
obligated
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under this paragraph to repair any damage caused by (1) any act, omission,
accident or negligence of Tenant or its employees, agents, invitees,
licensees, subtenants, or contractors and (2) any alterations or additions to
the Premises or the Building made by Tenant without the prior written consent
of Landlord (which consent shall be deemed given with respect to all of the
initial Tenant Finish Work and any subsequent alterations and additions to the
Premises or the Building that are structural in nature or affect the Building
systems if such alterations and additions are shown on plans and
specifications delivered to Landlord by Tenant and approved by Landlord in
conformity with the requirements of Section 9 hereof).
(b) In addition to Landlord's maintenance and repair obligations
under paragraph (a) above, Tenant shall, at its sole cost and expense, (i)
provide customary routine maintenance for the Premises and the fixtures
therein and keep them in neat and orderly condition, wear and tear and damage
by fire or other casualty excepted, and (ii) repair and replace the HEPA
ceiling filters and keep them in good condition, reasonable wear and tear and
damage by fire or other casualty excepted, and (iii) provide customary routine
maintenance of the Chiller System to maintain them in good condition,
including quarterly maintenance inspections by a reputable maintenance
contractor, reasonable wear and tear, damage by casualty and non-routine
repairs and replacements by Landlord excepted. In addition, Tenant shall
promptly notify Landlord of any material defect or breakdown in the Chiller
System of which it has actual knowledge, and provide Landlord copies of the
quarterly inspection reports promptly upon receipt. If Tenant refuses or
neglects to provide such maintenance, or fails to diligently prosecute the
same to completion, after notice from Landlord of the need therefor, Landlord
may make such repairs at the expense of Tenant, and such expense shall be
collectible on demand as Additional Rent.
(c) Landlord shall not be liable for any interference with Tenant's
business arising from the making of any repairs in the Premises under
paragraph (a) above. Landlord shall use its best efforts not to interfere with
the operation of Tenant's business when making repairs in the Premises. Upon
Tenant's specific request from time to time, unless required by emergency, any
repair work that would substantially interfere with the conduct of Tenant's
business shall be done after 5:00 p.m. There shall be no abatement of Base
Rent or Additional Rent because of such repairs.
(d) In the event Landlord fails to perform a repair under this
Section, Tenant shall notify Landlord of
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Landlord's failure to repair, including a description of the nature of the
required repair. Landlord shall perform the repair within ten (10) days (or if
such repair cannot be performed within ten (10) days, such longer period
reasonably necessary to perform the repair) after receipt of Tenant's notice.
If Landlord fails to perform the repair within such period, Tenant shall
notify Landlord of Tenant's intent to fulfill Landlord's obligation to repair
and to deduct from Tenant's succeeding installments of Base Rent the actual
expense of such repair. If Landlord then fails to perform the repair and if
Landlord fails to reasonably and in good faith dispute such failure to repair
by written notice to Tenant, within ten (10) days after receipt of such notice
from Tenant, Tenant may perform or cause to be performed Landlord's obligation
to repair and may then without further action being required deduct from
Tenant's succeeding installments of Base Rent payable to Landlord hereunder
the reasonable costs and expenses paid by Tenant in performing or causing to
be performed such obligation to repair.
Section 14. INDEMNIFICATION AND LIABILITY INSURANCE.
(a) Tenant shall indemnify, defend and hold Landlord harmless from
and against any and all costs, expenses (including reasonable counsel fees),
liabilities, losses, damages, suits, actions, fines, penalties, claims or
demands of any kind and asserted by or on behalf of any person or governmental
authority, arising out of or in any way connected with, and Landlord shall not
be liable to Tenant on account of, (i) any failure by Tenant to perform any of
the agreements, terms, covenants or conditions of this Lease required to be
performed by Tenant, (ii) any failure by Tenant to comply with any statutes,
ordinances, regulations or orders of any governmental authority applicable to
Tenant or its use and occupancy of the Premises (except for requirements
applicable to the Building in general and its occupancy, which shall be
Landlord's sole responsibility), or (iii) any accident, death or personal
injury, or damage to or loss or theft of property, which shall occur in or
about the Premises occasioned wholly or in part by reason of any act or
omission of Tenant, or any of its agents, contractors, licensees, invites,
employees or subtenants. In no event shall Tenant be obligated under this
paragraph to indemnify, defend or hold harmless Landlord from and against
damages, claims or demands of any kind arising out of the willful or negligent
conduct of Landlord, its agents, contractors and employees, or Landlord's
default in its obligations under this Lease. In no event shall Landlord be
responsible for inspecting or monitoring the Premises for workplace safety
arising out of or with respect to Tenant's equipment and operations.
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(b) During the term of this Lease and any renewal thereof, Tenant
shall obtain and promptly pay all premiums for Comprehensive General Liability
Insurance with broad form extended coverage, including Contractual Liability,
covering claims for bodily injury (including death resulting therefrom) and
property loss or damage occurring upon, in or about the Premises, with a
minimum combined single limit of at least $1,000,000. All such policies and
renewals thereof shall identify Landlord as additional insured. All policies
of insurance shall provide (i) that no material change or cancellation of said
policies shall be made without at least thirty (30) days' prior written notice
to Landlord and Tenant, and (ii) that any loss shall be payable
notwithstanding any act or negligence of Tenant or Landlord which might
otherwise result in the forfeiture of said insurance. On or before the
Commencement Date of the term of this Lease, and thereafter not less than
fifteen (15) days prior to the expiration dates of said policy or policies,
Tenant shall furnish Landlord with renewal certificates of the policies of
insurance required under this paragraph. Tenant's insurance policies shall be
issued by insurance companies authorized to do business in the Commonwealth of
Pennsylvania with a financial rating of at least an B as rated in the most
recent edition of Best's Insurance Reports. The aforesaid insurance limits may
be reasonably increased by Landlord from time to time during the term of this
Lease.
Section 15. QUIET ENJOYMENT. Landlord covenants and agrees with
Tenant that upon Tenant paying the Base Rent and Additional Rent and observing
and performing all the terms, covenants and conditions, on Tenant's part to be
observed and performed under this Lease, Tenant may peaceably and quietly
enjoy the Premises hereby demised, subject, nevertheless, to the terms and
conditions of this Lease, and subject to the ground leases, underlying leases
and mortgages hereinafter mentioned.
Section 16. NEGATIVE COVENANTS OF TENANT. Tenant agrees that it will
not do or suffer to be done, any act, matter or thing objectionable under any
generally applicable fire insurance or any other insurance now in force or
hereafter placed on the Premises or any part thereof or on the Building by
Landlord which shall cause such Policy to become void or suspended. In case of
a breach of this covenant, in addition to all other remedies of Landlord
hereunder, Tenant agrees to pay to Landlord, as Additional Rent, any and all
increases in premiums on insurance carried by Landlord on the Premises or any
part thereof or on the Building caused in any way by the occupancy of Tenant.
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It is understood that Tenant shall not be in default of its
obligations expressed in this Section unless Tenant has been furnished with
advice regarding the requirements of Landlord's insurer, shall have been
notified of any violation of or noncompliance with such requirements in
writing, and shall have failed to take or accomplish corrective actions within
a reasonable period of time.
Section 17. FIRE OR OTHER CASUALTY.
(a) Subject to the provisions of paragraphs (b) and (c) below, if the
Premises and/or any portion(s) or component(s) of the Building or the Common
Areas outside the Premises that are reasonably necessary to provide Tenant
with normal access to and from the Premises or which provide Building Services
or Common Area Services to the Premises, such as, for example, Building
entrances, lobbies, hallways and electrical, plumbing and HVAC systems and
equipment (together or separately, the "Significant Building Components") are
damaged by fire or other insured casualty, Tenant shall give prompt notice of
such event to Landlord and the damages shall be repaired by and at the expense
of Landlord and restored to substantially the condition that existed
immediately prior to such damage (provided that no difference in the condition
may adversely affect Tenant's operation; and, in the case of the Premises, as
required by the standards for the initial Tenant Finish Work as described in
Section 27) and the Base Rent and Additional Rent shall be apportioned from
the date of such fire or other casualty until substantial completion of the
repairs, according to the part of the Premises which is usable by Tenant.
Landlord agrees to repair such damage in an expeditious manner as quickly as
possible after receipt from Tenant of written notice of such damage, subject
to any delays caused by Acts of God or other events beyond Landlord's control
relating to the actual construction (excluding cost) which Landlord has used
its best efforts to avoid or overcome. Landlord shall not be liable for any
inconvenience or annoyance to Tenant or injury to the business of Tenant
resulting in any way from such damage or the repair thereof, but Tenant shall
be entitled to abatement of Base Rent and Additional Rent, as aforesaid.
Tenant acknowledges notice that (i) Landlord shall not obtain insurance of any
kind on Tenant's furniture or furnishings, equipment, fixtures, alterations,
improvements and additions, (ii) it is Tenant's obligation to obtain such
insurance at Tenant's sole cost and expense, and (iii) Landlord shall not be
obligated to repair any damage thereto or replace the same, unless such damage
is caused by the negligence or misconduct of Landlord, its agents, servants or
employees.
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(b) If (i) the Premises are rendered substantially untenantable or
any Significant Building Component is rendered substantially unusable or
inoperable by reason of such fire or other casualty, or (ii) twenty percent
(20%) or more of the Premises is damaged by said fire or other casualty, and,
in either case, Landlord's engineer or architect reasonably estimates that it
will take more than three (3) months to substantially complete the required
repairs and restoration, Landlord or Tenant shall have the right, upon written
notice to the other within fifteen days after said occurrence, in the case of
Landlord to elect not to repair and restore the Premises or Significant
Building Component, and in the case of Tenant (except with respect to a fire
or other casualty caused by the negligence or wilful misconduct of Tenant, its
agents and employees) to terminate this Lease, and in such event, this Lease
and the tenancy hereby created shall cease as of the date of said occurrence,
the Base Rent and Additional Rent to be adjusted and apportioned as of said
date.
(c) If, in the reasonable opinion of Landlord, the Building shall be
substantially damaged by fire or other casualty and Landlord's lender refuses
to permit available insurance proceeds to be used by Landlord to restore the
Building and the Premises to the condition that existed immediately prior to
the occurrence of the fire or other casualty, Landlord shall have the right,
upon written notice to Tenant within fifteen days after said occurrence, to
terminate this Lease, and in such event, this Lease and the tenancy hereby
created shall cease and the Base Rent and Additional Rent shall be adjusted
and apportioned as of the date of said termination unless terminated as of the
date of said occurrence in accordance with paragraph (b) above.
Section 18. SUBORDINATION.
(a) Subject to the provisions of paragraph 19(b) below, this Lease
shall be subject and subordinate at all times to the lien of any mortgages now
placed on the Land or the Building without the necessity of any further
instrument or act on the part of the Tenant to effectuate such subordination.
(b) Landlord covenants and agrees to use Landlord's best efforts to
obtain and furnish to Tenant, simultaneously with Tenant's execution of this
Lease, an agreement reasonably acceptable to Tenant ("Non-Disturbance
Agreement") executed and acknowledged from the holder(s) of any mortgage now
encumbering the Building or the Premises ("Existing
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Holder") whereby each Existing Holder agrees to not disturb Tenant in its
rights, use and possession of the Premises and Building under this Lease or to
terminate this Lease, except to the extent permitted to Landlord by the terms
of this Lease, notwithstanding the foreclosure or the enforcement of the
mortgage or termination or other enforcement of an underlying lease or
installment purchase agreement. Tenant covenants and agrees to execute and
deliver the Non-Disturbance Agreement(s).
(c) Tenant further agrees that this Lease shall be subject and
subordinate to the lien of any mortgages hereafter placed upon the Land or the
Building, provided that the holder thereof shall have entered into a
Non-Disturbance Agreement with Tenant as described in paragraph (b) above,
which Non-Disturbance Agreement shall be in form reasonably acceptable to the
mortgagee and also may provide for the subordination of this Lease and
Tenant's agreement to attorn as part of its terms.
Section 19. CONDEMNATION.
(a) If any of the Premises or a portion of the Building or the Common
Areas that contains a Significant Building Component (and, as a result,
Tenant's use and enjoyment of the Premises is substantially impaired) shall be
condemned or taken permanently for any public or quasi-public use or purpose,
under any statute or by right of eminent domain, or by private purchase in
lieu thereof, then in that event, at the option of either Landlord or Tenant
exercised by notice to the other within thirty (30) days after the date when
possession is taken, the term of this Lease shall cease and terminate as of
the date when possession is taken pursuant to such proceeding or purchase. The
Base Rent and Additional Rent shall be adjusted and apportioned as of the time
of such termination and any Base Rent and Additional Rent paid for a period
thereafter shall be refunded. In the event a material portion only of the
Building shall be so taken (even though the Premises may not have been
affected by the taking of some other portion of the Building), Landlord may,
within such 30-day period, elect to terminate this Lease as of the date when
possession is taken pursuant to such proceeding or purchase of Landlord may
elect to repair and restore the portion not taken at its own expense, and
thereafter the Base Rent and Additional Rent shall be reduced proportionately
to reflect the portion of the Premises or Building not taken.
(b) In the event of any total or partial taking of the Building,
Landlord shall be entitled to receive the entire award in any such proceeding
and Tenant hereby assigns any and all right, title and interest of Tenant now
or hereafter arising
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in or to any such award or any part thereof and Tenant hereby waives all
rights against Landlord and the condemning authority, except that Tenant shall
have the right to claim and prove in any such proceeding and to receive any
award which may be made to Tenant, if any, specifically for damages for loss
of movable trade fixtures, equipment and moving expenses.
Section 20. ESTOPPEL CERTIFICATE. At any time and from time to time
and within ten (10) days after written request by Landlord or Tenant, Landlord
or Tenant, as the case may be, shall execute, acknowledge and deliver to the
other a statement in writing duly executed by Landlord or Tenant, as the case
may be, certifying that (i) this Lease is in full force and effect, without
modification or amendment (or, if there have been any modifications or
amendments, that this Lease is in full force and effect as modified and
amended and setting forth the dates of the modifications and amendments); (ii)
the dates to which annual Base Rent and Additional Rent have been paid; (iii)
to the knowledge of the certifying party, no default exists under this Lease
or specifying each such default; and (iv) such other matters as Landlord or
Tenant may reasonably request; it being the intention and agreement of
Landlord and Tenant that any such statement by Tenant may be relied upon by a
prospective purchaser or a prospective mortgagee of the Building, or by a
prospective assignee of Tenant, or by a prospective subtenant of the Premises,
or by others, in any matter affecting the Premises.
Section 21. DEFAULT. The occurrence of any of the following shall
constitute an event of default ("Event of Default") and a material breach of
this Lease by Tenant:
(a) The failure of Tenant to take possession of the Premises within
ninety (90) days after the Commencement Date of this Lease;
(b) A failure by Tenant to pay, when due, any installment of Base
Rent required to be paid by Tenant under this Lease, and such failure
continues for more than ten (10) days after Tenant has received notice of the
delinquent payment from Landlord; provided that such grace period and notice
shall not be applicable more than two times in any Lease Year.
(c) A failure by Tenant to pay, when due, any installment of
Additional Rent or any other sum required to be paid by Tenant under this
Lease, and such failure continues for more than ten (10) days after Tenant has
received notice of the delinquent payment from Landlord;
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(d) A failure by Tenant to observe and perform any other provision or
covenant of this Lease to be observed or performed by Tenant, and such failure
continues for thirty (30) days after Tenant receives written notice thereof
from Landlord; provided, however, that if the nature of the default is such
that the same cannot reasonably be cured within such thirty (30) day period
but is subject to cure within an additional sixty (60) days, Tenant shall not
be deemed to be in default if Tenant shall commence and diligently pursue the
cure of the default within such thirty (30) day period and cures such failure
within sixty (60) days following such notice; and
(e) The filing of a petition by or against Tenant for adjudication as
a bankrupt or insolvent or for its reorganization or for the appointment of a
receiver or trustee of Tenant's property pursuant to any local, state or
federal bankruptcy or insolvency law; or an assignment by Tenant for the
benefit of creditors; or the taking possession of the property of Tenant by
any local, state or federal governmental officer or agency or court-appointed
official for the dissolution or liquidation of Tenant or for the operating,
either temporary or permanent, of Tenant's business, provided, however, that
if any such action is commenced against Tenant the same shall not constitute a
default if Tenant causes the same to be dismissed within sixty (60) days after
the filing thereof.
Section 22. REMEDIES. Upon the occurrence of any Event of Default
then, in addition to all rights and remedies provided by law or equity, or
provided for elsewhere in this Lease, Landlord shall have all of the rights
and remedies specified in the following paragraphs, without any further notice
or demand whatsoever:
(a) Landlord may perform for the account of Tenant the cure of any
such default of Tenant and immediately recover as additional rent any
expenditures made and the amount of any obligations incurred in connection
therewith, plus the prime rate announced by Citibank, N.A. from time to time
("Prime Rate"), plus three percent (3%) per annum interest from the date of
any such expenditures;
(b) Landlord may immediately proceed to collect or bring action for
the rent as well as for liquidated damages provided for hereinafter, as being
rent in arrears, or may file a Proof of Claim in any bankruptcy or insolvency
proceeding for such rent, or Landlord may institute any other proceedings,
whether similar to the foregoing or not, to enforce payment thereof;
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(c) To the extent permitted by law, Landlord may re-enter and
repossess the Premises breaking open locked doors, if necessary, and may use
as much force as necessary to effect such entrance. To the extent permitted by
law, Landlord may remove all of Tenant's goods and property from the Building
and store same, at Tenant's sole cost and expense;
(d) At any time after the occurrence of any event of default,
Landlord may re-enter and repossess the Premises or any part thereof and
attempt to relet all or any part of the Premises for and upon such terms and
to such persons, firms or corporations and for such period or periods as
Landlord, in its sole discretion, shall determine, including a term beyond the
termination of this Lease. Landlord shall consider any tenant offered by
Tenant in connection with such reletting. For the purpose of such reletting,
Landlord may decorate or make reasonable repairs, changes, alterations or
additions in or to the Building and the Premises to the extent reasonably
deemed by Landlord necessary; and the cost of such repairs, changes,
alterations or additions shall be charged to and be payable by Tenant as
Additional Rent hereunder, as well as any reasonable brokerage and legal fees
expended by Landlord. Any sums collected by Landlord from any new tenant
obtained on account of Tenant shall be credited against the balance of the
Base Rent and Additional Rent due hereunder as aforesaid. Tenant shall pay to
Landlord monthly, on the days when the Base Rent and Additional Rent would
have been payable under this Lease, the amount due hereunder less the net
amount obtained by Landlord from such new tenant;
(e) At its option, Landlord may serve notice upon Tenant that this
Lease and the then unexpired term hereof shall cease and expire and become
absolutely void on the date specified in such notice, to be not less than
fifteen (15) days after the date of such notice, without any right on the part
of Tenant to save the forfeiture by payment of any sum due or by the
performance of any term, provision, covenant, agreement or condition broken;
and, thereupon and at the expiration of the time limit in such notice, this
Lease and the term hereof granted, as well as the entire right; title and
interest of Tenant hereunder, shall wholly cease and expire and become void in
the same manner and with the same force and effect (except as to Tenant's
liability) as if the date fixed in such notice were the expiration date of the
term of this Lease. Thereupon, Tenant shall immediately quit and surrender the
Premises to Landlord and Landlord may enter into and repossess the Premises by
summary proceedings, detainer, ejectment or otherwise and remove all
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occupants thereof and, at Landlord's option, any property therein, without
being liable to indictment, prosecution or damages there for;
(f) At Landlord's option, Tenant shall pay to Landlord on demand all
Base Rent, Additional Rent and other charges payable hereunder due and unpaid
to the date of demand (allowing Tenant a credit for any sums collected by
Landlord from any new tenant to the extent provided in paragraph (d) above),
together with liquidated damages in an amount equal to twenty five percent
(25%) of the Base Rent, Additional Rent and other charges required to be paid
under this Lease from the date of said demand to the Expiration Date of the
term of this Lease, as if the same had not or will not be terminated, together
with interest thereon from the date of demand to the date paid at a rate equal
to the Prime Rate plus three percent (3%) per annum. The amount of liquidated
damages attributable to Operations Costs shall equal the amount of Operations
Costs Additional Rent paid by Tenant for the entire Lease Year immediately
prior to such default multiplied by the number of Lease Years (or portions
thereof) remaining through the Expiration Date. In the event any judgment has
been entered against Tenant for any amount in excess of the total amount
required to be paid by Tenant to Landlord hereunder, then the damages assessed
under said judgment shall be reassessed and a credit granted to the extent of
such excess. Landlord and Tenant acknowledge that the damages to which
Landlord is entitled in the event of a default under this Lease and, if
applicable, termination by Landlord, are not easily computed and are subject
to many variable factors. Therefore, Landlord and Tenant have agreed to the
liquidated damages as herein provided in order to avoid extended litigation in
the event of default by Tenant, and if applicable, termination of this Lease.
In the event Landlord exercises the remedy under this paragraph and
Tenant pays Landlord the entire amount of the liquidated damages, Landlord
shall be deemed to have made an election of remedies and except for regaining
possession of the Premises and termination of this Lease, Landlord shall not
be entitled to exercise any further remedy under this Section; it being
expressly agreed by the parties that the payment of the liquidated damages
shall not entitle Tenant to continue this Lease and possession of the
Premises, which Landlord may terminate at any time under an event of default
hereunder.
(g) The rights and remedies given to Landlord in this Lease are
distinct, separate and cumulative remedies, and no
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one of them, whether or not exercised by Landlord, shall be deemed to be in
exclusion of any of the others.
Section 23. REQUIREMENT OF STRICT PERFORMANCE. The failure or delay on
the part of Landlord to enforce or exercise at any time any of the provisions,
rights or remedies in the Lease shall in no way be construed to be a waiver
thereof, or in any way to affect the validity of this Lease or any part
thereof, or the right of Landlord to thereafter enforce each and every such
provision, right or remedy. No waiver of any breach of this Lease shall be
held to be a waiver of any other or subsequent breach. The receipt by Landlord
of Base Rent or Additional Rent at a time when the Base Rent or Additional
Rent is in default under this Lease shall not be construed as waiver of such
default. The receipt by Landlord of a lesser amount than the Base Rent or
Additional Rent due shall not be construed to be other than a payment on
account of the Base Rent or Additional Rent then due, and any statement on
Tenant's check or any letter accompanying Tenant's check to the contrary shall
not be deemed an accord and satisfaction, and Landlord may accept such payment
without prejudice to Landlord's right to recover the balance of the Base Rent
or Additional Rent due or to pursue any other remedies provided in this Lease.
No act or thing done by Landlord or Landlord's agents or employees during the
term of this Lease shall be deemed an acceptance of a surrender of the
Premises and no agreement to accept such a surrender shall be valid unless in
writing and signed by Landlord.
Section 24. SURRENDER OF PREMISES; HOLDING OVER.
(a) The Lease shall terminate and Tenant shall deliver up and
surrender possession of the Premises to Landlord at 11:59 P.M. local time on
the last day of the term hereof, and Tenant hereby waives the right to any
notice of termination or notice to quit. Upon the expiration or sooner
termination of this Lease, Tenant covenants to deliver up and surrender
possession of the Premises in the same condition in which Tenant has agreed to
maintain and keep the same during the term of this Lease in accordance with
the provisions of this Lease, normal wear and tear excepted.
(b) Upon the failure of Tenant to surrender possession of the
Premises to Landlord upon the expiration or sooner termination of this Lease,
Tenant shall pay to Landlord, as liquidated damages, an amount equal to 150%
of the then current Base Rent and Additional Rent required to be paid by
Tenant under this Lease, applied to the first thirty (30) days Tenant shall
remain in possession after the expiration or sooner
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termination of this Lease, and 200% of the then current Base Rent and
Additional Rent required to be paid by Tenant under this Lease, applied to the
holdover period from and after the 31st day Tenant shall remain in possession
after the expiration or sooner termination of this Lease. Acceptance by
Landlord of Base Rent or Additional Rent after such expiration or earlier
termination shall not constitute a consent to a holdover hereunder or result
in a renewal. The foregoing provisions of this paragraph are in addition to
and do not affect Landlord's right of reentry or any other rights of Landlord
hereunder or otherwise provided by law.
Section 25. COMPLIANCE WITH LAWS AND ORDINANCES. At its sole cost and
expense, Tenant shall promptly fulfill and comply with all laws, ordinances,
regulations and requirements of the Federal state and local governments and
any and all departments thereof having jurisdiction over the Building
applicable to Tenant's use and occupancy of the Premises (but not those
applicable to the Building generally or its occupancy, which, subject to the
terms hereof, shall be Landlord's sole responsibility), and the National Board
of Fire Underwriters or any other similar body now or hereafter constituted,
affecting Tenant's occupancy of the Premises or the business conducted
therein.
Section 26. TENANT DESIGN PROCESS.
(a) Landlord shall retain, at Landlord's cost and expense, the
services of a qualified and experienced tenant finish architect ("Tenant
Finish Architect") and other consultants as shall be reasonably necessary for
the purposes of planning, designing and administering the design and
construction of the Premises for Tenant's occupancy acceptable to Tenant in
scope and detail ("Tenant Finish Work"). The Tenant Finish Architect shall be
responsible for the development, completion and submission of certain design
and construction documentation for Tenant's and Landlord's review and approval
as set forth herein. Tenant hereby approves Spillman Farmer Architects as the
Tenant Finish Architect.
(b) The Tenant Finish Architect shall meet with Tenant to determine
Tenant's space requirement program. Tenant's space requirement program shall
include a determination of Tenant's general space requirements, Tenant's
specific functional and organizational space requirements, special lighting,
electrical and security requirements, preferred locations and configurations
of offices, work rooms, manufacturing requirements, conference rooms,
reception areas, file rooms and other rooms, and a determination of any other
specialized Tenant
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requirements. The Tenant Finish Architect shall confirm Tenant's space
requirement program in writing to Tenant, based upon the information gathered
and determinations of Tenant's general space requirements.
(c) On or before July 1, 1993, the Tenant Finish Architect, on behalf
of Landlord, shall complete and deliver three (3) sets two (2) sets of sepia
reproducibles and one (1) set of black-lined prints) of the completed
construction drawings and specifications acceptable to Tenant ("Tenant
Construction Documents") to Tenant, Landlord and the Tenant Finish Contractor.
Such Tenant Construction Documents shall consist of, at minimum, floor plans,
reflected ceiling plans, and power plans, designed floor loads, floor openings
and all other details and schedules designating the locations and
specifications of all mechanical, electrical, and plumbing equipment, all
partitions, doors, lighting fixtures, electrical receptacles and switches
(number but not location), specialty air-conditioning, as well as all other
specialty systems or equipment to be installed in the Premises. Tenant's
Construction Documents shall also include mechanical, electrical, fire
protection, plumbing and structural engineering plans as may be required to
implement the Tenant Finish Work. The Tenant Construction Documents shall be
signed by the Tenant Finish Architect and be in compliance with and contain
all information necessary to obtain the permits and licenses required to
perform the Tenant Finish Work. Prior to June 15, 1993, the Tenant Finish
Architect shall provide Tenant, Landlord and the Tenant Finish Contractor with
preliminary drafts of the Tenant Construction Documents as the same became
available from time to time.
Section 27. TENANT FINISH WORK.
(a) At Landlord's sole cost and expense, Landlord shall provide all
labor, materials, and expertise necessary for the construction of the Tenant
Finish Work in conformity with the Tenant Construction Documents provided
pursuant to Section 26 above.
(b) Landlord shall cause all Tenant Finish Work to be done in a good
and workmanlike manner. Subject to force majeure, Landlord shall cause the
Tenant Finish Work to be carried forward expeditiously and with adequate work
forces so as to achieve Substantial Completion of the Premises on or before
the Anticipated Commencement Date. Landlord shall secure and pay for the
building permit and all other permits and fees, licenses, and inspections
necessary for the proper execution and completion of the Tenant Finish Work.
Landlord shall comply with and give
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all notices required by laws, ordinances, rules, regulations, and lawful
orders of public authorities bearing on performance of the Tenant Finish Work.
Landlord shall be responsible for initiating, maintaining, and supervising all
safety precautions and programs in connection with performance of the Tenant
Finish Work.
(c) Landlord is responsible for removal of all debris within and
adjacent to the Premises. Landlord shall leave the Premises, upon completion
of all construction trades, in a broom-swept and fully serviceable fashion.
Landlord is responsible for coordination of all trades and their performance,
to assure compliance with the standards and clean-up as specified above.
(d) Tenant shall designate, prior to commencement of construction, a
representative authorized to act on Tenant's behalf with respect to the Tenant
Finish Work. Tenant shall examine documents submitted by Landlord and shall
render decisions pertaining thereto promptly to avoid unreasonable delay in
the progress of the Tenant Finish Work. Additionally, Tenant shall furnish
information required of it as promptly and expeditiously as necessary for the
orderly progress of the endeavor to render such decisions and furnish such
information within five (5) working days (or such shorter period as may be
appropriate for the stage of construction) after Landlord's written request
for the same is received by the Tenant representative.
(e) To the extent permitted by law, Landlord shall indemnify and hold
harmless Tenant from and against claims, damages, lawsuits, and expenses,
including, but not limited to, reasonable attorney's fees, relating to bodily
injuries to persons or damage to property arising out of or resulting from
Landlord's performance of the Tenant Finish Work, but only to the extent
caused wholly or primarily by negligent acts or omissions of Landlord and its
employees and independent contractors.
(f) Landlord promptly shall cause to be corrected Tenant Finish Work
reasonably rejected by Tenant for failing to conform to the requirements of
the Tenant Construction Documents, whether or not fabricated, installed, or
completed. Landlord shall bear costs of correcting all properly rejected
Tenant Finish Work. If, within one (1) year after the date of Substantial
Completion of the Tenant Finish Work, any of Tenant's Finish Work is
reasonably found by Tenant to be not in accordance with the requirements of
the Tenant Construction Documents, Landlord shall cause it to be corrected
promptly after receipt of written notice from Tenant to do so. Landlord's
obligation under
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this paragraph shall survive Tenant's occupancy of the Premises upon
Substantial Completion. Tenant shall give Landlord notice promptly after
discovery of the condition.
(g) Changes in the Tenant Finish Work may be accomplished only by (i)
a Change Order or (ii) an order for Minor Change. A Change Order shall be
based upon agreement between Landlord and Tenant; an Order for Minor Change
may be issued by Landlord alone, subject to the right of Tenant to dispute the
Order. Changes in the Tenant Finish Work shall be performed in conformity with
the provisions of this Section and the provisions of the Change Order or the
Order for Minor Change.
Tenant shall have the right to request changes in the Tenant Finish
Work by making a written request to Landlord describing the requested change,
provided that Landlord shall not be obliged to execute the requested change
unless a Change Order is issued with respect thereto.
A Change Order is a written instrument prepared by the Tenant Finish
Contractor and signed by Landlord and Tenant stating their agreement upon all
of the following: (a) a Change in the Tenant Finish work; (b) the extent of
the adjustment in the cost of the Tenant Finish Work, and which party shall
pay; and (c) the extent of the adjustment in the date of Substantial
Completion of the Tenant Finish Work, if any.
Landlord shall have the authority to order minor Changes in the
Tenant Finish Work not involving any change in the Cost of the Tenant Finish
Work or extension of the date of Substantial Completion of the Tenant Finish
Work and not inconsistent with the Tenant Construction Documents. Such minor
Changes in the Tenant Finish Work shall be effected by written order for Minor
Change issued by Landlord, which shall be binding on Tenant unless, within
five (5) working days after the same is received by Tenant, Tenant notifies
Landlord that it disputes the order for Minor Change. In such event, the Order
for Minor Change shall be treated as a request for a Change Order and shall
become effective and binding on Landlord and Tenant only after mutual
agreement of the parties as provided in this Section.
Section 28. TENANT'S SEPARATE CONTRACTORS. At Tenant's sole cost and
expense, Tenant may perform work with separate contractors, prior to the
Commencement Date, subject to the following requirements:
(a) The work shall be limited to computer, network installation,
telephone installations, process gas line
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installation, DI water system installation, and furniture and equipment
installations.
(b) Tenant shall obtain Landlord's prior written approval of the
contractor and of the specified work to be performed, which approval will not
be unreasonably withheld or delayed, and shall furnish Landlord with adequate
design documentation of such work.
(c) As soon as practicable, Tenant shall furnish to Landlord, in
writing, the names of the persons or entities proposed to perform Tenant's
separate work. Tenant shall not contract with any person or entity with whom
Landlord has reasonable objections.
(d) The entry by Tenant and Tenant's contractors, workmen and
mechanics into the Premises shall be deemed to be under all of the terms,
covenants, conditions and provisions of this Lease, except the covenant to pay
Base Rent and Additional Rent.
(e) Tenant further agrees that, to the extent permitted by law,
Landlord shall not be liable to Tenant in any way for any injury or death to
any person or persons, loss or damage to any of the leasehold improvements or
installations made in the Premises or loss or damage to property placed
therein or thereabout, the same being at Tenant's sole risk, except for any
injury or damage caused in whole or in part by the negligence of Landlord, its
employees, agents or independent contractors. In addition to any other
conditions or limitations on such license to enter the Premises prior to the
Commencement Date, Tenant expressly agrees that none of its agents,
contractors, workmen, mechanics, suppliers or invitees shall enter the
Premises prior to the Commencement Date unless and until each of them shall
furnish Landlord with satisfactory evidence of Comprehensive General Liability
insurance coverage and financial responsibility.
(f) Landlord shall endeavor to afford Tenant's separate contractors
reasonable access to work areas at reasonable times consistent with the
restrictions herein, provided, however, that the reasonable decision of
Landlord as to such access shall be final.
Section 29. FURNITURE AND EQUIPMENT SYSTEMS.
(a) Tenant shall have the right to perform installation of Tenant's
furniture and equipment systems, in the
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Premises for a period of ten (10) days following the date on which Landlord
delivers the Premises to Tenant in Ready for Fixture Installation condition
(defined below). All such work shall be performed by Tenant in conformity with
the provisions of Section 31 hereof.
(b) As used herein, the Premises shall be considered in "Ready For
Fixture Installation" condition as of the date when construction of the Tenant
Finish Work has been completed in all aspects necessary to permit Tenant to
install Tenant's furniture and other systems without material interference by
the Tenant Finish Contractor performing the Tenant Finish Work. The Premises
shall not be considered in Ready for Fixture Installation condition unless:
(i) Installation of lighting fixtures and HEPA ceiling
filters has been substantially completed;
(ii) Installation of electrical outlets in other electrical
power sources has been substantially completed; and
(iii) Carpeting and other specified floor coverings have
been installed.
Section 30. SUBSTANTIAL COMPLETION.
(a) As used herein, the Premises shall be considered "Substantially
Complete" as of the date when construction of the Tenant Finish Work has been
substantially completed in conformity with the Tenant Construction Documents
in all aspects necessary to permit Tenant to occupy and utilize the Premises
for the uses permitted by this Lease, subject to minor punch list items. The
Premises shall not be considered Substantially Complete until a Use and
Occupancy Certificate is issued by the City of Bethlehem authorizing lawful
occupancy of the Premises and a copy of such Certificate is furnished to
Tenant.
(b) Immediately prior to occupancy of the Premises by Tenant, Tenant
and Landlord jointly shall inspect the Building and the Premises in order to
determine and record their condition and to prepare a comprehensive list of
items that have not been completed (or which have not been correctly or
properly completed) in conformity with the Building Plans and Specifications
and Tenant's Construction Documents ("Punch List Items"). Thereafter,
Landlord, shall proceed promptly to complete and correct all Punch List Items.
Failure to include an item on
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the List does not alter the responsibility of Landlord to complete
construction of the Building and the Premises in accordance with the Building
Plans and Specifications and Tenant's Construction Documents. Occupancy and
use of the Building and the Premises by Tenant shall not constitute acceptance
of non-conforming construction work.
Section 31. TENANT DELAYS DEFINED. A "Tenant Delay" is any delay in
the completion of Tenant's Construction Documents or in preparation of the
Premises for occupancy, caused by an act or omission of Tenant, including,
without limitation, the following:
(a) Tenant's failure to submit in a timely manner as provided herein
approved Tenant's Construction Documents.
(b) Delay caused by revisions to approved Tenant's Construction
Documents requested by Tenant after submission to Landlord.
(c) Delay in the commencement of Tenant Finish Work resulting from
Tenant's failure to authorize the award of the Construction Contracts in a
timely manner as provided herein.
(d) Delay caused by the performance or nonperformance of any work or
activity by Tenant or any of its employees, agents or separate contractors or
consultants provided Landlord gives Tenant written notice of such delay as
promptly as possible, but in any event within thirty (30) days following any
such delay.
(e) Delay caused by Tenant requested changes in the Tenant Finish
Work as established by written Change Order signed by Landlord and Tenant.
Section 32. DELAY IN POSSESSION. In the event that Substantial
Completion of the Tenant Finish Work is delayed by any Tenant Delay, then for
purposes of determining the Commencement Date as provided in Section 3 hereof
the date of Substantial Completion of the Tenant Finish Work shall be adjusted
by subtracting one (1) day from the actual date of Substantial Completion of
the Tenant Finish Work for each day of Tenant Delay.
Section 33. TENANT'S RIGHT TO TERMINATE LEASE. Tenant may elect to
terminate this Lease upon written notice to Landlord in the event that
Landlord fails to (1) cause the foundation for the Building to be constructed
and installed on or before July 26, 1993, (2) cause the Building frame and
roof to be constructed and
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installed on or before August 23, 1993, or (3) achieve Substantial Completion
of the Tenant Finish Work on or before October 1, 1993, all in accordance with
the Building Plans attached hereto and in compliance with applicable building
code requirements. Such date shall be extended by one day for each day of
Tenant Delay and Force Majeure Cause (defined below); provided that such date
shall not be extended, in the aggregate, by more than 120 days on account of
Force Majeure Cause. As used herein, "Force Majeure Cause" shall mean any
cause beyond Landlord's control, including but not limited to, acts of God,
strikes or labor troubles, inclement weather, fuel or energy shortages,
utility failures, or governmental preemption or curtailment in connection with
a national emergency or in connection with any rule, order, guideline or
regulation of any department or governmental agency. If Tenant shall fail to
exercise its right to terminate this Lease within ten (10) days following any
date on which such right may first be exercised, Tenant shall be deemed to
have waived its right of termination with respect to such date as granted by
this Section.
Section 34. OPTIONS TO RENEW. Landlord hereby grants Tenant two (2)
options to renew the term of the Lease, upon the following terms and
conditions:
(a) Each renewal term shall be for five (5) years, commencing on the
day following the expiration date of the initial term and the first renewal
term, as the case may be;
(b) Tenant must exercise each option, if at all, upon at least ninety
(90) days' written notice to Landlord, prior to the expiration date of the
initial term and the first renewal term, as the case may be;
(c) At the time Tenant delivers its notice of election to renew to
Landlord, this Lease shall be in full force and effect and Tenant shall not
then be in default under any of the material terms and conditions of the Lease
beyond any applicable cure period;
(d) Each renewal term shall be upon the same terms, covenants and
conditions contained in the Lease, except that the annual Base Rent for the
first renewal term shall be the rent set forth in Exhibit I attached hereto,
and except that the annual Base Rent for the second renewal term shall be the
rent set forth in Exhibit I attached hereto;
(e) Tenant shall continue to pay Tenant's Percentage of operation
Costal
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(f) In the event that Tenant assigns this Lease to other than a
Permitted Transferee at any time prior to the expiration of the initial term
of this Lease, there shall be no further right or privilege to renew the term
of this Lease for the second renewal term; and
(g) There shall be no further privilege of renewal beyond the second
renewal term.
If Tenant exercises one or both of the two options to renew, Landlord
and Tenant shall execute and deliver an amendment to this Lease confirming the
commencement and expiration dates of the renewal term, the Base Rent payable
by Tenant during the renewal term, and any other relevant terms and conditions
agreed upon by Landlord and Tenant applicable during the renewal term.
Section 35. PROJECT NAME AND SIGNAGE. During the term of this Lease, so
long as Tenant and its Permitted Transferees occupy at least seventy-five
percent (75%) of the Premises, Tenant shall have the right to display its name
and corporate logo on a "monument sign" located near the entrance to Land (to
the extent permitted by applicable zoning ordinances and regulations).
Section 36. FIRST OFFER SPACE.
(a) So long as at least three (3) years remain in the term of the
Lease (including renewal terms), Landlord agrees, within fifteen (15) days
after receipt of Tenant's written request therefor, but not more than once
every six months, to notify Tenant ("Offer") of all rentable space within the
space designated as option space the Building as shown on Exhibit A attached
hereto ("Option Space") that is either (A) not currently subject to any lease
or option agreement with any other party or (B) subject to a lease which is
expiring within the next succeeding six (6) months and all or substantially
all of which space is not subject to any other option or lease rights of a
third party or for which Landlord shall not have executed a new lease or a
letter of intent therefor (collectively "Offered Space"). The Offer shall
relate to all of the available Option Space described above; provided, that
Tenant may not lease less than all of the "A Expansion Space" subject to the
Offer.
(b) Tenant shall have the right, exercisable within thirty (30) days
after Landlord gives notice of the Offer to Tenant, to accept the Offer by
giving Landlord written notice of such acceptance as provided herein, which
notice shall specify
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the particular Offered Space accepted by Tenant. If Tenant shall reject the
Offer, or shall fail to properly accept it as aforesaid, Landlord shall have
the right to lease the space identified in the Offer, or portions thereof, to
other tenants free and clear of Tenant's rights under this Section; provided
that no lease of any such space (i) shall be for a term of more than three (3)
years (including renewal terms); (ii) shall be executed more than two (2)
months prior to its commencement date; or (iii) during the next three (3)
years shall contain a base rent and tenant allowance substantially more
favorable to the tenant than those set forth in the Offer, unless Landlord re-
offers such space on such modified terms to Tenant pursuant to and acceptable
by Tenant the terms set forth in this Section.
(c) If the Offer is properly accepted by Tenant within three (3)
years of the end of the initial term or the initial renewal term, then the
then current term shall be automatically extended for a period to end on the
last day of the first calendar month following the third anniversary of the
date of the Offer; and the next succeeding renewal period shall be reduced by
the period such term was so extended.
(d) Promptly following Tenant's acceptance of each Offer, and in any
event within fifteen (15) days following such request, Landlord and Tenant
shall execute an Amendment to this Lease evidencing Tenant's acceptance of the
Offer and incorporation of the additional space into the Premises. Any failure
by Tenant to comply with such request shall terminate Tenant's acceptance of
the Offer, which shall be void and of no further force and effect. The Offered
Space to which the Tenant's acceptance relates shall be included as part of
the Premises and all of the terms, covenants, conditions and provisions of
this Lease shall apply to the such space, provided that the annual Base Rent
and Tenant's Percentage each shall be recomputed based solely on the increased
square footage leased to Tenant. The Offered Space accepted by Tenant shall be
delivered to Tenant in broom-clean condition, free and clear of all other
tenancies, lettings, and rights of possession.
(e) Following Tenant's acceptance of each Offer, Tenant shall have
the right, in conformity with the requirements of Section 8 hereof, to enter
the Offered Space in question in order to improve and fit-up such space for
its use and occupancy. Tenant's obligation to pay Base Rent and Additional
Rent payable hereunder respecting such Offered Space shall commence on the
date on which the Offered Space is in a condition equivalent to Substantially
Complete (as applicable to the offered Space).
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(f) When Tenant exercises an Option, Tenant shall receive from
Landlord an "Option Space Construction Allowance" (i) if the Option Space had
not previously been improved and rented as finished space to a tenant on an
arm's length basis, the actual cost of improvements not to exceed twenty five
dollars ($25) (increased as described below) multiplied by the rentable square
footage of the Option Space; or (ii) if the Option Space had been previously
improved and rented as finished space to a tenant on an arm's length basis, an
amount equal to the greater of (A) $10.00 per square foot or (B) twenty five
dollars ($25) less the per square foot cost of the initial tenant fit-out of
the Option Space in each case to be paid for costs actually incurred pursuant
to plans approved by Landlord (not to be unreasonably withheld). The Option
Space Construction Allowance shall be increased by the Consumer Price Index
(Philadelphia Area-All Urban Consumer 1982 - 84- 100) during the period from
the Commencement Date through the applicable Option Space Commencement Date.
(g) Nothing contained in this Section shall in any way modify or
release Landlord's obligation to make the Option Space available to Tenant on
the dates and in the manner expressed in Section 36 hereof.
Section 37. TENANT'S RIGHT TO PURCHASE THE BUILDING.
(a) Landlord agrees that if at any time during the term of this Lease
Landlord shall desire to transfer or convey the Building or the Land on which
the Building is situated, then Landlord shall first offer in writing to
transfer or convey the Building (hereinafter "Offered Property") to Tenant (it
being understood that Landlord shall have the sole and exclusive right to
determine the offering price and terms for the Offered Property). Tenant shall
have a period of thirty (30) days following the date on which Landlord gives
such offer to accept it in writing. If Tenant shall reject such offer, or
shall fail to accept unconditionally such offer in writing delivered to
Landlord within such thirty (30) day period, Landlord shall be free to
transfer or convey the Offered Property free and clear of the provisions of
this Section at a price not less than that offered to Tenant and upon terms
substantially no more favorable than those offered to Tenant, provided that
within two (2) years following the date on which such offer was given to
Tenant, such transfer or conveyance shall be consummated; otherwise the
Offered Property or the relevant portion thereof containing the Building, as
the case may be, shall again be subject to the provisions of this Section.
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(b) Notwithstanding any provision in paragraph (a) above to the
contrary, this Section shall not apply, and Tenant shall have no right to
purchase the Building, (i) in connection with or in the event of any change in
the ownership interests in the Landlord or other recapitalization of the
Landlord, mortgage foreclosure or deed-in-lieu of foreclosure (ii) if such
sale and purchase will violate a deed restriction or prohibition created upon
or prior to the date of this Agreement.
Section 38. ARBITRATION. Any controversy or claim arising out of or
related to this Lease (excluding controversies or claims arising out of an
event of default under Section 22 of this Lease) may be settled by arbitration
in Northampton County, Pennsylvania, in accordance with the Rules of the
American Arbitration Association, and, in such event, the arbitrator's award
shall be binding on the parties and judgment upon such award may be entered in
any court having jurisdiction thereof. If Landlord and Tenant are unable to
agree on the resolution of a controversy or claim, either party may five (5)
days thereafter, by written notice to the other and to the American
Arbitration Association, submit the dispute to arbitration for conclusive and
final determination. No arbitration shall include, by consolidation or joinder
or in any other manner, parties other than the Landlord and the Tenant,
including Tenant's assigns and subtenants.
Section 39. NOTICES. All notices or demands under this Lease shall be
in writing and shall be given or served by either Landlord or Tenant to or
upon the other, either personally or by Registered or Certified Mail, Return
Receipt Requested, postage prepaid, or by Federal Express or any other
national overnight delivery service, and addressed as follows:
TO LANDLORD: Northampton County New Jobs Corp.
157 South Fourth Street
Easton, Pennsylvania
TO TENANT: Prior to Commencement Date:
Quantum Epitaxial Designs, Inc.
115 Research Drive
Bethlehem, Pennsylvania 18015
After Commencement Date:
Quantum Epitaxial Designs, Inc.
25 East Second Street
Bethlehem, Pennsylvania 18015
All notices and demands shall be deemed-given or served upon the date
of receipt thereof if by personal delivery, two (2) business days following
mailing if by certified mail, and one (1) business day following sending if by
any national overnight
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delivery. Either Landlord or Tenant may change its address to which notices
and demands shall be delivered or mailed by giving written notice of such
change to the other as herein provided.
Section 40. BROKERAGE. Tenant warrants to Landlord that Tenant dealt
and negotiated solely and only with Landlord for this Lease and with no other
broker, firm, company or person.
For good and valuable consideration, Tenant hereby agrees to
indemnify, defend and hold Landlord harmless from and against any and all
claims, suits, proceedings, damages, obligations, liabilities, counsel fees,
costs, losses, expenses, orders and judgments imposed upon, incurred by or
asserted against Landlord by reason of the falsity or error of Tenant's
warranty.
Section 41. FORCE MAJEURE. Landlord and Tenant shall each be excused
for the period of any delay in the performance of any of its obligations under
this Lease, except for Tenant's obligations to pay Base Rent and additional
rent, when prevented from so doing by cause or causes beyond their control,
which shall include, without limitation, all labor disputes, civil commotion,
or acts of God.
Section 42. SUCCESSORS. The respective rights and obligations of
Landlord and Tenant under this Lease shall bind and shall inure to the benefit
of Landlord and Tenant and their legal representatives, heirs, successors and
assigns, provided, however, that no rights shall inure to the benefit of any
successor of Tenant unless Landlord's written consent to the transfer, if any,
to such successor has first been obtained if and to the extent required under
the provisions of Section 11 above.
Section 43. LANDLORD WAIVER. Landlord agrees to provide to Tenant
from time to time, upon ten (10) days written request by Tenant, a Landlord's
Waiver with respect to Tenant's Property in form and substance reasonably
required by Tenant's lender; provided that Landlord shall not be required to
execute a Landlord's Waiver if it changes the terms of this Lease.
Section 44. GOVERNING LAW. This Lease shall be construed, governed
and enforced in accordance with the internal laws of the Commonwealth of
Pennsylvania.
Section 45. SEVERABILITY. If any provisions of this Lease shall be
held to be invalid, void or unenforceable, the remaining provisions of this
Lease shall in no way be affected or impaired and such remaining provisions
shall continue in full force and effect.
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Section 46. CAPTIONS. Any headings preceding the text of the several
Sections of this Lease are inserted solely for convenience of reference and
shall not constitute a part of this Lease or affect its meaning, construction
or effect.
Section 47. GENDER. As used in this Lease, the word "person" shall
mean and include, where appropriate, an individual, corporation, partnership
or other entity; the plural shall be substituted for the singular, and the
singular for the plural, where appropriate; and words of any gender shall mean
to include any other gender.
Section 48. EXECUTION. This Lease shall become effective when it has
been signed by a duly authorized officer or representative of Landlord and
Tenant and delivered to the other party.
Section 49. EXHIBITS. Attached to this Lease and made part hereof are
Exhibits A through H.
Section 50. ENTIRE AGREEMENT. This Lease, including the Exhibits
contains all the agreements, conditions, understandings, representations and
warranties made between Landlord and Tenant with respect to the subject matter
hereof, and may not be modified orally or in any manner other than by an
agreement in writing signed by both Landlord and Tenant or their respective
successors in interest.
Section 51. CORPORATE AUTHORITY. Each individual executing this Lease
on behalf of Tenant represents and warrants that he is duly authorized to
execute and deliver this Lease on behalf of said corporation in accordance
with the duly adopted resolution of the Board of Directors of Tenant or in
accordance with the ByLaws of Tenant, and that this Lease is binding upon said
corporation in accordance with its terms.
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IN WITNESS WHEREOF, Landlord and Tenant have caused this Lease to be
duly executed the day and year first above written.
(LANDLORD)
ATTEST: NORTHAMPTON COUNTY NEW JOBS CORP.
By: /s/ By: /s/
-------------------------- ----------------------------
Assistant Secretary President
(Corporate Seal)
(TENANT)
ATTEST: QUANTUM EPITAXIAL DESIGNS, INC.
Witness: By:
--------------------- ----------------------------
President
(corporate Seal)
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AMENDMENT TO OFFICE LEASE
This Amendment to Office Lease (this "Amendment") is made as of the
21st day of June, 1995 by and between NORTHAMPTON COUNTY NEW JOBS CORP.
("Landlord") and QUANTUM EPITAXIAL DESIGNS, INC. ("Tenant")
W I T N E S S E T H
WHEREAS, Landlord and Tenant entered into a certain Office Lease
dated May 17, 1993 (the "Lease") whereby Landlord agreed to lease to Tenant
and Tenant agreed to lease from Landlord certain property situate at 25 East
Second Street, Bethlehem, Pennsylvania (now known as "Technology Drive");
and
WHEREAS, Section 36 of the Lease provides that Tenant shall have the
right of first offer with respect to certain space at the building identified
on Exhibit "A" attached to the Lease; and
WHEREAS, Landlord and Tenant desire to amend the Lease to provide
that the first offer space shall be as set forth on Exhibit "A" to this
Amendment and not as set forth on Exhibit "A" to the Lease.
NOW THEREFORE, in consideration of the mutual covenants herein
contained and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged and intending to be legally bound
hereby, Landlord and Tenant hereby covenant and agree that the Lease is
amended as follows:
<PAGE>
1. Exhibit "A" to the Lease shall be deleted in its entirety and
replaced by Exhibit "A" attached hereto and incorporated herein by
reference.
2. All other terms and conditions of the Lease shall remain in full
force and effect and are hereby ratified and confirmed.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as
of the day and year first set forth above.
ATTEST: NORTHAMPTON COUNTY NEW JOBS CORP.
By: /s/
-----------------------------
ATTEST: QUANTUM EPITAXIAL DESIGNS, INC.
By: /s/
-----------------------------
<PAGE>
SECOND AMENDMENT TO OFFICE LEASE
--------------------------------
THIS SECOND AMENDMENT TO OFFICE LEASE (this "AMENDMENT") is made as of the
14th day of March, 1996 by and between NORTHAMPTON COUNTY NEW JOBS CORP.
("Landlord") and QUANTUM EPITAXIAL DESIGNS, INC. ("Tenant");
W I T N E S S E T H :
WHEREAS, Landlord and Tenant entered into a certain Office Lease dated May
17, 1993 and amended by an Amendment to Office Lease dated June 21, 1995 (as
amended, the "Lease") whereby Landlord agreed to lease to Tenant and Tenant
agreed to lease from Landlord certain property situate at 119 Technology Drive,
Bethlehem, Pennsylvania; and
WHEREAS, Section 36 of the Lease provides that Tenant shall have the right
of first offer with respect to certain space at the building identified on
Exhibit "A" attached to the Lease, as amended, containing 4,520 square feet (the
"Initial Option Space"); and
WHEREAS, Tenant desires to exercise its option and lease an amount equal to
the Initial Option Space plus an additional 5150 square feet for a total of 9670
additional square feet (collectively, the "Option Space") in lieu of the Initial
Option Space on the terms and conditions hereinafter set forth;
NOW THEREFORE, in consideration of the mutual covenants herein contained
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, and intending to be legally bound hereby,
Landlord and Tenant hereby covenant and agree that the Lease is amended as
follows:
1. The term "Premises" as used in the Lease shall include, in addition to
the Premises defined therein, the Option Space as configured and set forth on
Exhibit "A" attached hereto and the square footage of the Premises shall be
19,590 and not 9,920.
2. The Base Rent shall be increased by an amount equal to Eight Dollars
($8.00) per square foot multiplied by 9,670. The base rent for the Option Space
shall be subject to increases as otherwise set forth in the Lease as shown on
Exhibit "B" attached hereto.
3. Tenant's Percentage is the ratio of the square footage of the Premises
(19,590) to the total square footage of the Building actually rented. This
percentage will vary as the space actually rented varies.
<PAGE>
4. The method of initiating, constructing and completing the Tenant Finish
Work for the Option Space will follow the procedures outlined in Sections 26
through 32 of the Lease, except:
a. Tenant shall pay for engineering work expenses entailed in fulfilling
Tenant's special mechanical and electrical needs;
b. The drawings and specifications outlined in Section 26c shall be
prepared no later than six (6) weeks after the signing of this Agreement;
c. The limit of the Landlord's fiscal responsibility with respect to
such Tenant Finish Work shall be $241,750.00;
d. Landlord shall not be required to deliver a Certificate of Occupancy
for the Premises to be considered Substantially Complete provided the City of
Bethlehem has inspected the same and given verbal approval of occupancy; and
e. The Anticipated Commencement Date for the Option Space portion of the
Premises is July 1, 1996.
5. Landlord will pay the sum of $241,750 towards the cost of the Tenant
Finish Work for the Option Space (being an amount equal to $25.00 per square
foot). Tenant shall pay for the balance of the cost of the Tenant Finish Work
for the Option Space. Such amounts shall be payable as follows:
a. Upon receipt and approval by Landlord and Tenant of the bids for the
Tenant Finish Work for the Option Space, Landlord and Tenant shall open a joint
checking account requiring the signatures of both Landlord and Tenant on checks.
Landlord will deposit the sum of $241,750 into said account and Tenant will
deposit an amount equal to the bid price less $241,750, in each case within ten
(10) days of the acceptance of the bids.
b. Tenant shall also deposit into such account an amount equal to the
reasonably anticipated additional expenses and requested extras for the Tenant
Finish Work for the Option Space including, without limitation, the cost of
special HVAC engineering.
c. All invoices for the Tenant Finish Work, upon approval by Norwood
Construction and Spillman Farmer, shall be delivered to Landlord for review with
Tenant and approval by both Landlord and Tenant.
d. Upon approval of the invoices, Landlord and Tenant shall jointly
execute a check and deliver the same for payment of such invoices.
<PAGE>
e. Tenant shall be responsible for the cost of any Tenant Finish Work in
excess of $241,750 regardless of the reason for such coverage. In the event, the
total cost of the Tenant Finish Work is in excess of $241,750 but less than the
total amount deposited in the joint account, the balance remaining in the
account upon completion of the Tenant Finish Work shall be delivered to Tenant.
In the event the total cost of the Tenant Finish Work is less than $241,750, an
amount equal to $241,750 less the total cost shall be refunded to Landlord and
the balance remaining in the account, if any, shall be delivered to Tenant.
6. Tenant hereby exercises the first renewal option providing for an
additional five year term as set forth in paragraph 34 of the Lease.
7. The effective date of this Amendment shall be March __, 1996.
8. All other terms and conditions of the Lease shall remain in full force
and effect and are hereby ratified and confirmed; provided, however, that the
provisions of the Lease giving Tenant the right to lease the Option Space
defined therein are hereby deleted.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the
day and year first set forth above.
ATTEST: NORTHAMPTON COUNTY NEW JOBS CORP.
/s/ By: /s/
- ----------------------------------- -------------------------------------
Secretary Vice President
ATTEST: QUANTUM EPITAXIAL DESIGNS, INC.
/s/ By: /s/
- ----------------------------------- -------------------------------------
<PAGE>
Tax-1
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LEASE COMMENCEMENT DATE AMENDMENT
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THIS AMENDMENT TO LEASE is made this 3rd day of July 1996, by and between
NORTHAMPTON COUNTY NEW JOBS CORP., a Pennsylvania nonprofit corporation, having
an office at 157 South Fourth Street, Easton, Pennsylvania 18042 ("Landlord")
and QUANTUM EPITAXIAL DESIGNS, INC., a Pennsylvania corporation, having its
principal offices at 119 Technology Drive, Bethlehem, Pennsylvania 18015
("Tenant"), with reference to the following background. Capitalized terms used
herein have the meanings assigned to them in the Lease (defined below),
W I T N E S S E T H
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WHEREAS, by Office Lease dated May 17, 1993 and amended by an Amendment to
Office Lease dated June 21, 1995 and by a Second Amendment to Office Lease (the
"Second Amendment") dated March 14, 1996 (the "Lease"), Landlord demised and
leased unto Tenant, and Tenant leased and took from Landlord, for the term, at
the rent and upon the terms and conditions therein set forth, certain Premises,
being a portion of the first floor in a building known as Bethlehem Technology
Center, and located at 25 East Second Street, Bethlehem, Pennsylvania which
Premises are more particularly described on Exhibit A annexed to the Lease, as
amended;
WHEREAS, pursuant to the Second Amendment, the Premises were increased by
an additional 9670 rentable square feet (the "Option Space"); and
WHEREAS, pursuant to the Second Amendment, Landlord and Tenant desire to
execute and deliver the instrument setting forth the Commencement Date and
Expiration Date of the term of the Lease with respect to the Option Space;
NOW, THEREFORE, Landlord and Tenant, intending to be legally bound hereby,
agree as follows:
1. The Commencement Date of the Lease with respect to the Option Space is
July 2, 1996; the Expiration Date of the Lease will be December 31, 2003, unless
extended or earlier terminated as provided in the Lease.
2. All other terms and conditions of the Lease are hereby ratified and
confirmed.
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IN WITNESS WHEREOF, the parties hereto have caused this Amendment to Lease
to be executed by their duly authorized officers or representatives as of the
day and year first above written.
ATTEST: NORTHAMPTON COUNTY NEW JOBS CORP.
/s/ By: /s/
- ----------------------------------- -------------------------------------
Secretary President
ATTEST: QUANTUM EPITAXIAL DESIGNS, INC.
/s/ By: /s/
- ----------------------------------- -------------------------------------
(Assistant) Secretary President
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THIRD AMENDMENT TO OFFICE LEASE
THIS THIRD AMENDMENT TO OFFICE LEASE (this "Amendment") is made as of the
28th day of May, 1997 by and between NORTHAMPTON COUNTY NEW JOBS CORP.
("Landlord") and QUANTUM EPITAXIAL DESIGNS, INC. ("Tenant");
W I T N E S S E T H:
WHEREAS, Landlord and Tenant entered into a certain Office Lease dated May
17, 1993 as amended by an Amendment to Office Lease dated June 21, 1995 and a
Second Amendment to Office Lease dated March 14, 1996 (as amended, the "Lease")
whereby Landlord agreed to lease to Tenant and Tenant agreed to lease from
Landlord certain space in property in Landlord's building known as 119
Technology Drive, Bethlehem, Pennsylvania; and
WHEREAS, Tenant desires to lease an additional 6467 square feet of
unimproved space in the building (the "Unimproved Space") on the terms and
conditions hereinafter set forth;
WHEREAS, Tenant further desires to lease from Landlord certain space in the
building (the "Bio-Med Space") currently occupied by Bio-Med Sciences, Inc.
("Bio-Med") with rent to commence upon the expiration of Bio-Med's lease
(November 30, 1998) and the subsequent fit-out (alteration) of the Bio-Med
Space;
WHEREAS, Tenant further desires to obtain a right of first refusal with
respect to certain space in the building currently leased to All-Phase
Environmental Services, Inc. at the expiration of the All Phase Lease initial
term on May 31, 1999 provided All Phase does not exercise its option to renew
contained in such lease (the "All Phase Space");
WHEREAS, Tenant further desires to obtain a right of first refusal with
respect to certain space in the building (6160 sq. ft.) to be initially leased
to Submicro Encapsulation Technologies, Inc., which right of first refusal will
commence at the expiration of the Submicro lease term and all renewals which are
exercised (6 years) (the "Submicro Space"); and
WHEREAS, Landlord is willing to amend the Lease to provide for the above on
the terms and conditions hereinafter set forth.
NOW THEREFORE, in consideration of the mutual covenants herein contained
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, and intending to be legally bound hereby,
Landlord and Tenant hereby covenant and agree that the Lease is amended as
follows:
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SECTION I. - UNIMPROVED SPACE
1. Capitalized terms used herein and defined in the Lease shall have the
meaning ascribed to such terms in the Lease.
2. The term "Premises" as used in the Lease shall include, in addition to
the Premises defined therein, the Unimproved Space as configured and set forth
on Exhibit "A" attached hereto.
3. The Base Rent under the Lease shall be increased by $1,350.00 per month
on account of the Unimproved Space commencing June 1, 1997 and running until
fit-out work commences on any or all of the Unimproved Space which shall occur
on or before June 1, 1999. The Additional Rent shall be increased by the
increase resulting from the increase in the Tenant's Percentage as a result of
the Unimproved Space.
4. In addition to the above, Tenant hereby agrees to lease from the
Landlord the Unimproved Space for a term of at least five years commencing upon
the Substantial Completion of the fit-out of such space (as provided in
paragraph 5 below). If Tenant does not request fit-out by June 1, 1999, Landlord
shall have the option of terminating the Lease with respect to the Unimproved
Space. Upon Substantial Completion of the fit-out of the Unimproved Space, the
monthly Base Rent shall be increased by the square footage of the Unimproved
Space times the Base Rent per square foot then in effect under the Lease subject
to the same further increases as otherwise provided in the Lease.
5. The method of initiating, constructing and completing the Tenant Finish
Work for the Unimproved Space will follow the procedures outlined in Sections 26
through 32 of the Lease, except:
a. Tenant shall pay for engineering work expenses entailed in fulfilling
Tenant's special mechanical and electrical needs;
b. The drawings and specifications outlined in Section 26c shall be
prepared no later than three (3) months after the Tenant notifies the Landlord
that the Tenant Finish Work shall proceed;
c. The limit of the Landlord's fiscal responsibility with respect to
such Tenant Finish Work shall be $161,675.00 (6467 square feet X $25.00 per
square foot);
d. Landlord shall not be required to deliver a Certificate of Occupancy
for the Premises to be considered Substantially Complete provided the City of
Bethlehem has inspected the same and given verbal approval of occupancy; and
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e. The Anticipated Commencement Date for the Unimproved Space portion of
the Premises is September 1, 1999.
6. Landlord will pay the sum of $161,675.00 towards the cost of the Tenant
Finish Work for the Unimproved Space (being an amount equal to $25.00 per square
foot). Tenant shall pay for the balance of the cost of the Tenant Finish Work
for the Unimproved Space. Such amounts shall be payable as follows:
a. Upon receipt and approval by Landlord and Tenant of the bids for the
Tenant Finish Work for the Unimproved Space, Landlord and Tenant shall open a
joint checking account requiring the signatures of both Landlord and Tenant on
checks. Landlord will deposit the sum of $161,675.00 into said account and
Tenant will deposit an amount equal to the bid price less $161,675.00, in each
case within ten (10) days of the acceptance of the bids.
b. Tenant shall also deposit into such account an amount equal to the
reasonably anticipated additional expenses and requested extras for the Tenant
Finish Work for the Unimproved Space including, without limitation, the cost of
special HVAC engineering.
c. All invoices for the Tenant Finish Work, upon approval by the
architect and the engineer for the project, shall be delivered to Landlord for
review with Tenant and approval by both Landlord and Tenant.
d. Upon approval of the invoices, Landlord and Tenant shall jointly
execute a check and deliver the same for payment of such invoices.
e. Tenant shall be responsible for the cost of any Tenant Finish Work in
excess of $161,675.00 regardless of the reason for such overage. In the event,
the total cost of the Tenant Finish Work is in excess of $161,675.00 but less
than the total amount deposited in the joint account, the balance remaining in
the account upon completion of the Tenant Finish Work shall be delivered to
Tenant. In the event the total cost of the Tenant Finish Work is less than
$161,675.00 an amount equal to $161,675.00 less the total cost shall be refunded
to Landlord and the balance remaining in the account, if any, shall be delivered
to Tenant.
SECTION II. BIO-MED SPACE
7. In addition to the above, Tenant hereby leases from Landlord the Bio-Med
Space for a term of five (5) years commencing upon the Substantial Completion of
the fit-out of such space (as provided in paragraph 8 below). Tenant
acknowledges and agrees that such fit-out shall not commence until the
expiration of the Bio-Med Lease on November 30, 1998. Prior to commencement of
the fit-out of the Bio-Med Space, the
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Base Rental under the Lease shall be increased by $250.00 per month on account
of the Bio-Med Space commencing June 1, 1997 and ending upon commencement of the
fit-out of the Bio-Med Space. Upon Substantial Completion of the fit-out of the
Bio-Med Space, the monthly Base Rent shall be increased by the square footage of
the Bio-Med Space times the Base Rent per Square Foot then in effect under the
Lease, subject to further increases as provided in the Lease. The Additional
Rent shall also be increased upon substantial completion by the increase
resulting from the increase in the Tenant's Percentage.
8. The method of initiating, constructing and completing the Tenant Finish
Work for the Bio-Med Space will follow the procedures outlined in Sections 26
through 32 of the Lease, except:
a. Tenant shall pay for engineering work expenses entailed in fulfilling
Tenant's special mechanical and electrical needs;
b. The drawings and specifications outlined in Section 26c shall be
prepared no later than February 1, 1999;
c. The limit of the Landlord's fiscal responsibility with respect to
such Tenant Finish Work shall be $54,600.00 (5460 sq. ft. X $10.00 per sq.
foot);
d. Landlord shall not be required to deliver a Certificate of Occupancy
for the Premises to be considered Substantially Complete provided the City of
Bethlehem has inspected the same and given verbal approval of occupancy; and
e. The Anticipated Commencement Date for the Bio-Med Space portion of
the Premises is September 1, 1999.
9. Landlord will pay the sum of $54,600.00 towards the cost of the Tenant
Finish Work for the Bio-Med Space (being an amount equal to $10.00 per square
foot). Tenant shall pay for the balance of the cost of the Tenant Finish Work
for the Bio-Med Space. Such amounts shall be payable as follows:
a. Upon receipt and approval by Landlord and Tenant of the bids for the
Tenant Finish Work for the Bio-Med Space, Landlord and Tenant shall open a joint
checking account requiring the signatures of both Landlord and Tenant on checks.
Landlord will deposit the sum of $54,600.00 into said account and Tenant will
deposit an amount equal to the bid price less $54,600.00, in each case within
ten (10) days of the acceptance of the bids.
b. Tenant shall also deposit into such account an amount equal to the
reasonably anticipated additional expenses and requested extras for the Tenant
Finish Work for the Bio-Med Space including, without limitation, the cost of
special HVAC
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engineering.
c. All invoices for the Tenant Finish Work, upon approval by the
architect and the engineer for the project, shall be delivered to Landlord for
review with Tenant and approval by both Landlord and Tenant.
d. Upon approval of the invoices, Landlord and Tenant shall jointly
execute a check and deliver the same for payment of such invoices.
e. Tenant shall be responsible for the cost of any Tenant Finish Work in
excess of $54,600.00 regardless of the reason for such overage. In the event,
the total cost of the Tenant Finish Work is in excess of $54,600.00 but less
than the total amount deposited in the joint account, the balance remaining in
the account upon completion of the Tenant Finish Work shall be delivered to
Tenant. In the event the total cost of the Tenant Finish Work is less than
$54,600.00, an amount equal to $54,600.00 less the total cost shall be refunded
to Landlord and the balance remaining in the account, if any, shall be delivered
to Tenant.
SECTION III. - REFUSAL SPACE
10. Provided an Event of Default does not then exist, prior to leasing the
All Phase Space or the Submicro Space (individually and collectively, the
"Refusal Space") to any third party tenant, Landlord shall (i) either obtain a
bona fide written offer from such third party Tenant to lease all or a portion
of the Refusal Space which is acceptable to Landlord or enter into a lease for
the lease of such space with such third party tenant, which lease shall be
conditioned upon Tenant's failure to exercise its right under this Paragraph,
and (ii) give written notice to Tenant of the offer (and Landlord's willingness
to accept the same) or lease, together with a copy of the executed offer or
lease. For a period of fifteen (15) days following receipt of such notice.
Tenant shall have the right and option, exercisable by written notice to
Landlord given within said fifteen (15) day period, to elect to lease the
subject portion of the Refusal Premises at the rental and upon all the terms and
conditions set forth in such written offer or lease. If at the expiration of the
aforesaid fifteen (15) day period Tenant shall have failed to exercise the
aforesaid option, Landlord may lease the subject portion of the Refusal Premises
to such third party tenant upon the terms set forth in such offer or lease.
11. Tenant shall have the right to exercise the foregoing right of first
refusal upon each proposed lease of a portion of the Refusal Premises.
Notwithstanding anything to the contrary, if Tenant fails to exercise the right
of first refusal granted pursuant to this Paragraph and the lease to the third
party Tenant is consummated, such right shall terminate and be null and void and
of no further force and effect as to the portion of the Refusal Premises which
is subject to such lease.
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12. The Base Rent under the Lease shall be increased by $50.00 per month on
account of the right of first refusal for the All-Phase space and $50.00 per
month on account of the right of first refusal for the Sub-Micro space which
shall in each case commence June 1, 1997 and continue as to the applicable
Refusal Space until Tenant exercises such right, the space is otherwise leased
or Tenant in writing agrees to termination of such right.
13. All other terms and conditions of the Lease shall remain in full force
and effect and are hereby ratified and confirmed.
14. This Amendment as it relates to the Bio-Med space is specifically
contingent upon the execution by Landlord and Bio-Med Sciences, Inc. of an
Agreement satisfactory to Landlord relating to the termination of the lease
between Landlord and Bio-Med Sciences, Inc. and shall be of no force and effect
as to the Bio-Med space until such Agreement is executed.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the
day and year first set forth above.
ATTEST: NORTHAMPTON COUNTY NEW JOBS CORP.
/s/ xxxxxxxxxxxxx By: /s/ xxxxxxxxxxxxxxxxxxxx
- ---------------------------------- -------------------------------
Secretary President
ATTEST: QUANTUM EPITAXIAL DESIGNS, INC.
/s/ xxxxxxxxxxxxxxxx By: /s/ xxxxxxxxxxxxxxxxxxxxxx
- ----------------------------------- -------------------------------
5/27/97
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QUANTUM EPITAXIAL DESIGNS, INC.
NOTE AND WARRANT PURCHASE AGREEMENT
THIS AGREEMENT is made this 30th day of August, 1989 between QUANTUM
EPITAXIAL DESIGNS, INC., a Pennsylvania corporation located at 115 Research
Drive, Bethlehem, Pennsylvania 18015 ("Corporation"); NEPA VENTURE FUND, L.P.,
a Pennsylvania limited partnership located at 125 Goodman Drive, Bethlehem, PA
18015 ("NEPA"); JAMES C. M. HWANG ("Hwang"), an individual residing at 9 Villa
Drive, Princeton Junction, New Jersey 08550; and THOMAS L. HIERL ("Hierl"), an
individual residing at 86 Delaware Lane, Somerville, New Jersey 08876. NEPA
and Hwang are sometimes hereinafter referred to collectively as the "Lenders"
or individually as a "Lender." Hierl is sometimes hereinafter referred to as
the "Founder".
In consideration of the mutual agreements and undertakings set forth
in this Agreement, the parties, intending to be legally bound hereby, agree as
follows:
SECTION 1. Amendment to Articles. Prior to or contemporaneous with
Closing (as defined in Section 4(a)) the Corporation will file with the
Secretary of State of the Commonwealth of Pennsylvania an amendment to its
Articles of Incorporation (the "Amendment"), setting forth the designations,
powers, preferences and rights and the qualifications, limitations and
restrictions of the Corporation's Class A Preferred Stock, $.0l par value (the
"Preferred Stock"). A copy of the Amendment is attached hereto as Exhibit A.
SECTION 2. Issuance of Securities. Subject to the terms and
conditions of this Agreement, the Corporation has authorized the issuance and
sale to (a) NEPA of (i) a $81,820 convertible subordinated note in the form
attached hereto as Exhibit B (the "Convertible Note"), (ii) a $143,180
non-convertible subordinated note in the form attached hereto as Exhibit C
(the "Non-Convertible Note"), and (iii) warrants to purchase up to 13,571
shares of the Corporation's Common Stock in the form attached hereto as
Exhibit D (the "Warrant"); and (b) to Hwang of (i) a $18,180 Convertible Note,
(ii) a $31,820 of Non-Convertible Note, and (iii) Warrants to purchase up to
3,018 shares of the Corporation's Common Stock. The Convertible Notes, the
Non-Convertible Notes and the Warrants are sometimes hereinafter referred to
collectively as the "Securities" or individually as a "Security."
SECTION 3. Agreement to Sell and Purchase the Securities. At the
Closing, the Corporation is selling to the Lenders, and the Lenders are
purchasing from the Corporation, upon the terms and conditions hereinafter set
forth, the Convertible Notes, the Non-Convertible Notes and the Warrants. The
aggregate purchase price for the NEPA Securities is $225,000 and the aggregate
purchase price for the Hwang Securities is $50,000.
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SECTION 4. Delivery of Securities.
(a) The Closing (the "Closing") hereunder with respect to
the transactions contemplated hereby is taking place at the offices of NEPA,
simultaneously with the execution and delivery of this Agreement (the "Closing
Date").
(b) At the Closing, the Corporation is delivering to each
Lender one Convertible Note, one Non-Convertible Note and one Warrant, in each
case registered in the name of such Lender. Delivery is being made against
receipt by the Corporation by wire transfer of immediately available funds to
the account of the Corporation in the full amount of the aggregate purchase
price of the Securities.
SECTION 5. Representations and Warranties of the Corporation and
Founder. The Corporation and Founder hereby represent and warrant to the
Lenders that, as of the date hereof, and except as set forth and identified on
the Schedule of Exceptions to Representations and Warranties attached hereto:
5.1. Corporate Records. The Corporation has previously made
available to the Lenders the Corporation's complete corporate minute and stock
books, including all formal corporate actions of the Corporation's Board of
Directors and shareholders, whether by meeting or written consents in lieu of
a meeting. Such records are true and correct, and remain in full force and
effect except as expressly provided therein to the contrary.
5.2. Organization. The Corporation is a corporation duly
organized, in good standing and validly subsisting under the laws of the
Commonwealth of Pennsylvania and has all requisite corporate power and
authority to own, lease and operate its properties, to carry on its business
as presently conducted and as proposed to be conducted and to carry out the
transactions contemplated hereby. The Corporation is qualified as a foreign
corporation and is in good standing in all such other jurisdictions, if any,
in which the conduct of its business or its ownership, leasing or operation of
property requires such qualification. The Corporation has provided the Lenders
with true, correct and complete copies of its Articles of Incorporation
(certified by the Secretary of State of the Commonwealth of Pennsylvania) and
its By-laws (certified by its Secretary), in each case as amended to and as in
effect on the date hereof (the "Articles of Incorporation" and the "By-laws",
respectively).
5.3. Capitalization. The authorized capital stock of the
Corporation immediately upon the consummation of the Closing of the
transactions contemplated hereby shall consist of 1,000,000 shares of Common
Stock, $.0l par value, of which 155,350 shares are validly issued and
outstanding, fully paid and nonassessable, and 150,000 shares of Class A
Preferred Stock, $.0l par value, of which no shares have been issued or be
outstanding.
Exhibit E attached hereto contains a list immediately prior to Closing of (i)
all record holders of capital stock of the Corporation, including the number
of shares of capital stock of the Corporation held by each such holder, and
(ii) all outstanding warrants, options, agreements,
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convertible securities or other commitments pursuant to which the Corporation
is or may become obligated to issue any shares of its capital stock or other
securities of the Corporation, which names all persons entitled to receive
such shares or other securities and the shares of capital stock or other
securities required to be issued hereunder. The number of shares of capital
stock (if any) reserved for issuance in connection with clause (ii) of the
immediately preceding sentence is not subject to adjustment by reason of the
issuance of the Securities. Except as set forth in Exhibit E attached hereto,
there are, and immediately upon consummation at the Closing of the
transactions contemplated hereby there will be, no preemptive or similar
rights to purchase or otherwise acquire shares of capital stock of the
Corporation pursuant to applicable laws, the Articles of Incorporation or
By-laws or any agreement to which the Corporation is a party, or otherwise,
except as contemplated by this Agreement; and there is no agreement,
restriction or encumbrance (such as a right of first refusal, right of first
offer, proxy, voting agreement, etc.) with respect to the sale or voting of
any shares of capital stock of the Corporation (whether outstanding or
issuable upon conversion or exercise of outstanding securities) except as
contemplated by this Agreement and by a Stock Restriction Agreement among the
Corporation, the Founder and Hwang dated the date of this Agreement (the
"Stock Restriction Agreement"). All shares of Common Stock and other
securities issued by the Corporation prior to the Closing have been issued in
transactions exempt from registration under the Securities Act of 1933, as
amended (the "Securities Act"), and all applicable state securities or "blue
sky" laws. The Corporation has not violated the Securities Act or any
applicable state securities or "blue sky" laws in connection with the issuance
of any shares of capital stock or other securities of the Corporation prior to
the Closing.
5.4. Commencement of Business, Etc. The Corporation was
incorporated under the laws of the Commonwealth of Pennsylvania on December
23, 1988. The Corporation has never had, nor does it presently have, any
subsidiaries, nor has it owned, nor does it presently own, any capital stock
or other proprietary interest, directly or indirectly, in any corporation,
association, trust, partnership, joint venture or other entity.
5.5. Agreements. Except as listed on Exhibit F and the Stock
Restriction Agreement, the Corporation is not a party to any written or oral
material (a) collective bargaining agreement with any labor union; (b)
contract for the future purchase of fixed assets or for the future purchase of
materials, supplies or equipment; (c) contract for the employment of any
officer, individual employee or other person on a full-time basis or any
material contract with any person on a consulting basis; (d) bonus, pension,
profit-sharing, retirement, stock purchase, stock option plans, in effect with
respect to employees or any of them or the employees of others; (e) agreement
or indenture relating to the borrowing of money or to the mortgaging, pledging
or otherwise placing of a lien on any assets of the Corporation; (f) guaranty
of any obligation for borrowed money or otherwise; (g) lease or agreement
under which the Corporation is lessee of or holds or operates any property,
real or personal, owned by any other party; (h) lease or agreement under which
the Corporation is lessor of or permits any third party to hold or operate any
property, real or personal, owned or controlled by the Corporation; (i)
agreement or other commitment for capital expenditures; j) contract, agreement
or commitment under which the Corporation is obligated to pay any broker's
fees, finder's fees or any such similar fees, to any
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third party; (k) contract, agreement or commitment under which the Corporation
has issued, or may become obligated to issue, any shares of capital stock of
the Corporation, or any warrants, options, convertible securities or other
commitments pursuant to which the Corporation is or may become obligated to
issue any shares of its capital stock, other than as contemplated by this
Agreement; or (1) any other contract, agreement, arrangement or understanding
which is material to the business of the Corporation. The Corporation has
furnished to the Lenders true and correct copies of all such written
agreements and other documents as have been requested by the Lenders. For
purposes of this Section 5.5, "material" shall mean those agreements involving
payments in excess of $25,000 per year and those agreements which if
terminated or breached may have a material adverse effect on the Corporation.
5.6. Intellectual Property Rights and Governmental Approval.
Except as set forth in Exhibit G attached hereto:
(a) the Corporation owns or has the right to use, and where
necessary, has made or is making proper application for, all Intellectual
Property Rights material and necessary for the conduct of its business as
presently conducted or as specifically proposed to be conducted in the
Business Plan (as defined in Section 5.1 1), which Intellectual Property
Rights are identified in Exhibit G (collectively, the "Requisite Rights"). The
Corporation has in a timely and proper manner included appropriate proprietary
rights notices on all of its products. The Corporation has not lost or
diminished substantive legal protection available for its Intellectual
Property Rights or products by any failure or delay to file patent or
copyright registrations.
(b) the Corporation has all governmental approvals,
authorizations, consents, licenses and permits material and necessary to
conduct its business as presently conducted or as proposed to be conducted in
the Business Plan, all of the foregoing being listed in Exhibit G.
(c) no royalties, honorariums or fees are payable by the
Corporation to other persons by reason of the ownership or use of the
Requisite Rights.
(d) no product or service manufactured, marketed or sold, or
proposed to be manufactured, marketed or sold as set forth in the Business
Plan, by the Corporation violates or will violate any license or infringes or
will infringe any Intellectual Property Rights.
(e) the Corporation is not a party to any distribution,
development, marketing arrangement, agreement or cooperative venture affecting
its Intellectual Property Rights or products.
(f) there is no pending or threatened claim or litigation
against the Corporation (nor does there exist any basis therefor known to the
Corporation or the Founder) contesting the validity of or right to use the
Requisite Rights, nor has the Corporation received any notice that any of the
Requisite Rights or the operation or proposed operation of the Corporation's
business conflicts, or will conflict, with the asserted rights of others, nor
does there exist any basis known to the Corporation or the Founder for any
such conflict.
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As used herein, the term "Intellectual Property Rights" means all industrial
and intellectual property rights, including, without limitation, Proprietary
Technology (as hereinafter defined), patents, patent applications, patent
rights, trademarks, trademark applications, trade names, service marks,
service mark applications, copyrights, know-how, certificates of public
convenience and necessity, franchises, licenses, trade secrets, proprietary
processes and formulae. As used herein, "Proprietary Technology" means all
source and object code, algorithms, architecture, structure, display screens,
layouts, processes, inventions, trade secrets, know-how, development tools and
other proprietary rights owned by the Corporation pertaining to any product or
service manufactured, marketed or sold, or proposed to be manufactured,
marketed or sold (as the case may be), by the Corporation or used, employed or
exploited in the development, license, sale, marketing, distribution or
maintenance thereof, and all documentation and media constituting, describing
or relating to the above, including, without limitation, manuals, memoranda,
know-how, notebooks, patents and patent applications, trademarks and trademark
applications, copyrights and copyright applications, records and disclosures.
5.7. Litigation, Etc. There are no (i) actions, suits,
arbitrations, claims, investigations or legal or administrative proceedings
pending or threatened against the Corporation, whether at law or in equity, or
before or by any Federal, state, municipal or other governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign, or
(ii) judgments, decrees, injunctions or orders of any court, governmental
department, commission, agency, instrumentality or arbitrator against the
Corporation, nor does there exist any basis known to the Corporation or the
Founder for any of the foregoing.
5.8. No Defaults. The Corporation is not in default (a)
under the Articles of Incorporation or By-laws, or any material indenture,
mortgage, lease, purchase or sales order, or any other material contract,
agreement or instrument to which the Corporation is a party or by which it or
any of its property is bound or affected or (b) with respect to any order,
writ, injunction or decree of any court or any Federal, state, municipal or
other domestic or foreign governmental department, commission, board, bureau,
agency or instrumentality. There exists no condition, event or act which
constitutes, or which after notice, lapse of time or both, would constitute, a
default under any of the foregoing by the Corporation or by any other party
bound by the foregoing.
5.9. Employment of Officers, Employees and Consultants. No
third party may assert any valid claim against the Corporation or the Founder,
any officer, director or key employee (collectively, the "Designated Persons")
with respect to (a) the continued employment by, or association with, the
Corporation, of any of the Designated Persons or (b) the use, in connection
with any business presently conducted or proposed to be conducted in the
Business Plan by the Corporation of any information which the Corporation or
any of the Designated Persons would be prohibited from using under any prior
agreements or arrangements or any legal considerations applicable to unfair
competition, trade secrets or proprietary information, provided the
Corporation and the Founder make no representation or warranty concerning the
subject matter of this Section 5.9 with respect to Hwang.
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5.10. Tax Matters. All Federal, state and local tax returns
and tax reports required to be filed by the Corporation have been filed with
the appropriate governmental agencies in all jurisdictions in which such
returns and reports are required to be filed and all of the foregoing are
true, correct and complete. All Federal, state, local and foreign income,
profits, franchise, sales, use, occupation, property, excise, payroll,
withholding and other taxes (including interest and penalties) required to
have been paid or accrued by the Corporation have been fully paid or are
adequately provided for on the Interim Balance Sheet (as defined in Section
5.23), except for tax liabilities arising in the ordinary course of business
since the date of the Interim Balance Sheet and liabilities being challenged
in good faith by the Corporation as set forth on the Schedule of Exceptions.
No issues have been raised (and are currently pending) by the Internal Revenue
Service or any other taxing authority in connection with any of the returns
and reports referred to above, and no waivers of statutes of limitations have
been given or requested with respect to the Corporation. All deficiencies
asserted or assessments (including interest and penalties) made as a result of
any examination by the Internal Revenue Service or by appropriate state or
departmental tax authorities of the Federal, state or local income tax, sales
tax or franchise tax returns of or with respect to the Corporation have been
fully paid or are adequately provided for on the Interim Balance Sheet and no
proposed (but unassessed) additional taxes, interest or penalties have been
asserted. The provisions for taxes on the Interim Balance Sheet are sufficient
for the payment of all accrued and unpaid Federal, state or local and foreign
taxes as of such date, except for taxes being challenged in good faith by the
Corporation as set forth on the Schedule of Exceptions. Consents that the
Corporation be taxed as a Subchapter S corporation have been filed with the
Internal Revenue Service and the Pennsylvania Department of Revenue on August
22, 1989, which consents will become effective for the period commencing July
1, 1989.
5.11. Business Plan. The Corporation has previously
presented and delivered to the Lenders the Corporation's Business Plan dated
October 1988 and the QED Customer Survey dated April 1989 (collectively, the
"Business Plan"), which Business Plan has been material to the Lenders in
their decision to enter into this Agreement and purchase the Securities. The
description of the business, operations (as presently conducted and as
proposed to be conducted), properties and assets of the Corporation contained
in the Business Plan, as well as all other factual statements contained
therein, are true and correct in all material respects as of the respective
dates thereof. The financial projections and other estimates contained in the
Business Plan are derived from reasonable assumptions.
5.12. Compliance. The Corporation (a) has complied with all
federal, state, local and foreign laws, ordinances, regulations and orders
applicable to it, its business or the ownership of its assets, and (b) has all
federal, state, local and foreign governmental licenses and permits material
to and necessary in the conduct of its business as presently being conducted;
such licenses and permits are in full force and effect, and no violations have
been recorded in respect of any such licenses or permits and no proceeding is
pending or threatened to revoke or limit any thereof
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5.13. Insurance. The Corporation has such policies of
liability, theft, life, fire, workmen's compensation, health and other forms
of insurance as are adequate against risks usually insured against by
comparable persons, businesses and properties. Such policies are in full force
and effect and all premiums with respect to such policies are currently paid.
The Corporation has never been denied or had revoked or rescinded any policy
of insurance.
5.14. Authorization of this Agreement, Employment Agreement,
Etc. The execution, delivery and performance by the Corporation of this
Agreement, the Employment Agreement (as defined in Section 7.9) and the
Securities have been duly authorized by all requisite corporate action by the
Corporation, and each constitutes the valid and binding obligation of the
Corporation, enforceable in accordance with its terms, subject as to
enforcement of remedies to applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting creditors' rights generally and,
with respect to the remedy of specific performance, equitable doctrines
applicable thereto. The Employment Agreement has been duly executed and
delivered by the signatories thereto, and constitutes the valid and binding
obligation of the signatories thereto, enforceable in accordance with its
terms, subject as to enforcement of remedies to applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting
creditors' rights generally and, with respect to the remedy of specific
performance, equitable doctrines applicable thereto. The execution, delivery
and performance of this Agreement, the Employment Agreement and the Securities
and consummation of the transactions contemplated hereby and thereby and
Compliance with the provisions hereof and thereof by the Corporation and the
signatories thereto, as the case may be, and the issuance, sale and delivery
of the Securities by the Corporation, will not (a) violate any provision of
law, statute, rule or regulation, or any ruling, writ, injunction, order,
judgment or decree of any court, administrative agency or other governmental
body applicable to the Corporation or any of its properties or assets or (b)
conflict with or result in any breach of any of the terms, conditions or
provisions of, or constitute (with due notice or lapse of time, or both) a
default (or give rise to any right of termination, cancellation or
acceleration) under, or result in the creation of any lien, security interest,
charge or encumbrance upon any of the properties or assets of the Corporation
under the Articles of Incorporation or By-laws of the Corporation, or any
note, indenture, mortgage, lease agreement or other contract, agreement or
instrument to which the Corporation is a party or by which it or any of its
property is bound or affected.
5.15. Authorization of Securities. The issuance, sale and
delivery of the Securities have been duly authorized by all requisite
corporate action of the Corporation, and when issued, sold and delivered in
accordance with this Agreement will be validly issued and outstanding, and not
subject to preemptive or any other similar rights of the shareholders of the
Corporation or others.
5.16. Related Transactions. No Corporation director, officer
or "affiliate" (as defined in the rules and regulations promulgated under the
Securities Act) of any such person, is presently, or since the inception of
the Corporation has been, directly or indirectly through his or its
affiliation with any other person or entity, a party to any transaction with
the Corporation providing for the furnishing of services by or to, or rental
or sale of real or personal property
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from or to, or otherwise requiring cash payments to or by any such person
involving amounts in excess of $2,500 per person per year, except for normal
employment arrangements in the ordinary course of the Corporation's business.
For purposes of this Agreement, a transaction of the type described in this
Section 5.16 is sometimes herein referred to as a "Related Transaction".
5.17. Use of Proceeds. The net proceeds received by the
Corporation from the sale of the Securities shall be used by the Corporation
generally for the purposes and in the respective amounts set forth in Exhibit
H attached hereto.
5.18. Offering Exemption. The offering and sale of the
Securities are each exempt from registration under the Securities Act pursuant
to Section 4(2) thereof. The aforesaid offering and sale is also exempt from
registration under applicable state securities and "blue sky" laws.
5.19. No Governmental Consent or Approval Required. Except
for the filing of any notice subsequent to the Closing that may be required
under applicable federal and/or state securities laws (which, if required,
shall be filed on a timely basis as may be so required), no consent, approval
or authorization of, or declaration to, or filing with, any governmental or
regulatory authority is required for the valid authorization, execution,
delivery and performance by the Corporation of this Agreement or the
Employment Agreement or for the valid authorization, issuance, sale and
delivery of the Securities.
5.20. Brokers. Neither the Corporation nor any of the
Corporation's officers, directors, employees or shareholders has employed or
is liable for fees to any broker or finder in connection with the transactions
contemplated by this Agreement.
5.21. Registration Rights. Except as contemplated by this
Agreement, no person has any contractual right to cause the Corporation to
effect the registration under the Securities Act of any shares of Common Stock
or any other securities (including debt securities) of the Corporation.
5.22. Non-Competition, Non-Disclosure, Proprietary
Information and Patent and Invention Assignment Agreements. The Designated
Persons, Hwang and each current employee of the Corporation who has or is
proposed to have access to confidential and proprietary information of the
Corporation is a signatory to, and is bound by, an agreement with the
Corporation relating to non-competition, non disclosure, proprietary
information and patent and invention assignment (copies of each of which are
attached hereto as Exhibit I), none of which agreements shall be modified or
amended in any respect without the prior consent of a majority of the Board of
Directors of the Corporation.
5.23. Financial Information. The Corporation has previously
delivered to the Lenders the unaudited balance sheet of the Corporation as of
August 30, 1989 (the "Interim Balance Sheet") and related unaudited statements
of income, stockholders' equity and changes in financial position for the
fiscal period then ended, prepared by the Corporation (collectively, the
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"Financial Statements"). The Financial Statements (i) fairly present in all
material respects the financial condition of the Corporation as of the
respective dates indicated and the results of operations, stockholders' equity
and changes in financial position of the Corporation for the respective
periods indicated and (ii) unless otherwise stated therein, have been prepared
in accordance with generally accepted accounting principles consistently
applied, subject to routine year-end adjustments.
5.24. Absence of Undisclosed Liabilities. Except as
disclosed in the Financial Statements, (a) the Company had no liability in
excess of $5,000 individually or $15,000 in the aggregate (matured or
unmatured) which was not provided for or disclosed on the Interim Balance
Sheet, and (b) all liability reserves established by the Company and set forth
on the Interim Balance Sheet were adequate for the purposes indicated therein.
5.25. Absence of Changes. Since the date of the Interim
Balance Sheet to the date of this Agreement, there has not been (a) any
adverse change in the financial condition, results of operations, assets,
liabilities or business of the Corporation, (b) any liability or obligation
incurred by the Corporation, other than current liabilities or obligations
incurred in the ordinary course of business, (c) any asset or property of the
Corporation made subject to a lien of any kind, (d) any waiver of any right of
the Corporation, or the cancellation of any debt or claim held by the
Corporation, (e) any payment of dividends on, or other distributions with
respect to, or any direct or indirect redemption or acquisition of, any shares
of the capital stock of the Corporation, or any agreement or commitment
therefor, (f) any issuance of any stock, bonds or other securities of the
Corporation or options, warrants or rights or agreements or commitments to
purchase or issue such securities or grant such options, warrants or rights
other than pursuant to or in connection with the transactions contemplated by
this Agreement, (g) any mortgage, pledge, sale, assignment or transfer of any
tangible or intangible assets of the Corporation, except, with respect to
tangible assets, in the ordinary course of business, (h) any loan by the
Corporation to any officer, director, employee or stockholder of the
Corporation, or any agreement or commitment therefor, (i) any damage,
destruction or loss (whether or not covered by insurance) which is or may
adversely affect the assets, property or business of the Corporation, j) any
increase, direct or indirect, in the compensation paid or payable to any
officer, director, employee or agent of the Corporation or (k) any change in
the accounting methods or practices followed by the Corporation.
5.26. Encumbrances. Except as disclosed on the Interim
Balance Sheet, the Corporation owns outright all the property and assets,
real, personal or mixed, tangible or intangible, reflected as assets in the
Interim Balance Sheet (other than assets disposed of in the ordinary course of
business), including, but not limited to, the Requisite Rights, subject to no
mortgages, hens, security interests, pledges, charges or other encumbrances of
any kind, except as reflected in the Financial Statements. The Corporation
owns, or has a valid leasehold interest in, or valid license for, all assets
necessary for the conduct of its business as presently conducted or as
proposed to be conducted, subject to the consummation of the acquisition of
$617,582 of equipment pursuant to an invoice dated June 19, 1989 to the
Corporation from Siemens Corporate Research, Inc.
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5.27. Complaince e with ERISA: Benefit Plans: Etc. The
Corporation does not (a) maintain and has never maintained any employee
benefit plan subject to the Employee Retirement Income Security Act of 1974,
as amended or (b) contribute to and has never contributed to any such employee
benefit plan maintained by any other person or entity.
5.28. Burdensome Restrictions. The Corporation is not
obligated under any contract or agreement or subject to any charter or other
corporate restriction which presently materially adversely affects, or in the
future may reasonably be expected to materially adversely affect its business,
properties, assets, prospects or condition (financial or otherwise).
5.29. Disclosure. Neither this Agreement nor any other
document, certificate, instrument or statement furnished or made to the
Lenders by or on behalf of the Corporation in connection with the transactions
contemplated hereby contains any untrue statement of a material fact or omits
to state a material fact necessary in order to make the statements contained
herein and therein not misleading.
SECTION 6. Representations and Warranties of the Lenders.
(a) Each Lender represents and warrants to the Corporation
that it is acquiring the Securities for investment and not with a view to the
distribution thereof within the meaning of the Securities Act.
(b) Each Lender understands that none of the securities
which are being purchased pursuant to this Agreement have been registered
under the Securities Act, and such securities cannot be sold unless they are
subsequently registered under the Securities Act or unless an exemption from
such registration is available.
(c) Each Lender further understands that Rule 144 (the
provisions of which are known to such Lender) promulgated under the Securities
Act is not currently available as a basis for exemption from registration of
any of the securities purchased by such Lender and, except as otherwise
expressly provided in this Agreement, the Corporation is under no obligation
to take any actions which may be necessary in order to render the provisions
of Rule 144 available as a basis for such exemption from registration.
(d) Each Lender represents and warrants that it has not
employed any broker or finder in connection with the transactions contemplated
by this Agreement.
(e) NEPA represents and warrants that it has been duly
formed under the Limited Partnership Act of Pennsylvania, it is validly
subsisting as of the date of this Agreement and the execution, delivery and
performance of this Agreement has been authorized by all requisite limited
partnership action. NEPA's principal place of business is located in
Pennsylvania.
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(f) NEPA is an "institutional investor" as that term is
defined in Section 102 of the Pennsylvania Securities Act of 1972, as amended,
and is a limited partnership, not formed for the specific purpose of acquiring
the Securities, with total assets in excess of $5,000,000.
(g) The Lenders have no present arrangement, understanding
or agreements for transferring or disposing of any of the Securities.
(h) The Lenders are familiar with the Corporation's
business, financial condition, affairs and prospects and also are aware that
the Corporation is a development-stage company, does not have any operating
history and that the Securities represent a very speculative investment with
the possibility of complete loss of all funds the Lenders have invested.
(i) Before executing this Agreement, each Lender was
furnished with or given access to all information with respect to the
Corporation, which was requested. The Lenders or their representatives also
were given the opportunity to ask the Founder and the Corporation's officers
any and all questions which such persons had, and confirm that such persons
received satisfactory answers relating to the Corporation's business,
financial condition, affairs and prospects.
(j) Hwang represents and warrants that (A) he is a resident
of New Jersey, (B) he is an"accredited investor" as such term is defined in
Rule 501 of Regulation D promulgated under the Securities Act of 1933, as
amended, with individual net worth (or joint net worth with his spouse) in
excess of $1,000,000, or with individual income in excess of $200,000 in each
of the two most recent years (or joint income with his spouse in excess of
$300,000 in each of those years) and has a reasonable expectation of reaching
the same income level in the current year, (C) no third party may assert any
valid claim against the Corporation or him relating to those matters set forth
in Section 5.9.
(k) Based on the foregoing representations and warranties of
the Lenders, the representatives and warranties of the Corporation and
Founder, and the information and schedules provided by the Corporation to the
Lenders in connection with the execution of this Agreement, each Lender
confirms that he or it possesses sufficient knowledge and experience in
financial and business matters generally, and sufficient familiarity with the
Corporation in particular, to evaluate the risks of investment in the
Securities and to execute and deliver this Agreement. Each Lender also
confirms that he or it is able to bear the economic risk inherent in his or
its investment and understands that there is and will be no private or public
market for the Securities in the event such Lender needs to liquidate his or
its investment.
(l) The parties acknowledge that notwithstanding the
foregoing representations and warranties of the Lenders, the Lenders shall be
entitled to rely on the representations and warranties of the Corporation and
the Founder contained in this Agreement, which later representations and
warranties shall not be diminished in any respect by the contents of this
Section 6 (except insofar as a breach of the Corporation's and the Founder's
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representations and warranties is directly attributed to a breach of one or
more of these Section 6 representations and warranties).
SECTION 7. Conditions Precedent to Closing by the Lenders on the
Closing Date. The obligation of the Lenders to purchase and pay for the
Securities on the Closing Date is subject to the following conditions
precedent:
7.1. Corporate Proceedings;Consents, Etc. All corporate and
other proceedings to be taken and all waivers and consents to be obtained in
connection with the transactions contemplated by this Agreement and the
Employment Agreement shall have been taken or obtained. All documents incident
thereto and all legal matters incident to this Agreement and the Closing shall
be reasonably satisfactory in form and substance to the Lenders and their
counsel, each of whom shall have received all such originals or certified or
other copies of such documents either may reasonably request.
7.2. Opinion of Counsel. At the Closing, the Lenders shall
have received from counsel for the Corporation its opinion addressed to the
Lenders, dated the date of the Closing, in the form of Exhibit J attached
hereto.
7.3. Amendment. The Board of Directors and shareholders of
the Corporation shall have duly adopted resolutions in the form of the
Amendment attached hereto as Exhibit A and the Amendment shall have been filed
with and accepted by the Secretary of State of the Commonwealth of
Pennsylvania and become effective, and evidence of the foregoing in form
satisfactory to the Lenders shall have been delivered to the Lenders.
7.4. Blue Sky Matters. All consents, approvals,
qualifications and/or registrations required to be obtained or effected under
any applicable state securities or "blue sky" laws in connection with the
issuance, sale and delivery of the Securities shall have been obtained or
effected (except for the filing of any notice subsequent to the Closing which
may be required under applicable state securities laws which, if required,
shall be filed on a timely basis as may be so required) and copies of the same
delivered to the Lenders.
7.5. Reconstitution of Board of Directors; Election of
Directors. Simultaneously with the Closing, the Board of Directors of the
Corporation shall be reconstituted with up to five directors in accordance
with the terms of this Agreement and at least the following three individuals
shall have been elected as members of the Board of Directors, as
reconstituted:
Thomas L. Hierl James C.M. Hwang
Michael G. Bolton
7.6. Secretary's Certificate. The Lenders shall have
received a certificate, dated the date of the Closing, of the Secretary or an
Assistant Secretary of the Corporation to the effect (i) that attached thereto
is a true and complete copy of the Articles of Incorporation and the Bylaws of
the Corporation, in each case as in effect on the date thereof, (ii) that
attached thereto is a
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true and complete copy of resolutions adopted by the Board of Directors of the
Corporation authorizing the execution, delivery and performance of this
Agreement and the Employment Agreement and consummation of the transactions
contemplated hereby and thereby, and authorizing the issuance and delivery of
the Securities, (iii) that the Corporation is validly subsisting under the
laws of the Commonwealth of Pennsylvania and is duly qualified as a foreign
corporation in any other state in which the conduct of its business or its
ownership or leasing of property requires qualification of the Corporation,
and has paid all required franchise taxes in such states, (iv) that all
requested consents have been obtained, (v) that all conditions set forth in
this Section 7 have been fulfilled, and (vi) of such other matters as may
reasonably be requested by the Lenders or their counsel.
7.7. Amendments. The Corporation's By-laws shall be amended
to the extent necessary to conform to the provisions of this Agreement. Any
amendments to the Corporation's Bylaws and to the existing agreements between
the Corporation and other parties shall be satisfactory to the Lenders and
executed copies shall be delivered to the Lenders.
7.8. Insurance Policy. The Corporation shall deliver to the
Lenders a policy or binder representing $350,000 of life insurance on Hierl
which designates the Corporation as the beneficiary.
7.9. Key Employee Agreement. The Corporation shall deliver
to the Lenders copies of an executed employment agreement (in the form
attached hereto as Exhibit K) with the Founder (the "Employment Agreement").
7.10. Capital Contributions. The Corporation shall have
received capital contributions in the amount of $65,000 from Hierl.
7.11. Equipment Loan. The Corporation shall have purchased
or have binding agreements to purchase substantially all of the equipment
(including a Varian Molecular Beam EPITAXIAL)required for its business as set
forth in the Business Plan and shall have secured and closed bank financing in
the amount of $600,000 on terms acceptable to the Lenders.
SECTION 8. Management of the Corporation.
8.1. Access to Records. The Corporation shall afford to the
Lenders and their employees, counsel and other authorized representatives free
and full access, on a reasonable basis during normal business hours, to all of
the books, records and properties of the Corporation and to all officers and
employees of the Corporation for any reasonable purpose whatsoever. The
Lenders shall use their best efforts to maintain the confidentiality of any
confidential and proprietary information so obtained which is not otherwise
available from other sources; provided, however, that the foregoing shall in
no way limit or otherwise restrict the ability of NEPA or its authorized
representatives to disclose any such information concerning the Corporation
which it may be required to disclose (i) to its partners to the extent
required to
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satisfy its fiduciary obligations to such persons, provided NEPA takes
reasonable actions to make such partners aware of the confidential nature of
the material disclosed and the obligation of NEPA to use its best efforts to
preserve such confidentiality, or (ii) otherwise pursuant to or required by
law.
8.2. Financial Reports. The Corporation agrees to furnish the
Lenders with the following:
8.2.1. Within 20 days after the end of each month,
an unaudited financial report of the Corporation, which report shall include
the following:
(a) a profit and loss statement for such month, together
with a cumulative profit and loss statement form the first day of the current
year to the last day of such month, which statements shall be prepared in
accordance with generally accepted accounting principles consistently applied;
(b) a balance sheet as of the last day of such month, which
balance sheet shall be prepared in accordance with generally accepted
accounting principles consistently applied;
(c) a statement of changes in cash balances for such mont,
together with a cumulative statement of changes in cash balances form the
first day of the current year to the last day of such month, and a six month
projected statement of cash flow;
(d) except to the extent included in other monthly reports
provided to the Lenders, a schedule showing all expenditures of a capital
nature in excess of $10,000 individually during such month;
(e) an aging schedule (or summary thereof) of all accounts
receivable and accounts payable; and
(f) a comparison between the actual figures for such month
and the comparable figures included in the Budget (as defined in Section 8.4)
with variances delineated; certified by the chief executive officer and chief
financial officer of the Corporation as being prepared in accordance with
generally accepted accounting principles consistently applied.
8.2.2. Within 90 days after the end of each fiscal
year of the corporation, financial statements of the Corporation which shall
include a profit and loss statement for such fiscal year and a balance sheet
as of the last day thereof, each prepared in accordance with generally
accepted accounting principles consistently applied, and accompanied by the
unqualified audit report (unless otherwise waived by NEPA in writing) of an
independent certified public accountant firm as shall have been approved by
NEPA, together with a copy of such firm's letter management.
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8.2.3. If for any period the Corporation shall have
any subsidiary or subsidiaries whose accounts are consolidated with those of
the Corporation, then in respect of such period the financial statements
delivered shall be the consolidated and, where reasonably appropriate,
consolidating financial statements of the Corporation and all such
consolidated subsidiaries.
8.2.4. Promptly upon becoming available:
(a) except to the extent included in materials furnished to
the Lenders as shareholders, copies of all financial statements, reports,
press releases, notices, proxy statements and other documents sent by the
Corporation to its stockholders or released to the public and copies of all
regular and periodic reports, if any, filed by the Corporation with the
Securities and Exchange Commission (the "Commission") or any securities
exchange, and
(b) any other financial or other information available to
management of the Corporation as the Lenders shall have reasonably requested
on a timely basis.
8.3. No Default Certificate. With the financial statements
referred to in Sections 8.2.1 and 8.2.2, the Corporation shall deliver to the
Lenders a certificate executed by the chief executive officer and the chief
financial officer of the Corporation to the effect that no knowledge has been
obtained of any violation or default by the Corporation in the performance of
its agreements or covenants contained herein, in the Articles of
Incorporation, or in any other material agreement to which the Corporation is
a party or of the occurrence of any condition, event or act which, with or
without notice or lapse of time, or both, would constitute a violation or an
event of default, or, if such officer shall have obtained knowledge of any
such violation, condition, event or act he shall specify in such certificate
all such violations, conditions, events and acts and the nature and status
thereof.
8.4. Budget. At least 30 days prior to the beginning of each
fiscal year of the Corporation, the Corporation will prepare and submit to the
Board of Directors of the Corporation and the Lenders a comprehensive
operating and capital expenditures plan, with monthly projected income
statements, cash flows and balance sheets, statement of underlying assumptions
and a written business plan including planned product development, sales
activities and staffing, significant events and a qualitative description by
the chief executive officer of the Corporation's plan to achieve such results
(the "Budget"). The Budget shall be accepted as the Budget for such fiscal
year when it has been approved by the Board of Directors of the Corporation,
which approval shall occur within 30 days of submission to the Board. The
Budget shall be reviewed by the Corporation periodically and all material
changes therein and all material deviations therefrom shall be resubmitted to
the Board of Directors of the Corporation in advance and shall be accepted
when approved by, and the Corporation shall not make any such material changes
or material deviations to or from the Budget without such prior approval of,
the Board of Directors of the Corporation. Individual capital expenditures in
excess of $25,000 and aggregate capital expenditures in excess of $100,000 in
any fiscal year, including capitalized leases, will require Board of Directors
approval.
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8.5. Existence; Maintenance of Property. The Corporation
shall do or cause to be done all things necessary to maintain, preserve and
keep in full force and effect its corporate existence and all rights,
licenses, permits and franchises necessary to the proper conduct of its
business and the ownership, leasing or operation of its properties. The
Corporation shall maintain and operate its business and properties in
accordance with all applicable laws and regulations and take all reasonable
action which may be required to obtain, preserve, renew and extend all
licenses, permits, authorizations, tradenames, trademarks, copyrights and
patents which may be necessary for the continuance of the operation of any
such property by it. The Corporation shall at all times maintain and preserve
all property necessary in the conduct of its business and keep the same in
good repair, working order and condition, and from time to time make, or cause
to be made, all needful and proper repairs, renewals, replacements,
betterments and improvements thereto so that the business carried on in
connection therewith may properly and advantageously be conducted at all
times.
8.6. Property and Liability Insurance. The Corporation shall
maintain adequate insurance, by financially sound and reputable insurers, on
its properties of a character customarily insured by companies engaged in the
same or a similar business against liability, loss or damage resulting from
hazards, risks and other liabilities, including without limitation extended
coverage of the kind customarily insured against by such companies and public
liability insurance against claims for personal injury, death or property
damage occurring upon, in, about or in connection with the use of any of its
properties, and maintain such other insurance as may be required by law or
other agreements to which the Corporation is or shall become a party.
8.7. Payment of Debts, Taxes, Etc. The Corporation shall pay
all indebtedness and obligations promptly and in accordance with normal terms
and pay and discharge promptly all taxes, assessments and governmental charges
or liens imposed upon it or upon its income or receipts or in respect of any
of its property, before the same shall become in default, as well as all
lawful claims which, if unpaid, might result in the creation of a lien or
charge upon such properties or any part thereof; provided, however, that the
Corporation shall not be required to pay and discharge or to cause to be paid
and discharged any such indebtedness, obligation or tax so long as the
validity or amount thereof shall be contested in good faith and the
Corporation shall set aside on its books such reserves as are required by
generally accepted accounting principles with respect to any such
indebtedness, obligation or tax.
8.8. Litigation and Other Notices. The Corporation shall
deliver to the Lenders promptly following the occurrence thereof (but in any
event within 10 days) written notice and a description of and management's
proposed response to the following:
(i) all events of default or any event that would become an event of
default upon notice or lapse of time or both under any of the terms or
provisions of any note, agreement or contract, including without limitation
this Agreement;
(ii) levy of an attachment, execution or other process against any of
the property or assets, real or personal, of the Corporation or any of its
subsidiaries;
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(iii) the filing or commencement of any action, suit or proceeding by
or before any court or any federal, state, municipal or other governmental
department, commission, instrumentality or agency; and
(iv) any matter of non-general effect which has resulted in, or which
may result in, a material adverse change in the financial condition or
operations of the Corporation.
8.9. Non-Competition, Non-Disclosure and Patent and
Invention Assignment Agreements. The Corporation shall cause each person who
becomes a key consultant or employee of the Corporation or who shall have or
be proposed to have access to confidential or proprietary information of the
Corporation, to execute an agreement relating to matters of non-competition,
non-disclosure, proprietary information and patent assignment in such form as
is satisfactory to the Board of Directors of the Corporation. The Corporation
will take all reasonable actions to protect its proprietary information,
including without limitation the filing of copyright and patent applications
when appropriate.
8.10. Compensation. The Board of Directors shall approve all
compensation arrangements for key employees of the Corporation. An annual
bonus pool for management employees of up to 5% of the Corporation's pre-tax
income may be distributed to employees, including the Founders, at the sole
discretion of management of the Corporation.
8.11. System of Accounting. The Corporation shall maintain a
system of accounting established and administered in accordance with generally
accepted accounting principles, and will set aside on its books and cause each
of its subsidiaries to set aside on its books all such proper reserves as
shall be required by generally accepted accounting principles.
8.12. Life Insurance. The Corporation will maintain a life
insurance policy in the amount of $350,000 on Hierl, with the Corporation as
the designated beneficiary.
8.13. Negative Covenants. The Corporation shall not,
directly or indirectly, without the prior approval of the Board of Directors
of the Corporation and NEPA, take any of the following actions:
(a) directly or indirectly, sell, lease, transfer or
otherwise dispose of (whether in one transaction or in a series of related
transactions occurring within a 12 month period) assets valued in excess of
$50,000 (except for sales of product in the ordinary course of business), or
directly or indirectly purchase, lease or otherwise acquire (whether in one
transaction or in a series of related transactions occurring within a 12 month
period) assets valued in excess of $50,000 of any other person (except for
purchases of product in the ordinary course of business), consolidate with or
merge into any corporation or permit any corporation to merge into it, or sell
all or substantially all of the assets of the Corporation;
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(b) except as expressly provided in the Stock Restriction
Agreement, declare or pay any dividend on or make any other distribution
(whether by reduction of capital or otherwise) of cash or property or both
with respect to, or redeem, retire, purchase or otherwise acquire for value or
set apart any sum for, the reduction, retirement, purchase or other
acquisition of any shares of its capital stock, except for the repurchase of
stock options or shares of its capital stock at cost from employees of the
Company terminated from employment and except as expressly provided in the
Employment Agreement and Consulting Agreement.
(c) take any action to cause any amendment, alteration or
repeal of any provision of the Corporation's Articles of Incorporation or
By-laws;
(d) voluntarily dissolve, liquidate or wind-up or carry out
any partial liquidation, distribution or transaction in the nature of a
partial liquidation or distribution;
(e) except as provided in Section 9.4 and up to 20,000
shares of Common Stock reserved for issuance to a key marketing executive and
other newly hired key employees at a price of at least $.4649 per share, issue
any equity securities or any options or warrants to acquire equity securities
of the Corporation, or authorize or adopt any stock option plan or program;
(f) discontinue, abandon or materially change the character
of its business as such business is conducted on the date hereof or is
proposed to be conducted in the business Plan or enter a new business are;
(g) incur, create, assume or permit to exist any
indebtedness in excess of $100,000 (including capitalized leases), or
indebtedness which by its terms is convertible into capital stock of the
Corporation;
(h) increase the base compensation (excluding bonus) of any
officer or key employee by more than 10% per year or create any bonus plan
except as provided in Section 8.10;
(i) in any manner alter or change the designations, powers,
preferences or rights, or the qualifications, limitations or restrictions of
the Preferred Stock;
(j) enter into any Related Transactions except, with Board
of Directors' approval, on terms no less favorable to the Corporation than
those obtainable form a nonrelated person;
(k) create any committee of the Board of Directors which has
the authority to take any action requiring Board approval pursuant to this
Agreement, unless the director designated by NEPA is a member of such
committee; or
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(l) amend, terminate or waive any provision of the
Employment Agreement or Consulting Agreement.
SECTION 9. Additional Agreements.
9.1. Meetings of the Board of Directors and Representation
Thereon, Etc.
(a) The Corporation shall call, and use its best efforts to
have, regular meetings of the Board of Directors of the Corporation not less
often than monthly until such time as the Corporation has two successive
profitable quarters, and thereafter not less often than bimonthly or quarterly
as determined by NEPA.
(b) The Corporation shall pay all reasonable travel expenses
and other out-of-pocket disbursements incurred by non-employee directors in
connection with attending meetings of the Board of Directors of the
Corporation.
(c) The Board of Directors shall consist of up to five
directors, one of which shall be designated (and subject to removal,
replacement and re-designation from time to time) by NEPA for so long as it is
at least a 5% shareholder (or has the right to acquire at least 5% of the
shares of the Corporation), one of which shall be James C. M. Hwang for so
long as he is at least a 5% shareholder (or has the right to acquire at least
5% of the shares of the Corporation), two of which shall be designated (and
subject to removal, replacement and re-designation from time to time) by the
holders of the Corporation's Common Stock other than the Lenders and one of
which shall be an individual mutually agreed upon by the remaining four
directors. The Corporation, the Founder and the Lenders shall use their best
efforts to cause the directors specified above to be elected. Notwithstanding
the foregoing, Section 8 of the Amendment to the extent applicable shall
supersede the foregoing.
(d) In addition to the right to designate a director, NEPA
shall have the right to one observer at all Board of Directors and Board
committee meetings, which observer will be entitled to participate in
discussions, but shall not have voting rights. Such observer shall receive
notices of all meetings and copies of all materials distributed to the Board.
Such observer shall agree to be bound by the confidentiality restrictions set
forth in Section 8. 1.
9.2. Right of First Refusal.
(a) Except in the case of Excluded Securities (as hereafter
defined), the Corporation shall not issue, sell or exchange, agree to issue,
sell or exchange, or reserve or set aside for issuance, sale or exchange, any
(i) shares of Common Stock, (ii) any other equity security of the Corporation,
(iii) any debt security of the Corporation which by its terms is convertible
into or exchangeable for any equity security of the Corporation, (iv) any
security of the Corporation that is a combination of debt and equity, or (v)
any option, warrant or other right to subscribe for, purchase or otherwise
acquire any equity security or any such debt security of the Corporation,
unless in each case the Corporation shall have first offered (the "Offer") to
sell
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to the Lenders their Proportionate Percentage of such securities proposed to
be sold by the Corporation (the "Offered Securities"), at a price and on such
other terms as specified in the Offer, which Offer by its terms shall remain
open and irrevocable for a period of 20 days from the date notice is given by
the Corporation to the Lenders.
(b) Notice of a Lender's intention to accept, in whole or in
part, an Offer shall be evidenced by a writing signed by such Lender and
delivered to the Corporation prior to the end of the 20-day period of such
Offer, setting forth such portion of the Offered Securities as such Lender
elects to purchase (the "Notice of Acceptance"), provided, however that such
Lender shall have no obligation to make such purchase if no sale is ultimately
made of at least 90% (or at least the minimum required number of shares in a
predesignated minimum/maximum private placement) of the Offered Securities.
(c) The Corporation shall have 90 days from the expiration
of the foregoing 20-day period, to sell all or any part of such Offered
Securities as to which a Notice of Acceptance has not been given by such
Lender (the "Refused Securities"), but only upon terms and conditions in all
respects, including, without limitation, unit price and interest rates, which
are no more favorable to the purchaser or less favorable to the Corporation
than those set forth in the Offer. Upon the closing of the sale of the Refused
Securities, a Lender shall purchase from the Corporation, and the Corporation
shall sell to such Lender, the Offered Securities in respect of which Notice
of Acceptance was delivered to the Corporation by such Lender, at the terms
specified in the Offer. The purchase by a Lender of any Offered Securities is
subject in all cases to the preparation, execution and delivery by the
Corporation and such Lender of a purchase agreement containing the provisions
set forth in the Offer and Notice of Acceptance, and no less favorable to such
Lender than the purchase agreement executed by the purchasers of the Refused
Securities.
(d) In each case, any Offered Securities not purchased by a
Lender or other purchasers in accordance with Section 9.2(c) may not be sold
or otherwise disposed of until they are again offered to the Lenders under the
procedures specified in Sections 9.2(a), (b), and (c).
(e) The rights of the Lenders under this Section 9.2 shall
not apply to (i) Common Stock issued as a stock dividend or upon any stock
split or other subdivision or combination of shares of Common Stock, (ii)
Common Stock issued upon conversion of Class A Preferred Stock or upon
exercise of the Warrants, (iii) Class A Preferred Stock issued upon conversion
of the Convertible Notes, (iv) options and shares of Common Stock issued to
employees as provided in Section 9.4, and (v) up to 20,000 shares of Common
Stock reserved for issuance to a key marketing executive and other newly hired
key employees at a price of at least $.4649 per share (the "Excluded
Securities").
(f) Notwithstanding the foregoing provisions of this Section
9.2, the rights of the Lenders and the obligations of the Corporation under
this Section 9.2 shall be inapplicable to the consummation of an offering and
sale of securities of the Corporation as part of a public offering registered
under the Securities Act with a minimum price per share of Common Stock of
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$3.50 (subject to adjustment for subsequent stock splits, dividends and
combinations), and minimum gross proceeds to the Corporation of $2,500,000 (a
"Designated Offering"), and the provisions of this Section 9.2 shall terminate
upon the consummation of such Designated Offering.
(g) "Proportionate Percentage" shall mean as to a Lender,
that percentage figure which expresses the ratio which (x) the number of
shares of outstanding Common Stock then owned by such Lender bears to (y) the
aggregate number of shares of outstanding Common Stock then owned by all
shareholders of the Corporation. For purposes solely of the computation
required under clauses (x) and (y) above, a Lender holding a Convertible Note,
outstanding Class A Preferred Stock or a Warrant shall be treated as having
converted or exercised all of such Convertible Note, outstanding Class A
Preferred Stock and Warrant into shares of Common Stock at the rate which such
securities are convertible into or exercisable for Common Stock in effect at
the time of delivery by the Corporation of the notice of the Offer
contemplated by Section 9.2(a), and all outstanding convertible notes and
Class A Preferred Stock held by other parties shall likewise be deemed
converted, and all outstanding warrants held by other parties shall likewise
be deemed exercised.
9.3. Filing of Reports Under the Exchange Act. Subsequent to
a registered public offering of the Corporation's Common Stock, the
Corporation shall comply with public information reporting requirements of the
Commission as a condition to the availability of an exemption from the
Securities Act under Rule 144 (as amended from time to time or successor rule
thereto) for the sale of Common Stock by the Lenders, and the Corporation
shall cooperate with the Lenders in supplying such information as may be
necessary for the Lenders to complete and file any information reporting forms
presently or hereafter required by the Commission as a condition to the
availability of an exemption from the Securities Act under Rule 144 (as
amended from time to time, or successor rule thereto), for the sale of Common
Stock by the Lenders.
9.4. Employee Plans. The Corporation may establish and
maintain an employee stock option plan and/or stock purchase plan with respect
to up to 16,589 shares of Common Stock of the Corporation, which will (i)
provided for option grants and/or stock purchases as the Board of Directors in
its sole discretion shall determine, (ii) provide that the Corporation will
have the right, but not the obligation, to repurchase stock granted pursuant
to such stock option or purchase arrangements in certain circumstances to be
specified by the Board of Directors, (iii) provide for issuance and option
exercise prices of not less than fair market value on the date of grant, as
determined by the Board of Directors, (iv) provide for annual proportional
vesting over a five year period from the date of grant, and (v) have such
other terms as shall be approved by the Board of Directors; provided, however,
that in no event shall the Corporation be obligated to repurchase stock
granted pursuant to such stock option or purchase arrangements. Neither the
Corporation nor the Founder shall enter into any shareholder, voting, proxy,
purchase or right of first refusal agreement regarding options or shares
issued or obtained pursuant to such plans without the prior written consent of
NEPA.
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9.5. Right of Co-Sale. In the event the Founder or Lender
(the "Section 9.5 Offeree") receives a bona fide offer (the "Section 9.5
Offer") from a third party (the "Section 9.5 Offeror") to purchase from the
Section 9.5 Offeree shares of the Corporation's capital stock or the
securities (which offer must be for a specified price payable in cash and on
specified terms and conditions) such Section 9.5 Offeree shall promptly
forward a copy of the Section 9.5 Offer to the Corporation and the Lenders.
the Section 9.5 Offeree shall not sell any such stock or Securities to the
Section 9.5 Offeror unless the Section 9.5 Offer is extended to the Lenders in
an amount equal to their respective Proportionate Percentages of the total
amount of stock to be purchased by the Section 9.5 Offeror. Legends referring
to this Section shall be placed on all stock certificates and Securities held
by the Founder and Lenders.
SECTION 10. Transfer of Securities.
10.1. Restriction on Transfer. The Restricted Securities,
any shares of capital stock received in respect thereof, whether by reason of
a stock split or share reclassification thereof, a stock dividend thereon or
otherwise, shall not be transferable except upon compliance with the
provisions of the Securities Act in respect of the transfer thereof.
10.2. Definitions. As used in this Section 10, the following
terms shall have the following respective meanings:
"Person" shall mean and include an individual, a corporation, a
partnership, a trust, an unincorporated organization and a government or any
department, agency or political subdivision thereof.
"Restricted Securities" shall mean the Warrants, Convertible Notes,
Non-Convertible Notes, Preferred Stock obtained upon converstion of
Convertible Notes, Common Stock obtained upon conversion of Preferred Stock or
exercise of Warrants, any shares of Common Stock purchased by a Lender
pursuant to Section 9.2 and any securities received in respect of any thereof,
in each case which have not been sold to the public (a) pursuant to
registration under the Securities Act or (b) subsequent to the Corporation's
initial public offering of securities registered under the Securities Act,
pursuant to Rule 144 (or similar or successor rule) promulgated under the
Securities Act.
"Restricted Shares" shall mean the shares of Common Stock constituting
Restricted Securities.
"Transfer" shall include any disposition of any shares of Restricted
Securities or of any interest therein which would constitute a sale thereof
within the meaning of the Securities Act.
10.3. Restrictive Legend. Each certificate for the
Restricted Securities and any securities received in respect thereof, whether
by reason of a stock split or share reclassification thereof, a stock dividend
thereon or otherwise and each certificate for any such securities issued to
subsequent transferees of any such certificate shall (unless otherwise
permitted by the
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provisions of Sections 10.4 or 10. 12) be stamped or otherwise imprinted with
legends in substantially the following form:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED
FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED. THESE SECURITIES MAY NOT BE SOLD OR TRANSFERRED
IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER
SAID ACT. ADDITIONALLY, THE TRANSFER OF THESE SECURITIES IS SUBJECT
TO THE CONDITIONS SPECIFIED IN SECTION 10 OF THE NOTE AND WARRANT
PURCHASE AGREEMENT DATED AUGUST 30,1989, AMONG QUANTUM EPITAXIAL
DESIGNS, INC. AND CERTAIN OTHER SIGNATORIES THERETO.
10.4. Notice of Transfer. The holder of any Restricted
Securities, by acceptance thereof agrees, prior to any transfer of any
Restricted Securities, to give written notice to the Corporation of such
holder's intention to effect such transfer and to comply in all other respects
with the provisions of this Section 10.4. Each such notice shall describe the
manner and circumstances of the proposed transfer and shall be accompanied by
(a) the written opinion, addressed to the Corporation, of counsel for the
holder of such Restricted Securities, as to whether in the opinion of such
counsel (which counsel and opinion shall be reasonably satisfactory to the
Corporation) such proposed transfer involves a transaction requiring
registration of such Restricted Securities under the Securities Act, and (b)
in the case of Restricted Shares, if in the opinion of such counsel such
registration is required, a written request addressed to the Corporation by
the holder of Restricted Securities, describing in detail the proposed method
of disposition and requesting the Corporation to effect the registration of
such Restricted Shares pursuant to the terms and provisions of Sections 10.5,
10.6 or 10.7 as the case may be. If in such opinion of counsel the proposed
transfer of Restricted Securities may be effected without registration under
the Securities Act, the holder of Restricted Securities shall thereupon be
entitled to transfer Restricted Securities in accordance with the terms of the
notice delivered by it to the Corporation. Each certificate or other
instrument evidencing the securities issued upon the transfer of any
Restricted Securities (and each certificate or other instrument evidencing any
untransferred balance of such securities) shall bear the legend set forth in
Section 10.3 unless (a) in such opinion of counsel registration of future
transfer is not required by the applicable provisions of the Securities Act
and such securities may immediately be sold by the holder without taking any
other actions in order to comply with an applicable exemption from such
registration requirements, or (b) the Corporation shall have waived the
requirement of such legend; provided, however, that such legend shall not be
required (a) on any certificate or other instrument evidencing the securities
issued upon such transfer in the event such transfer shall be made in
compliance with the requirements of Rule 144 (as amended from time to time)
promulgated under the Securities Act (or successor rule thereto which would
allow the purchaser to rely on the exemption provided by Section 4(l) of the
Securities Act) or (b) on any certificate or other instrument which is
immediately resalable (whether or not such resale is proposed) under Rule 144
(k) or successor thereto. The holder of Restricted Securities shall not
transfer such Restricted Securities until such opinion of counsel has been
given to and accepted by the
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Corporation (unless waived by the Corporation or unless such opinion is not
required in accordance with the provisions of this Section 10.4) or until
registration of the Restricted Shares involved in the above-mentioned request
has become effective under the Securities Act
10.5. Required Registration. If at any time the Corporation
shall be requested by NEPA to effect the registration under the Securities Act
of Restricted Shares, the Corporation shall promptly give written notice of
such proposed registration to all holders of outstanding Restricted
Securities, and thereupon the Corporation shall promptly use its best efforts
as expeditiously as practicable to effect the registration under the
Securities Act of the Restricted Shares that the Corporation has been
requested to register for disposition described in the request of said holder
or holders of Restricted Securities; provided, however, that the Corporation
shall not be obligated to effect any registration under the Securities Act
except in accordance with the following provisions:
(a) The Corporation shall not be obligated to file and cause
to become effective more than one registration statements in which Restricted
Shares are registered under the Securities Act pursuant to this Section 10.5
and effectively sold thereunder.
(b) Anything contained herein to the contrary
notwithstanding, with respect to each registration requested pursuant to this
Section 10.5, the Corporation may include in such registration any authorized
but unissued shares of Common Stock for sale by the Corporation or any issued
and outstanding shares of Common Stock for sale by others; provided, however,
that if the number of shares of Common Stock so included pursuant to this
clause (b) exceeds the number of Restricted Shares registered by the holder or
holders of outstanding Restricted Securities requesting such registration,
then such registration shall be deemed to be a registration in accordance with
and pursuant to Section 10.6; provided further, however, that the inclusion of
such previously authorized but unissued shares by the Corporation or issued
and outstanding shares of Common Stock by others in such registration shall
not prevent the holder or holders of outstanding Restricted Securities
requesting such registration from registering the entire number of Restricted
Shares requested by them and, in the event the registration is, in whole or in
part, an underwritten public offering and the managing underwriter determines
and advises in writing that the inclusion of all Restricted Shares proposed to
be included in such registration and such previously authorized but unissued
shares of Common Stock by the Corporation and/or issued and outstanding shares
of Common Stock by persons other than the holders of Restricted Securities
proposed to be included in such registration would interfere with the
successful marketing (including pricing) of such securities, then the number
of Restricted Shares and such other previously authorized but unissued shares
of Common Stock proposed to be included by the Corporation and issued and
outstanding shares of Common Stock proposed to be included by persons other
than the holders of Restricted Securities shall be reduced, first, pro rata
among the Corporation and the holders of shares of Common Stock other than the
holders of Restricted Securities, based upon the number of shares requested by
holders thereof to be registered in such offering, and, thereafter, if
necessary, pro rata among the holders of Restricted Securities, based upon the
number of Restricted Securities then owned by the holders thereof.
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10.6. Incidental Registration. If the Corporation at any
time proposes for any reason to register any of its securities under the
Securities Act (other than pursuant to a registration statement on Form S-8,
S-4 or similar or successor form (collectively, "Excluded Forms")), it shall
each such time promptly give written notice to all holders of outstanding
Restricted Securities of its intention so to do, and, upon the written
request, given within 30 days after receipt of any such notice, of the holder
of any such Restricted Securities to register any Restricted Shares (which
request shall specify the holders and shall state the intended method of
disposition of such Restricted Shares by the prospective seller), the
Corporation shall use its best efforts to cause all such Restricted Shares (in
minimum aggregate amounts of 10,000 shares as presently constituted and
subject to adjustment for subsequent stock splits, combinations and dividends)
to be registered under the Securities Act promptly upon receipt of the written
request of such holders for such registration, all to the extent requisite to
permit the sale or other disposition (in accordance with the intended methods
thereof, as aforesaid) by the prospective seller or sellers of the Restricted
Shares so registered. In the event that the proposed registration by the
Corporation is, in whole or in part, an underwritten public offering of
securities of the Corporation, any request pursuant to this Section 10.6 to
register Restricted Shares may specify that such shares are to be included in
the underwriting (a) on the same terms and conditions as the shares of Common
Stock, if any, otherwise being sold through underwriters under such
registration or (b) on terms and conditions comparable to those normally
applicable to offerings of common stock in reasonably similar circumstances in
the event that no shares of Common Stock other than Restricted Shares are
being sold through underwriters under such registration; provided, however,
that if the managing underwriter determines and advises in writing that the
inclusion of all Restricted Shares proposed to be included in the underwritten
public offering and other issued and outstanding shares of Common Stock
proposed to be included therein by persons other than holders of Restricted
Securities and other than Hierl (the "Other Shares") would interfere with the
successful marketing (including pricing) of such securities, then the number
of Restricted Shares, Heirl shares and Other Shares to be included in such
underwritten public offering shall be reduced first, pro rate among the
holders of Other Shares; second, if necessary, pro rata among the holders of
Restricted Shares and Heirl, based upon the number of shares requested by
holders thereof to be registered in such underwritten public offering; and
lastly , if necessary, among the Corporation's shares requested by the
Corporation to be registered in such Section 10.6 underwritten public
offering, subject however to Section 10.5 (b).
10.7. Registrations on Forms S-2 and S-3. After the
Corporation's initial registered public offering , the Corporation shall use
its best efforts to qualify for registration under the Securities Act on Forms
S-2 or S-3 (or any similar form or forms promulgated under the Securities
Act) the holders of Restricted Securities shall each have the right to request
registrations on Forms S-2 or S-3 (which request or requests shall be in
writing, shall specify the Restricted Shares intended to be sold or disposed
of by the holders thereof, shall state the intended method of disposition of
the intended method of disposition of such Restricted Shares intended to be
sold or disposed of by the holders thereof and shall state the intended method
of disposition of such Restricted Shares by the holder(s) requesting such
registration) and the Corporation shall be obligated to use its best efforts
to effect such registration, or registrations on Forms S-2 or S-3 (as the case
may be); provided however, that the Corporation shall not be
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obligated to file and cause to become effective more than two registration
statement on Forms S-2 or S-3 in which Restricted Securities are registered
under the Securities Act pursuant to this Section 10.7 and effectively sold
thereunder.
10.8. Granting of Registration Rights. The Corporation shall
not grant any rights to any persons to register any shares of capital stock or
other securities of the Corporation if such Restricted Securities granted
pursuant to this Agreement.
10.9. Preparation and Filing. If and whenever the
Corporation is under and obligation pursuant to the provisions of this Section
10 to use its best efforts to effect the registration of any Restricted
Shares, the Corporation shall, as expeditiously as practicable:
(a) prepare and file with the Commission a registration
statement with respect to such securities and use its reasonable efforts to
cause such registration statement to become and remain effective in accordance
with Section 10.9(b), provided that the holders and prospective sellers of
Restricted Shares shall provide the Corporation with such information as
reasonably necessary in connection with the preparation of the registration
statement;
(b) prepare and file with the Commission such amendments and
supplements to such registration statements and the prospectus used in
connection therewith as may be necessary to keep such registration statement
effective for at least six months and to comply with the provisions of the
Securities act with respect to the sale or other disposition of all
restriction Shares covered by such registration statement;
(c) furnish to each selling shareholder copies of any
prospectus subject to completion and final prospectus, in conformity with the
requirements of the Securities Act, in order to facilitate the public sale or
other disposition of such Restricted Shares;
(d) use its best efforts to register or qualify the
Restricted Shares covered by such registration statement under the securities
or "blue sky" laws of such jurisdictions as each such seller shall reasonably
request (provided however, that the Corporation shall not be required to
consent to general service of process for all purposes in any jurisdiction
where it is not then qualified) and do any and all other reasonable acts or
things which may be reasonably necessary to enable such seller to consummate
the public sale or other disposition in such jurisdictions of such securities;
(e) notify each seller of Restricted Shares covered by such
registration statement, at any time when a prospectus relating thereto covered
by such registration statement is required to be delivered under the
Securities Act within the appropriate period mentioned in Section 10.9(b), of
the happening of any event as a result of which the prospectus included in
such registration statement, as then in effect, includes an untrue statement
of a material fact or omits to state a material fact required to be stated
therein or necessary to make the statements therein in light of the
circumstances under which such statements were made not misleading and at the
reasonable request of such seller, prepare and furnish to such seller a
reasonable number of
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copies of a supplement to or an amendment of such prospectus as may be
necessary so that, as thereafter delivered to the purchasers of such shares,
such prospectus shall not include an untrue statement of a material fact or
omit 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 such
statements were made, not misleading; and
(f) furnish, at the request of any holder or holders
requesting registration of Restricted Shares pursuant to this Section 10, on
the date that such Restricted Shares are delivered to the underwriters for
sale in connection with a registration pursuant to this Section 10, if such
securities are being sold through underwriters, or, if such securities are not
being sold through underwriters, on the date that the registration statement
with respect to such securities becomes effective, (i) to the underwriter an
opinion, dated such date, of the counsel representing the Corporation for the
purposes of such registration, in form and substance as is customarily given
to underwriters in an underwritten public offering, addressed to the
underwriters, if any, and to the holder or holders making such request, or, at
the option of the Corporation, reimburse the holders' for the expense of
holders' counsel providing such opinion; and (ii) a letter dated such date,
from the independent certified public accountants of the Corporation, in form
and substance as is customarily given by independent certified public
accountants to underwriters in an underwritten public offering, addressed to
the underwriters, if any, and to the holder or holders making such request.
10.10. Expenses. All expenses incurred by the Corporation in
complying with Section 10.9, including, without limitation, all registration
and filing fees (including all expenses incident to filing with the National
Association of Securities Dealers, Inc.), fees and expenses of complying with
securities and "blue sky" laws, printing expenses and fees and disbursements
of counsel, including with respect to each registration effected pursuant to
Sections 10.5, 10.6 and 10.7, reasonable fees and disbursements of not more
than one counsel for the holders of Restricted Securities requesting
registration hereunder, and of the independent certified public accountants
(but excluding the compensation of regular employees of the Corporation which
shall be paid in any event by the Corporation) shall be paid by the
Corporation to the extent permitted under applicable federal and state
regulations or by federal or state agencies having jurisdiction over the
registration, provided however if NEPA shall request a registration under
Section 10.5 and shares are not effectively sold thereunder by reason of
unfavorable market conditions or action by NEPA, NEPA shall pay the forgoing
expenses to the extent related to its securities sought to be registered in a
subsequently requested registration by NEPA under Section 10.5. The holders of
Restricted Shares included in such registration shall, if and to the extent
required by such applicable regulations and agencies, pay their proportionate
share of expenses of the offering, in proportion to the number of their shares
included in the offering; under no circumstances shall underwriting discounts
and selling commissions applicable to the Restricted Shares covered by
registrations effected pursuant to Sections 10.5, 10.6 or 10.7 become by the
Corporation; such expenses shall be become by the seller or sellers, in
proportion to the number of Restricted Shares sold by such seller or sellers.
-27-
<PAGE>
10.11. Indemnification. In the event of any registration of
any Restricted Shares under the Securities Act pursuant to this Section 10 or
registration or qualification of any Restricted Shares pursuant to Section
10.9(d), the Corporation shall indemnify and hold harmless the seller of such
shares, each underwriter of such shares, if any, each broker or any other
person acting on behalf of such seller and each other person, if any, who
controls any of the foregoing persons, within the meaning of the Securities
Act, against any losses, claims, damages or liabilities, joint or several, to
which any of the foregoing persons may become subject under the Securities Act
or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon an untrue statement
or alleged untrue statement of a material fact contained in any registration
statement under which such Restricted Shares were registered under the
Securities Act, any prospectus subject to completion or final prospectus
contained therein, or any amendment or supplement thereto, or any document
furnished to any agency with jurisdiction over securities laws by the
Corporation required for the registration or qualification of any Restricted
Shares pursuant to Section 10.9(d), or arise out of or are based upon the
omission or alleged omission to state therein a material 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, or any violation by
the Corporation of the Securities Act or state securities or "blue sky" laws
applicable to the Corporation and relating to action or inaction required of
the Corporation in connection with such registration or qualification under
such state securities or blue sky laws; and shall reimburse (except to the
extent the Corporation assumes the defense and costs thereof as hereinafter
provided) such seller, such underwriter, broker or other person acting on
behalf of such seller and each such controlling person for any legal or any
other expenses reasonably incurred by any of them in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that the Corporation shall not be liable in any such case
to the extent that any such loss, claim, damage or liability arises out of or
is based upon such seller's or such underwriter's failure to deliver a
prospectus subject to completion or final prospectus as provided by the
Corporation in accordance with Section 10.9, or an untrue statement or alleged
untrue statement or omission or alleged omission made in said registration
statement, said prospectus subject to completion or said prospectus or said
amendment or supplement or any document incident to the registration or
qualification of any Restricted Shares pursuant to Section 10.9(d) in reliance
upon and in conformity with written information furnished to the Corporation
through an instrument duly executed by such seller or such underwriter for use
in the preparation thereof.
Before Restricted Shares held by any prospective seller shall be sold
pursuant to any registration pursuant to Section 10, such prospective seller
and any underwriter acting on its behalf shall have agreed to indemnify and
hold harmless (in the same manner and to the same extent as set forth in the
preceding paragraph of this Section I0.11) the Corporation, each director of
the Corporation, each officer of the Corporation who shall sign such
registration statement, any person consenting to be named as a person becoming
an officer or director and any person who controls the Corporation within the
meaning of the Securities Act, with respect to any untrue statement or
omission from such registration statement, any prospectus subject to
completion or final prospectus contained therein, or any amendment or
supplement thereto, if such untrue statement or omission was made in reliance
upon and in conformity with written information
-28-
<PAGE>
furnished to the Corporation through an instrument duly executed by such
seller or such underwriter for use in the preparation of such registration
statement, prospectus subject to completion, final prospectus or amendment or
supplement; provided that the maximum amount of liability in respect of such
indemnification shall be limited, in the case of each prospective seller of
Restricted Shares, to an amount equal to the net proceeds actually received by
such prospective seller from the sale of Restricted Shares effected pursuant
to such registration.
Promptly after receipt by an indemnified party of notice of the
commencement of any action involving a claim referred to in the preceding
paragraphs of this Section 10.11, such indemnified party will, if a claim in
respect thereof is made against an indemnifying party, give written notice to
the latter of such claim and/or the commencement of such action. In case any
such action is brought against an indemnified party, the indemnifying party
will be entitled to participate in and to assume the defense thereof, jointly
with any other indemnifying party similarly notified to the extent that it may
wish, with counsel reasonably satisfactory to such indemnified party, and
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party shall not be
responsible for any legal or other expenses subsequently incurred by the
indemnified party in connection with the defense thereof, provided that if
representation of both the indemnified and indemnifying parties by the same
counsel is inappropriate under applicable standards of professional conduct
due to defenses available to the indemnified party which conflict with those
available to the indemnifying party, the indemnifying party shall not have the
right to assume the defense of such action on behalf of such indemnified party
and such indemnifying party shall reimburse such indemnified party and any
person controlling such indemnified party for that portion of the fees and
expenses of any counsel retained by the indemnified party which are reasonably
related to the matters covered by the indemnity agreement provided in this
Section 10.11. The indemnifying party shall not be liable for the expenses of
more than one separate counsel representing the indemnified parties pursuant
to this Section 10.11.
Neither the indemnifying party nor the indemnified party shall make
any settlement of any claims indemnified against hereunder without the written
consent of the other party or parties, which consent shall not be unreasonably
withheld.
Notwithstanding the foregoing provisions of this Section 10.11, if
pursuant to an underwritten public offering of the Common Stock, the
Corporation, the selling shareholders and the underwriters enter into an
underwriting or purchase agreement relating to such offering which contains
provisions covering indemnification among the parties thereto in connection
with such offering, the indemnification provisions of this Section 10.11 shall
be deemed inoperative for purposes of such offering.
10.12. Removal of Legends, Etc. Notwithstanding the
foregoing provisions of this Section 10, the restrictions imposed by this
Section 10 upon the transferability of any Restricted Securities shall cease
and terminate when any such Restricted Securities are sold or otherwise
disposed of in accordance with the intended method of disposition by the
seller or sellers thereof set forth in the registration statement or as
otherwise contemplated by Section 10.4
-29-
<PAGE>
which does not require that the securities transferred bear the legend set
forth in Section 10.3. Whenever the restrictions imposed by this Section 10
shall terminate as herein provided, the holder of any Restricted Securities as
to which such restrictions have terminated shall be entitled to receive from
the Corporation, without expense, one or more new certificates not bearing the
restrictive legend set forth in Section 10.3 and not containing any other
reference to the restrictions imposed by this Section 10.
10.13. Suspension of Rights. Notwithstanding the foregoing
provisions of this Section 10, the registration rights set forth herein shall
be inapplicable to the extent and for the period during which all Restricted
Shares sought to be registered hereunder could be immediately sold in a
transaction complying with the requirements of Rule 144 (as amended from time
to time) promulgated under the Securities Act (or successor rule thereto which
would allow reliance on the exemption provided by Section 4(l) of the
Securities Act) without additional expense or time delay to the seller beyond
that which would be incurred by such seller in a registration.
SECTION 11. Fees.
(a) The Corporation will pay, and save NEPA harmless against
all liability for the payment of the fees (not to exceed $15,000) and
disbursements of counsel to NEPA, for its services in connection with the
transactions contemplated by this Agreement, which fees and disbursements will
be paid by the Corporation at the Closing.
(b) The Corporation further agrees that it will pay all
issue and stamp taxes, if any, in respect of the issuance of the Securities
SECTION 12. Exchanges; Lost, Stolen or Mutilated Instruments, Upon
surrender by a Lender to the Corporation of any instrument representing
Securities, the Corporation at its expense will issue in exchange therefor,
and deliver to such Lender, a new instrument representing such Securities, in
such denominations as may be requested by such Lender. Upon receipt of
evidence satisfactory to the Corporation of the loss, theft, destruction or
mutilation of any instrument representing any Securities, and in case of any
such loss, theft or destruction, upon delivery of an indemnity agreement and
bond satisfactory to the Corporation, or in case of any such mutilation, upon
surrender and cancellation of such instrument, the Corporation at its expense
will issue and deliver to such Lender a new instrument for such Securities of
like tenor, in lieu of such lost, destroyed, stolen or mutilated instrument.
SECTION 13. Survival of Representations, Warranties and Agreements.
All representations and warranties hereunder shall survive the Closing and
shall terminate on the earlier to occur of a Designated Offering or the date
two years after the Closing Date. The agreements and covenants contained in
Sections 8 and 9 (except 9. 1 (c) and (d) and 9.3) shall terminate upon the
earliest to occur of (i) conversion into Common Stock of at least 75% of the
aggregate Preferred Stock obtained upon conversion of the Convertible Notes,
(ii) consummation of a required registration in accordance with Section 10.5,
and (iii) consummation of a
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<PAGE>
Designated Offering. All other agreements contained herein shall survive
indefinitely until, by their respective terms, they are no longer operative.
Termination of any representation, warranty, agreement or covenant shall not
affect any claim or action commenced prior to the date of termination.
SECTION 14. Indemnification. The Corporation and the Founder shall,
with respect to the representations, warranties, covenants and agreements made
by the Corporation and the Founder herein, indemnify, defend and hold the
Lenders harmless against all liability, loss or damage, together with all
reasonable costs and expenses related thereto (including legal and accounting
fees and expenses), arising from the untruth, inaccuracy or breach of any such
representations or warranties. Without limiting the generality of the
foregoing, the Lenders shall be deemed to have suffered liability, loss or
damage as a result of the untruth, inaccuracy or breach of any such
representations or warranties if such liability, loss or damage shall be
suffered by the Corporation as a result of, or in connection with, such
untruth, inaccuracy or breach or any facts or circumstances constituting such
untruth, inaccuracy or breach, provided such liability, loss or damages to a
Lender shall be deemed not to exceed the actual liability, loss or damage to
the Corporation, multiplied by such Lender's Proportionate Percentage.
SECTION 15. Remedies. In case any one or more of the covenants and/or
agreements set forth in this Agreement shall have been breached by the
Corporation or the Founder in any material respect, the Lenders may proceed to
protect and enforce their rights either by suit in equity and/or by action at
law, including, but not limited to, an action for damages as a result of any
such breach and/or an action for specific performance of any such covenant or
agreement contained in this Agreement, including reasonable legal and
accounting fees and expenses.
SECTION 16. Successors and Assigns. This Agreement shall bind and
inure to the benefit of the Corporation, the Lenders and (a) each other person
who shall become a registered holder of any instrument representing the
Securities, except those who receive them in connection with 144 sales, after
any Designated Offering or offering pursuant to a 1933 Act registration
statement, after registration of any of the Corporation's securities under the
Securities Exchange Act of 1934 or in any trade on a recognized trading market
or exchange and (b) the respective successors and assigns of the Corporation,
the Lenders and each such other person. Notwithstanding the foregoing, the
Corporation may not assign or transfer any of its rights or obligations
hereunder without the prior written consent of the Lenders. NEPA may assign or
transfer, in whole or in part, any of its right or obligations hereunder in
connection with a transfer by NEPA of some or all of the Securities to which
such rights or obligations pertain.
SECTION 17. Entire Agreement. This Agreement and the exhibits and
schedules which form a part hereof contain the entire agreement among the
parties with respect to the subject matter hereof and supersede all prior
arrangements or understandings with respect thereto.
SECTION 18. Notices. All notices, requests, consents and other
communications hereunder to any party shall be deemed to be sufficient if
contained in a written instrument delivered in person or duly sent by
reputable overnight carrier or first class registered or certified
-31-
<PAGE>
mail, return receipt requested, postage prepaid, addressed to such party at
the address set forth in the first paragraph of this Agreement or such other
address as may hereafter be designated in writing by the addressee to the
addressor listing all parties. All such notices, advices and communication
shall be deemed to have been received (a) in the case of personal delivery on
the date of such delivery, (b) in the case of overnight carrier, on the next
business day, and (c) in the case of mailing, on the third day after the
posting thereof.
SECTION 19. Changes. The terms and provisions of this Agreement may
not be modified or amended, or any of the provisions hereof waived,
temporarily or permanently, except pursuant to the written consent of the
parties hereto.
SECTION 20. Counterparts. This Agreement may be executed in any
number of counterparts, and each such counterpart hereof shall be deemed to be
original instrument, but all such counterparts together shall constitute but
one agreement.
SECTION 21. Headings. The headings of the sections of this Agreement
have been inserted for convenience of reference only and shall not be deemed
to be a part of this Agreement.
SECTION 22. Nouns and Pronouns. Whenever the context may require, any
pronouns used herein shall include the corresponding masculine, feminine or
neuter forms, and the singular form of names and pronouns shall include the
plural and vice-versa.
SECTION 23. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the Commonwealth of Pennsylvania.
SECTION 24. Severability. Any provision of this Agreement that is
prohibited or unenforceable shall be ineffective to the extent of such
prohibition or unenforceability without invalidating the remaining provisions
hereof.
SECTION 25. No Waivers. No failure or delay of any party in
exercising any power or right hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any such right or power, or any
abandonment or discontinuance of steps to enforce such a right or power,
preclude any other or further exercise thereof or the exercise of any other
right or power. The rights and remedies hereunder are cumulative and not
exclusive of any rights or remedies which a party would otherwise have. No
notice or demand in any case shall entitle a party to any other or further
notice or demand in similar or other circumstances.
-32-
<PAGE>
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the date first set forth above.
<TABLE>
<CAPTION>
NEPA VENTURE FUND, L.P. QUANTUM EPITAXIAL DESIGNS, INC.
By: NEPA MANAGEMENT CORPORATION
<S> <C>
By:___________________________________ By:________________________________
Glen R. Brettner, Secretery Thomans L. Hierl, President
Attest_______________________________
, Secretary
Witness:_______________________________ ___________________________________
James C. M. Hwang
Witness:_______________________________ ___________________________________
Thomas L. Hierl
</TABLE>
-33-
<PAGE>
AMENDMENT TO NOTE AND WARRANT PURCHASE AGREEMENT
THIS AMENDMENT TO NOTE AND WARRANT PURCHASE AGREEMENT (this
"Amendment") is hereby made on this 8th day of September, 1995 by and among
QUANTUM EPITAXIAL DESIGNS, INC., a Pennsylvania corporation (the "Company"),
NEPA VENTURE FUND, L.P., a Pennsylvania limited partnership ("NEPA"), JAMES
C.M. HWANG ("Hwang") and THOMAS L. HIERL ("Hierl").
Preliminary Statements
A. Each of the Company, NEPA, Hwang and Hierl are parties to that
certain Note and Warrant Purchase Agreement dated August 30, 1989 (the
"Purchase Agreement").
B. The Company's board of directors and shareholders have approved a
split of the Company's common stock, par value $0.01 per share (the "Common
Stock") on a ten (10) for one (1) basis (the "Stock Split").
C. The Company, NEPA, Hwang and Hierl desire to amend and restate
Section 8.13(e), Section 9.2(e)(v) and Section 9.4 of the Purchase Agreement
to accommodate the Stock Split.
IN CONSIDERATION of the foregoing, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties hereto, intending to be legally bound, hereby agree to the
following:
Section 1. Amendment to Purchase Agreement. The Purchase Agreement is
amended as follows:
(a) Section 8.13(e) of the Purchase Agreement is deleted and
restated in its entirety to be and read as follows:
"(e) except as provided in Section 9.4 and up to 165,890 shares of Common
Stock reserved for issuance to a key marketing executive and other newly
hired key employees at a price of at least $.04649 per share, issue any
equity securities or any options or warrants to acquire equity securities
of "the Corporation, or authorize or adopt any stock option plan or
program;"
(b) Section 9.2(e) of the Purchase Agreement is deleted and
restated in its entirety to be and read as follows:
"(e) The rights of the Lenders under this Section 9.2 shall not apply to
(i) Common Stock issued as a stock dividend or upon any stock split or
other subdivision or combination of shares of Common Stock, (ii) Common
Stock issued upon conversion of Class A Preferred Stock or upon the
exercise of the Warrants, (iii) Class A Preferred Stock issued upon
conversion of the Convertible Notes, (iv) options and shares of Common
Stock issued to key employees as provided in
<PAGE>
Section 9.4, and (v) up to 165,890 shares of Common Stock reserved for
issuance to a key marketing executive and other newly hired key employees
at a price of at least $.04649 per share (the "Excluded Securities")."
(b) Section 9.4 of the Purchase Agreement is deleted and restated
in its entirety to be and read as follows:
"9.4. The Corporation may establish and maintain an employee stock option
plan and/or stock purchase plan with respect to up to 165,890 shares of
Common Stock of the Corporation, which will (i) provide for option grants
and/or stock purchases as the Board of Directors in its sole discretion
shall determine, (ii) provide that the Corporation will have the right,
but not the obligation, to repurchase stock granted pursuant to such stock
option or purchase arrangements in certain circumstances to be specified
by the Board of Directors, (iii) provide for issuance and option exercise
prices of not less than fair market value on the date grant, as determined
by the Board of Directors, (iv) provide for annual proportional vesting
over a five year period from the date of grant, and (v) have such other
terms as shall be approved by the Board of Directors; provided, however,
that in no event shall the Corporation be obligated to repurchase stock
granted pursuant to such stock option or purchase arrangements. Neither
the Corporation nor the Founder shall enter into any shareholder, voting,
proxy, purchase or right of first refusal agreement regarding options or
shares issued or obtained pursuant to such plans without the prior written
consent of NEPA."
Section 2. Ratification. Except as expressly amended by this
Amendment, the Purchase Agreement is hereby ratified and confirmed in all
respects.
IN WITNESS WHEREOF, the parties to this Amendment have executed
and delivered this Amendment as of the date set forth above.
NEPA VENTURE FUND, L.P. QUANTUM EPITAXIAL DESIGNS,
INC.
By: NEPA MANAGEMENT CORPORATION
By:____________________________ By: /s/ Thomas L. Hierl
------------------------------
Print Name:____________________ Thomas L. Hierl, President
Title:_________________________
/s/ Thomas L. Hierl /s/ James C.M. Hwang 9/8/95
- ------------------------------- -------------------------------
Thomas L. Hierl James C.M. Hwang
2
<PAGE>
Section 9.4, and (v) up to 165,890 shares of Common Stock reserved for
issuance to a key marketing executive and other newly hired key employees
at a price of at least $.04649 per share (the "Excluded Securities")."
(b) Section 9.4 of the Purchase Agreement is deleted and restated
in its entirety to be and read as follows:
"9.4. The Corporation may establish and maintain an employee stock option
plan and/or stock purchase plan with respect to up to 165,890 shares of
Common Stock of the Corporation, which will (i) provide for option grants
and/or stock purchases as the Board of Directors in its sole discretion
shall determine, (ii) provide that the Corporation will have the right,
but not the obligation, to repurchase stock granted pursuant to such stock
option or purchase arrangements in certain circumstances to be specified
by the Board of Directors, (iii) provide for issuance and option exercise
prices of not less than fair market value on the date grant, as determined
by the Board of Directors, (iv) provide for annual proportional vesting
over a five year period from the date of grant, and (v) have such other
terms as shall be approved by the Board of Directors; provided, however,
that in no event shall the Corporation be obligated to repurchase stock
granted pursuant to such stock option or purchase arrangements. Neither
the Corporation nor the Founder shall enter into any shareholder, voting,
proxy, purchase or right of first refusal agreement regarding options or
shares issued or obtained pursuant to such plans without the prior written
consent of NEPA."
Section 2. Ratification. Except as expressly amended by this
Amendment, the Purchase Agreement is hereby ratified and confirmed in all
respects.
IN WITNESS WHEREOF, the parties to this Amendment have executed
and delivered this Amendment as of the date set forth above.
NEPA VENTURE FUND, L.P. QUANTUM EPITAXIAL DESIGNS,
INC.
By: NEPA MANAGEMENT CORPORATION
By: /s/ Glen R. Bressner By:
--------------------------- ------------------------------
Thomas L. Hierl, President
Print Name: Glen R. Bressner
-------------------
Title: Vice President
-------------------------
- ------------------------------- ---------------------------------
Thomas L. Hierl James C.M. Hwang
2
<PAGE>
QUANTUM EPITAXIAL DESIGNS, INC.
NOTE PURCHASE AGREEMENT
THIS AGREEMENT is made this 21st day of February, 1997 between QUANTUM
EPITAXIAL DESIGNS, INC., a Pennsylvania corporation located at 119 Technology
Drive, Bethlehem, Pennsylvania 18015 ("Corporation") and AMP INCORPORATED, a
Pennsylvania corporation located at 470 Friendship Road, Harrisburg,
Pennsylvania 17111 ("Lender").
In consideration of the mutual agreements and undertakings set forth in
this Agreement, the parties, intending to be legally bound hereby, agree as
follows:
SECTION 1. Amendment to Articles. Prior to or contemporaneous with
Closing (as defined in Section 4(a)) the Corporation will file with the
Secretary of State of the Commonwealth of Pennsylvania an amendment to its
Articles of Incorporation (the "Amendment"), setting forth, among other things,
the designations, powers, preferences and rights and the qualifications,
limitations and restrictions of the Corporation's Class B Preferred Stock, $.0l
par value (the "Class B Preferred Stock"). A copy of the Amendment is attached
hereto as Exhibit A.
SECTION 2. Issuance of Note. Subject to the terms and conditions of
this Agreement, the Corporation has authorized the issuance and sale to Lender
of a $2,000,000 convertible subordinated note in the form attached hereto as
Exhibit B (the "Note"). The Note, the Class B Preferred Stock and the Common
Stock underlying the Class B Preferred Stock are sometimes hereinafter referred
to collectively as the "Securities", or individually, as a "Security".
SECTION 3. Agreement to Sell and Purchase the Note. At the Closing, the
Corporation is selling to the Lender, and the Lender is purchasing from the
Corporation, upon the terms and conditions hereinafter set forth, the Note. The
aggregate purchase price for the Note is Two Million Dollars ($2,000,000).
SECTION 4. Delivery of Note.
(a) The Closing (the "Closing") hereunder with respect to the
transactions contemplated hereby is taking place by facsimile transmission of
executed copies of the documents contemplated hereby at the offices of Pepper,
Hamilton & Scheetz, Suite 400, 1235 Westlakes Drive, Berwyn, Pennsylvania,
19312, simultaneously with the execution and delivery of this Agreement (the
"Closing Date"), all of which shall be confirmed by overnight delivery of
originally executed copies of such documents.
(b) At the Closing, the Corporation is delivering to Lender
the Note, payable to the order of Lender. Delivery is being made against receipt
by the Corporation by
<PAGE>
wire transfer of immediately available funds to the account of the Corporation
in the full amount of the aggregate purchase price of the Note.
SECTION 5. Representations and Warranties of the Corporation. The
Corporation hereby represents and warrants to the Lender that, as of the date
hereof:
5.1 Organization. The Corporation is a corporation duly
organized, in good standing and validly subsisting under the laws of the
Commonwealth of Pennsylvania and has all requisite corporate power and authority
to own, lease and operate its properties, to carry on its business as presently
conducted and as proposed to be conducted and to carry out the transactions
contemplated hereby. The Corporation is qualified as a foreign corporation and
is in good standing in all such other jurisdictions, if any, in which the
conduct of its business or its ownership, leasing or operation of property
requires such qualification. The Corporation has provided the Lender with true,
correct and complete copies of its Articles of Incorporation (certified by its
Secretary) and its By-laws (certified by its Secretary), in each case as amended
to and as in effect on the date hereof (the "Articles of Incorporation" and the
"By-laws", respectively).
5.2 Capitalization. The authorized capital stock of the
Corporation immediately upon the consummation of the Closing of the transactions
contemplated hereby shall consist of (i) 25,000,000 shares of Common Stock,
$.00l par value per share, of which 1,585,350 shares are validly issued and
outstanding, fully paid and nonassessable, and (ii) 5,420,000 shares of
preferred stock, par value $0.01 per share (the "Preferred Stock") of which (x)
150,000 shares are designated as Class A Preferred Stock, (y) 270,000 shares are
designated as Class B Preferred Stock, and (z) 5,000,000 shares may be
designated from time to time by the Corporation's board. There are no shares of
Preferred Stock issued and outstanding.
Schedule 5.2 attached hereto contains a list immediately prior to Closing of (i)
all record holders of capital stock of the Corporation, including the number of
shares of capital stock of the Corporation held by each such holder, and (ii)
all outstanding warrants, options, agreements, convertible securities or other
commitments pursuant to which the Corporation is or may become obligated to
issue any shares of its capital stock or other securities of the Corporation,
which names all persons entitled to receive such shares or other securities and
the shares of capital stock or other securities required to be issued
thereunder. The number of shares of capital stock (if any) reserved for issuance
in connection with clause (ii) of the immediately preceding sentence is not
subject to adjustment by reason of the issuance of the Note. Except as set forth
in Schedule 5.2 attached hereto, there are, and immediately upon consummation at
the Closing of the transactions contemplated hereby there will be, no preemptive
or similar rights to purchase or otherwise acquire shares of capital stock of
the Corporation pursuant to applicable laws, the Articles of Incorporation or
By-laws or any agreement to which the Corporation is a party, or otherwise,
except as contemplated by this Agreement and that certain Note and Warrant
Purchase Agreement (the "NEPA Agreement") dated August 30, 1989 among the
Corporation, NEPA Venture Fund, L.P. ("NEPA"), James C.M. Hwang ("Hwang") and
Thomas L. Hierl ("Hierl"); and there is no agreement, restriction or encumbrance
(such as a right of first refusal, right of first offer, proxy, voting
agreement, etc.) with respect to the sale or voting of any shares of capital
-2-
<PAGE>
stock of the Corporation (whether outstanding or issuable upon conversion or
exercise of outstanding securities). Except as contemplated by the NEPA
Agreement and by this Agreement, the Corporation has not granted to any of its
shareholders any right to require the Corporation to effect a registration of
shares of the Corporation's capital stock pursuant to the Securities Act of
1933, as amended (the "Securities Act"). All shares of Common Stock and other
securities issued by the Corporation prior to the Closing have been issued in
transactions exempt from registration under the Securities Act. The Corporation
has not violated the Securities Act in connection with the issuance of any
shares of capital stock or other securities of the Corporation prior to the
Closing.
5.3 Organization of Business, Etc. The Corporation was
incorporated under the laws of the Commonwealth of Pennsylvania on December 23,
1988. The Corporation has never had, nor does it presently have, any
subsidiaries, nor has it owned, nor does it presently own, any capital stock or
other equity interest, directly or indirectly, in any corporation, association,
trust, partnership, joint venture or other entity.
5.4 Agreements. Except as listed on Schedule 5.4, the
Corporation is not a party to any written or oral material (a) collective
bargaining agreement with any labor union; (b) contract for the future purchase
of fixed assets or for the future purchase of materials, supplies or equipment;
(c) contract for the employment of any officer, individual employee or other
person on a full-time basis or any material contract with any person on a
consulting basis; (d) bonus, pension, profit-sharing, retirement, stock
purchase, stock option plans, in effect with respect to employees or any of them
or the employees of others; (e) agreement or indenture relating to the borrowing
of money or to the mortgaging, pledging or otherwise placing of a lien on any
assets of the Corporation; (f) guaranty of any obligation for borrowed money or
otherwise; (g) lease or agreement under which the Corporation is lessee of or
holds or operates any property, real or personal, owned by any other party; (h)
lease or agreement under which the Corporation is lessor of or permits any third
party to hold or operate any property, real or personal, owned or controlled by
the Corporation; (i) agreement or other commitment for capital expenditures; (j)
contract, agreement or commitment under which the Corporation is obligated to
pay any broker's fees, finder's fees or any such similar fees, to any third
party; (k) contract, agreement or commitment under which the Corporation has
issued, or may become obligated to issue, any shares of capital stock of the
Corporation, or any warrants, options, convertible securities or other
commitments pursuant to which the Corporation is or may become obligated to
issue any shares of its capital stock, other than as contemplated by this
Agreement; or (1) any other contract, agreement, arrangement or understanding
which is material to the business of the Corporation. For purposes of this
Section 5.4, "material" shall mean those agreements involving obligations in
excess of $250,000 or payments for any one year in excess of $100,000.
5.5 Intellectual Property Rights and Governmental Approval.
Except as set forth in Schedule 5.5 attached hereto:
(a) the Corporation owns or has the right to
use all Intellectual Property Rights material and necessary for the conduct of
its business as presently conducted (collectively, the "Requisite Rights").
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(b) the Corporation has all governmental
approvals, authorizations, consents, licenses and permits material and necessary
to conduct its business as presently conducted.
(c) no royalties or fees are payable by the
Corporation to other persons by reason of the ownership or use of the Requisite
Rights.
(d) to the knowledge of the Corporation, no
product or service manufactured, marketed or sold by the Corporation violates
any license or infringes any Intellectual Property Rights of others.
(e) there is no pending or (to the knowledge
of the Corporation) threatened claim or litigation against the Corporation
contesting the validity of or right to use the Requisite Rights, nor has the
Corporation received any notice that any of the Requisite Rights or the
operation or proposed operation of the Corporation's business conflicts with the
asserted rights of others.
As used herein, the term "Intellectual Property Rights" means all intellectual
property rights, including, without limitation, Proprietary Technology (as
hereinafter defined), patents, patent applications, patent rights, trademarks,
trademark applications, trade names, service marks, service mark applications,
copyrights, know-how, licenses, trade secrets, proprietary processes and
formulae. As used herein, "Proprietary Technology" means all source and object
code, processes, inventions, trade secrets, know-how and other proprietary
rights owned by the Corporation pertaining to any product or service
manufactured, marketed or sold by the Corporation or used, employed or exploited
in the development, license, sale, marketing, distribution or maintenance
thereof, and all documentation describing or relating to the above, including,
without limitation, manuals, memoranda, know-how, notebooks, patents and patent
applications, trademarks and trademark applications, copyrights and copyright
applications, records and disclosures.
5.6. Litigation, Etc. Except as set forth on Schedule 5.6
attached hereto, there are no (i) actions, suits, arbitrations, claims,
investigations or legal or administrative proceedings pending or threatened
against the Corporation, whether at law or in equity, or before or by any
Federal or state governmental department, commission, board, bureau, agency or
instrumentality that, if adversely determined against the Corporation, would
require the Corporation to pay damages in excess of $100,000 or that would
restrict the Corporation's ability to consummate the transactions contemplated
by this Agreement or draw into question the validity of this Agreement; or (ii)
material judgments, decrees, injunctions or orders of any court, governmental
department, commission, agency, instrumentality or arbitrator against the
Corporation.
5.7. No Defaults. Except as described on Schedule 5.7
attached hereto, the Corporation is not in default (a) under the Articles of
Incorporation or By-laws, or any material (as defined in Section 5.4) indenture,
mortgage, lease or contract, agreement or instrument to which the Corporation is
a party or by which it or any of its property is bound or affected or (b)
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with respect to any order, writ, injunction or decree of any court or any
Federal or state, department, commission, board, bureau, agency or
instrumentality. There exists no condition, event or act which constitutes, or
which after notice, lapse of time or both, would constitute, a default under any
of the foregoing by the Corporation or by any other party bound by the
foregoing.
5.8. Tax Matters. All Federal, state and local tax returns
and tax reports required to be filed by the Corporation have been filed with the
appropriate governmental agencies in all jurisdictions in which such returns and
reports are required to be filed and all of the foregoing are true, correct and
complete. All Federal, state and local income, profits, franchise, sales, use,
occupation, property, excise, payroll, withholding and other taxes (including
interest and penalties) required to have been paid or accrued by the Corporation
have been fully paid or are adequately provided for on the Interim Balance Sheet
(as defined in Section 5.20), except for tax liabilities arising in the ordinary
course of business since the date of the Interim Balance Sheet and liabilities
being challenged in good faith by the Corporation as set forth on the Schedule
of Exceptions. No issues have been raised (and are currently pending) by the
Internal Revenue Service or any other taxing authority in connection with any of
the returns and reports referred to above, and no waivers of statutes of
limitations have been given or requested with respect to the Corporation. All
deficiencies asserted or assessments (including interest and penalties) made as
a result of any examination by the Internal Revenue Service or by appropriate
state or local tax authorities of the Federal, state or local income tax, sales
tax or franchise tax returns of or with respect to the Corporation have been
fully paid or are adequately provided for on the Interim Balance Sheet and no
proposed (but unassessed) additional taxes, interest or penalties have been
asserted. The provisions for taxes on the Interim Balance Sheet are sufficient
for the payment of all accrued and unpaid Federal, state or local taxes as of
such date, except for taxes being challenged in good faith by the Corporation as
set forth on the Schedule of Exceptions.
5.9. Disclosure Document. The Corporation has delivered to
the Lender a Confidential Disclosure Memorandum dated September 9, 1996, which
memorandum is derived from the Corporation's draft of Registration Statement on
Form S-1 (the "Disclosure Document"). In addition, the Corporation has furnished
to the Lender information listed on Schedule 5.9 attached hereto as a supplement
to the Disclosure Document (the "Supplemental Information"). The descriptions of
the business, operations, properties and assets of the Corporation contained in
the Disclosure Document, as supplemented by the Supplemental Information, are
true and correct in all material respects as of the date thereof, and the
Disclosure Document, as supplemented by the Supplemental Information, does not
omit to state a material fact necessary to make such descriptions not misleading
under the circumstances.
5.10. Compliance. The Corporation (a) has complied, in all
material respects, with all federal, state and local laws, ordinances,
regulations and orders applicable to it, its business or the ownership of its
assets, and (b) has all federal, state and local and governmental licenses and
permits material to and necessary in the conduct of its business as presently
being conducted; such licenses and permits are in full force and effect, and no
violations have been recorded in respect of any such licenses or permits and no
proceeding is pending or threatened to revoke or limit any thereof.
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5.11. Insurance. The Corporation has such policies of
liability, theft, life, fire, workmen's compensation, health and other forms of
insurance as are adequate against risks usually insured against by comparable
persons, businesses and properties. Such policies are in full force and effect
and all premiums with respect to such policies are currently paid.
5.12. Authorization of Agreement. The execution, delivery and
performance by the Corporation of this Agreement and the Note have been duly
authorized by all requisite corporate action by the Corporation, and each
constitutes the valid and binding obligation of the Corporation, enforceable in
accordance with its terms, subject as to enforcement of remedies to applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights generally and, with respect to the remedy of
specific performance, equitable doctrines applicable thereto. The execution,
delivery and performance of this Agreement and the Note and consummation of the
transactions contemplated hereby and thereby and compliance with the provisions
hereof and thereof by the Corporation and the issuance, sale and delivery of the
Securities by the Corporation, will not (a) violate any provision of law,
statute, rule or regulation, or any ruling, writ, injunction, order, judgment or
decree of any court, administrative agency or other governmental body applicable
to the Corporation or any of its properties or assets or (b) conflict with or
result in any breach of any of the terms, conditions or provisions of, or
constitute (with due notice or lapse of time, or both) a default (or give rise
to any right of termination, cancellation or acceleration) under, or result in
the creation of any lien, security interest, charge or encumbrance upon any of
the properties or assets of the Corporation under the Articles of Incorporation
or By-laws of the Corporation, or any note, indenture, mortgage, lease agreement
or other contract, agreement or instrument to which the Corporation is a party
or by which it or any of its property is bound or affected.
5.13. Authorization of Note. The issuance, sale and delivery
of the Note has been duly authorized by all requisite corporate action of the
Corporation, and when issued, sold and delivered in accordance with this
Agreement will be validly issued and outstanding, and not subject to any
unwaived preemptive or any other similar rights of the shareholders of the
Corporation or others. The reservation, issuance, sale and delivery of the Class
B Preferred Stock and of the Common Stock issuable upon conversion of the Class
B Preferred Stock (collectively, the "Reserved Shares") have been duly
authorized by all requisite corporate action by the Corporation, and the
Reserved Shares have been duly reserved by the Corporation. Upon the issuance
and delivery of the Reserved Shares in accordance with the terms of this
Agreement, the Note, or the Amendment, as applicable, such Reserved Shares will
be validly issued and outstanding, fully paid and nonassessable, and not subject
to any unwaived preemptive or any similar rights of shareholders of the
Corporation or others.
5.14. Related Transactions. Except as set forth on Schedule
5.14 attached hereto, no Corporation director, officer or "affiliate" (as
defined in the rules and regulations promulgated under the Securities Act) of
any such person, is presently, directly or indirectly, through his or its
affiliation with any other person or entity, a party to any transaction with the
Corporation providing for the furnishing of services by or to, or rental or sale
of real or personal property from or to, or otherwise requiring cash payments to
or by any such person involving amounts in
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excess of $25,000 per person per year, except for normal employment or
consulting arrangements in the ordinary course of the Corporation's business.
For purposes of this Agreement, a transaction of the type described in this
Section 5.14 is sometimes herein referred to as a "Related Transaction".
5.15. Use of Proceeds. The net proceeds received by the
Corporation from the sale of the Note shall be used by the Corporation for
working capital and other general corporate purposes.
5.16. Offering Exemption. The offering and sale of the
Securities are each exempt from registration under the Securities Act pursuant
to Section 4(2) thereof.
5.17. No Governmental Consent or Approval Required. Except
for the filing of any notice in connection with the Closing that may be required
under applicable federal and/or state securities laws (which, if required, shall
be filed on a timely basis as may be so required), no consent, approval or
authorization of, or declaration to, or filing with, any governmental or
regulatory authority is required for the valid authorization, execution,
delivery and performance by the Corporation of this Agreement or for the valid
authorization, issuance, sale and delivery of the Note.
5.18. Brokers. Except as set forth in Schedule 5.18 attached
hereto, neither the Corporation nor any of the Corporation's officers,
directors, employees or shareholders has employed or is liable for fees to any
broker or finder in connection with the transactions contemplated by this
Agreement.
5.19. Non-Disclosure, Proprietary Information and Patent and
Invention Assignment Agreements. Each current employee of the Corporation who
has or is proposed to have access to confidential and proprietary information of
the Corporation is a signatory to, and is bound by, an agreement with the
Corporation relating to non-disclosure, proprietary information and patent and
invention assignment.
5.20. Financial Information.
(a) The Corporation has previously delivered
to the Lender the draft unaudited balance sheet of the Corporation as at
December 31, 1996 (the "Interim Balance Sheet") and related unaudited statements
of operations for the fiscal month then ended, prepared by the Corporation
(collectively, the "Interim Financial Statements"). The Interim Financial
Statements (i) fairly present in all material respects the financial position of
the Corporation as at the respective dates indicated and the results of
operations of the Corporation for the respective periods indicated and (ii)
unless otherwise stated therein, have been prepared in accordance with generally
accepted accounting principles consistently applied, subject to routine year-end
adjustments.
(b) The Corporation has previously delivered
to the Lender the audited balance sheets of the Corporation as of December 31,
1994 and 1995 (together, the "Balance
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Sheets"), and the related statements of operations, shareholders' equity and
changes in cash flows for the respective periods indicated, prepared by the
Corporation and reported on by Arthur Andersen LLP (collectively, the "Financial
Statements"). The Financial Statements (i) fairly present, in all material
respects, the financial position of the Corporation as of the respective dates
indicated and the results of the Corporation's operations and cash flows of the
Corporation for the respective periods indicated and (ii) unless otherwise
stated therein, have been prepared in conformity with generally accepted
accounting principles consistently applied.
(c) Except for the Corporation's purchase of
raw materials in the ordinary course of business and as otherwise disclosed on
Schedule 5.20(c) attached hereto, since the date of the Interim Financial
Statements, the Corporation has not incurred any obligation in excess of
$250,000 or that requires payments for any one year in excess of $100,000.
5.21. Encumbrances. Except as disclosed on the Balance Sheet,
the Corporation owns outright all the property and assets, real, personal or
mixed, tangible or intangible, reflected as assets in the Balance Sheet (other
than assets disposed of in the ordinary course of business), including, but not
limited to, the Requisite Rights, subject to no mortgages, liens, security
interests, pledges, charges or other encumbrances of any kind, except as
reflected in the Financial Statements.
5.22. Environmental Matters.
(a) During the period that the Corporation
has leased or owned its respective properties or owned or operated any
facilities, there have been no disposals, releases or threatened releases of
Hazardous Materials (as defined below) on, from or under such properties or
facilities, except for disposals, releases or threatened releases of Hazardous
Materials that are incidental to the Corporation's operation of its business or
any of its respective properties and that are in compliance with all applicable
Environmental Laws (as defined in Section 5.22(b) below). The Corporation has no
knowledge of any disposals, releases or threatened releases of Hazardous
Materials on, from or under any of such properties or facilities, which may have
occurred prior to the Corporation having taken possession of any of such
properties or facilities. Except for those materials used in connection with the
Corporation's manufacturing processes and any materials used in connection with
activities performed in conjunction with, in support of, or incidental to the
manufacturing process in compliance with all applicable Environmental Laws
(including, but not limited to, maintenance and cleaning supplies, office
products and the like), no Hazardous Materials are stored on or under such
properties or facilities, and no Hazardous Materials have been removed from such
properties or facilities during the time that the Corporation has owned or
leased its properties. To the best of the Corporation's knowledge, there are no
and have never been any, underground storage tanks or surface impoundments
located on such properties or facilities. For the purposes of this Agreement,
the terms "disposal," "release," and "threatened release" shall have the
definitions assigned thereto by the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, 42 U.S.C. ss. 9601 et seq., as amended
("CERCLA"). For the purposes of this Agreement "Hazardous Materials" shall mean
any hazardous or toxic substances, material or waste which is, or becomes prior
to the Closing regulated under, or defined as a "hazardous
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substance," "pollutant," "contaminant," "toxic chemical," "hazardous materials,"
"toxic substance" or "hazardous chemical" under (1) CERCLA; (2) any similar
federal, state or local law; or (3) regulations promulgated under any of the
above laws or statutes.
(b) The Corporation has not been informed by
any federal, state or local agency that it is in violation of any federal, state
or local law, ordinance, regulation or order relating to industrial hygiene or
to the environmental conditions on, above, under or about such properties or
facilities, including, but not limited to , air, soil, ground water or surface
water condition (collectively, the "Environmental Laws"), nor is the Corporation
subject to any outstanding violations, orders or enforcement actions of any kind
by any federal, state or local agency. During the time that the Corporation has
owned or leased its properties and facilities, neither the Corporation nor, to
the best of the Corporation's knowledge, any third party, has used, generated,
manufactured or stored on, under or about such properties or facilities or
transported to or from such properties or facilities any Hazardous Materials,
except pursuant to the requirements of applicable Environmental Laws; provided,
however, that the Corporation does not make representations or warranties with
respect to the acts or omissions of third parties after such parties have left
the Corporation's premises.
(c) Except as to the claims identified on
Schedule 5.6 attached hereto, during the time that the Corporation has owned or
leased its properties and facilities, there has been no litigation brought or
threatened against the Corporation by, or any settlement reached by the
Corporation with, any party or parties alleging the presence, disposal, release
or threatened release of any Hazardous Materials on, from or under any of such
properties or facilities.
SECTION 6. Representations and Warranties of the Lender.
(a) Lender represents and warrants to the
Corporation that it is acquiring the Securities for investment and not with a
view to the distribution thereof within the meaning of the Securities Act.
(b) Lender understands that none of the
securities which are being purchased pursuant to this Agreement have been
registered under the Securities Act, and such securities cannot be sold unless
they are subsequently registered under the Securities Act or unless an exemption
from such registration is available.
(c) Lender further understands that Rule 144
(the provisions of which are known to Lender) promulgated under the Securities
Act is not currently available as a basis for exemption from registration of any
of the securities purchased by such Lender and, except as otherwise expressly
provided in this Agreement, the Corporation is under no obligation to take any
actions which may be necessary in order to render the provisions of Rule 144
available as a basis for such exemption from registration.
(d) Lender represents and warrants that it
has not engaged any broker or finder in connection with the transactions
contemplated by this Agreement.
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(e) Lender represents and warrants that it
has been duly formed under the Pennsylvania law, it is validly subsisting as a
corporation as of the date of this Agreement and the execution, delivery and
performance of this Agreement has been authorized by all requisite corporate
action. Lender's principal place of business is located in Pennsylvania.
(f) Lender is (i) an "institutional investor"
as that term is defined in Section 102 of the Pennsylvania Securities Act of
1972, as amended, and (ii) a corporation not formed for the specific purpose of
acquiring the Securities with total assets in excess of $5,000,000.
(g) The Lender has no present arrangement,
understanding or agreements for transferring or disposing of any of the
Securities.
(h) The Lender is familiar with the
Corporation's business, financial condition, affairs and prospects and also is
aware that the Securities represent a very speculative investment with the
possibility of complete loss of all funds the Lender has invested.
(i) Before executing this Agreement, Lender
was furnished with or given access to all information with respect to the
Corporation, which was requested. The Lender or their representatives were given
the opportunity to ask the Corporation's officers any and all questions which
such persons had, and confirm that such persons received satisfactory answers
relating to the Corporation's business, financial condition, affairs and
prospects.
(j) Based on the foregoing representations
and warranties of the Lender, the representations and warranties of the
Corporation and the information and schedules provided by the Corporation to the
Lender in connection with the execution of this Agreement, Lender confirms that
it possesses sufficient knowledge and experience in financial and business
matters generally, and sufficient familiarity with the Corporation in
particular, to evaluate the risks of investment in the Securities and to execute
and deliver this Agreement. Lender also confirms that it is able to bear the
economic risk inherent in its investment and understands that there is and will
be no private or public market for the Securities in the event Lender needs to
liquidate its investment.
SECTION 7. Conditions Precedent to Closing by the Lender on the Closing
Date. The obligation of the Lender to purchase and pay for the Note on the
Closing Date is subject to the following conditions precedent:
7.1. Corporate Proceedings; Consents, Etc. All corporate and
other proceedings to be taken and all waivers and consents to be obtained in
connection with the transactions contemplated by this Agreement shall have been
taken or obtained. All documents incident thereto and all legal matters incident
to this Agreement and the Closing shall be reasonably satisfactory in form and
substance to the Lender and its counsel, who shall have received all such
originals or certified or other copies of such documents either may reasonably
request.
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7.2. Representations and Warranties. Each of the
Corporation's representations and warranties contained in Section 5 hereof shall
be true and correct in all material respects as of the Closing Date.
7.3. Opinion of Counsel. At the Closing, the Lender shall
have received from Pepper, Hamilton & Scheetz, counsel for the Corporation, its
opinion addressed to the Lender, dated the date of the Closing, in the form of
Exhibit C attached hereto.
7.4. Amendment. The Board of Directors and shareholders of
the Corporation shall have duly approved the Amendment and the Amendment shall
have been filed with and accepted by the Secretary of State of the Commonwealth
of Pennsylvania and become effective, and evidence of the foregoing in form
satisfactory to the Lender shall have been delivered to the Lender.
7.5. Voting Agreement. At the Closing, the Lender shall have
received from the Corporation and its shareholders a duly executed Voting
Agreement in the form attached hereto as Exhibit D.
7.6. Blue Sky Matters. All consents, approvals,
qualifications and/or registrations required to be obtained or effected under
any applicable state securities or "blue sky" laws in connection with the
issuance, sale and delivery of the Note shall have been obtained or effected
(except for the filing of any notice subsequent to the Closing which may be
required under applicable state securities laws which, if required, shall be
filed on a timely basis as may be so required) and copies of the same delivered
to the Lender.
7.7. Secretary's Certificate. The Lender shall have received
a certificate, dated the date of the Closing, of the Secretary or an Assistant
Secretary of the Corporation to the effect (i) that attached thereto is a true
and complete copy of the Articles of Incorporation and the Bylaws of the
Corporation, in each case as in effect on the date thereof, (ii) that attached
thereto is a true and complete copy of resolutions adopted by the Board of
Directors of the Corporation authorizing the execution, delivery and performance
of this Agreement and consummation of the transactions contemplated hereby and
thereby, and authorizing the issuance and delivery of the Note, (iii) that the
Corporation is validly subsisting under the laws of the Commonwealth of
Pennsylvania and is duly qualified as a foreign corporation in any other state
in which the conduct of its business or its ownership or leasing of property
requires qualification of the Corporation, and has paid all required franchise
taxes in such states, (iv) that all requested consents have been obtained, (v)
that all conditions set forth in this Section 7 have been fulfilled, and (vi) of
such other matters as may reasonably be requested by the Lender or its counsel.
SECTION 8. Management of the Corporation.
8.1. Access to Records. The Corporation shall afford to the
Lender and its employees within the Lender's "Corporate Development Department"
or any successor organization thereto, access, on a reasonable basis during
normal business hours, to the books, records and properties of the Corporation
and to the officers and employees of the Corporation
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for any reasonable purpose relating to the Lender's evaluation and monitoring of
its investment in the Corporation. Except for the Permitted Recipients (as
defined below), the Lender shall not disclose to, or, except to the extent
strictly necessary to evaluate and monitor its investment in the Corporation,
the Lender shall not use for the Lender's direct or indirect benefit or for the
direct or indirect benefit of, any other person, entity or association
including, without limitation M/A COM, Inc., any other person, entity or
association controlling, controlled by, or under common control with, the
Lender, and any of their respective directors, officers, employees, or
contractors, any information that the Corporation has not authorized to be made
readily available to the general public or that is not otherwise available from
other sources that did not obtain such information as a direct or indirect
result of the Lender's breach of its obligations under this Section 8.1
(collectively, "Confidential Information"). The Lender shall limit dissemination
of the Confidential Information to the Lender's directors, senior executive
officers, employees within the Lender's "Corporate Development Department" or
any successor organization thereto, employees within the Lender's "Corporate
Controller's Office," or any successor organization thereto, and outside
financial and legal advisors that have a need to know such Confidential
Information for the performance of their respective duties as such in connection
with the Lender's evaluation and monitoring of its investment in the Corporation
(collectively, the "Permitted Recipients"). Additionally, the Lender shall cause
the Permitted Recipients to maintain the confidentiality of, and not to use, any
Confidential Information to the same extent required of the Lender under this
Section 8.1. Nothing contained in this Section 8.1 shall restrict the Lender's
or any of its directors,' officers,' employees' or advisors' ability to make
disclosures that are compelled by any requirement of law or legal process;
provided, that the Lender shall promptly notify the Corporation thereof and
shall cooperate with the Corporation to obtain a protective order or other
similar determination with respect to the Confidential Information that is so
required to be disclosed.
8.2. Financial Reports. The Corporation agrees to furnish
the Lender with the following:
8.2.1. Within 45 days after the end of each
quarter, an unaudited financial report of the Corporation, which report shall
include the following:
(a) a profit and loss statement for such quarter
which statement shall be prepared in accordance with generally accepted
accounting principles consistently applied, subject to routine year-end
adjustments; and
(b) a balance sheet as of the last day of such
quarter, which balance sheet shall be prepared in accordance with generally
accepted accounting principles consistently applied, subject to routine year-end
adjustments;
8.2.2. Within 90 days after the end of each fiscal
year of the corporation, financial statements of the Corporation which shall
include a profit and loss statement for such fiscal year and a balance sheet as
of the last day thereof, each prepared in accordance with generally accepted
accounting principles consistently applied, and accompanied by the unqualified
audit report of an independent certified public accounting firm.
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8.2.3. If for any period the Corporation shall have
any subsidiary or subsidiaries whose accounts are consolidated with those of the
Corporation, then in respect of such period the financial statements delivered
shall be the consolidated and, where reasonably appropriate, unaudited
consolidating financial statements of the Corporation and all such consolidated
subsidiaries.
8.2.4. Promptly upon becoming available:
(a) except to the extent included in materials
furnished to the Lender as shareholders, copies of all financial statements,
reports, press releases, notices, proxy statements and other documents sent by
the Corporation to its stockholders or released to the public and copies of all
regular and periodic reports, if any, filed by the Corporation with the
Securities and Exchange Commission (the "Commission") or any securities
exchange, and
(b) any other financial information available to
management of the Corporation as the Lender shall have reasonably requested on a
timely basis.
8.3. Existence; Maintenance of Property. The Corporation
shall do or cause to be done all things necessary to maintain, preserve and keep
in full force and effect its corporate existence and all rights, licenses,
permits and franchises necessary to the proper conduct of its business and the
ownership, leasing or operation of its properties. The Corporation shall
maintain and operate its business and properties in accordance with all
applicable laws and regulations and take all reasonable action which may be
required to obtain, preserve, renew and extend all licenses, permits,
authorizations, trade names, trademarks, copyrights and patents which may be
necessary for the continuance of the operation of any such property by it. The
Corporation shall at all times maintain and preserve all property necessary in
the conduct of its business and keep the same in good repair, working order and
condition, and from time to time make, or cause to be made, all needful and
proper repairs, renewals, replacements, betterments and improvements thereto so
that the business carried on in connection therewith may properly and
advantageously be conducted at all times.
8.4. Property and Liability Insurance. The Corporation shall
maintain adequate insurance, by financially sound and reputable insurers, on its
properties of a character customarily insured by companies engaged in the same
or a similar business against liability, loss or damage resulting from hazards,
risks and other liabilities, including without limitation extended coverage of
the kind customarily insured against by such companies and public liability
insurance against claims for personal injury, death or property damage occurring
upon, in, about or in connection with the use of any of its properties, and
maintain such other insurance as may be required by law or other agreements to
which the Corporation is or shall become a party.
8.5. Payment of Debts, Taxes, Etc. The Corporation shall pay
all indebtedness and obligations promptly and in accordance with normal terms
and pay and discharge promptly all taxes, assessments and governmental charges
or liens imposed upon it or upon its income or receipts or in respect of any of
its property, before the same shall become in default, as well as all
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lawful claims which, if unpaid, might result in the creation of a lien or charge
upon such properties or any part thereof; provided, however, that the
Corporation shall not be required to pay and discharge or to cause to be paid
and discharged any such indebtedness, obligation or tax so long as the validity
or amount thereof shall be contested in good faith and the Corporation shall set
aside on its books such reserves as are required by generally accepted
accounting principles with respect to any such indebtedness, obligation or tax.
8.6. Litigation and Other Notices. The Corporation shall
deliver to the Lender promptly following the occurrence thereof (but in any
event within 10 days) written notice and a description of and management's
proposed response to the following:
(i) all events of default or any event that would become an event of
default upon notice or lapse of time or both under any of the terms or
provisions of any material (as defined in Section 5.4) note, agreement or
contract, including without limitation this Agreement;
(ii) levy of an attachment, execution or other process against any of
the property or assets, real or personal, of the Corporation or any of its
subsidiaries that individually or in the aggregate have a value in excess of
$100,000;
(iii) the filing or commencement of any action, suit or proceeding
against the Corporation by or before any court or any federal, state, municipal
or other governmental department, commission, instrumentality or agency that, if
adversely determined against the Corporation, would require the Corporation to
pay damages in excess of $100,000; and
(iv) any matter of non-general effect which has resulted in, or which
may result in, a material adverse change in the financial condition or
operations of the Corporation that would, if the Corporation were an issuer of
any equity securities registered under the Securities Exchange Act of 1934, as
amended, require the Corporation to disclose the occurrence of such matter under
the federal securities laws.
8.7. Non-Disclosure and Patent and Invention Assignment
Agreements. The Corporation shall cause each person who becomes a key consultant
or employee of the Corporation or who shall have or be proposed to have access
to confidential or proprietary information of the Corporation, to execute an
agreement relating to matters of non-disclosure, proprietary information and
patent assignment in such form as is satisfactory to the Board of Directors of
the Corporation. The Corporation will take all reasonable actions to protect its
proprietary information, including without limitation the filing of copyright
and patent applications when appropriate.
8.8. System of Accounting. The Corporation shall maintain a
system of accounting established and administered in accordance with generally
accepted accounting principles, and will set aside on its books and cause each
of its subsidiaries to set aside on its books all such proper reserves as shall
be required by generally accepted accounting principles.
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8.9. Alteration of Class B Preferred Stock. The Corporation
shall not, directly or indirectly, without the prior approval of the Lender in
any manner alter or change the designations, powers, preferences or rights, or
the qualifications, limitations or restrictions of the Class B Preferred Stock.
SECTION 9. Additional Agreements.
9.1. Right of First Refusal.
(a) Except in the case of Excluded
Securities (as hereafter defined), the Corporation shall not issue, sell or
exchange, agree to issue, sell or exchange, or reserve or set aside for
issuance, sale or exchange, any (i) shares of Common Stock, (ii) any other
equity security of the Corporation, (iii) any debt security of the Corporation
which by its terms is convertible into or exchangeable for any equity security
of the Corporation, (iv) any security of the Corporation that is a combination
of debt and equity, or (v) any option, warrant or other right to subscribe for,
purchase or otherwise acquire any equity security or any such debt security of
the Corporation, unless in each case the Corporation shall have first offered
(the "Offer") to sell to the Lender its Proportionate Percentage of such
securities proposed to be sold by the Corporation (the "Offered Securities"), at
a price and on such other terms as specified in the Offer, which Offer by its
terms shall remain open and irrevocable for a period of 30 days from the date
notice is given by the Corporation to the Lender.
(b) Notice of a Lender's intention to
accept, in whole or in part, an Offer shall be evidenced by a writing signed by
such Lender and delivered to the Corporation prior to the end of the 30-day
period of such Offer, setting forth such portion of the Offered Securities as
such Lender elects to purchase (the "Notice of Acceptance"), provided, however
that such Lender shall have no obligation to make such purchase if no sale is
ultimately made of at least 90% (or at least the minimum required number of
shares in a predesignated minimum/maximum private placement) of the Offered
Securities.
(c) The Corporation shall have 90 days from
the expiration of the foregoing 30-day period, to sell all or any part of such
Offered Securities as to which a Notice of Acceptance has not been given by such
Lender (the "Refused Securities"), but only upon terms and conditions in all
respects, including, without limitation, unit price and interest rates, which
are no more favorable to the purchaser or less favorable to the Corporation than
those set forth in the Offer. Upon the closing of the sale of the Refused
Securities, the Lender shall purchase from the Corporation, and the Corporation
shall sell to the Lender, the Offered Securities in respect of which Notice of
Acceptance was delivered to the Corporation by the Lender, at the terms
specified in the Offer. The purchase by the Lender of any Offered Securities is
subject in all cases to the preparation, execution and delivery by the
Corporation and the Lender of a purchase agreement containing the provisions set
forth in the Offer and Notice of Acceptance, and no less favorable to such
Lender than the purchase agreement executed by the purchasers of the Refused
Securities.
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(d) In each case, any Offered Securities not
purchased by the Lender or other purchasers in accordance with Section 9.1(c)
may not be sold or otherwise disposed of until they are again offered to the
Lender under the procedures specified in Sections 9.2(a), (b), and (c).
(e) The rights of the Lender under this
Section 9.1 shall not apply to (i) Common Stock issued as a stock dividend or
upon any stock split or other subdivision or combination of shares of Common
Stock, (ii) Common Stock issued upon conversion of Class A Preferred Stock,
Class B Preferred Stock or upon exercise of the warrants identified on Schedule
5.2 attached hereto, (iii) Common Stock issued pursuant to any merger or
consolidation, or to any acquisition of stock or other property of any person,
(iv) Class A Preferred Stock issued upon conversion of the convertible
subordinated notes issued to each of NEPA and Hwang pursuant to the NEPA
Agreement, (v) Class B Preferred Stock issued upon conversion of the Note, and
(vi) options and shares of Common Stock issued to employees, directors and/or
consultants of the Corporation pursuant to stock option or stock purchase plans
established and approved by the Corporation's board for the general benefit of
persons constituting employees, directors or consultants of the Corporation
(collectively, the "Excluded Securities").
(f) Notwithstanding the foregoing provisions
of this Section 9.1, the rights of the Lender and the obligations of the
Corporation under this Section 9.1 shall be inapplicable to the consummation of
an offering and sale of securities of the Corporation as part of a public
offering registered under the Securities Act, and the provisions of this Section
9.1 shall terminate upon the consummation of such offering.
(g) "Proportionate Percentage" shall mean as
to the Lender, that percentage figure which expresses the ratio which (x) the
number of shares of outstanding Common Stock then owned by such Lender bears to
(y) the aggregate number of shares of outstanding Common Stock then owned by all
shareholders of the Corporation. For purposes solely of the computation required
under clauses (x) and (y) above, the Note and any outstanding Class B Preferred
Stock shall be treated as having been converted into shares of Common Stock at
the rate which such securities are convertible into shares of Common Stock in
effect at the time of delivery by the Corporation of the notice of the Offer
contemplated by Section 9.1(a), and all outstanding convertible notes and
convertible stock held by other parties shall likewise be deemed converted, and
all outstanding warrants and options held by other parties shall likewise be
deemed exercised.
9.2. Filing of Reports Under the Exchange Act. Subsequent to
a registered public offering of the Corporation's Common Stock, the Corporation
shall comply with public information reporting requirements of the Commission as
a condition to the availability of an exemption from the Securities Act under
Rule 144 (as amended from time to time or successor rule thereto) for the sale
of Common Stock by the Lender, and the Corporation shall cooperate with the
Lender in supplying such information as may be necessary for the Lender to
complete and file any information reporting forms presently or hereafter
required by the Commission as a condition to the availability of an exemption
from the Securities Act under Rule 144 (as amended from time to time, or
successor rule thereto), for the sale of Common Stock by the Lender.
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SECTION 10. Transfer of Securities.
10.1. Restriction on Transfer. The Restricted Securities,
any shares of capital stock received in respect thereof, whether by reason of a
stock split or share reclassification thereof, a stock dividend thereon or
otherwise, shall not be transferable except upon compliance with the provisions
of the Securities Act in respect of the transfer thereof.
10.2. Definitions. As used in this Section 10, the following
terms shall have the following respective meanings:
"Person" shall mean and include an individual, a corporation, a
partnership, a trust, an unincorporated organization and a government or any
department, agency or political subdivision thereof.
"Restricted Securities" shall mean the Note, Class B Preferred Stock
obtained upon conversion of the Note, Common Stock obtained upon conversion of
Class B Preferred Stock, any securities purchased by a Lender pursuant to
Section 9.1, and any securities received in respect of any of the foregoing, in
each case which have not been sold to the public (a) pursuant to registration
under the Securities Act or (b) subsequent to the Corporation's initial public
offering of securities registered under the Securities Act, pursuant to Rule 144
(or similar or successor rule) promulgated under the Securities Act.
"Restricted Shares" shall mean the shares of Common Stock constituting
Restricted Securities.
"Transfer" shall include any disposition of any shares of Restricted
Securities or of any interest therein which would constitute a sale thereof
within the meaning of the Securities Act.
10.3. Restrictive Legend. Each certificate for the
Restricted Securities and any securities received in respect thereof, whether by
reason of a stock split or share reclassification thereof, a stock dividend
thereon or otherwise and each certificate for any such securities issued to
subsequent transferees of any such certificate shall (unless otherwise permitted
by the provisions of Sections 10.4 or 10.11) be stamped or otherwise imprinted
with legends in substantially the following form:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED. THESE SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN
THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID
ACT. ADDITIONALLY, THE TRANSFER OF THESE SECURITIES IS SUBJECT TO THE
CONDITIONS SPECIFIED IN SECTION 10 OF THE NOTE PURCHASE AGREEMENT DATED
FEBRUARY 21, 1997, BETWEEN QUANTUM EPITAXIAL DESIGNS, INC. AND AMP
INCORPORATED.
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10.4. Notice of Transfer. The holder of any Restricted
Securities, by acceptance thereof agrees, prior to any transfer of any
Restricted Securities, to give written notice to the Corporation of such
holder's intention to effect such transfer and to comply in all other respects
with the provisions of this Section 10.4. Each such notice shall describe the
manner and circumstances of the proposed transfer and shall be accompanied by
(a) the written opinion, addressed to the Corporation, of counsel for the holder
of such Restricted Securities, as to whether in the opinion of such counsel
(which counsel and opinion shall be reasonably satisfactory to the Corporation)
such proposed transfer involves a transaction requiring registration of such
Restricted Securities under the Securities Act, and (b) in the case of
Restricted Shares, if in the opinion of such counsel such registration is
required, a written request addressed to the Corporation by the holder of
Restricted Securities, describing in detail the proposed method of disposition
and requesting the Corporation to effect the registration of such Restricted
Shares pursuant to the terms and provisions of Sections 10.5, 10.6 or 10.7 as
the case may be. If in such opinion of counsel the proposed transfer of
Restricted Securities may be effected without registration under the Securities
Act, the holder of Restricted Securities shall thereupon be entitled to transfer
Restricted Securities in accordance with the terms of the notice delivered by it
to the Corporation. Each certificate or other instrument evidencing the
securities issued upon the transfer of any Restricted Securities (and each
certificate or other instrument evidencing any untransferred balance of such
securities) shall bear the legend set forth in Section 10.3 unless (a) in such
opinion of counsel registration of future transfer is not required by the
applicable provisions of the Securities Act and such securities may immediately
be sold by the holder without taking any other actions in order to comply with
an applicable exemption from such registration requirements, or (b) the
Corporation shall have waived the requirement of such legend; provided, however,
that such legend shall not be required (a) on any certificate or other
instrument evidencing the securities issued upon such transfer in the event such
transfer shall be made in compliance with the requirements of Rule 144 (as
amended from time to time) promulgated under the Securities Act (or successor
rule thereto which would allow the purchaser to rely on the exemption provided
by Section 4(l) of the Securities Act) or (b) on any certificate or other
instrument which is immediately resalable (whether or not such resale is
proposed) under Rule 144 (k) or successor thereto. The holder of Restricted
Securities shall not transfer such Restricted Securities until such opinion of
counsel has been given to and accepted by the Corporation (unless waived by the
Corporation or unless such opinion is not required in accordance with the
provisions of this Section 10.4) or until registration of the Restricted Shares
involved in the above-mentioned request has become effective under the
Securities Act
10.5. Required Registration. If at any time subsequent to
180 days after the initial public offering of the Corporation the Corporation
shall be requested by Lender to effect the registration under the Securities Act
of Restricted Shares, the Corporation shall promptly give written notice of such
proposed registration to all holders of outstanding Restricted Securities, and
thereupon the Corporation shall promptly use its best efforts as expeditiously
as practicable to effect the registration under the Securities Act of the
Restricted Shares that the Corporation has been requested to register for
disposition described in the request of said holder or holders of Restricted
Securities; provided, however, that the Corporation shall have the right to
delay such efforts for a period not to exceed six (6) months if the Board of
Directors of the Corporation determines that such registration and/or sale could
interfere with the business plans of the
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Corporation and provided, further, however, that the Corporation shall not be
obligated to effect any registration under the Securities Act, except in
accordance with the following provisions:
(a) The Corporation shall not be obligated
to file and cause to become effective more than one registration statement in
which Restricted Shares are registered under the Securities Act pursuant to this
Section 10.5 and effectively sold thereunder.
(b) Anything contained herein to the
contrary notwithstanding, with respect to each registration requested pursuant
to this Section 10.5, the Corporation may include in such registration any
authorized but unissued shares of Common Stock for sale by the Corporation or
any issued and outstanding shares of Common Stock for sale by others; provided,
however, that if the number of shares of Common Stock so included pursuant to
this clause (b) exceeds the number of Restricted Shares registered by the holder
or holders of outstanding Restricted Securities requesting such registration,
then such registration shall be deemed to be a registration in accordance with
and pursuant to Section 10.6 and not this Section 10.5; provided further,
however, that the inclusion of such previously authorized but unissued shares by
the Corporation or issued and outstanding shares of Common Stock by others in
such registration shall not prevent the holder or holders of outstanding
Restricted Securities requesting such registration from registering the entire
number of Restricted Shares requested by them and, in the event the registration
is, in whole or in part, an underwritten public offering and the managing
underwriter determines and advises in writing that the inclusion of all
Restricted Shares proposed to be included in such registration and such
previously authorized but unissued shares of Common Stock by the Corporation
and/or issued and outstanding shares of Common Stock by persons other than the
holders of Restricted Securities proposed to be included in such registration
would interfere with the successful marketing (including pricing) of such
securities, then the number of Restricted Shares and such other previously
authorized but unissued shares of Common Stock proposed to be included by the
Corporation and issued and outstanding shares of Common Stock proposed to be
included by persons other than the holders of Restricted Securities shall be
reduced, first, pro rata among the Corporation and the holders of shares of
Common Stock other than the holders of Restricted Securities, based upon the
number of shares requested by holders thereof to be registered in such offering,
and, thereafter, if necessary, pro rata among the holders of Restricted
Securities, based upon the number of Restricted Securities then owned by the
holders thereof.
10.6. Incidental Registration. If the Corporation at any
time proposes for any reason to register any of its securities under the
Securities Act subsequent to its initial public offering (other than pursuant to
a registration statement on Form S-8, S-4 or similar or successor form
(collectively, "Excluded Forms")), it shall each such time promptly give written
notice to all holders of outstanding Restricted Securities of its intention so
to do, and, upon the written request, given within 30 days after receipt of any
such notice, of the holder of any such Restricted Securities to register any
Restricted Shares (which request shall specify the holders and shall state the
intended method of disposition of such Restricted Shares by the prospective
seller), the Corporation shall use its best efforts to cause all such Restricted
Shares (in minimum aggregate amounts of 10,000 shares as presently constituted
and subject to adjustment for subsequent stock splits, combinations and
dividends) to be registered under the Securities Act promptly upon
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receipt of the written request of such holders for such registration, all to the
extent requisite to permit the sale or other disposition (in accordance with the
intended methods thereof, as aforesaid) by the prospective seller or sellers of
the Restricted Shares so registered. In the event that the proposed registration
by the Corporation is, in whole or in part, an underwritten public offering of
securities of the Corporation, any request pursuant to this Section 10.6 to
register Restricted Shares may specify that such shares are to be included in
the underwriting (a) on the same terms and conditions as the shares of Common
Stock, if any, otherwise being sold through underwriters under such registration
or (b) on terms and conditions comparable to those normally applicable to
offerings of common stock in reasonably similar circumstances in the event that
no shares of Common Stock other than Restricted Shares are being sold through
underwriters under such registration; provided, however, that if the managing
underwriter determines and advises in writing that the inclusion of all
Restricted Shares proposed to be included in the underwritten public offering
and other issued and outstanding shares of Common Stock proposed to be included
therein by persons other than holders of Restricted Securities and other than
Hierl NEPA and Hwang (the "Other Shares") would interfere with the successful
marketing (including pricing) of such securities, then the number of Restricted
Shares, Hierl shares, NEPA shares, Hwang shares and Other Shares to be included
in such underwritten public offering shall be reduced first, pro rata among the
holders of Other Shares; second, if necessary, pro rata among the holders of
Restricted Shares, Hierl, NEPA and Hwang, based upon the number of shares
requested by holders thereof to be registered in such underwritten public
offering; and lastly, if necessary, among the Corporation's shares requested by
the Corporation to be registered in such Section 10.6 underwritten public
offering, subject however to Section 10.5 (b).
10.7. Registrations on Forms S-2 and S-3. After the
Corporation's initial registered public offering , the Corporation shall use its
best efforts to qualify for registration under the Securities Act on Forms S-2
or S-3 ( or any similar form or forms promulgated under the Securities Act) the
holders of Restricted Securities shall each have the right to request
registrations on Forms S-2 or S-3 (which request or requests shall be in
writing, shall specify the Restricted Shares intended to be sold or disposed of
by the holders thereof, shall state the intended method of disposition of such
Restricted Shares intended to be sold or disposed of by the holders thereof and
shall state the intended method of disposition of such Restricted Shares by the
holder(s) requesting such registration) and the Corporation shall be obligated
to use its best efforts to effect such registration, or registrations on Forms
S-2 or S-3 (as the case may be); provided however, that the Corporation shall
not be obligated to file and cause to become effective more than two
registration statement on Forms S-2 or S-3 in which Restricted Securities are
registered under the Securities Act pursuant to this Section 10.7 and
effectively sold thereunder.
10.8. Preparation and Filing. If and whenever the
Corporation is under and obligation pursuant to the provisions of this Section
10 to use its best efforts to effect the registration of any Restricted Shares,
the Corporation shall, as expeditiously as practicable:
(a) prepare and file with the Commission a
registration statement with respect to such securities and use its reasonable
efforts to cause such registration statement to become and remain effective in
accordance with Section 10.8(b), provided that the holders and
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prospective sellers of Restricted Shares shall provide the Corporation with such
information as reasonably necessary in connection with the preparation of the
registration statement;
(b) prepare and file with the Commission
such amendments and supplements to such registration statements and the
prospectus used in connection therewith as may be necessary to keep such
registration statement effective for at least six months and to comply with the
provisions of the Securities act with respect to the sale or other disposition
of all restriction Shares covered by such registration statement;
(c) furnish to each selling shareholder
copies of any prospectus subject to completion and final prospectus, in
conformity with the requirements of the Securities Act, in order to facilitate
the public sale or other disposition of such Restricted Shares;
(d) use its best efforts to register or
qualify the Restricted Shares covered by such registration statement under the
securities or "blue sky" laws of such jurisdictions as each such seller shall
reasonably request (provided however, that the Corporation shall not be required
to consent to general service of process for all purposes in any jurisdiction
where it is not then qualified) and do any and all other reasonable acts or
things which may be reasonably necessary to enable such seller to consummate the
public sale or other disposition in such jurisdictions of such securities;
(e) notify each seller of Restricted Shares
covered by such registration statement, at any time when a prospectus relating
thereto covered by such registration statement is required to be delivered under
the Securities Act within the appropriate period mentioned in Section 10.8(b),
of the happening of any event as a result of which the prospectus included in
such registration statement, as then in effect, includes an untrue statement of
a material fact or omits to state a material fact required to be stated therein
or necessary to make the statements therein in light of the circumstances under
which such statements were made not misleading and at the reasonable request of
such seller, prepare and furnish to such seller a reasonable number of copies of
a supplement to or an amendment of such prospectus as may be necessary so that,
as thereafter delivered to the purchasers of such shares, such prospectus shall
not include an untrue statement of a material fact or omit 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 such statements were made, not
misleading; and
(f) furnish, at the request of any holder or
holders requesting registration of Restricted Shares pursuant to this Section
10, on the date that such Restricted Shares are delivered to the underwriters
for sale in connection with a registration pursuant to this Section 10, if such
securities are being sold through underwriters, or, if such securities are not
being sold through underwriters, on the date that the registration statement
with respect to such securities becomes effective, (i) to the underwriter an
opinion, dated such date, of the counsel representing the Corporation for the
purposes of such registration, in form and substance as is customarily given to
underwriters in an underwritten public offering, addressed to the underwriters,
if any, and to the holder or holders making such request, or, at the option of
the Corporation, reimburse the holders' for the expense of holders' counsel
providing such opinion;
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and (ii) a letter dated such date, from the independent certified public
accountants of the Corporation, in form and substance as is customarily given by
independent certified public accountants to underwriters in an underwritten
public offering, addressed to the underwriters, if any, and to the holder or
holders making such request.
10.9. Expenses. All expenses incurred by the Corporation in
complying with Section 10.8, including, without limitation, all registration and
filing fees (including all expenses incident to filing with the National
Association of Securities Dealers, Inc.), fees and expenses of complying with
securities and "blue sky" laws, printing expenses and fees and disbursements of
counsel, including with respect to each registration effected pursuant to
Sections 10.5, 10.6 and 10.7, reasonable fees and disbursements of not more than
one counsel for the holders of Restricted Securities requesting registration
hereunder, and of the independent certified public accountants (but excluding
the compensation of regular employees of the Corporation which shall be paid in
any event by the Corporation) shall be paid by the Corporation to the extent
permitted under applicable federal and state regulations or by federal or state
agencies having jurisdiction over the registration, provided however if the
holders of Restricted Securities shall request a registration under Section 10.5
and shares are not effectively sold thereunder by reason of unfavorable market
conditions (as determined by the underwriter, if any, otherwise, by the
Corporation's investment banker or financial advisor) or action by the holders
of Restricted Securities, then such holders shall pay the foregoing expenses to
the extent related to its or their securities sought to be registered in a
subsequently requested registration by such holders under Section 10.5. The
holders of Restricted Shares included in such registration shall, if and to the
extent required by such applicable regulations and agencies, pay their
proportionate share of expenses of the offering, in proportion to the number of
their shares included in the offering; under no circumstances shall underwriting
discounts and selling commissions applicable to the Restricted Shares covered by
registrations effected pursuant to Sections 10.5, 10.6 or 10.7 be borne by the
Corporation; such expenses shall be borne by the seller or sellers, in
proportion to the number of Restricted Shares sold by such seller or sellers.
10.10. Indemnification. In the event of any registration of
any Restricted Shares under the Securities Act pursuant to this Section 10 or
registration or qualification of any Restricted Shares pursuant to Section
10.8(d), the Corporation shall indemnify and hold harmless the seller of such
shares, each underwriter of such shares, if any, each broker or any other person
acting on behalf of such seller and each other person, if any, who controls any
of the foregoing persons, within the meaning of the Securities Act, against any
losses, claims, damages or liabilities, joint or several, to which any of the
foregoing persons may become subject under the Securities Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon an untrue statement or alleged untrue
statement of a material fact contained in any registration statement under which
such Restricted Shares were registered under the Securities Act, any prospectus
subject to completion or final prospectus contained therein, or any amendment or
supplement thereto, or any document furnished to any agency with jurisdiction
over securities laws by the Corporation required for the registration or
qualification of any Restricted Shares pursuant to Section 10.8(d), or arise out
of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein in light of the circumstances under which they were
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made, not misleading, or any violation by the Corporation of the Securities Act
or state securities or "blue sky" laws applicable to the Corporation and
relating to action or inaction required of the Corporation in connection with
such registration or qualification under such state securities or blue sky laws;
and shall reimburse (except to the extent the Corporation assumes the defense
and costs thereof as hereinafter provided) such seller, such underwriter, broker
or other person acting on behalf of such seller and each such controlling person
for any legal or any other expenses reasonably incurred by any of them in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Corporation shall not be liable
in any such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon such seller's or such underwriter's failure to
deliver a prospectus subject to completion or final prospectus as provided by
the Corporation in accordance with Section 10.8, or an untrue statement or
alleged untrue statement or omission or alleged omission made in said
registration statement, said prospectus subject to completion or said prospectus
or said amendment or supplement or any document incident to the registration or
qualification of any Restricted Shares pursuant to Section 10.8(d) in reliance
upon and in conformity with written information furnished to the Corporation
through an instrument duly executed by such seller or such underwriter for use
in the preparation thereof.
Before Restricted Shares held by any prospective seller shall be sold
pursuant to any registration pursuant to Section 10, such prospective seller and
any underwriter acting on its behalf shall have agreed to indemnify and hold
harmless (in the same manner and to the same extent as set forth in the
preceding paragraph of this Section 10.10) the Corporation, each director of the
Corporation, each officer of the Corporation who shall sign such registration
statement, any person consenting to be named as a person becoming an officer or
director and any person who controls the Corporation within the meaning of the
Securities Act, with respect to any untrue statement or omission from such
registration statement, any prospectus subject to completion or final prospectus
contained therein, or any amendment or supplement thereto, if such untrue
statement or omission was made in reliance upon and in conformity with written
information furnished to the Corporation through an instrument duly executed by
such seller or such underwriter for use in the preparation of such registration
statement, prospectus subject to completion, final prospectus or amendment or
supplement; provided that the maximum amount of liability in respect of such
indemnification shall be limited, in the case of each prospective seller of
Restricted Shares, to an amount equal to the net proceeds actually received by
such prospective seller from the sale of Restricted Shares effected pursuant to
such registration.
Promptly after receipt by an indemnified party of notice of the
commencement of any action involving a claim referred to in the preceding
paragraphs of this Section 10.10, such indemnified party will, if a claim in
respect thereof is made against an indemnifying party, give written notice to
the latter of such claim and/or the commencement of such action. In case any
such action is brought against an indemnified party, the indemnifying party will
be entitled to participate in and to assume the defense thereof, jointly with
any other indemnifying party similarly notified to the extent that it may wish,
with counsel reasonably satisfactory to such indemnified party, and after notice
from the indemnifying party to such indemnified party of its election so to
assume the defense thereof, the indemnifying party shall not be responsible for
any legal or other expenses subsequently incurred by the indemnified party in
connection with the
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defense thereof, provided that if representation of both the indemnified and
indemnifying parties by the same counsel is inappropriate under applicable
standards of professional conduct due to defenses available to the indemnified
party which conflict with those available to the indemnifying party, the
indemnifying party shall not have the right to assume the defense of such action
on behalf of such indemnified party and such indemnifying party shall reimburse
such indemnified party and any person controlling such indemnified party for
that portion of the fees and expenses of any counsel retained by the indemnified
party which are reasonably related to the matters covered by the indemnity
agreement provided in this Section 10.10. The indemnifying party shall not be
liable for the expenses of more than one separate counsel representing the
indemnified parties pursuant to this Section 10.10.
Neither the indemnifying party nor the indemnified party shall make any
settlement of any claims indemnified against hereunder without the written
consent of the other party or parties, which consent shall not be unreasonably
withheld.
Notwithstanding the foregoing provisions of this Section 10.10, if
pursuant to an underwritten public offering of the Common Stock, the
Corporation, the selling shareholders and the underwriters enter into an
underwriting or purchase agreement relating to such offering which contains
provisions covering indemnification among the parties thereto in connection with
such offering, the indemnification provisions of this Section 10.10 shall be
deemed inoperative for purposes of such offering.
10.11. Removal of Legends, Etc. Notwithstanding the
foregoing provisions of this Section 10, the restrictions imposed by this
Section 10 upon the transferability of any Restricted Securities shall cease and
terminate when any such Restricted Securities are sold or otherwise disposed of
in accordance with the intended method of disposition by the seller or sellers
thereof set forth in the registration statement or as otherwise contemplated by
Section 10.4 which does not require that the securities transferred bear the
legend set forth in Section 10.3. Whenever the restrictions imposed by this
Section 10 shall terminate as herein provided, the holder of any Restricted
Securities as to which such restrictions have terminated shall be entitled to
receive from the Corporation, without expense, one or more new certificates not
bearing the restrictive legend set forth in Section 10.3 and not containing any
other reference to the restrictions imposed by this Section 10.
10.12. Suspension of Rights. Notwithstanding the foregoing
provisions of this Section 10, the registration rights set forth herein shall be
inapplicable to the extent and for the period during which all Restricted Shares
sought to be registered hereunder could be immediately sold in a transaction
complying with the requirements of Rule 144 (as amended from time to time)
promulgated under the Securities Act (or successor rule thereto which would
allow reliance on the exemption provided by Section 4(l) of the Securities Act)
without additional expense or time delay to the seller beyond that which would
be incurred by such seller in a registration.
SECTION 11. Exchanges; Lost, Stolen or Mutilated Instruments. Upon
surrender by the Lender to the Corporation of any instrument representing
Securities, the Corporation at its expense will issue in exchange therefor, and
deliver to the Lender, a new instrument representing
-24-
<PAGE>
such Securities, in such denominations as may be requested by the Lender. Upon
receipt of evidence satisfactory to the Corporation of the loss, theft,
destruction or mutilation of any instrument representing any Securities, and in
case of any such loss, theft or destruction, upon delivery of an indemnity
agreement and bond satisfactory to the Corporation, or in case of any such
mutilation, upon surrender and cancellation of such instrument, the Corporation
at its expense will issue and deliver to the Lender a new instrument for such
Securities of like tenor, in lieu of such lost, destroyed, stolen or mutilated
instrument.
SECTION 12. Survival of Representations, Warranties and Agreements. All
representations and warranties hereunder shall survive the Closing and shall
terminate on the earlier to occur of the initial public offering of the
Corporation or the date three years after the Closing Date. The agreements and
covenants contained in Sections 8 and 9 other than the Corporation's agreements
and covenants contained in Section 9.2 and the Lender's agreements and covenants
contained in Section 8.1, shall terminate upon the earliest to occur of (i)
conversion into Common Stock of at least 75% of the aggregate Class B Preferred
Stock obtained upon conversion of the Note, and (ii) the effectiveness of the
initial public offering of the Corporation. All other agreements contained
herein shall survive indefinitely until, by their respective terms, they are no
longer operative. Termination of any representation, warranty, agreement or
covenant shall not affect any claim or action commenced prior to the date of
termination.
SECTION 13. Indemnification. The Corporation shall, with respect to the
representations, warranties, covenants and agreements made by the Corporation
herein, indemnify, defend and hold the Lender harmless against all liability,
loss or damage, together with all reasonable costs and expenses related thereto
(including legal and accounting fees and expenses), arising from the untruth,
inaccuracy or breach of any such representations or warranties. Without limiting
the generality of the foregoing, the Lender shall be deemed to have suffered
liability, loss or damage as a result of the untruth, inaccuracy or breach of
any such representations or warranties if such liability, loss or damage shall
be suffered by the Corporation as a result of, or in connection with, such
untruth, inaccuracy or breach or any facts or circumstances constituting such
untruth, inaccuracy or breach, provided such liability, loss or damages to the
Lender shall be deemed not to exceed the actual liability, loss or damage to the
Corporation, multiplied by the Lender's Proportionate Percentage; provided
further that the foregoing limitation shall not be construed as a limitation on
the rights, if any, that the Lender may have to recover pursuant to the director
indemnification provisions of the Pennsylvania Business Corporation Law of 1988,
as amended, the Corporation's Articles of Incorporation or Bylaws, or any
insurance policy maintained for the benefit of the Corporation's directors, with
respect to any amounts for which the Lender may be liable by reason of having
one of the Lender's employees serve as a member of the Corporation's board.
SECTION 14. Remedies. In case any one or more of the covenants and/or
agreements set forth in this Agreement shall have been breached by the
Corporation in any material respect, the Lender may proceed to protect and
enforce their rights either by suit in equity and/or by action at law,
including, but not limited to, an action for damages as a result of any such
breach
-25-
<PAGE>
and/or an action for specific performance of any such covenant or agreement
contained in this Agreement, including reasonable legal and accounting fees and
expenses.
SECTION 15. Successors and Assigns. This Agreement shall bind and inure
to the benefit of the Corporation, the Lender and (a) each other person who
shall become a registered holder of any instrument representing the Securities,
except those who receive them in connection with Section 144 sales, after any
offering pursuant to a Securities Act registration statement, after registration
of any of the Corporation's securities under the Securities Exchange Act of 1934
or in any trade on a recognized trading market or exchange and (b) the
respective successors and assigns of the Corporation, the Lender and each such
other person, provided, however, that with respect to clauses (a) and (b) above,
no rights hereunder shall be assignable, in whole or in part, to any person,
entity or association that is, directly or indirectly, a customer or competitor
of the Corporation. Notwithstanding the foregoing, the Corporation may not
assign or transfer any of its rights or obligations hereunder without the prior
written consent of the Lender.
SECTION 16. Entire Agreement. This Agreement and the exhibits and
schedules which form a part hereof contain the entire agreement among the
parties with respect to the subject matter hereof and supersede all prior
arrangements or understandings with respect thereto, including without
limitation, that certain Confidentiality Agreement dated July 26, 1996 between
Lender and Corporation.
SECTION 17. Notices. All notices, requests, consents and other
communications hereunder to any party shall be deemed to be sufficient if
contained in a written instrument delivered in person or duly sent by reputable
overnight carrier or first class registered or certified mail, return receipt
requested, postage prepaid, addressed to such party at the address set forth in
the first paragraph of this Agreement or such other address as may hereafter be
designated in writing by the addressee to the addressor listing all parties. All
such notices, advices and communication shall be deemed to have been received
(a) in the case of personal delivery on the date of such delivery, (b) in the
case of overnight carrier, on the next business day, and (c) in the case of
mailing, on the third day after the posting thereof.
SECTION 18. Changes. The terms and provisions of this Agreement may not
be modified or amended, or any of the provisions hereof waived, temporarily or
permanently, except pursuant to the written consent of the parties hereto.
SECTION 19. Counterparts. This Agreement may be executed in any number
of counterparts, and each such counterpart hereof shall be deemed to be original
instrument, but all such counterparts together shall constitute but one
agreement.
SECTION 20. Headings. The headings of the sections of this Agreement
have been inserted for convenience of reference only and shall not be deemed to
be a part of this Agreement.
-26-
<PAGE>
SECTION 21. Nouns and Pronouns. Whenever the context may require, any
pronouns used herein shall include the corresponding masculine, feminine or
neuter forms, and the singular form of names and pronouns shall include the
plural and vice-versa.
SECTION 22. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the Commonwealth of Pennsylvania.
SECTION 23. Severability. Any provision of this Agreement that is
prohibited or unenforceable shall be ineffective to the extent of such
prohibition or unenforceability without invalidating the remaining provisions
hereof.
SECTION 24. No Waivers. No failure or delay of any party in exercising
any power or right hereunder shall operate as a waiver thereof, nor shall any
single or partial exercise of any such right or power, or any abandonment or
discontinuance of steps to enforce such a right or power, preclude any other or
further exercise thereof or the exercise of any other right or power. The rights
and remedies hereunder are cumulative and not exclusive of any rights or
remedies which a party would otherwise have. No notice or demand in any case
shall entitle a party to any other or further notice or demand in similar or
other circumstances.
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the date first set forth above.
QUANTUM EPITAXIAL DESIGNS, INC.
By:________________________________
Thomas L. Hierl, President
AMP INCORPORATED
By:_________________________________
Name: ______________________________
Title: _____________________________
-27-
<PAGE>
QUANTUM EPITAXIAL DESIGNS, INC.
EMPLOYEE CONFIDENTIALITY AGREEMENT
THIS EMPLOYEE CONFIDENTIALITY AGREEMENT (this "Agreement") is
made this _____ day of ____________, 199___ by and between
______________________ (the "Employee"), a resident of
_____________________________, _______________________ and QUANTUM EPITAXIAL
DESIGNS, INC., a corporation organized and existing under the laws of the
Commonwealth of Pennsylvania (the "Company").
W I T N E S S E T H:
WHEREAS, the Employee desires employment by the Company
and has not yet commenced such employment relationship; and
WHEREAS, the Company desires to employ the Employee and
desires to receive the benefits of the covenants set forth
herein; and
WHEREAS, the Employee agrees to make the covenants to the
Company set forth herein.
NOW, THEREFORE, in consideration of these premises and the
mutual promises made herein and the mutual benefits to be derived herefrom, the
Employee and the Company, intending to be legally bound, hereby agree as
follows:
1. Confidential Information. Without the prior written consent
of the President of the Company, except as shall be necessary in the performance
of the Employee's assigned duties, the Employee shall not disclose or use for
the Employee's direct or indirect benefit or the direct or indirect benefit of
any third party, and Employee shall maintain, both during and after the
Employee's employment, the confidentiality of any and all Confidential
Information (as hereinafter defined) of the Company. "Confidential Information"
means any information (written, oral or stored in any information storage and/or
retrieval medium or device) that the Company treats as confidential or
proprietary, including, but not limited to, any information relating to research
and development plans, methods, efforts and results; manufacturing or production
design, processes, flow-charts and methods; existing and proposed products;
product plans, sketches, and blueprints; computer codes or instructions
(including source and object code listings, program logic algorithms,
-1-
<PAGE>
subroutines, modules or other subparts of computer programs and related
documentation, including program notation); business studies; business
development plans and efforts; business procedures; financial data (including,
but not limited to cost data); personnel information; marketing and sales data,
methods, plans and efforts; the identities of customers, contractors and
suppliers and prospective customers, contractors and suppliers; the terms of
contracts and agreements with customers, contractors and suppliers; the
Company's relationship with actual and prospective customers, contractors and
suppliers and the needs and requirements of, and the Company's course of dealing
with, any such actual or prospective customers, contractors and suppliers;
customer and vendor credit information; any information or data provided by or
on behalf of independent contractors, customers, prospective customers or others
subject to the terms of a confidentiality, non-disclosure or similar agreement
or the reasonable expectation that such information or data would be treated as
"confidential" or non-public information or data; any information, data or work
product created, developed, prepared, compiled or assembled for or on behalf of
the Company, any independent contractor, customer, prospective customer, or
other person or entity, whether by the Employee or by other Company employees,
agents or contractors; and any other information that has not been made
available to the general public. Failure to mark any of the Confidential
Information as confidential or proprietary shall not affect its status as
Confidential Information under the terms of this Agreement.
2. Property. During the term of this Agreement and thereafter,
the Employee shall not remove from the Company's offices or premises any
documents, records, notebooks, files, correspondence, reports, memoranda,
computer tapes, computer disks or similar materials of or containing
Confidential Information of the type identified in Section 1 hereof, or other
materials or property of any kind, unless necessary in accordance with the
Employee's duties and responsibilities of employment, and in the event that any
of such material or property is removed, all of the foregoing shall be returned
to their proper files or places of safekeeping as promptly as possible after the
removal shall have served its specific purpose; nor shall the Employee make,
retain, remove or distribute any copies of any of the foregoing for any reason
whatsoever, except as may be necessary in the discharge of the Employee's
assigned duties; and upon the termination of the Employee's employment by the
Company, the Employee shall return to the Company all originals, copies and
extracts of the foregoing, then in the Employee's possession or under Employee's
direct or indirect control, and shall delete or destroy any of the foregoing in
his possession or under his direct or indirect control stored on magnetic or
other media or on any information storage or retrieval device, whether prepared
by the Employee or by others.
-2-
<PAGE>
3. Intellectual Property.
(a) The Employee acknowledges and agrees that any
and all writings, documents, inventions, discoveries, improvements, computer
programs or instructions (whether in source code, object code, or any other
form), plans, memoranda, tests, research, designs, specifications, models, data,
diagrams, flow charts, and/or techniques (whether reduced to written form or
otherwise) that the Employee makes, conceives, discovers or develops, either
solely or jointly with any other person, at any time during the term of the
Employee's employment (or thereafter, if based upon or incorporating any
Confidential Information), whether during working hours or at the Company's
facility or at any other time or location, and whether upon the request or
suggestion of the Company or otherwise, that relate to or are useful in any way
in connection with any business now or hereafter carried on by the Company
(collectively, "Intellectual Work Product") shall be the sole and exclusive
property of the Company. The Employee shall promptly disclose to the Company all
Intellectual Work Product and maintain any and all records thereof. The Employee
shall have no claim for additional compensation for the Intellectual Work
Product.
(b) The Employee acknowledges that all the
Intellectual Work Product that is copyrightable shall be considered a work made
for hire under United States Copyright Law. To the extent that any copyrightable
Intellectual Work Product may not be considered a work made for hire under the
applicable provisions of the Copyright Law, or to the extent that,
notwithstanding the foregoing provisions, the Employee may retain an interest in
any Intellectual Work Product that is not copyrightable, the Employee hereby
irrevocably assigns and transfers to the Company any and all right, title,
and/or interest that the Employee may have in the Intellectual Work Product
under copyright, patent, trade secret and trademark law, in perpetuity or for
the longest period otherwise permitted by law, without the necessity of further
consideration. The Company shall be entitled to obtain and hold in its own name
all copyrights, patents, trade secrets, and trademarks with respect thereto.
-3-
<PAGE>
(c) At the request and expense of the Company, either
before or after the cessation of the Employee's employment, the Employee shall
assist the Company in acquiring and maintaining copyright, patent, trade secret,
and trade mark protection upon, and confirming the Company's title to, any
Intellectual Work Product. The Employee's assistance shall include making all
lawful oaths and declarations, executing and delivering all applications for and
other documents prepared in connection with the prosecution, maintenance,
enforcement and or defense of any copyrights, patent rights, trade secret
rights, and trademark rights, cooperating in legal proceedings, and taking any
and all other actions considered necessary or desirable by the Company.
(d) In the event the Company is unable after
reasonable effort to secure the Employee's signature on any of the documents
referenced in Section 3(c) above, whether because of the Employee's physical or
mental incapacity or for any other reason whatsoever, the Employee hereby
irrevocably designates and appoints the Company and its duly authorized officers
and agents as the Employee's agent and attorney-in-fact, to act for and in his
behalf and stead to execute and file any such documents and to do all other
lawfully permitted acts to further the prosecution and issuance of any such
copyright, patent, trade secret, trade mark, or other analogous protection, with
the same legal force and effect as if executed by the Employee.
(e) The Employee represents that the writings,
documents, inventions, discoveries, computer programs or instructions (whether
in source code, object code, or any other form), algorithms, plans, memoranda,
tests, research, designs, innovations, systems, analyses, specifications,
models, data, diagrams, flow charts, and/or techniques and all copyrights,
patents, trademarks and trade names or similar intangible property identified in
Schedule 3(e) hereof comprises all of the writings, documents, inventions,
discoveries, computer programs or instructions (whether in source code, object
code, or any other form), algorithms, plans, memoranda, tests, research,
designs, innovations, systems, analyses, specifications, models, data, diagrams,
flow charts, and/or techniques and all copyrights, patents, trademarks and trade
names or similar intangible property that Employee has created, made, conceived
of, discovered or developed prior to the date hereof, and the same are excluded
from the operation of the other provisions of this Section 3.
-4-
<PAGE>
4. Disclosure. Employee shall disclose promptly to the Company
any and all Confidential Information and information relating to all
Intellectual Work Product which Employee may make, conceive, discover or develop
during the period of his employment by the Company (or thereafter, if based upon
or incorporating any Confidential Information).
5. Covenant Not to Compete.
(a) During the period of the Employee's employment by
the Company and for a period of two (2) years thereafter, the Employee shall
not, anywhere in the world, directly or indirectly engage or become interested
in (as owner, proprietor, promoter, stockholder, partner, co-venturer, director,
officer, employee, agent, consultant or otherwise) any business which develops,
manufactures, markets or sells MBE grown III-V semiconductor wafers to include
MESFETs, QWIPs, HBTs, PHEMTs or any other new product or service marketed or
sold by the Company during the period of Employee's employment by the Company
(the "Business of the Company"). Notwithstanding the foregoing Section 5(a)
hereof to the contrary, Employee shall be permitted to own not more than two
percent (2%) of the issued outstanding equity securities of any class of
publicly-traded equity securities, irrespective of whether the issuer thereof is
engaged in the Business of the Company.
(b) During the period of Employee's employment by the
Company and for a period of two (2) years thereafter, the Employee shall not,
directly or indirectly, solicit, call on, or otherwise deal in any way with any
customer, supplier or contractor with whom the Company shall have dealt at any
time during the period of the Employee's performance of services to the Company,
for a purpose which is competitive with the Business of the Company, or
influence or attempt to influence any customer, supplier or contractor of the
Company to terminate or modify any written or oral agreement or course of
dealing with the Company.
(c) For a period of two (2) years after the cessation
of Employee's employment with the Company, Employee shall not directly or
indirectly, employ, engage or retain, or arrange to have any other person or
entity employ, engage or retain any person who is an employee, contractor,
consultant or agent of the Company or shall have been employed, engaged or
retained by the Company as an employee, contractor, consultant or agent at any
time during the one (1) year period preceding the date upon which Employee's
-5-
<PAGE>
employment with the Company ceases; additionally, Employee shall not, directly
or indirectly, influence or attempt to influence any such person to terminate or
modify his employment arrangement or engagement with the Company.
6. Other Agreements. The Employee hereby represents and
warrants that the Employee is not subject to any other agreement that the
Employee may violate by executing, delivering or performing this Agreement. The
Employee agrees to disclose the existence and terms of this Agreement to any
employer or other person that the Employee may perform services for after the
cessation of the Employee's employment at the Company.
7. Outside Employment; No Employment Agreement. During the
period of Employee's employment by the Company Employee shall not engage in any
outside employment, business or other remunerative activity, except with the
prior written consent of the Company. This Agreement is not, and does not
contain an employment agreement or a promise of continued employment. Either the
Employee or the Company has the right to terminate Employee's employment at the
Company at any time and for any reason or no reason.
8. Survival of Provisions. The obligations of the Employee as
set forth herein shall survive the cessation or termination of the Employee's
employment with the Company.
9. Successors and Assigns. The Company may assign this
Agreement to, and this Agreement shall bind and inure to the benefit of, any
parent, subsidiary, affiliate or successor of the Company. This Agreement shall
not be assignable by the Employee.
10. Entire Agreement; Amendments. This Agreement contains the
entire agreement and understanding of the parties relating to the subject matter
hereof and merges and supersedes all prior discussions, agreements and
understandings of every nature between them. This Agreement may not be changed
or modified, except by an agreement in writing signed by both of the parties
hereto.
11. Waiver. The waiver of the breach of any term or provision
of this Agreement shall not operate as or be construed to be a waiver of any
other or subsequent breach of this Agreement.
-6-
<PAGE>
12. Governing Law. This Agreement shall be construed and
enforced in accordance with the laws of the Commonwealth of Pennsylvania,
without regard to conflicts of law principles of Pennsylvania or any other
jurisdiction.
13. Invalidity. If any provision of this Agreement shall be
determined to be void, invalid, unenforceable or illegal for any reason, the
validity and enforceability of all of the remaining provisions hereof shall not
be affected thereby. If any particular provisions of this Agreement shall be
adjudicated to be invalid or unenforceable, such provision shall be deemed
amended to delete therefrom the portion thus adjudicated to be invalid or
unenforceable, such amendment to apply only to the operation of such provision
in the particular jurisdiction in which such adjudication is made; provided
that, if any one or more of the provisions contained in this Agreement shall be
adjudicated to be invalid or unenforceable because such provision is held to be
excessively broad as to duration, geographic scope, activity or subject, such
provision shall be deemed amended by limiting and reducing it so as to be valid
and enforceable to the maximum extent compatible with the applicable laws of
such jurisdiction, such amendment only to apply with respect to the operation of
such provision in the applicable jurisdiction in which the adjudication is made.
14. Section Headings. The section headings in this Agreement
are for convenience only; they form no part of this Agreement and shall not
affect its interpretation.
15. Gender; Number. Words used herein, regardless of the
number and gender specifically used, shall be deemed and construed to include
any other number, singular or plural, and any other gender, masculine, feminine
or neuter, as the context requires.
16. Enforcement. The Employee acknowledges that it is
impossible to measure fully, in money, the injury that will be caused to the
Company in the event of a breach or threatened breach of any of the provisions
of this Agreement, and the Employee waives the claim or defense that the Company
has an adequate remedy at law. The Employee shall not, in any action or
proceeding to enforce any of the provisions of this Agreement, assert the claim
or defense that such an adequate remedy at law exists. The Company shall be
entitled to injunctive relief to enforce the provisions of such sections hereof,
without prejudice to any other remedy the Company may have at law or in equity.
-7-
<PAGE>
The periods of time set forth in Section 5 hereof shall not include and shall be
deemed extended by any time required for litigation to enforce the relevant
covenant periods, provided that the Company is successful on the merits in any
such litigation. The "time required for litigation" is herein defined to mean
the period of time from service of process upon the Employee through the
expiration of all appeals related to such litigation. If an action at law or in
equity is necessary to enforce or interpret the terms of this Agreement, the
prevailing party shall be entitled to recover, in addition to any other relief,
reasonable attorney's fees, costs and disbursements.
17. Disclosure of Agreement. Employee agrees that upon and
after her termination or cessation of employment with the Company, until such
time as no obligations of Employee to the Company hereunder exist, Employee
shall (i) provide a complete copy of this Agreement to any prospective employer
or other person, entity or association in the Business of the Company, with whom
or which Employee proposes to be employed, affiliated, engaged, associated or to
establish any business or remunerative relationship prior to the commencement
thereof and (ii) shall notify the Company of the name and address of any such
person, entity or association prior to her employment, affiliation, engagement,
association or the establishment of any business or remunerative relationship.
Employee will provide the names and addresses of any of such persons or entities
as the Company may from time to time reasonably request.
18. Consent to Forum, Etc. Any legal proceeding arising out of
or relating to this Agreement shall be instituted in the United States District
Court for the Eastern District of Pennsylvania, or if such court does not have
jurisdiction or will not accept jurisdiction, in any court of general
jurisdiction in Northampton County, Pennsylvania and the Employee hereby
consents to the personal and exclusive jurisdiction of such court and hereby
waives any objection that the Employee may have to the laying of venue of any
such proceeding and any claim or defense of inconvenient forum. Notwithstanding
anything to the contrary set forth above, the Company shall have the right to
institute or defend and legal action arising out of or relating to this
Agreement in any appropriate court and in any jurisdiction.
[Executions set forth on page 9]
-8-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Employee
Confidentiality Agreement to be executed the day and year first above written.
QUANTUM EPITAXIAL DESIGNS, INC.
By:
-----------------------------
Its:
----------------------------
EMPLOYEE:
--------------------------------
(Signature)
--------------------------------
Print Name
-9-
EXHIBIT 11.1
QUANTUM EPITAXIAL DESIGNS, INC.
PRO FORMA AND SUPPLEMENTAL PRO FORMA
NET INCOME (LOSS) PER SHARE CALCULATION
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, 1996 June 30, 1997
------------------- -----------------
<S> <C> <C>
Pro forma net loss per share
Pro forma net loss per statement of operations .............................. $ (61,676) $ (325,442)
Reduction of interest expense, net of tax .................................... -- 44,000
---------- -----------
Pro forma net loss ......................................................... $ (61,676) $ (281,442)
---------- -----------
Weighted average shares outstanding .......................................... 1,585,350 1,585,350
Dilutive effect of outstanding stock options, net of tax benefit ............ 123,250 123,250
Dilutive effect of convertible notes payable ................................. 269,905 269,905
---------- -----------
Shares used in computing pro forma net loss per share ........................ 1,978,505 1,978,505
---------- -----------
Pro forma net loss per share ................................................ $ (0.03) $ (0.14)
========== ==========
Supplemental pro forma net income (loss) per share
Pro forma net income (loss) ................................................ $ (61,676) $ (281,442)
Reduction in interest expense, net of tax ................................. 128,000 87,000
---------- ----------
Supplemental pro forma net income (loss) .................................... $ 66,324 $ (194,442)
---------- ----------
Shares used in computing pro forma net income (loss) per share ............... 1,978,505 1,978,505
Assumed repayment of bank debt ............................................. 366,484 439,444
Dilutive effect of outstanding stock options, net of tax benefit ............ 174,522 --
Dilutive effect of convertible notes payable .............................. 1,432,459 --
Dilutive effect of common stock warrants .................................... 131,204 --
---------- ----------
Shares used in computing supplemental pro forma net income (loss) per share 4,083,174 2,417,949
---------- ----------
Supplemental pro forma net income (loss) per share ........................ $ 0.02 $ (0.08)
========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 6-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> JUN-30-1997 DEC-31-1996
<CASH> 341 78
<SECURITIES> 881 0
<RECEIVABLES> 0 1,124
<ALLOWANCES> 35 40
<INVENTORY> 895 830
<CURRENT-ASSETS> 2,242 2,132
<PP&E> 10,419 8,558
<DEPRECIATION> 3,406 2,765
<TOTAL-ASSETS> 9,390 8,481
<CURRENT-LIABILITIES> 2,563 4,100
<BONDS> 5,127 2,154
0 0
0 0
<COMMON> 2 2
<OTHER-SE> 1,699 2,226
<TOTAL-LIABILITY-AND-EQUITY> 9,390 8,481
<SALES> 3,733 6,312
<TOTAL-REVENUES> 4,142 6,902
<CGS> 3,044 4,691
<TOTAL-COSTS> 4,421 6,787
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 249 213
<INCOME-PRETAX> (527) (98)
<INCOME-TAX> (202) (36)
<INCOME-CONTINUING> (325) (62)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (325) (62)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
