<PAGE>
As filed with the Securities and Exchange Commission on October 29, 1997
Registration No 333-37457
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------------
Amendment No. 1
to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
QUANTUM EPITAXIAL DESIGNS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
PENNSYLVANIA 3674 23-2566613
<S> <C> <C>
(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. [ ]
<PAGE>
---------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=============================================================================================================
Title of Each Class of Proposed Maximum Proposed
Securities Amount to be Offering Price Maximum Aggregate Amount of
to be Registered Registered Per Unit (1) Offering Price (1) Registration Fee
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par
value $.001 per
share ............ 2,875,000 shares (2) $10.00 $28,750,000 $ 8,713(3)
=============================================================================================================
</TABLE>
(1) Estimated solely for purposes of determining the registration fee in
accordance with Rule 457 under the Securities Act of 1933.
(2) Includes 375,000 shares of Common Stock subject to the over-allotment
option granted by the Company to the Underwriters.
(3) Calculated pursuant to Rule 457(a) under the Securities Act of 1933. Fees
totaling $7,841 were previously paid by the Registrant in connection with
the filing of the Registration Statement on October 8, 1997.
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 29, 1997
PROSPECTUS
2,500,000 Shares
[QED LOGO]
Quantum Epitaxial Designs, Inc.
Common Stock
----------------
Of the 2,500,000 shares of Common Stock offered hereby, 2,250,000 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 6 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.
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions(1) Company(2) Shareholders
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share ...... $ $ $ $
- --------------------------------------------------------------------------------
Total(3) ...... $ $ $ $
================================================================================
</TABLE>
(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 187,500 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 $500,000.
(3) The Company and the Selling Shareholders have granted the Underwriters a
30-day option to purchase up to an additional 125,000 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>
[GRAPHICS]
PERIODIC TABLE OF ELEMENTS
[Periodic Table of Elements Chart]
Caption: Compound semiconductors are composed of two or more elements that are
found in each of columns III and V of the periodic table. These elements
typically include Gallium (Ga), Arsenic (As), Aluminum (Al), Indium (In),
Antimony (Sb), Phosphorous (P) and Nitrogen (N). Many compound semiconductor
materials have unique physical properties that allow electrons to move many
times faster than through Silicon.
DIRECT BROADCAST SATELLITE
[Picture depicting satellite TV dish, satellite, and
television]
Caption: QED supplies GaAs based epitaxial wafers used for transistors in the
receivers of high frequency satellite TV dishes. This technology has made it
possible to reduce the diameter of these dishes from six feet to eighteen
inches.
[Picture depicting a wafer being manufactured through the Molecular Beam
Epitaxy (MBE) Production process.]
Caption: QED utilizes a process known as Molecular Beam Epitaxy (MBE) to produce
compound semiconductor wafers. MBE is a process by which thin layers of compound
semiconductor materials are grown on a crystal material called the substrate.
QED believes that the MBE production process allows for the precise control,
high uniformity and quality which is essential to produce the electronic results
required of semiconductors and integrated circuits used in high performance
applications.
GLOBAL TELECOMMUNICATIONS
[Picture depicting a woman and man on telephones and illustrating the signals
transmitted via satellite]
Caption: QED is a key supplier for the production of Transmit/Receive modules
for global satellite communications systems such as IRIDIUM and Globalstar.
These systems will utilize high performance devices derived from GaAs based
epitaxial wafers to achieve higher data transmission rates.
CELLULAR/PCS COMMUNICATIONS
[Picture depicting a woman and a man speaking on PCS telephones]
Caption: QED designs and manufactures GaAs based epitaxial wafers used for high
performance power and switch devices which provide benefits such as longer talk
times for portable cellular and PCS telephones and base stations.
[QED Logo surrounded by five circular photos of Company headquarters and phases
of production]
[V-100 Automated MBE System]
The Company has applied to register its trademarks for 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 wafers. MBE wafers
are 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, computers, 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 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.
Compound semiconductors are composed of two or more elements that are
found in each of columns III and V of the periodic table. These elements
typically include gallium, aluminum, indium, arsenic, phosphorous, antimony and
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 applications.
The Company's goal is to become the leading supplier of MBE based compound
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.
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, and its telephone
number is (610) 861-6930.
3
<PAGE>
The Offering
<TABLE>
<S> <C>
Common Stock offered:
By the Company ....................................... 2,250,000 shares
By the Selling Shareholders ........................... 250,000 shares
---------
Total ............................................. 2,500,000 shares
Common Stock to be outstanding after the Offering ...... 5,673,415 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"
</TABLE>
Summary Financial Data
(in thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 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 $4,382 $ 6,474
Operating income (loss) ............ 658 754 867 1,153 115 (299) (317)
Income (loss) before income taxes ... 545 674 788 1,088 (98) (415) (722)
Pro forma net income (loss)(2) ...... $ 332 $ 411 $ 481 $ 664 $ (62) $(261) $ (446)
Pro forma net loss per share(2) ... $ (0.03) $ (0.19)
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 $ (0.09)
Shares used in computing supplemental
pro forma net income (loss) per
share(3) ........................... 4,083 2,446
</TABLE>
<TABLE>
<CAPTION>
September 30, 1997
----------------------------------------------
Pro Forma
Actual Pro Forma(4) As Adjusted(4)(5)
-------- -------------- ------------------
<S> <C> <C> <C>
Balance Sheet Data:
Working capital (deficit) .................. $(490) $ (408) $15,285
Total assets ................................. 9,803 9,780 23,577
Short-term debt .............................. 1,839 1,831 82
Long-term debt, less current portion ......... 2,794 2,794 154
Convertible subordinated notes payable ...... 2,092 -- --
Shareholders' equity ........................ 1,619 2,880 21,066
</TABLE>
- ----------------
(1) Excludes shares of Common Stock issuable upon the exercise of outstanding
options and shares of Common Stock issuable upon the exercise of the
Representatives' Warrants. 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, 25,000 shares of Common Stock reserved for issuance upon the
exercise of an outstanding option at an exercise price equal to the per
share initial public offering price and 142,000 shares of Common Stock
reserved for future issuance under the Company's stock option plans. See
"Management--Executive Compensation," "--Stock Option Plans,"
"Underwriting" 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
4
<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 $750,000 if the termination
occurred on September 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 loss and pro forma net loss per share. Upon the closing of the
Offering, the Company will accelerate the vesting of certain stock options
which will result in a special compensation charge. This amount would have
been $859,000 if the vesting acceleration occurred on September 30, 1997.
Such expense amount is excluded from the above data. See "Management--Stock
Option Plans" and Note 10 of Notes to Financial Statements.
(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 $750,000 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 1,432,450
shares of Common Stock, and the conversion of a convertible subordinated
note payable to AMP Incorporated in the principal amount of $2,000,000
less deferred financing costs of $96,669 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 2,250,000 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 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 6 which could cause actual results
to differ materially from those indicated by such forward-looking statements.
5
<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 the associated adaptation of its operational systems. 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,
financial condition and results of operation. 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 the 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. Since January 1996, the Company's largest customers based on
revenues have included Alpha Industries Inc., Hughes Aircraft, Inc., M/A-COM,
Inc., Motorola, Inc., Raytheon Company, Texas Instruments Incorporated and
Watkins Johnson
6
<PAGE>
Company. For the years ended December 31, 1995 and 1996 and for the nine months
ended September 30, 1997, three customers accounted for approximately 52%, 63%
and 55%, respectively, of the Company's total revenues and the ten largest
customers accounted for approximately 85%, 88% and 81%, respectively, of the
Company's total revenues in each such period. Generally, the Company does not
have long-term or other non-cancelable 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 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. 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
7
<PAGE>
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."
8
<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 5,673,415 shares of Common Stock outstanding
(assuming no exercise of options to purchase Common Stock). Of such shares, the
2,500,000 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 3,171,745 shares of Common
Stock and 317,890 shares of Common Stock issuable upon exercise of options
which will be exercisable upon completion of the Offering 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 1,663,699 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 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."
9
<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 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 $0.01 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 53.4% (48.1% 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 $5.29 per share. See "Dilution."
10
<PAGE>
USE OF PROCEEDS
The proceeds from the sale of the Common Stock offered by the Company
hereby will be approximately $18.3 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 $3.3 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 September 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
use as described above, 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 $750,000 if the
Termination Date had been September 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."
11
<PAGE>
CAPITALIZATION
The following table sets forth, as of September 30, 1997, (i) the actual
capitalization of the Company, (ii) the pro forma capitalization of the
Company, and (iii) the pro forma as adjusted capitalization of the Company
after giving effect to the sale of 2,250,000 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>
September 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) .............................. $1,839 $1,831 $ 82
====== ====== ========
Long-term debt, less current portion(3) ......... 2,794 2,794 154
------ ------ --------
Convertible subordinated notes payable(3) ...... 2,092 -- --
------ ------ --------
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; 3,423,415 shares issued and
outstanding, pro forma; and 5,673,415 shares
issued and outstanding, as adjusted(4) ......... 2 3 6
Additional paid-in capital ..................... 1,045 3,736 21,060
Deferred compensation(5) ........................ (859) (859) --
Retained earnings .............................. 1,431 -- --
------ ------ --------
Total shareholders' equity ..................... 1,619 2,880 21,066
------ ------ --------
Total capitalization ........................ $6,505 $5,674 $21,220
====== ====== ========
</TABLE>
<PAGE>
- ------------
(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 2,250,000 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 and shares of Common Stock issuable upon the exercise of the
Representatives' Warrants. 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, 25,000 shares of Common Stock reserved for issuance upon the
exercise of an outstanding option at an exercise price equal to the per
share initial public offering price and 142,000 shares of Common Stock
reserved for future issuance under the Company's stock plans. See
"Management--Executive Compensation," "--Stock Option Plans,"
"Underwriting" and Note 10 of Notes to Financial Statements.
(5) The Company recorded deferred compensation of $972,000 in connection with
the grant of certain stock options in July 1997. Of this amount, $113,000
was recognized as an expense in the third quarter of 1997. The balance of
$859,000 will be recognized as an expense upon completion of the Offering.
See "Management--Stock Option Plans--1996 Stock Option Plan" and Note 10
of Notes to Financial Statements.
12
<PAGE>
DILUTION
The net tangible book value of the Company as of September 30, 1997 was
approximately $1,619,000, or $1.02 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 September 30, 1997 would
have been approximately $2,880,000, or $0.84 per share. After giving effect to
the sale by the Company of 2,250,000 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 September 30, 1997 would have been
approximately $21,066,000, or $3.71 per share. This represents an immediate
increase in pro forma, as adjusted, net tangible book value of $2.87 per share
to existing shareholders and an immediate dilution in pro forma, as adjusted,
net tangible book value of $5.29 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 September
30, 1997 .......................................... $ 1.02
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 ....................................... 0.84
Increase attributable to new shareholders ......... 2.87
-------
Pro forma, as adjusted, net tangible book value per
share after the Offering ........................... 3.71
--------
Dilution per share to new shareholders ............... $ 5.29
========
</TABLE>
As of September 30, 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 $5.34. See "Capitalization," "Description of Capital Stock"
and Note 10 of Notes to Financial Statements.
The following table sets forth, as of September 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) ...... 3,423,415 60.3% $ 2,075,588 9.3% $ 0.61
New investors(2) .................. 2,250,000 39.7 20,250,000 90.7 9.00
--------- ------ ------------ ------
Total ........................... 5,673,415 100.0% $22,325,588 100.0%
========= ====== ============ ======
</TABLE>
<PAGE>
- ------------
(1) Assumes no exercise of options outstanding as of September 30, 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
3,173,415, or 55.9% of the total shares of Common Stock outstanding after
the Offering (2,923,415 shares, or 50.4%, 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 2,500,000, or 44.1%, of the total shares
of Common Stock outstanding after the Offering (2,875,000 shares, or
49.6%, of the total shares if the Underwriters' over-allotment option is
exercised).
13
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below as of December 31, 1995 and
1996 and September 30, 1997 and for each of the three years in the period ended
December 31, 1996 and for the nine months ended September 30, 1997 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 for the nine months ended September 30, 1996 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 nine months
ended September 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>
Year Ended December 31,
---------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- -----------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Product .......................................... $2,176 $2,515 $3,229 $4,644 $ 6,312
Contract research and development .................. 73 38 404 609 590
------- ------- ------- ------- -------
Total revenues ................................. 2,249 2,553 3,633 5,253 6,902
------- ------- ------- ------- -------
Operating expenses:
Cost of product, excluding depreciation ............ 607 837 1,331 2,221 3,799
Cost of product-depreciation ..................... 212 230 424 599 892
------- ------- ------- ------- -------
Total cost of product ........................... 819 1,067 1,755 2,820 4,691
Research and development ........................... 159 72 277 416 576
Selling, general and administrative ............... 613 660 734 864 1,520
Special compensation charge(1) ..................... -- -- -- -- --
------- ------- ------- ------- -------
Total operating expenses ........................ 1,591 1,799 2,766 4,100 6,787
------- ------- ------- ------- -------
Operating income (loss) .............................. 658 754 867 1,153 115
Interest expense .................................... 113 80 79 65 213
------- ------- ------- ------- -------
Net income (loss) before income taxes ............... 545 674 788 1,088 (98)
Pro forma provision (benefit) for income taxes(1) ... 213 263 307 424 (36)
------- ------- ------- ------- -------
Pro forma net income (loss)(1) ..................... $ 332 $ 411 $ 481 $ 664 $ (62)
======= ======= ======= ======= =======
Pro forma net loss per share(1) ..................... $ (0.03)
=======
Shares used in computing pro forma net loss per
share(1) .......................................... 1,979
Supplemental pro forma net income (loss) per
share(2) .......................................... $ 0.02
=======
Shares used in computing supplemental pro forma
net income (loss) per share(2) ..................... 4,083
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------
1996 1997
-------- ----------
<S> <C> <C>
Statement of Operations Data:
Revenues:
Product .......................................... $4,044 $ 5,871
Contract research and development .................. 338 603
------ -------
Total revenues ................................. 4,382 6,474
------ -------
Operating expenses:
Cost of product, excluding depreciation ............ 2,628 3,741
Cost of product-depreciation ..................... 608 893
------ -------
Total cost of product ........................... 3,236 4,634
Research and development ........................... 355 685
Selling, general and administrative ............... 1,090 1,359
Special compensation charge(1) ..................... -- 113
------ -------
Total operating expenses ........................ 4,681 6,791
------ -------
Operating income (loss) .............................. (299) (317)
Interest expense .................................... 116 405
------ -------
Net income (loss) before income taxes ............... (415) (722)
Pro forma provision (benefit) for income taxes(1) ... (154) (276)
------ -------
Pro forma net income (loss)(1) ..................... $(261) $ (446)
====== =======
Pro forma net loss per share(1) ..................... $ (0.19)
=======
Shares used in computing pro forma net loss per
share(1) .......................................... 1,979
Supplemental pro forma net income (loss) per
share(2) .......................................... $ (0.09)
=======
Shares used in computing supplemental pro forma
net income (loss) per share(2) ..................... 2,446
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31, September 30, 1997
------------------------------------------------------- -----------------------
1992 1993 1994 1995 1996 Actual Pro Forma(3)
-------- ---------- -------- --------- ------------ -------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital (deficit) .................. $ 385 $ (564) $ 333 $ (22) $ (1,967) $(490) $ (408)
Total assets ................................. 2,044 3,002 3,309 5,537 8,481 9,803 9,780
Short-term debt .............................. 287 327 334 483 3,039 1,839 1,831
Long-term debt, less current portion ......... 776 647 795 1,235 2,054 2,794 2,794
Convertible subordinated notes payable ...... 100 100 100 100 100 2,092 --
Shareholders' equity ........................ 725 1,150 1,665 2,355 2,228 1,619 2,880
</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 $750,000 if the termination occurred
on September 30, 1997. Such expense amount is excluded from the above
data. See "S Corporation Termination" and Note 3 of Notes to Financial
Statements. Upon the closing of the Offering, the Company will accelerate
the vesting of certain stock options which will result in a special
compensation charge. This amount would have been $859,000 if the vesting
acceleration occurred on September 30, 1997. Such expense amount is
excluded from the above data. See "Management--Stock Option Plans" and
Note 10 of the Notes to Financial Statements.
(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
1,702,355 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.
14
<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
epitaxial 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 wafers, primarily MBE wafers. The Company has experienced rapid
sales growth, and from 1993 to 1996, the Company's total revenues increased
from $2.6 million to $6.9 million, or a compound annual growth rate of
approximately 39%. 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 semiconductor 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. 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 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 of production cycles and reduced the frequency of
unscheduled production interruptions. This has been accomplished by increasing
the
15
<PAGE>
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 as a percentage of
total revenues for the periods indicated.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
---------------------------- ---------------------
1994 1995 1996 1996 1997
------ ------ ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Product ............................................. 89% 88% 91% 92% 91%
Contract research and development ..................... 11 12 9 8 9
---- ---- ---- ---- ----
Total revenues ....................................... 100 100 100 100 100
---- ---- ---- ---- ----
Operating Expenses:
Cost of product, excluding depreciation ............... 36 42 55 60 57
Cost of product-depreciation ........................ 12 12 13 14 14
---- ---- ---- ---- ----
Total cost of product .............................. 48 54 68 74 71
Research and development .............................. 8 8 8 8 11
Selling, general and administrative .................. 20 16 22 25 21
Special compensation charge ........................... -- -- -- -- 2
---- ---- ---- ---- ----
Total operating expenses ........................... 76 78 98 107 105
---- ---- ---- ---- ----
Operating income (loss) .............................. 24 22 2 (7) (5)
Interest expense ....................................... 2 1 3 2 6
---- ---- ---- ---- ----
Net income (loss) before income taxes .................. 22 21 (1) (9) (11)
Pro forma provision (benefit) for income taxes(1) ...... 9 8 -- (3) (4)
---- ---- ---- ---- ----
Pro forma net income (loss)(1) ........................ 13% 13% (1)% (6)% (7)%
==== ==== ==== ==== ====
</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).
<PAGE>
Nine Months Ended September 30, 1997 and 1996.
Product Revenues. Product revenues increased 45% to $5.9 million in the
nine month period ended September 30, 1997 from $4.0 million in the nine month
period ended September 30, 1996. The increase in product revenues results from
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 78% to $603,000 in the nine month period ended
September 30, 1997 from $338,000 in the nine month period ended September 30,
1996. The increase is attributable to the timing of expenses incurred on SBIR
contracts rather than the addition of new contracts.
Cost of Product. Cost of product increased 43% to $4.6 million in the nine
month period ended September 30, 1997 from $3.2 million in the nine month
period ended September 30, 1996. As a percentage of total revenues, cost of
product decreased to 71% in the nine month period ended September 30, 1997 from
74% in the nine month period ended September 30, 1996. This increase in the
absolute cost of product resulted from the significant increase in wafer
production and additional costs associated with the addition of the fourth
multi-wafer MBE system offset by improved manufacturing efficiencies. These
efficiencies were primarily due to fewer production interruptions for
unscheduled maintenance, longer average production cycles and higher wafer
throughput.
16
<PAGE>
Research and Development Expenses. Research and development expenses
increased by 93% to $685,000 in the nine month period ended September 30, 1997
from $355,000 in the nine month period ended September 30, 1996. As a
percentage of total revenues, research and development expenses increased to
11% in the nine month period ended September 30, 1997 from 8% in the nine month
period ended September 30, 1996. Research and development expenses increased
due to a higher level of internal and externally funded research and
development activity in the nine month period ended September 30, 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by 25% to $1.4 million in the nine month
period ended September 30, 1997 from $1.1 million in the nine month period
ended September 30, 1996. As a percentage of total revenues, selling, general
and administrative expenses decreased to 21% in the nine month period ended
September 30, 1997 from 25% in the nine month period ended September 30, 1996.
The absolute increase resulted principally from additional compensation
expenses for finance, sales and marketing, and administrative personnel.
Special Compensation Charge. A non-cash deferred compensation charge of
$113,000 was recorded in the nine month period ended September 30, 1997. The
charge reflects the amortization of the vested portion of 153,000 options
granted in July 1997 multiplied by the difference between 90% of an assumed
initial public offering price of $9.00 per share and the $1.75 per share
exercise price of the options. It is anticipated that the remaining portion of
this deferred compensation charge ($859,000) will be recognized as an expense
upon completion of the Offering when the options become fully vested.
Interest Expense. Interest expense increased by 250% to $405,000 in the
nine month period ended September 30, 1997 from $116,000 in the nine month
period ended September 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 nine month period ended
September 30, 1997 and the nine month period ended September 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 nine month periods ended September 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 addition of personnel and other resources.
17
<PAGE>
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% 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 226% 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 manufactured and 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 addition of 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.
18
<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 11
quarters from September 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, Mar. 31,
1995 1995 1995 1995 1996
---------- ---------- ----------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Product ........................ $1,432 $ 927 $1,234 $1,051 $1,215
Contract research and
development .................. 102 150 202 155 146
------- -------- ------- ------- ------
Total revenues ............... 1,534 1,077 1,436 1,206 1,361
------- -------- ------- ------- ------
Operating Expenses:
Cost of product, excluding
depreciation .................. 557 555 585 524 764
Cost of product-depreciation . 134 136 154 175 177
------- -------- ------- ------- ------
Total cost of product ...... 691 691 739 699 941
Research and development ......... 68 91 131 126 122
Selling, general and
administrative ............... 237 225 191 211 311
Special compensation charge . -- -- -- -- --
------- -------- ------- ------- ------
Total operating expenses 996 1,007 1,061 1,036 1,374
------- -------- ------- ------- ------
Operating income (loss) ......... 538 70 375 170 (13)
Interest expense .................. 17 16 14 18 32
------- -------- ------- ------- ------
Net income (loss) before income
taxes ........................... 521 54 361 152 (45)
Pro forma provision (benefit) for
income taxes(1) .................. 198 21 137 57 (17)
------- -------- ------- ------- ------
Pro forma net income (loss)(1) ... $ 323 $ 33 $ 224 $ 95 $ (28)
======= ======== ======= ======= ======
<PAGE>
<CAPTION>
June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept.30,
1996 1996 1996 1997 1997 1997
---------- ----------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Product ........................ $1,232 $1,597 $2,268 $2,219 $1,514 $2,138
Contract research and
development .................. 79 113 252 204 205 194
------ ------ ------- ------- ------ ------
Total revenues ............... 1,311 1,710 2,520 2,423 1,719 2,332
------ ------ ------- ------- ------ ------
Operating Expenses:
Cost of product, excluding
depreciation .................. 857 1,007 1,171 1,257 1,192 1,292
Cost of product-depreciation . 207 224 284 302 293 298
------ ------ ------- ------- ------ ------
Total cost of product ...... 1,064 1,231 1,455 1,559 1,485 1,590
Research and development ......... 120 113 221 210 230 245
Selling, general and
administrative ............... 419 360 430 498 439 422
Special compensation charge . -- -- -- -- -- 113
------ ------ ------- ------- ------ ------
Total operating expenses 1,603 1,704 2,106 2,267 2,154 2,370
------ ------ ------- ------- ------ ------
Operating income (loss) ......... (292) 6 414 156 (435) (38)
Interest expense .................. 34 50 97 108 140 157
------ ------ ------- ------- ------ ------
Net income (loss) before income
taxes ........................... (326) (44) 317 48 (575) (195)
Pro forma provision (benefit) for
income taxes(1) .................. (121) (16) 118 18 (220) (74)
------ ------ ------- ------- ------ ------
Pro forma net income (loss)(1) ... $ (205) $ (28) $ 199 $ 30 $ (355) $ (121)
====== ====== ======= ======= ====== ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
As a Percentage of Total Revenues
-----------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31,
1995 1995 1995 1995 1996
---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Product ........................ 93% 86% 86% 87% 89%
Contract research and
development .................. 7 14 14 13 11
---- ---- ---- ---- ----
Total revenues ............... 100 100 100 100 100
---- ---- ---- ---- ----
Operating Expenses:
Cost of product, excluding
depreciation .................. 36 51 41 43 56
Cost of product-depreciation . 9 13 11 15 13
---- ---- ---- ---- ----
Total cost of product ...... 45 64 52 58 69
Research and development ...... 4 8 9 11 9
Selling, general and
administrative ............... 16 21 13 17 23
Special compensation charge . -- -- -- -- --
---- ---- ---- ---- ----
Total operating expenses 65 93 74 86 101
---- ---- ---- ---- ----
Operating income (loss) ......... 35 7 26 14 (1)
Interest expense .................. 1 2 1 1 2
---- ---- ---- ---- ----
Net income (loss) before income
taxes ........................... 34 5 25 13 (3)
Pro forma provision (benefit) for
income taxes(1) .................. 13 2 9 5 (1)
---- ---- ---- ---- ----
Pro forma net income (loss)(1) ... 21% 3% 16% 8% (2)%
==== ==== ==== ==== ====
<CAPTION>
June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept.30,
1996 1996 1996 1997 1997 1997
---------- ----------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Product ........................ 94% 93% 90% 92% 88% 92%
Contract research and
development .................. 6 7 10 8 12 8
------ ---- ---- ---- ------- ----
Total revenues ............... 100 100 100 100 100 100
------ ---- ---- ---- ------- ----
Operating Expenses:
Cost of product, excluding
depreciation .................. 65 59 47 52 69 55
Cost of product-depreciation . 16 13 11 12 17 13
------ ---- ---- ---- ------- ----
Total cost of product ...... 81 72 58 64 86 68
Research and development ...... 9 7 9 9 13 11
Selling, general and
administrative ............... 32 21 17 21 26 18
Special compensation charge . -- -- -- -- -- 5
------ ---- ---- ---- ------- ----
Total operating expenses 122 100 84 94 125 102
------ ---- ---- ---- ------- ----
Operating income (loss) ......... (22) 0 16 6 (25) (2)
Interest expense .................. 3 3 4 4 8 6
------ ---- ---- ---- ------- ----
Net income (loss) before income
taxes ........................... (25) (3) 12 2 (33) (8)
Pro forma provision (benefit) for
income taxes(1) .................. (9) (1) 4 1 (12) (3)
------ ---- ---- ---- ------- ----
Pro forma net income (loss)(1) ... (16)% (2)% 8% 1% (21)% (5)%
====== ==== ==== ==== ======= ====
</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).
19
<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
downtime, 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 nine month
periods ended September 30, 1996 and 1997. See "Statements of Cash Flow" in the
Company's Financial Statements.
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 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 $ 1,606 $ 288
Net cash (used in) investing activities ............... (248) (2,208) (3,488) (2,754) (1,447)
Net cash provided by (used in) financing activities . (78) 477 2,816 1,026 1,338
------ -------- -------- -------- --------
Net increase (decrease) in cash ........................ $ (61) $ 383 $ (369) $ (122) $ 179
====== ======== ======== ======== ========
</TABLE>
From 1994 through September 30, 1997, the Company generated approximately
$3.0 million in net cash from operating activities, $1.1 million of which was
generated from net income and $3.0 million of which was non-cash depreciation
expense offset by $1.1 million from other changes in elements of working
capital. These changes were related principally to an increase in accounts
receivable and inventories, offset by an increase in accounts payable and
accrued expenses that resulted primarily from the growth of the Company and
increased sales and manufacturing activities.
20
<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 nine month period ended September 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 nine month period ended
September 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 nine month period ended September 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 nine month period ended September
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 several additional multi-wafer MBE systems and
associated test and measurement equipment, and additional office space for
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 materially affected by inflation or changes in
foreign exchange rates.
21
<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 wafers. MBE wafers are 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 are power efficient in a battery operated system.
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. These elements typically include gallium, aluminum, indium, arsenic,
phosphorous, antimony and 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
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).
22
<PAGE>
The trend to higher frequency operation in commercial applications and the
use of compound semiconductors to meet the requirements of such applications is
illustrated in the chart below:
Radio Spectrum of Commercial Wireless Applications
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Compound
Silicon Semiconductors Frequency (GHz) Application
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
| | 0.500
| | ------------------------------------------------------
| | 0.869 - 0.894 Cellular
| | 0.929 - 0.930 Private Paging
| | 0.930 - 0.941 NarrowBand PCS / Two Way Paging
| | ------------------------------------------------------
| | 1,000
| | ------------------------------------------------------
| | 1.215 - 1.240 Global Positioning System (GPS)
| | 1.616 - 1.626 IRIDIUM and Globalstar Handset
| | 1.850 - 1.980 Broadband PCS
| | 2.150 - 2.180 Wireless Cable (MMDS)
| | 2.400 - 2.483 Wireless Local Area Networks
| | 2.483 - 2.500 Globalstar Satellite to User
| | 2.500 - 2.690 Wireless Cable (MMDS)
- ----- | 5.091 - 5.250 Globalstar Gateway to Satellite
| 6.875 - 7.055 Globalstar Satellite to Gateway
| ------------------------------------------------------
| 10.000
| ------------------------------------------------------
| 12.200 - 12.700 Direct Broadcast Satellite (DBS)
| 14.000 - 14.700 Very Small Aperature Transponder (VSAT)
| 17.300 - 17.700 Direct Broadcast Satellite (DBS)
| 19.400 - 19.600 IRIDIUM Satellite to Gateway
| 23.180 - 23.380 IRIDIUM Satellite Crosslinks
| 27.500 - 28.350 Wireless Cable (LMDS)
| 29.100 - 29.250 Wireless Cable (LMDS)
| 29.100 - 29.300 IRIDIUM Gateway to Satellite
| 37.500 - 40.000 Base Station Communication
| 45.500 - 46.900 Automotive Radar
| 77.000 - 80.000 Automotive Radar
| ------------------------------------------------------
| 100.000
------------------------------------------------------
Wavelength Spectrum of Opto-Electronic Applications
- -----------------------------------------------------------------------------------------------------------------------
Compound Semiconductors* Wavelength (nm) Application
- -----------------------------------------------------------------------------------------------------------------------
AlGaInP 650 Digital Versatile Disc (DVD) ROM
AlGaAs 750 - 950 Compact Disc Players
AlGaAs 750 - 950 High Speed Laser Printing
AlGaAs 780 Read / Write Optical Storage
AlGaAs 785 Pump for Solid State Laser for LIDAR Sensing
AlGaAs 808 Pump Solid State Laser for Industrial Uses
InGaAs 980 Fiber Optic Amplifiers
InGaAsP (on InP) 1300, 1550 Fiber Optic Communication
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Only compound semiconductors can be utilized in this wavelength spectrum.
23
<PAGE>
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.
===============================================================================
Multi-Wafer MBE System
[GRAPHIC DEPICTING MULTI-WAFER MBE SYSTEM]
MBE Wafer Growth Process Growth Chamber Input/Output Chamber
(Ultra-high vacuum)
GaAs Substrate
Rotation Mechanism
Entry/Exit
Load Locks
Epitaxial
Layers Water Platen
Shutter
===============================================================================
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.
24
<PAGE>
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.
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 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
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
25
<PAGE>
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 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
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 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 based epitaxial 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.
26
<PAGE>
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 based MBE devices offer significant performance advantages
compared to both conventional silicon based devices and GaAs 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 other wafer materials and production methods can
sometimes be utilized to produce devices for such applications, the Company
believes that GaAs epitaxial wafers provide superior performance
characteristics in such products.
QED Products and End-Use Applications
- -------------------------------------------------------------------------------
QED MBE Wafers Customer Products End-Use Applications
- -------------------------------------------------------------------------------
HBTs Cellular/PCS
HEMTs Direct Broadcast Satellite TV
MESFETs Global Satellite Communications
--------------------------------------------------
GaAs
AlGaAs Lasers Fiber Communications
Detectors Optical Storage
InGaAs Sensing
InSb --------------------------------------------------
Automotive Engine Controls
MR Sensors Anti-Lock Braking
Brushless Motors
- -------------------------------------------------------------------------------
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 GaAs based MBE wafers, the Company has applied its MBE
expertise to produce other column III and V based MBE wafers.
27
<PAGE>
Products in Development. The Company is currently developing MBE wafers
for opto-electronic devices such as diode lasers and 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 to progress to higher levels
of production in the future.
The Company also 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 which increases the performance of sensors and
allows lasers to operate at longer wavelengths.
Additionally, 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 this
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 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 nine month period ended September 30, 1997, third-party
contract revenue was $404,000, 609,000, $590,000 and $603,000, or approximately
11%, 12%, 9% and 9%, 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 based epitaxial
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 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
28
<PAGE>
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 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
research and development projects through the SBIR program.
For the years ended December 31, 1995 and 1996 and for the nine months
ended September 30, 1997, three customers accounted for approximately 52%, 63%
and 55%, respectively, and the ten largest customers accounted for
approximately 85%, 88% and 81%, respectively, of the Company's total revenues
in each such period. Generally, the Company does not have long-term or other
non-cancelable commitments from its customers and usually sells products
pursuant to customer purchase orders. The loss of 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 nine months ended September
30, 1997, were 11%, 7% and 6%, 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
29
<PAGE>
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 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 increase. 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
30
<PAGE>
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 September
30, 1997, the Company's product revenue backlog was approximately $1.3 million.
This is compared with backlog of approximately $1.4 million at September 30,
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 experienced, and may continue to
experience, cancellation, reduction and 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
several additional multi-wafer MBE systems and associated test and measurement
equipment, and additional office space for 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.
The Company owns and operates four V.G. Semicon V-100 MBE systems which
are capable of simultaneously producing 12 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 available during the fourth quarter of 1998.
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."
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.
MBE Systems Timeline
- --------------------------------------------------------------------------------
MBE Systems 1989 1990 1991 1992 1993 1994 1995 1996 1997
- --------------------------------------------------------------------------------
Single-wafer #1 O--Q-----------------------------------------------------
Single-wafer #2 O------Q------------------------------------------
Multi-wafer #1 O----Q-------------------------
Multi-wafer #2 O-----Q------------
Multi-wafer #3 O------Q-----------
Multi-wafer #4 O---Q-------
- --------------------------------------------------------------------------------
O - Ordered
Q - Qualified for production
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
31
<PAGE>
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.
32
<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, Chief N/A
Financial Officer and Secretary
William H. Weisbecker ............ 34 Vice President Sales and Marketing N/A
Scott T. Massie .................. 36 Vice President Operations N/A
James C. M. Hwang, Ph.D.(1) ...... 49 Director 2000
Gregory H. Olsen, Ph.D.(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 and Secretary since 1997. 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 eight 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.
33
<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 a Managing Director of Safeguard Scientifics, Inc. 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 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."
<PAGE>
Director Compensation
Upon completion of this Offering, each director who is not also an
employee of the Company will be eligible to receive a one-time grant of an
option to purchase 1,000 shares of Common Stock. Thereafter, on each date on
which the Company holds its annual meeting, all non-employee directors elected
at such meeting will be eligible to receive a 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.
34
<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
----------------------------------------------
Other Annual 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 (as amended, 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
35
<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
employee's options terminate 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 be
eligible to 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 elected at such annual meeting will be
eligible to 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. 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 an 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's Board of Directors has
approved an acceleration of the vesting upon closing of the Offering. The
Company recorded deferred compensation of $972,000 in connection with these
options and $113,000 was amortized to expense in the third quarter of 1997. The
remaining deferred compensation charge will be expensed as the options vest,
with the remaining charge expensed upon acceleration of the vesting of the
options upon completion of the Offering. In October 1997, the Company's Board
of Directors approved the grant of options to purchase 25,000 shares of Common
Stock at an exercise price equal to the per share initial public offering
price.
Employee 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"). 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.
36
<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, canceled or expired. No additional grants will be
made under the Employee NQSO Plan. In October 1997, the Company's Board of
Directors approved the acceleration of vesting of all options granted under the
NQSO Plan upon completion of the Offering.
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 12 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.
37
<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 and is payable quarterly with
principal payments commencing in August 1998 and continuing 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 immediately prior to the completion 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 September 30, 1997, $81,820 and $18,180 were outstanding under the
Convertible Notes to NEPA and Dr. Hwang, respectively, which will be converted
into 1,172,030 and 260,420 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 will sell a portion of the shares of Common Stock
received upon conversion of the Convertible Notes and exercise of the Warrants
and Dr. Hwang will sell a portion of the shares of Common Stock he currently
holds. Both NEPA and Dr. Hwang 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 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
38
<PAGE>
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 if the
Internal Revenue Service were to determine that the Company owed taxes because
it was not an S Corporation for any year prior to the Offering, 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 and increased on account of any tax on the tax payment) owed
by the current shareholders. The Company also will pay reasonable expenses
incurred by the current shareholders in connection with the matters described in
the tax agreements. Any payment made by the Company to the current shareholders
pursuant to the tax agreements will likely be considered by the applicable
taxing authority 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 $125,000 to Mr. Hierl and $15,000 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
$0.153 per share. Dr. 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. Dr. Olsen's
option will expire on May 21, 2002, and will continue in effect until
exercised, surrendered, canceled or expired.
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 its 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.
39
<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 Subordinated 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
2,250,000 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 24.6%
NEPA Venture Fund, L.P.(3)(5) ......... 1,307,740 38.2 204,546 1,103,194 19.4
James C. M. Hwang, Ph.D.(3)(6)(7) ...... 445,890 13.0 45,454 401,436 7.1
AMP Incorporated(3)(8) .................. 269,905 7.9 -- 269,905 4.8
Gregory H. Olsen, Ph.D.(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 2.8
All executive officers and directors as
a group (8 persons)(11) ............... 2,079,364 56.8 45,454 2,067,536 34.8
</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 3,423,415 shares outstanding prior to the Offering and 5,673,415
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 and Dr. Hwang 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 1,172,030 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 260,420 shares of Common Stock issuable upon conversion of a
convertible subordinated note payable immediately prior to consummation of
the Offering.
<PAGE>
(7) Shares beneficially owned after Offering 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 the Offering and 268,890
shares of Common Stock after the Offering issuable upon exercise of stock
options granted by the Company which are exercisable within 60 days of
October 1, 1997.
40
<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, 143,245 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 completion of the
Offering. The Preferred Stock will be automatically converted into a total of
1,702,355 shares of Common Stock upon the completion of the Offering and such
shares of the Preferred Stock will no longer be outstanding.
After the completion of the Offering, 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 provide
that, subject to certain limited exceptions, directors of the Company shall not
be personally liable, as such, for monetary damages (other than under criminal
statutes and under Federal, state and local laws imposing liability on
directors for the payment of taxes) for any action taken unless the director
has breached or failed to perform the duties of his or her 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 directors and officers of the Company and
that the Company may, to the extent permitted by the BCL, indemnify employees
and agents of the Company.
41
<PAGE>
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.
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 1,393,794 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,
42
<PAGE>
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 is ChaseMellon
Shareholder Services, L.L.C.
43
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
5,673,415 shares of Common Stock. Of these shares, the 2,500,000 shares sold in
the Offering (plus up to 375,000 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 53.4% of the shares of Common
Stock (48.1%, 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
Employee NQSO Plan and 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 1,393,794
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."
44
<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 2,250,000 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 ........................... 2,500,000
=========
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 125,000 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 completion of the Offering, the Company has agreed to issue
warrants to the Representatives to purchase a total of 187,500 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 effective date 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 who
beneficially own more than 1% of the Common Stock after the Offering 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."
45
<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. 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
September 30, 1997 and the statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1996
and the nine months ended September 30, 1997 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
46
<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.
47
<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
September 30, 1997, and the related statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1996 and the nine months ended September 30, 1997. 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 September 30, 1997, and the results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1996 and the nine months ended September 30, 1997, in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Philadelphia, Pa.,
October 17, 1997
F-2
<PAGE>
QUANTUM EPITAXIAL DESIGNS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
--------------------------------
1995 1996
--------------- ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash ......................................................... $ 446,307 $ 77,609
Accounts receivable .......................................... 755,358 1,084,195
Advances to shareholders .................................... -- 140,597
Inventories ................................................... 602,805 829,952
Prepaid expenses and other .................................... 20,872 --
Deferred income taxes ....................................... -- --
------------- -------------
Total current assets ....................................... 1,825,342 2,132,353
PROPERTY AND EQUIPMENT: .......................................
Machinery and equipment ....................................... 5,348,726 7,670,609
Furniture and office equipment .............................. 116,954 304,280
Leasehold improvements ....................................... 84,439 582,915
------------- -------------
5,550,119 8,557,804
Less- Accumulated depreciation .............................. (1,838,071) (2,765,088)
------------- -------------
Net property and equipment ................................. 3,712,048 5,792,716
DEFERRED FINANCING COSTS ....................................... -- 76,295
DEPOSITS ON EQUIPMENT .......................................... -- 480,000
------------- -------------
$ 5,537,390 $ 8,481,364
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit ................................................ $ -- $ 2,375,000
Current portion of long-term debt ........................... 482,636 663,791
Current portion of convertible subordinated notes payable ... -- --
Accounts payable ............................................. 512,783 845,588
Accrued expenses ............................................. 370,834 215,207
Distribution payable to shareholders ........................ 312,115 --
Deferred revenues ............................................. 168,875 --
------------- -------------
Total current liabilities ................................. 1,847,243 4,099,586
LONG-TERM DEBT ................................................ 1,235,485 2,053,667
CONVERTIBLE SUBORDINATED NOTES PAYABLE ........................ 100,000 100,000
DEFERRED INCOME TAXES .......................................... -- --
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 3,423,415 (1997 pro
forma) shares issued and outstanding ........................ 1,585 1,585
Additional paid-in capital .................................... 72,785 72,785
Deferred compensation .......................................... -- --
Retained earnings ............................................. 2,280,292 2,153,741
------------- -------------
Total shareholders' equity ................................. 2,354,662 2,228,111
------------- -------------
$ 5,537,390 $ 8,481,364
============= =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
September 30, 1997
-----------------------------------
Actual Pro Forma (Note 3)
--------------- -------------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash ......................................................... $ 256,496 $ 264,382
Accounts receivable .......................................... 1,543,495 1,543,495
Advances to shareholders .................................... 140,597 140,597
Inventories ................................................... 832,417 832,417
Prepaid expenses and other .................................... 35,809 35,809
Deferred income taxes ....................................... -- 66,000
------------- -------------
Total current assets ....................................... 2,808,814 2,882,700
PROPERTY AND EQUIPMENT: .......................................
Machinery and equipment ....................................... 9,457,829 9,457,829
Furniture and office equipment .............................. 380,814 380,814
Leasehold improvements ....................................... 646,346 646,346
------------- -------------
10,484,989 10,484,989
Less- Accumulated depreciation .............................. (3,734,172) (3,734,172)
------------- -------------
Net property and equipment ................................. 6,750,817 6,750,817
DEFERRED FINANCING COSTS ....................................... 243,585 146,916
DEPOSITS ON EQUIPMENT .......................................... -- --
------------- -------------
$ 9,803,216 $ 9,780,433
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit ................................................ $ 900,000 $ 900,000
Current portion of long-term debt ........................... 930,551 930,551
Current portion of convertible subordinated notes payable ... 8,252 --
Accounts payable ............................................. 1,114,442 1,114,442
Accrued expenses ............................................. 345,610 345,610
Distribution payable to shareholders ........................ -- --
Deferred revenues ............................................. -- --
------------- -------------
Total current liabilities ................................. 3,298,855 3,290,603
LONG-TERM DEBT ................................................ 2,793,883 2,793,883
CONVERTIBLE SUBORDINATED NOTES PAYABLE ........................ 2,091,748 --
DEFERRED INCOME TAXES .......................................... -- 816,000
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 3,423,415 (1997 pro
forma) shares issued and outstanding ........................ 1,585 3,423
Additional paid-in capital .................................... 1,044,785 3,735,524
Deferred compensation .......................................... (859,000) (859,000)
Retained earnings ............................................. 1,431,360 --
------------- -------------
Total shareholders' equity ................................. 1,618,730 2,879,947
------------- -------------
$ 9,803,216 $ 9,780,433
============= =============
</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 Nine Months Ended
December 31 September 30
------------------------------------------- ------------------------------
1994 1995 1996 1996 1997
------------- ------------- ------------- ------------- ---------------
(unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES: .......................................
Product ....................................... $ 3,228,753 $ 4,643,593 $ 6,312,035 $ 4,044,110 $ 5,870,748
Contract research and development ............ 404,417 609,549 590,393 337,877 603,661
------------ ------------ ----------- ----------- -----------
Total revenues .............................. 3,633,170 5,253,142 6,902,428 4,381,987 6,474,409
------------ ------------ ----------- ----------- -----------
OPERATING EXPENSES: ...........................
Cost of product, excluding depreciation ...... 1,330,264 2,221,513 3,799,266 2,628,044 3,741,438
Cost of product-depreciation .................. 424,228 598,698 891,676 608,343 893,036
------------ ------------ ----------- ----------- -----------
Total cost of product ..................... 1,754,492 2,820,211 4,690,942 3,236,387 4,634,474
Research and development ..................... 277,068 416,401 576,390 355,073 684,751
Selling, general and administrative ......... 734,361 863,137 1,519,785 1,089,679 1,358,593
Special compensation charge .................. -- -- -- -- 113,000
------------ ------------ ----------- ----------- -----------
Total operating expenses .................. 2,765,921 4,099,749 6,787,117 4,681,139 6,790,818
------------ ------------ ----------- ----------- -----------
Operating income (loss) .................. 867,249 1,153,393 115,311 (299,152) (316,409)
INTEREST EXPENSE ................................. 79,550 65,576 213,487 115,849 405,972
------------ ------------ ----------- ----------- -----------
NET INCOME (LOSS) .............................. $ 787,699 $ 1,087,817 $ (98,176) $ (415,001) $ (722,381)
============ ============ =========== =========== ===========
PRO FORMA DATA (UNAUDITED) (Note 3): ............
Historical net income (loss) .................. $ 787,699 $ 1,087,817 $ (98,176) $ (415,001) $ (722,381)
Pro forma provision (benefit) for income
taxes ....................................... 307,000 424,000 (36,500) (154,000) (276,000)
------------ ------------ ----------- ----------- -----------
Pro forma net income (loss) .................. $ 480,699 $ 663,817 $ (61,676) $ (261,001) $ (446,381)
============ ============ =========== =========== ===========
Pro forma net loss per share .................. $ (0.03) $ (0.19)
=========== ===========
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 $ (0.09)
=========== ===========
Shares used in computing supplemental pro
forma net income (loss) per share ............ 4,083,165 2,446,242
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
QUANTUM EPITAXIAL DESIGNS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Common Stock
---------------------- Paid-in
Shares Amount Capital
----------- --------- -------------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1993 .................. 1,553,500 $ 1,553 $ 70,667
Exercise of warrants ..................... 30,180 30 1,724
Exercise of options ..................... 1,670 2 394
Net income .............................. -- -- --
Distributions ........................... -- -- --
---------- -------- ------------
BALANCE, DECEMBER 31, 1994 .................. 1,585,350 1,585 72,785
Net income .............................. -- -- --
Distributions ........................... -- -- --
---------- -------- ------------
BALANCE, DECEMBER 31, 1995 .................. 1,585,350 1,585 72,785
Net loss ................................. -- -- --
Distributions ........................... -- -- --
---------- -------- ------------
BALANCE, DECEMBER 31, 1996 .................. 1,585,350 1,585 72,785
Grant of Common Stock options ............ -- -- 972,000
Amortization of deferred compensation ...... -- -- --
Net loss ................................. -- -- --
---------- -------- ------------
BALANCE, SEPTEMBER 30, 1997
(UNAUDITED) .............................. 1,585,350 1,585 1,044,785
PRO FORMA DATA (UNAUDITED) (Note 3): ......
Exercise of warrants (unaudited) ......... 135,710 136 7,750
Conversion of subordinated notes payable
(unaudited) .............................. 1,702,355 1,702 2,001,629
Termination of S Corporation (unaudited) -- -- 681,360
---------- -------- ------------
PRO FORMA BALANCE, SEPTEMBER 30,
1997 (UNAUDITED) ........................... 3,423,415 $ 3,423 $ 3,735,524
========== ======== ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Deferred Retained
Compensation Earnings Total
-------------- --------------- ---------------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1993 .................. $ -- $ 1,077,886 $ 1,150,106
Exercise of warrants ..................... -- -- 1,754
Exercise of options ..................... -- -- 396
Net income .............................. -- 787,699 787,699
Distributions ........................... -- (274,964) (274,964)
---------- ------------- -----------
BALANCE, DECEMBER 31, 1994 .................. -- 1,590,621 1,664,991
Net income .............................. -- 1,087,817 1,087,817
Distributions ........................... -- (398,146) (398,146)
---------- ------------- -----------
BALANCE, DECEMBER 31, 1995 .................. -- 2,280,292 2,354,662
Net loss ................................. -- (98,176) (98,176)
Distributions ........................... -- (28,375) (28,375)
---------- ------------- -----------
BALANCE, DECEMBER 31, 1996 .................. -- 2,153,741 2,228,111
Grant of Common Stock options ............ (972,000) -- --
Amortization of deferred compensation ...... 113,000 -- 113,000
Net loss ................................. -- (722,381) (722,381)
---------- ------------- -----------
BALANCE, SEPTEMBER 30, 1997
(UNAUDITED) .............................. (859,000) 1,431,360 1,618,730
PRO FORMA DATA (UNAUDITED) (Note 3): ......
Exercise of warrants (unaudited) ......... -- -- 7,886
Conversion of subordinated notes payable
(unaudited) .............................. -- -- 2,003,331
Termination of S Corporation (unaudited) -- (1,431,360) (750,000)
---------- ------------- -----------
PRO FORMA BALANCE, SEPTEMBER 30,
1997 (UNAUDITED) ........................... $ (859,000) $ -- $ 2,879,947
========== ============= ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
QUANTUM EPITAXIAL DESIGNS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------------
1994 1995 1996
------------- --------------- ---------------
<S> <C> <C> <C>
OPERATING ACTIVITIES: .................................
Net income (loss) .................................... $ 787,699 $ 1,087,817 $ (98,176)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities: ..................
Depreciation ....................................... 462,706 622,248 927,017
Amortization ....................................... 14,400 14,400 4,633
Deferred compensation .............................. -- -- --
Change in assets and liabilities: ..................
(Increase) decrease:
Accounts receivable .............................. (561,165) 126,317 (298,837)
Inventories .................................... (13,312) (406,752) (227,147)
Prepaid expenses and other ..................... (10,167) 6,642 16,739
Increase (decrease): ..............................
Accounts payable ................................. (439,448) 272,269 332,805
Accrued expenses ................................. (6,026) 252,449 (185,627)
Deferred revenues .............................. 30,075 138,800 (168,875)
----------- ------------- -------------
Net cash provided by operating activities ...... 264,762 2,114,190 302,532
----------- ------------- -------------
INVESTING ACTIVITIES: .................................
Purchases of property and equipment .................. (247,709) (2,207,722) (3,007,685)
Deposits on equipment .............................. -- -- (480,000)
----------- ------------- -------------
Net cash used in investing activities ......... (247,709) (2,207,722) (3,487,685)
----------- ------------- -------------
FINANCING ACTIVITIES: .................................
Distributions paid to shareholders .................. (222,032) (211,644) (340,490)
Advances to shareholders ........................... -- -- (140,597)
Net proceeds (repayments) under line of credit ...... -- -- 2,375,000
Repayments of long-term debt ........................ (345,583) (311,008) (500,663)
Proceeds from long-term debt ........................ 486,995 1,000,000 1,500,000
Proceeds from issuance of convertible subordinated
notes payable ....................................... -- -- --
Deferred financing costs ........................... -- -- (76,795)
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
----------- ------------- -------------
NET (DECREASE) INCREASE IN CASH ..................... (61,417) 383,816 (368,698)
CASH, BEGINNING OF PERIOD ........................... 123,908 62,491 446,307
----------- ------------- -------------
CASH, END OF PERIOD ................................. $ 62,491 $ 446,307 $ 77,609
=========== ============= =============
CASH PAID DURING THE PERIOD FOR INTEREST . $ 79,960 $ 58,722 $ 179,432
=========== ============= =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30
--------------------------------
1996 1997
--------------- ---------------
(unaudited)
<S> <C> <C>
OPERATING ACTIVITIES: .................................
Net income (loss) .................................... $ (415,001) $ (722,381)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities: ..................
Depreciation ....................................... 621,118 969,084
Amortization ....................................... 4,134 26,915
Deferred compensation .............................. -- 113,000
Change in assets and liabilities: ..................
(Increase) decrease:
Accounts receivable .............................. (96,644) (459,300)
Inventories .................................... (10,352) (2,465)
Prepaid expenses and other ..................... 20,872 (35,809)
Increase (decrease): ..............................
Accounts payable ................................. 1,821,951 268,854
Accrued expenses ................................. (171,061) 130,403
Deferred revenues .............................. (168,875) --
------------- -------------
Net cash provided by operating activities ...... 1,606,142 288,301
------------- -------------
INVESTING ACTIVITIES: .................................
Purchases of property and equipment .................. (2,753,920) (1,447,185)
Deposits on equipment .............................. -- --
------------- -------------
Net cash used in investing activities ......... (2,753,920) (1,447,185)
------------- -------------
FINANCING ACTIVITIES: .................................
Distributions paid to shareholders .................. (340,490) --
Advances to shareholders ........................... (140,597) --
Net proceeds (repayments) under line of credit ...... 1,950,000 (1,475,000)
Repayments of long-term debt ........................ (369,951) (593,024)
Proceeds from long-term debt ........................ -- 1,600,000
Proceeds from issuance of convertible subordinated
notes payable ....................................... -- 2,000,000
Deferred financing costs ........................... (72,990) (194,205)
Proceeds from exercise of warrants .................. -- --
Proceeds from exercise of options .................. -- --
------------- -------------
Net cash (used in) provided by financing
activities .................................... 1,025,972 1,337,771
------------- -------------
NET (DECREASE) INCREASE IN CASH ..................... (121,806) 178,887
CASH, BEGINNING OF PERIOD ........................... 446,307 77,609
------------- -------------
CASH, END OF PERIOD ................................. $ 324,501 $ 256,496
============= =============
CASH PAID DURING THE PERIOD FOR INTEREST . $ 119,672 $ 335,814
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
QUANTUM EPITAXIAL DESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS
(Information for the nine months ended September 30, 1996 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 for the nine months ended September 30, 1996 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 nine months ended September 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 September 30, 1997 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.
<PAGE>
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, $621,118 and
$969,084 for 1994, 1995, 1996 and for the nine months ended September 30, 1996
and 1997, respectively.
F-7
<PAGE>
QUANTUM EPITAXIAL DESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(Information for the nine months ended September 30, 1996 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
September 30, 1997, 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 and September 30, 1997, 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 $27,414 as of December 31, 1995, 1996 and September 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.
Special Compensation Charge
Special compensation charge represents the amortization of deferred
compensation (see Note 10).
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
$750,000 as of September 30, 1997 (see Note 3).
F-8
<PAGE>
QUANTUM EPITAXIAL DESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(Information for the nine months ended September 30, 1996 is unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (Continued)
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).
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 September 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 $750,000 as
of September 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 October 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 September 30, 1997 are as follows:
<TABLE>
<S> <C>
Current deferred income tax assets:
Accruals and reserves not currently deductible for tax ...... $ 51,000
Other ...................................................... 15,000
----------
66,000
----------
Non-current deferred income tax liabilities:
Depreciation methods ....................................... 816,000
----------
Net deferred income tax liabilities ..................... $ 750,000
----------
</TABLE>
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 1,432,450 shares of Common Stock, (ii) the conversion of
$2,000,000 of convertible subordinated notes payable less deferred financing
costs of $96,669 (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 a
warrant (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.
F-9
<PAGE>
QUANTUM EPITAXIAL DESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(Information for the nine months ended September 30, 1996 is unaudited)
3. PRO FORMA INFORMATION (UNAUDITED): -- (Continued)
Pro Forma Statements of Operations
Immediately prior to completion 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 $750,000 as of September 30,
1997).
The differences between the federal statutory income tax rate and the pro
forma income tax rate are as follows:
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31 September 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 0.2
------ ------ --------- --------- ---------
39.0% 39.0% (37.2)% (37.1)% (38.2)%
====== ====== ========= ========= =========
</TABLE>
<PAGE>
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 nine months ended September 30, 1997, the
calculation of the pro forma net loss per share excludes interest expense, net
of tax, of $0 and $71,000, 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
nine months ended September 30, 1997, the calculation of the pro forma net loss
per share includes interest expense, net of tax, of $5,000 and $3,000,
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 ($4,388,571 in the aggregate as of
September 30, 1997). These outstanding borrowings will be repaid upon
completion of the
F-10
<PAGE>
QUANTUM EPITAXIAL DESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(Information for the nine months ended September 30, 1996 is unaudited)
3. PRO FORMA INFORMATION (UNAUDITED): -- (Continued)
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 nine months ended September 30,
1997 excludes the impact of the three items discussed in the preceeding
sentence since the inclusion of such is antidilutive.
For the year ended December 31, 1996 and the nine months ended September
30, 1997, the calculation of the supplemental pro forma net income (loss) per
share excludes interest expense, net of tax, of $0 and $71,000, 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 nine months ended
September 30, 1997, the calculation of the supplemental pro forma net income
(loss) per share excludes interest expense, net of tax, of $123,000 and
$145,000, 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
nine months ended September 30, 1997 includes the interest expense of $3,000,
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:
Nine Months
Ended
Year Ended December 31 September 30
------------------------ --------------
Customer 1994 1995 1996 1996 1997
- ---------- ------ ------ ------ ------ -----
A ...... 17% 23% 41% 36% 19%
B ...... 7 18 14 19 15
C ...... 20 11 8 7 10
D ...... 2 -- -- -- 21
The loss of one or more of these major customers could have a material
adverse effect on the Company's business.
F-11
<PAGE>
QUANTUM EPITAXIAL DESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(Information for the nine months ended September 30, 1996 is unaudited)
4. RISKS AND UNCERTAINTIES: -- (Continued)
Total revenues are summarized as a percentage by geographic area as
follows:
Nine Months
Ended
Year Ended December 31 September 30
------------------------ --------------
1994 1995 1996 1996 1997
------ ------ ------ ------ -----
Domestic .................. 93% 89% 93% 90% 94%
Foreign: ..................
Far East ............... 5% 8% 6% 9% 6%
Europe and Canada ...... 2% 3% 1% 1% 0%
5. ACCOUNTS RECEIVABLE:
<TABLE>
<CAPTION>
December 31
--------------------------- September 30,
1995 1996 1997
----------- ------------- --------------
<S> <C> <C> <C>
Trade receivables ....................................... $ 546,847 $ 824,257 $1,392,192
Allowance for doubtful accounts and returns ............ (30,000) (40,000) (55,000)
--------- ----------- ----------
516,847 784,257 1,337,192
Billed and unbilled research contract receivables ...... 238,511 299,938 206,303
--------- ----------- ----------
$ 755,358 $ 1,084,195 $1,543,495
========= =========== ==========
</TABLE>
6. INVENTORIES:
December 31
------------------------- September 30,
1995 1996 1997
----------- ----------- --------------
Raw materials ............... $ 486,725 $ 588,242 $ 579,870
Finished goods ............... 116,080 19,860 --
Manufacturing supplies ...... -- 221,850 252,547
---------- ---------- ----------
$ 602,805 $ 829,952 $ 832,417
========== ========== ==========
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
$900,000 as of December 31, 1996 and September 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 for the nine months ended September 30, 1996 is unaudited)
8. LONG-TERM DEBT:
<TABLE>
<CAPTION>
December 31
----------------------------- September 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 95,238
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). ......... 1,000,000 800,000 650,000
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 1,250,000
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). ................................................... -- -- 1,493,333
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 50,587
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. ............................................. 271,052 226,496 185,276
----------- ----------- -----------
1,718,121 2,717,458 3,724,434
Less-Current portion .................................... (482,636) (663,791) (930,551)
----------- ----------- -----------
$ 1,235,485 $ 2,053,667 $ 2,793,883
=========== =========== ===========
</TABLE>
F-13
<PAGE>
QUANTUM EPITAXIAL DESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(Information for the nine months ended September 30, 1996 is unaudited)
8. LONG-TERM DEBT: -- (Continued)
At September 30, 1997, long-term debt matures as follows:
Years Ending
September 30
------------
1998 ...... $ 930,551
1999 ...... 918,961
2000 ...... 901,002
2001 ...... 710,587
2002 ...... 263,333
------------
$ 3,724,434
============
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
------------------------- September 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 September 30, 1997, convertible subordinated notes payable mature as
follows:
Years Ending
September 30
------------
1998 ...... $ 8,252
1999 ...... 50,008
2000 ...... 41,740
2001 ...... 2,000,000
-----------
$2,100,000
-----------
F-14
<PAGE>
QUANTUM EPITAXIAL DESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(Information for the nine months ended September 30, 1996 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). Upon conversion, the holder's right to one seat on the
Company's Board of Directors will be terminated.
As discussed above, the $2,000,000 Convertible Subordinated Note Payable
is with the parent Company of a significant customer. In addition, the Company
also purchases certain raw materials from this customer. The net sales to this
customer in 1994, 1995, 1996 and for the nine months ended September 30, 1996
and 1997 were $254,322, $971,177, $965,000, $833,577 and $947,196,
respectively. The purchases from this customer in 1994, 1995, 1996 and for the
nine months ended September 30, 1996 and 1997 were $0, $0, $132,266, $100,034
and $301,492, respectively. The accounts receivable due from this customer as
of December 31, 1995 and 1996 and September 30, 1997 were $231,712, $172,239
and $166,034, respectively. The accounts payable to this customer as of
December 31, 1995 and 1996 and September 30, 1997 were $0, $32,232 and
$145,902, respectively.
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 1,432,450 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 convert 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, no options were granted
under the 1996 Plan.
In July 1997, the Company issued 153,000 stock options under the 1996 Plan
to several employees at an exercise price of $1.75 per share. The Company has
recorded deferred compensation based upon the difference between the deemed
value for accounting purposes of the Company's stock (90% of the estimated
offering price of $.9.00 per share) and the exercise price on the date of
option grant. The deferred compensation balance will be amortized as
compensation expense ratably as the options vest. The options vest over a four
year period;
F-15
<PAGE>
QUANTUM EPITAXIAL DESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(Information for the nine months ended September 30, 1996 is unaudited)
10. SHAREHOLDERS' EQUITY: -- (Continued)
however, the Company's Board of Directors has approved an acceleration of the
vesting of these options upon the closing of the Offering. This acceleration in
vesting terms will result in the recognition of the remaining unamortized
balance of deferred compensation (which is $859,000 as of September 30, 1997)
as an expense in the period that the closing of the Offering occurs.
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. No
further options will be granted under the 1991 Plan. The options granted under
this plan will continue in effect until exercised, surrendered, canceled or
expired.
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.
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 ...... 310,890 0.045 - 0.721 0.155
Granted ....................................... 153,000 1.75 1.75
--------
Options outstanding at September 30, 1997 ...... 463,890 $0.045 - $1.75 $ 0.681
========
</TABLE>
<PAGE>
As of September 30, 1997, there were 290,473 options vested and
exercisable and 167,000 options were available for grant (all under the 1996
Plan).
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 increased to the following amounts:
<TABLE>
<CAPTION>
Year Nine Months
Ended Ended
December 31, September 30,
1996 1997
-------------- --------------
<S> <C> <C>
Pro forma net loss, as reported ............... $ (61,676) $ (446,381)
Pro forma net loss, as adjusted .................. (62,842) (465,191)
Pro forma net loss, per share, as reported ...... (0.03) (0.19)
Pro forma net loss per share, as adjusted ...... (0.03) (0.20)
</TABLE>
The weighted average fair value of each stock option granted during the
years ended December 31, 1995 and 1996 and for the nine months ended September
30, 1997 was $0.178, $0.203 and $6.90, respectively. As of
F-16
<PAGE>
QUANTUM EPITAXIAL DESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(Information for the nine months ended September 30, 1996 is unaudited)
10. SHAREHOLDERS' EQUITY: -- (Continued)
September 30, 1997, the weighted average remaining contractual life of all
stock options outstanding was 5.78 years. The weighted average remaining
contractual life of each stock option granted during the years ended December
31, 1995 and 1996 and the nine months ended September 30, 1997 was 7.42, 8.25
and 9.79 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:
December 31
--------------------- September 30
1995 1996 1997
--------- --------- -------------
Risk-free interest rate ...... 7.2% 5.5% 6.3%
Expected dividend yield ...... -- -- --
Expected life ............... 7 years 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).
<PAGE>
11. RESEARCH CONTRACTS:
Contract research revenue consists of the following:
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31 September 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 $ 61,766 $ 139,253
Phase II ........................ 137,000 321,474 435,675 195,679 464,408
Title III Research Contract ...... 115,490 154,308 80,432 80,432 --
---------- ---------- ---------- ---------- ----------
$ 404,417 $ 609,549 $ 590,393 $ 337,877 $ 603,661
========== ========== ========== ========== ==========
</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 nine months ended September 30, 1996 and 1997,
respectively.
F-17
<PAGE>
QUANTUM EPITAXIAL DESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(Information for the nine months ended September 30, 1996 is unaudited)
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 nine months ended September 30, 1997.
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 nine months ended September 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 nine months ended September 30, 1996 and 1997
was $118,189, $122,136, $147,168, $99,754 and $153,582, respectively. Future
minimum rental commitments under this operating lease are as follows at
September 30, 1997:
Years Ending
September 30
------------
1998 ..................... $ 217,000
1999 ..................... 194,000
2000 ..................... 177,000
2001 ..................... 183,000
2002 ..................... 189,000
2003 and thereafter ...... 244,000
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 made 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 in the affairs of the Company since the date hereof or that the
information contained herein is correct as of any time subsequent to the date
hereof.
-----------------------------------
TABLE OF CONTENTS
Page
---------
Prospectus Summary ..................... 3
Risk Factors ........................... 6
Use Of Proceeds ........................ 11
Dividend Policy ........................ 11
S Corporation Termination ............... 11
Capitalization ........................... 12
Dilution ................................. 13
Selected Financial Data .................. 14
Management's Discussion and Analysis
of Financial Condition and Results
of Operations ........................ 15
Business ................................. 22
Management .............................. 33
Certain Transactions ..................... 38
Principal and Selling Shareholders ...... 40
Description of Capital Stock ............ 41
Shares Eligible for Future Sale ......... 44
Underwriting ........................... 45
Legal Matters ........................... 46
Experts ................................. 46
Additional Information .................. 46
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>
================================================================================
2,500,000 Shares
[QED LOGO]
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:
<TABLE>
<S> <C>
SEC Registration Fee .............................. $ 7,841
National Association of Securities Dealers, Inc. Fee . 16,250
Nasdaq National Market Listing Fee .................. 31,750
Printing and engraving fees ........................ 75,000
Registrant's counsel fees and expenses ............ 150,000
Accounting fees and expenses ........................ 100,000
Blue Sky expenses and counsel fees .................. 3,000
Transfer agent and registrar fees .................. 10,000
Director & Officer Liability Insurance ............ *
Miscellaneous ....................................... *
---------
TOTAL ............................................. $500,000
=========
</TABLE>
- ------------
* 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.
Each of Article IV of the Company's Articles of Incorporation and Article
XIV of the Company's Amended 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, or an employee or agent of the Company, 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 Form of Amended and Restated Articles of Incorporation of the Company
3.2 Form of 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.
Hwang)**
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*
24.2 Power of Attorney (Michael G. Bolton)
27.1 Financial Data Schedule
</TABLE>
- ------------
* Previously filed.
** 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
II-3
<PAGE>
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.
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
Amendment No. 1 to this Registration Statement.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
October 29, 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 Amendment No. 1 to 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
29th day of October, 1997.
QUANTUM EPITAXIAL DESIGNS, INC.
By: /s/ THOMAS L. HIERL
-----------------------------------
Thomas L. Hierl
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, Amendment No.
1 to 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 President and Chief Executive Officer; October 29, 1997
----------------------- Director (principal executive officer)
Thomas L. Hierl
/s/ WILLIAM J. BURG Vice President Finance, Chief Financial October 29, 1997
----------------------- Officer and Secretary (principal financial
William J. Burg officer and principal accounting officer)
James C.M. Hwang Directors October 29, 1997
Gregory H. Olsen
Michael G. Bolton
Stephen N. Bretsen
By: /s/ THOMAS L. HIERL
- -------------------------
Thomas L. Hierl
Attorney-in-fact
</TABLE>
II-6
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit No. Description
- ------------- -----------
<S> <C>
1.1 Form of Underwriting Agreement
3.1 Form of Amended and Restated Articles of Incorporation of the Company
3.2 Form of 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. Hwang)**
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*
24.2 Power of Attorney (Michael G. Bolton)
27.1 Financial Data Schedule
</TABLE>
- ------------
* Previously filed.
** To be filed by Amendment.
<PAGE>
2,500,000 Shares*
QUANTUM EPITAXIAL DESIGNS, INC.
Common Stock
UNDERWRITING AGREEMENT
November _____, 1997
NEEDHAM & COMPANY, INC.
JANNEY MONTGOMERY SCOTT INC.
As Representatives of the several Underwriters
c/o Needham & Company, Inc.
445 Park Avenue
New York, New York 10022
Ladies and Gentlemen:
Quantum Epitaxial Designs, Inc., a Pennsylvania corporation (the
"Company"), proposes to issue and sell ________ shares (the "Company Firm
Shares") of the Company's Common Stock, $0.001 par value per share (the "Common
Stock"), and the stockholders of the Company named in Schedule II hereto (the
"Selling Stockholders") propose to sell an aggregate of _______ shares (the
"Selling Stockholder Firm Shares") of Common Stock, in each case to you and to
the several other Underwriters named in Schedule I hereto (collectively, the
"Underwriters"), for whom you are acting as representatives (the
"Representatives"). The Company and the Selling Stockholders also agreed to
grant to you and the other Underwriters an option (the "Option") to purchase up
to an additional ______ shares (the "Company Option Shares") and ______ shares
of Common Stock (the "Selling Stockholder Option Shares"), respectively, on the
terms and for the purposes set forth in Section 1(b). The Company Firm Shares
and Company Option Shares are collectively referred to herein as the "Company
Shares," and the Selling Stockholder Option Shares are collectively referred to
herein as the "Selling Stockholder Shares." The Company Firm Shares and the
Selling Stockholder Firm Shares are referred to collectively herein as the "Firm
Shares," and the Company Option Shares and Selling Stockholder Option Shares are
collectively referred to herein as the "Option Shares." The Firm Shares and the
Option Shares are referred to collectively herein as the "Shares."
- ----------
*Plus an option to purchase up to an additional 375,000 shares to cover
over-allotments.
<PAGE>
The Company and each of the Selling Stockholders, intending to be
legally bound, hereby confirm their respective agreements with the
Representatives and the several other Underwriters as follows:
1. Agreement to Sell and Purchase.
(a) On the basis of the representations, warranties and agreements of
the Company and the Selling Stockholders herein contained and subject to all the
terms and conditions of this Agreement, (i) the Company agrees to issue and sell
the Company Firm Shares to the several Underwriters, (ii) each Selling
Stockholder, severally and not jointly, agrees to sell to the several
Underwriters the respective number of Selling Stockholder Firm Shares set forth
opposite that Selling Stockholder's name on Schedule II hereto and (iii) each of
the Underwriters, severally and not jointly, agrees to purchase from the Company
and the Selling Stockholders the respective number of Firm Shares set forth
opposite that Underwriter's name in Schedule I hereto, at the purchase price of
$______ for each Firm Share. The number of Firm Shares to be purchased by each
Underwriter from the Company and each Selling Stockholder shall be as nearly as
practicable in the same proportion to the total number of Firm Shares being sold
by the Company and each Selling Stockholder as the number of Firm Shares being
purchased by each Underwriter bears to the total number of Firm Shares to be
sold hereunder.
(b) Subject to all the terms and conditions of this Agreement, the
Company and the Selling Stockholders grant the Option to the several
Underwriters to purchase, severally and not jointly, up to the maximum number of
Option Shares set forth in Schedule II hereto at the same price per share as the
Underwriters shall pay for the Firm Shares. The Option may be exercised only to
cover over-allotments in the sale of the Firm Shares by the Underwriters and may
be exercised in whole or in part at any time on or before the 30th day after the
date of this Agreement upon written or telegraphic notice (the "Option Shares
Notice") by the Representatives to the Company and the Selling Stockholders no
later than 12:00 noon, New York City time, at least two and no more than five
business days before the date specified for closing in the Option Shares Notice
(the "Option Closing Date"), setting forth the aggregate number of Option Shares
to be purchased and the time and date for such purchase. On the Option Closing
Date, the Company and the Selling Stockholders will sell to the Underwriters the
number of Option Shares set forth in the Option Shares Notice, and each
Underwriter will purchase such percentage of the Option Shares as is equal to
the percentage of Firm Shares that such Underwriter is purchasing, as adjusted
by the Representatives in such manner as they deem advisable to avoid fractional
shares.
(c) Subject to the terms and conditions of this Agreement, on the
Closing Date (as hereinafter defined) the Company shall issue to the
Representatives warrants in the form attached hereto as Exhibit A (the
"Representatives' Warrants") to purchase an aggregate of _______ shares of
Common Stock at an exercise price equal to ____% of the Price to Public set
forth on the cover page of the Prospectus (as hereinafter defined). The number
of shares of Common Stock subject to each Representatives' Warrant shall be
specified by the Representatives no less than one business day prior to the
Closing Date.
2
<PAGE>
2. Delivery and Payment. Delivery of the Firm Shares shall be made to the
Representatives for the accounts of the Underwriters against payment of the
purchase price by certified or official bank checks or by wire transfers payable
in same-day funds to the order of the Company for the Company Firm Shares to be
sold by it and to __________, as custodian for the Selling Stockholders (the
"Custodian") for the Firm Shares to be sold by the Selling Stockholders (with
all costs and expenses incurred by the Underwriters in connection with such
settlement in same-day funds, including but not limited to, interest or cost of
funds and expenses, to be borne by the Company) at the office of Needham &
Company, Inc., 445 Park Avenue, New York, New York 10022, at 10:00 a.m., New
York City time, on the third (or, if the purchase price set forth in Section
1(b) hereof is determined after 4:30 p.m., Washington D.C. time, the fourth)
business day following the commencement of the offering contemplated by this
Agreement, or at such time on such other date, not later than seven business
days after the date of this Agreement, as may be agreed upon by the Company and
the Representatives (such date is hereinafter referred to as the "Closing
Date").
To the extent the Option is exercised, delivery of the Option Shares
against payment by the Underwriters (in the manner specified above) will take
place at the offices specified above for the Closing Date at the time and date
(which may be the Closing Date) specified in the Option Shares Notice.
Certificates evidencing the Shares shall be in definitive form and shall
be registered in such names and in such denominations as the Representatives
shall request at least two business days prior to the Closing Date or the Option
Closing Date, as the case may be, by written notice to the Company. For the
purpose of expediting the checking and packaging of certificates for the Shares,
the Company agrees to make such certificates available for inspection at least
24 hours prior to the Closing Date or the Option Closing Date, as the case may
be.
The cost of original issue tax stamps, if any, in connection with the
issuance and delivery of the Firm Shares and Option Shares by the Company to the
respective Underwriters shall be borne by the Company. The Company will pay and
save each Underwriter and any subsequent holder of the Shares harmless from any
and all liabilities with respect to or resulting from any failure or delay in
paying Federal and state stamp and other transfer taxes, if any, which may be
payable or determined to be payable in connection with the original issuance or
sale to such Underwriter of the Shares.
3. Representations and Warranties of the Company. The Company represents,
warrants and covenants to each Underwriter that:
(a) A registration statement (Registration No. 333-___) on Form S-1
relating to the Shares, including a preliminary prospectus and such amendments
to such registration statement as may have been required to the date of this
Agreement, has been prepared by the Company under the provisions of the
Securities Act of 1933, as amended (the "Act"), and the rules and regulations
(collectively referred to as the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder, and has been filed with the
Commission. The term "preliminary prospectus" as used herein means a preliminary
prospectus as contemplated by Rule 430 or Rule 430A of the Rules and Regulations
3
<PAGE>
included at any time as part of the registration statement. Copies of such
registration statement and amendments and of each related preliminary prospectus
have been delivered to the Representatives. If such registration statement has
not become effective, a further amendment to such registration statement,
including a form of final prospectus, necessary to permit such registration
statement to become effective will be filed promptly by the Company with the
Commission. If such registration statement has become effective, a final
prospectus containing information permitted to be omitted at the time of
effectiveness by Rule 430A of the Rules and Regulations will be filed promptly
by the Company with the Commission in accordance with Rule 424(b) of the Rules
and Regulations. The term "Registration Statement" means the registration
statement as amended at the time it becomes or became effective (the "Effective
Date"), including financial statements and all exhibits and any information
deemed to be included by Rule 430A and includes any registration statement
relating to the offering contemplated by this Agreement and filed pursuant to
Rule 462(b) of the Rules and Regulations. The term "Prospectus" means the
prospectus as first filed with the Commission pursuant to Rule 424(b) of the
Rules and Regulations or, if no such filing is required, the form of final
prospectus included in the Registration Statement at the Effective Date. Any
reference herein to the terms "amend," "amendment" or "supplement" with respect
to the Registration Statement, any preliminary prospectus or the Prospectus
shall be deemed to refer to and include the filing of any document under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") after the
Effective Date, the date of any preliminary prospectus or the date of the
Prospectus, as the case may be, and deemed to be incorporated therein by
reference.
(b) No order preventing or suspending the use of any preliminary
prospectus has been issued by the Commission. On the Effective Date, the date
the Prospectus is first filed with the Commission pursuant to Rule 424(b) (if
required), at all times subsequent to and including the Closing Date and, if
later, the Option Closing Date and when any post-effective amendment to the
Registration Statement becomes effective or any amendment or supplement to the
Prospectus is filed with the Commission, the Registration Statement and the
Prospectus (as amended or as supplemented if the Company shall have filed with
the Commission any amendment or supplement thereto), including the financial
statements included in the Prospectus, did and will comply with all applicable
provisions of the Act and the Rules and Regulations and will contain all
statements required to be stated therein in accordance with the Act and the
Rules and Regulations. On the Effective Date and when any post-effective
amendment to the Registration Statement becomes effective, no part of the
Registration Statement, the Prospectus or any such amendment or supplement did
or will contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein not misleading. At the Effective Date, the date the
Prospectus or any amendment or supplement to the Prospectus is filed with the
Commission and at the Closing Date and, if later, the Option Closing Date, the
Prospectus did not and will not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading. The
foregoing representations and warranties in this Section 3(b) do not apply to
any statements or omissions made in reliance on and in conformity with
information relating to any Underwriter furnished in writing to the Company by
the Representatives specifically for inclusion in the Registration Statement or
4
<PAGE>
Prospectus or any amendment or supplement thereto. The Company acknowledges that
the statements set forth under the heading "Underwriting" in the Prospectus
constitute the only information relating to any Underwriter furnished in writing
to the Company by the Representatives specifically for inclusion in the
Registration Statement.
(c) The Company does not own, and at the Closing Date and, if later,
the Option Closing Date, will not own, directly or indirectly, any shares of
stock or any other equity or long-term debt securities of any corporation or
have any equity interest in any corporation, firm, partnership, joint venture,
association or other entity. The Company is, and at the Closing Date and, if
later, the Option Closing Date, will be, a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation. The Company has, and at the Closing Date and, if later, the
Option Closing Date, will have, full power and authority to conduct all the
activities conducted by it, to own or lease all the assets owned or leased by it
and to conduct its business as described in the Registration Statement and the
Prospectus. The Company is, and at the Closing Date and, if later, the Option
Closing Date, will be, duly licensed or qualified to do business and in good
standing as a foreign corporation in all jurisdictions in which the nature of
the activities conducted by it or the character of the assets owned or leased by
it makes such license or qualification necessary, except to the extent that the
failure to be so qualified or be in good standing would not materially and
adversely affect the Company or its business, properties, business prospects,
condition (financial or otherwise) or results of operations. The Company is not,
and at the Closing Date and, if later, the Option Closing Date, will not be,
engaged in any discussions or a party to any agreement or understanding, written
or oral, regarding the acquisition of an interest in any corporation, firm,
partnership, joint venture, association or other entity where such discussions,
agreements or understandings would require amendment to the Registration
Statement pursuant to applicable securities laws. Complete and correct copies of
the certificate of incorporation and of the by-laws of the Company and all
amendments thereto have been delivered to the Representatives, and no changes
therein will be made subsequent to the date hereof and prior to the Closing Date
or, if later, the Option Closing Date.
(d) All of the outstanding shares of capital stock of the Company have
been duly authorized, validly issued and are fully paid and nonassessable and
were issued in compliance with all applicable state and federal securities laws;
the Company Firm Shares and the Option Shares have been duly authorized and when
issued and paid for as contemplated herein will be validly issued, fully paid
and nonassessable; the shares of Common Stock issuable upon exercise of the
Representatives' Warrants will be duly authorized and, when issued pursuant to
the terms of the Representatives' Warrants will be validly issued, fully paid
and nonassessable; no preemptive or similar rights exist with respect to any of
the Shares or the issue and sale thereof or with respect to the issuance of the
Representatives' Warrants or the issue and sale of the shares issuable upon the
exercise thereof. The description of the capital stock of the Company in the
Registration Statement and the Prospectus is, and at the Closing Date and, if
later, the Option Closing Date, will be, complete and accurate in all respects.
Except as set forth in the Prospectus, the Company does not have outstanding,
and at the Closing Date and, if later, the Option Closing Date, will not have
outstanding, any options to purchase, or any rights or warrants to subscribe
for, or any securities or obligations convertible into, or any contracts or
5
<PAGE>
commitments to issue or sell, any shares of capital stock, or any such warrants,
convertible securities or obligations. No further approval or authority of
stockholders or the Board of Directors of the Company will be required for the
transfer and sale of the Selling Stockholder Firm Shares or the issuance and
sale of the Company Firm Shares and the Option Shares as contemplated herein.
(e) The financial statements and schedules included in the
Registration Statement or the Prospectus present fairly the financial condition
of the Company as of the respective dates thereof and the results of operations
and cash flows of the Company for the respective periods covered thereby, all in
conformity with generally accepted accounting principles applied on a consistent
basis throughout the entire period involved, except as otherwise disclosed in
the Prospectus. No other financial statements or schedules of the Company are
required by the Act, the Exchange Act, the Exchange Act Rules and Regulations or
the Rules and Regulations to be included in the Registration Statement or the
Prospectus. Arthur Andersen LLP (the "Accountants"), who have reported on such
financial statements and schedules, are independent accountants with respect to
the Company as required by the Act and the Rules and Regulations. The summary
consolidated financial and statistical data included in the Registration
Statement present fairly the information shown therein and have been compiled on
a basis consistent with the financial statements presented therein.
(f) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus and prior to the Closing
Date and, if later, the Option Closing Date, except as set forth in or
contemplated by the Registration Statement and the Prospectus, (i) there has not
been and will not have been any change in the capitalization of the Company
(other than in connection with the exercise of options to purchase the Company's
Common Stock granted pursuant to the Company's stock option plans from the
shares reserved therefor as described in the Registration Statement), or any
material adverse change in the business, properties, business prospects,
condition (financial or otherwise) or results of operations of the Company,
arising for any reason whatsoever, (ii) the Company has not incurred nor will it
incur, except in the ordinary course of business as described in the Prospectus,
any material liabilities or obligations, direct or contingent, nor has the
Company entered into nor will it enter into, except in the ordinary course of
business as described in the Prospectus, any material transactions other than
pursuant to this Agreement and the transactions referred to herein and (iii) the
Company has not and will not have paid or declared any dividends or other
distributions of any kind on any class of its capital stock.
(g) The Company is not, will not become as a result of the
transactions contemplated hereby, and does not intend to conduct its business in
a manner that would cause it to become, an "investment company" or an
"affiliated person" of, or "promoter" or "principal underwriter" for, an
"investment company," as such terms are defined in the Investment Company Act of
1940, as amended.
(h) There are no actions, suits or proceedings pending or, to the
knowledge of the Company, threatened against or affecting the Company or any of
its officers in their capacity as such, nor any basis therefor, before or by any
Federal or state court, commission, regulatory body, administrative agency or
other governmental body, domestic or foreign, wherein an unfavorable ruling,
6
<PAGE>
decision or finding might materially and adversely affect the Company or the
business, properties, business prospects, condition (financial or otherwise) or
results of operations of the Company.
(i) The Company has, and at the Closing Date and, if later, the Option
Closing Date, will have, performed all the obligations required to be performed
by it, and is not, and at the Closing Date, and, if later, the Option Closing
Date, will not be, in default, under any contract or other instrument to which
it is a party or by which its property is bound or affected, which default might
reasonably be expected to materially and adversely affect the Company or the
business, properties, business prospects, condition (financial or otherwise) or
results of operations of the Company. To the best knowledge of the Company, no
other party under any contract or other instrument to which it is a party is in
default in any respect thereunder, which default might reasonably be expected to
materially and adversely affect the Company or the business, properties,
business prospects, condition (financial or otherwise) or results of operations
of the Company. The Company is, and at the Closing Date and, if later, the
Option Closing Date, will not be, in violation of any provision of its
certificate or articles of organization or by-laws or other organizational
documents.
(j) No consent, approval, authorization or order of, or any filing or
declaration with, any court or governmental agency or body is required for the
consummation by the Company of the transactions on its part contemplated herein,
except such as have been obtained under the Act or the Rules and Regulations and
such as may be required under state securities or Blue Sky laws or the by-laws
and rules of the National Association of Securities Dealers, Inc. (the "NASD")
in connection with the purchase and distribution by the Underwriters of the
Shares.
(k) The Company has full corporate power and authority to enter into
this Agreement. This Agreement has been duly authorized, executed and delivered
by the Company and constitutes a valid and binding agreement of the Company,
enforceable against the Company in accordance with the terms hereof. The
performance of this Agreement and the consummation of the transactions
contemplated hereby will not result in the creation or imposition of any lien,
charge or encumbrance upon any of the assets of the Company pursuant to the
terms or provisions of, or result in a breach or violation of any of the terms
or provisions of, or constitute a default under, or give any party a right to
terminate any of its obligations under, or result in the acceleration of any
obligation under, the certificate or articles of incorporation or by-laws of the
Company, any indenture, mortgage, deed of trust, voting trust agreement, loan
agreement, bond, debenture, note agreement or other evidence of indebtedness,
lease, contract or other agreement or instrument to which the is a party or by
which the Company, or any of its properties is bound or affected, or violate or
conflict with any judgment, ruling, decree, order, statute, rule or regulation
of any court or other governmental agency or body applicable to the business or
properties of the Company.
(l) The Company has good and marketable title to all properties and
assets described in the Prospectus as owned by it, free and clear of all liens,
charges, encumbrances or restrictions, except such as are described in the
Prospectus or are not material to the business of the Company. The Company has
7
<PAGE>
valid, subsisting and enforceable leases for the properties described in the
Prospectus as leased by it/them. The Company owns or leases all such properties
as are necessary to its operations as now conducted or as proposed to be
conducted, except where the failure to so own or lease would not materially and
adversely affect the Company or the business, properties, business prospects,
condition (financial or otherwise) or results of operations of the Company.
(m) There is no document or contract of a character required to be
described in the Registration Statement or the Prospectus or to be filed as an
exhibit to the Registration Statement which is not described or filed as
required. All such contracts to which the Company is a party have been duly
authorized, executed and delivered by the Company, constitute valid and binding
agreements of the Company and are enforceable against and by the Company in
accordance with the terms thereof.
(n) No statement, representation, warranty or covenant made by the
Company in this Agreement or made in any certificate or document required by
Section 6 of this Agreement to be delivered to the Representatives was or will
be, when made, inaccurate, untrue or incorrect.
(o) Neither the Company nor any of its directors, officers or
controlling persons has taken, directly or indirectly, any action designed, or
which might reasonably be expected, to cause or result, under the Act or
otherwise, in, or which has constituted, stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Shares.
(p) No holder of securities of the Company has rights to the
registration of any securities of the Company because of the filing of the
Registration Statement, which rights have not been waived by the holder thereof
as of the date hereof.
(q) The Company has filed a registration statement pursuant to Section
12(g) of the Exchange Act to register the Common Stock, has filed an application
to list the Shares to be sold hereunder on the Nasdaq National Market ("NNM"),
and has received notification that the listing has been approved, subject to
notice of issuance of such Shares.
(r) Except as disclosed in the Prospectus (i) the Company has
sufficient trademarks, trade names, patent rights, mask works, copyrights,
licenses, approvals and governmental authorizations to conduct its business as
now conducted, (ii) the Company has no knowledge of any infringement by it of
trademarks, trade name rights, patent rights, mask work rights, copyrights,
licenses, trade secrets or other similar rights of others, where such
infringement could have a material and adverse effect on the Company or the
business, properties, business prospects, condition (financial or otherwise) or
results of operations of the Company, and (iii) there is no claim being made
against the Company, or to the best of the Company's knowledge, any employee of
the Company regarding trademark, trade name, patent, mask work, copyright,
license, trade secret or other infringement which could have a material and
adverse effect on the Company or the business, properties, business prospects,
condition (financial or otherwise) or results of operations of the Company.
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(s) The Company has filed all federal, state, local and foreign income
tax returns which have been required to be filed and has paid all taxes and
assessments received by it to the extent that such taxes or assessments have
become due. The Company has no tax deficiency which has been or, to the best
knowledge of the Company, might be asserted or threatened against it which could
have a material and adverse effect on the Company or the business, properties,
business prospects, condition (financial or otherwise) or results of operations
of the Company.
(t) The Company owns or possesses all authorizations, approvals,
orders, licenses, registrations, other certificates and permits of and from all
governmental regulatory officials and bodies, necessary to conduct its business
as contemplated in the Prospectus, except where the failure to own or possess
all such authorizations, approvals, orders, licenses, registrations, other
certificates and permits would not materially and adversely affect the Company
or the business, properties, business prospects, condition (financial or
otherwise) or results of operations of the Company. There is no proceeding
pending or threatened (or any basis therefor known to the Company) which may
cause any such authorization, approval, order, license, registration,
certificate or permit to be revoked, withdrawn, cancelled, suspended or not
renewed; and the Company is conducting its business in compliance with all laws,
rules and regulations applicable thereto (including, without limitation, all
applicable federal, state and local environmental laws and regulations) except
where such noncompliance would not materially and adversely affect the Company
or the business, properties, business prospects, condition (financial or
otherwise) or results of operations of the Company.
(u) The Company maintains insurance of the types and in the amounts
generally deemed adequate for its business, including, but not limited to,
insurance covering real and personal property owned or leased by the Company
against theft, damage, destruction, acts of vandalism and all other risks
customarily insured against, all of which insurance is in full force and effect.
(v) The Company has not, nor, to the best of the Company's knowledge,
has any of its respective employees or agents at any time during the last five
years (i) made any unlawful contribution to any candidate for foreign office, or
failed to disclose fully any contribution in violation of law, or (ii) made any
payment to any federal or state governmental officer or official, or other
person charged with similar public or quasi-public duties, other than payments
required or permitted by the laws of the United States or any jurisdiction
thereof.
(w) The executive offices and the manufacturing and storage facilities
of the Company (the "Premises"), and all operations presently or formerly
conducted thereon by the Company or any predecessor thereof, are now and, since
the Company began to use such Premises, always have been and, to the knowledge
of the Company, prior to when the Company began to use such Premises, always had
been, in compliance with all federal, state and local statutes, ordinances,
regulations, rules, standards and requirements of common law concerning or
relating to industrial hygiene and the protection of health and the environment
(collectively, the "Environmental Laws"), except to the extent that any failure
to be in such compliance would not materially adversely affect the general
affairs, properties, condition (financial or otherwise), results of operations,
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<PAGE>
stockholders' equity, business or prospects of the Company. There are no
conditions on, about, beneath or arising from the Premises or at any other
location that might give rise to liability, the imposition of a statutory lien
or require a "Response," "Removal" or "Remedial Action," as defined herein,
under any of the Environmental Laws, and that would materially adversely affect
the general affairs, properties, condition (financial or otherwise), results of
operations, stockholders' equity, business or prospects of the Company. Except
as expressly disclosed in the Prospectus, which disclosed items will not
materially adversely affect the general affairs, properties, condition
(financial or otherwise), results of operations, stockholders' equity, business
or prospects of the Company, (i) the Company has received no notice and has no
knowledge of any claim, demand, investigation, regulatory action, suit or other
action instituted or threatened against the Company or any portion of the
Premises relating to any of the Environmental Laws, and (ii) the Company has
received no notice of material violation, citation, complaint, order, directive,
request for information or response thereto, notice letter, demand letter or
compliance schedule to or from any governmental or regulatory agency arising out
of or in connection with "hazardous substances" (as defined by applicable
Environmental Laws) on, about, beneath, arising from or generated at the
Premises or at any other location. As used in this subsection, the terms
"Response," "Removal" and "Remedial Action" shall have the respective meanings
assigned to such terms under Sections 101(23)-101(25) of the Comprehensive
Environmental Response, Compensation and Liability Act, as amended by the
Superfund Amendments and Reauthorization Act, 42 U.S.C. 9601(23)-9601(25);
(x) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that: (i) transactions are executed
in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary in order to permit preparation of
financial statements in accordance with generally accepted accounting principles
and to maintain accountability for assets; (iii) access to assets is permitted
only in accordance with management's general or specific authorization; and (iv)
the recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(y) No unregistered securities of the Company have been sold by the
Company or on behalf of the Company by any person or persons controlling,
controlled by, or under common control with the Company within the three years
prior to the date hereof, except as expressly disclosed in the Registration
Statement.
(z) Except for the Company's disability, health, life insurance and
other welfare benefit plans, and those plans that are disclosed in the
Prospectus, the Company has not had and do not now have any employee benefit
plan, profit sharing plan, employee pension benefit plan or employee welfare
benefit plan or deferred compensation arrangements ("Plans") that are subject to
the provisions of the Employee Retirement Income Security Act of 1974, as
amended, or the rules and regulations thereunder ("ERISA"). All Plans that are
10
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subject to ERISA are in compliance with ERISA, in all material respects, and, to
the extent required by the Internal Revenue Code of 1986, as amended (the
"Code"), in compliance with the Code in all material respects. The Company has
no employee pension benefit plan that is subject to Part 3 of Subtitle B of
Title I of ERISA or any defined benefit plan or multi-employer plan. The Company
has not maintained retired life and retired health insurance plans that are
employee welfare benefit plans providing for continuing benefit or coverage for
any employee or any beneficiary of any employee after such employee's
termination of employment, except as required by Section 4980B of the Code. No
fiduciary or other party in interest with respect to any of the Plans has caused
any of such Plans to engage in a prohibited transaction as defined in Section
406 of ERISA. As used in this subsection, the terms "defined benefit plan,"
"employee benefit plan," "employee pension benefit plan," "employee welfare
benefit plan," "fiduciary" and "multi-employer plan" shall have the respective
meanings assigned to such terms in Section 3 of ERISA.
(aa) No labor dispute exists with the Company's employees, and to the
knowledge of the Company no such labor dispute is threatened. The Company has no
knowledge of any existing or threatened labor disturbance by the employees of
any of its principal suppliers, contractors or customers that would reasonably
be expected to result in a material adverse effect to the general affairs,
properties, condition (financial or otherwise), results of operations,
stockholders' equity, business or prospects of the Company.
(bb) The Company has not incurred any liability for any finder's fees
or similar payments in connection with the transactions contemplated herein.
Any certificate signed by any officer of the Company in such capacity
and delivered to the Representatives or to counsel for the Underwriters pursuant
to this Agreement shall be deemed a representation and warranty by the Company
to the several Underwriters as to the matters covered thereby.
4. Representations, Warranties and Covenants of the Selling
Stockholders. Each Selling Stockholder, severally and not jointly, represents,
warrants and covenants to each Underwriter that:
(a) All consents, approvals, authorizations and orders necessary for
the execution and delivery by such Selling Stockholder of this Agreement and the
Power-of-Attorney and Custody Agreement (hereinafter referred to as
"Stockholders' Agreement") hereinafter referred to, and for the sale and
delivery of the Selling Stockholder Shares to be sold by such Selling
Stockholder hereunder, have been obtained; and such Selling Stockholder has full
right, power and authority to enter into this Agreement and the Stockholders'
Agreement, to make the representations, warranties and agreements hereunder and
thereunder, and to sell, assign, transfer and deliver the Shares to be sold by
such Selling Stockholder hereunder.
(b) Certificates in negotiable form representing all of the Selling
Stockholder Shares to be sold by such Selling Stockholder have been placed in
custody under the Stockholders' Agreement, in the form heretofore furnished to
you, duly executed and delivered by such Selling Stockholder to the Custodian,
and such Selling Stockholder has duly executed and delivered a
power-of-attorney, in the form heretofore furnished to you and included in the
Stockholders' Agreement (the "Power-of-Attorney"), appointing _________ and
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<PAGE>
___________, and each of them, as such Selling Stockholder's attorney-in-fact
(the "Attorneys-in-Fact") with authority to execute and deliver this Agreement
on behalf of such Selling Stockholder, to determine (subject to the provisions
of the Stockholders' Agreement) the purchase price to be paid by the
Underwriters to the Selling Stockholders as provided in Section 2 hereof, to
authorize the delivery of the Selling Stockholder Shares to be sold by such
Selling Stockholder hereunder and otherwise to act on behalf of such Selling
Stockholder in connection with the transactions contemplated by this Agreement
and the Stockholders' Agreement.
(c) Such Selling Stockholder specifically agrees that the Selling
Stockholder Shares represented by the certificates held in custody for such
Selling Stockholder under the Stockholders' Agreement are for the benefit of and
coupled with and subject to the interests of the Underwriters, the Custodian,
the Attorneys-in-Fact, each other Selling Stockholder and the Company, that the
arrangements made by such Selling Stockholder for such custody, and the
appointment by such Selling Stockholder of the Attorneys-in-Fact by the
Power-of-Attorney, are to that extent irrevocable, and that the obligations of
such Selling Stockholder hereunder shall not be terminated by operation of law,
whether by the death, disability, incapacity, liquidation or dissolution of any
Selling Stockholder or by the occurrence of any other event. If any individual
Selling Stockholder or any executor or trustee for a Selling Stockholder should
die or become incapacitated, or if any Selling Stockholder that is an estate or
trust should be terminated, or if any Selling Stockholder that is a partnership
or corporation should be dissolved, or if any other such event should occur,
before the delivery of the Selling Stockholder Shares hereunder, certificates
representing the Selling Stockholder Shares shall be delivered by or on behalf
of the Selling Stockholders in accordance with the terms and conditions of this
Agreement and of the Stockholders' Agreement, and actions taken by the
Attorneys-in-Fact pursuant to the Powers-of-Attorney shall be as valid as if
such death, incapacity, termination, dissolution or other event had not
occurred, regardless of whether or not the Custodian, the Attorneys-in-Fact, or
any of them, shall have received notice of such death, incapacity, termination,
dissolution or other event.
(d) This Agreement and the Stockholders' Agreement have each been duly
authorized, executed and delivered by such Selling Stockholder and each such
document constitutes a valid and binding obligation of such Selling Stockholder,
enforceable in accordance with its terms.
(e) No consent, approval, authorization or order of, or any filing or
declaration with, any court or governmental agency or body is required in
connection with the sale of the Selling Stockholder Shares by such Selling
Stockholder or the consummation by such Selling Stockholder of the transactions
on its part contemplated by this Agreement and the Stockholders' Agreement,
except such as have been obtained under the Act or the Rules and Regulations and
such as may be required under state securities or Blue Sky laws or the by-laws
and rules of the NASD in connection with the purchase and distribution by the
Underwriters of the Shares to be sold by such Selling Stockholder.
(f) The sale of the Selling Stockholder Shares to be sold by such
Selling Stockholder hereunder and the performance by such Selling Stockholder of
this Agreement and the Stockholders' Agreement and the consummation of the
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<PAGE>
transactions contemplated hereby and thereby will not result in the creation or
imposition of any lien, charge or encumbrance upon any of the assets of such
Selling Stockholder pursuant to the terms or provisions of, or result in a
breach or violation of any of the terms or provisions of, or constitute a
default under, or give any party a right to terminate any of its obligations
under, or result in the acceleration of any obligation under, any indenture,
mortgage, deed of trust, voting trust agreement, loan agreement, bond,
debenture, note agreement or other evidence of indebtedness, lease, contract or
other agreement or instrument to which such Selling Stockholder is a party or by
which such Selling Stockholder or any of its properties is bound or affected, or
violate or conflict with any judgment, ruling, decree, order, statute, rule or
regulation of any court or other governmental agency or body applicable to such
Selling Stockholder or, if such Selling Stockholder is a corporation,
partnership or other entity, the organizational documents of such Selling
Stockholder.
(g) Such Selling Stockholder has, and at the Closing Date and, if
later, the Option Closing Date, will have, good and marketable title to the
Selling Stockholder Shares to be sold by such Selling Stockholder hereunder,
free and clear of all liens, encumbrances, equities or claims whatsoever; and,
upon delivery of such Selling Stockholder Shares and payment therefor pursuant
hereto, good and marketable title to such Selling Stockholder Shares, free and
clear of all liens, encumbrances, equities or claims whatsoever, will be
delivered to the Underwriters.
(h) On the Closing Date or, if later, the Option Closing Date, all
stock transfer or other taxes (other than income taxes) that are required to be
paid in connection with the sale and transfer of the Shares to be sold by such
Selling Stockholder to the several Underwriters hereunder will be have been
fully paid or provided for by such Selling Stockholder and all laws imposing
such taxes will have been fully complied with.
(i) Other than as permitted by the Act and the Rules and Regulations,
such Selling Stockholder has not distributed and will not distribute any
preliminary prospectus, the Prospectus or any other offering material in
connection with the offering and sale of the Shares. Such Selling Stockholder
has not taken and will not at any time take, directly or indirectly, any action
designed, or which might reasonably be expected, to cause or result in, or which
will constitute, stabilization of the price of shares of Common Stock to
facilitate the sale or resale of any of the Shares.
(j) All information with respect to such Selling Stockholder contained
in the Registration Statement, any preliminary prospectus, the Prospectus or any
amendment or supplement thereto complied or will comply in all material respects
with all applicable requirements of the Act and the Rules and Regulations and
does not and will not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading.
(k) Such Selling Stockholder has no knowledge of any material fact or
condition not set forth in the Registration Statement or the Prospectus that has
adversely affected, or may adversely affect, the business, properties, business
13
<PAGE>
prospects, condition (financial or otherwise) or results of operations of the
Company, and the sale of the Shares proposed to be sold by such Selling
Stockholder is not prompted by any such knowledge.
(l) Such Selling Stockholder has no reason to believe that the
representations and warranties of the Company contained in Section 3 hereof are
not true and correct.
(m) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Tax Equity and Fiscal Responsibility
Act of 1982 with respect to the transactions herein contemplated, such Selling
Stockholder agrees to deliver to you prior to or at the Closing Date a properly
completed and executed United States Treasury Department Form W-9 (or other
applicable form or statement specified by Treasury Department regulations in
lieu thereof).
5. Agreements of the Company and the Selling Stockholders. Each of the
Company and the Selling Stockholders respectively covenants and agrees with the
several Underwriters as follows:
(a) The Company will not, either prior to the Effective Date or
thereafter during such period as the Prospectus is required by law to be
delivered in connection with sales of the Shares by an Underwriter or dealer,
file any amendment or supplement to the Registration Statement or the
Prospectus, unless a copy thereof shall first have been submitted to the
Representatives within a reasonable period of time prior to the filing thereof
and the Representatives shall not have objected thereto in good faith.
(b) The Company will use its best efforts to cause the Registration
Statement to become effective, and will notify the Representatives promptly, and
will confirm such advice in writing, (i) when the Registration Statement has
become effective and when any post-effective amendment thereto becomes
effective, (ii) of any request by the Commission for amendments or supplements
to the Registration Statement or the Prospectus or for additional information,
(iii) of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or the initiation of any proceedings
for that purpose or the threat thereof, (iv) of the happening of any event
during the period mentioned in the second sentence of Section 5(e) that in the
judgment of the Company makes any statement made in the Registration Statement
or the Prospectus untrue or that requires the making of any changes in the
Registration Statement or the Prospectus in order to make the statements
therein, in the light of the circumstances in which they are made, not
misleading and (v) of receipt by the Company or any representative or attorney
of the Company of any other communication from the Commission relating to the
Company, the Registration Statement, any preliminary prospectus or the
Prospectus. If at any time the Commission shall issue any order suspending the
effectiveness of the Registration Statement, the Company will make every
reasonable effort to obtain the withdrawal of such order at the earliest
possible moment. If the Company has omitted any information from the
Registration Statement pursuant to Rule 430A of the Rules and Regulations, the
Company will comply with the provisions of and make all requisite filings with
the Commission pursuant to said Rule 430A and notify the Representatives
promptly of all such filings.
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(c) The Company will furnish to each Representative, without charge,
one signed copy of each of the Registration Statement and of any post-effective
amendment thereto, including financial statements and schedules, and all
exhibits thereto and will furnish to the Representatives, without charge, for
transmittal to each of the other Underwriters, a copy of the Registration
Statement and any post-effective amendment thereto, including financial
statements and schedules but without exhibits.
(d) The Company will comply with all the provisions of any
undertakings contained in the Registration Statement.
(e) On the Effective Date, and thereafter from time to time, the
Company will deliver to each of the Underwriters, without charge, as many copies
of the Prospectus or any amendment or supplement thereto as the Representatives
may reasonably request. The Company consents to the use of the Prospectus or any
amendment or supplement thereto by the several Underwriters and by all dealers
to whom the Shares may be sold, both in connection with the offering or sale of
the Shares and for any period of time thereafter during which the Prospectus is
required by law to be delivered in connection therewith. If during such period
of time any event shall occur which in the judgment of the Company or counsel to
the Underwriters should be set forth in the Prospectus in order to make any
statement therein, in the light of the circumstances under which it was made,
not misleading, or if it is necessary to supplement or amend the Prospectus to
comply with law, the Company will forthwith prepare and duly file with the
Commission an appropriate supplement or amendment thereto, and will deliver to
each of the Underwriters, without charge, such number of copies of such
supplement or amendment to the Prospectus as the Representatives may reasonably
request.
(f) Prior to any public offering of the Shares, the Company will
cooperate with the Representatives and counsel to the Underwriters in connection
with the registration or qualification of the Shares for offer and sale under
the securities or Blue Sky laws of such jurisdictions as the Representatives may
request; provided, that in no event shall the Company be obligated to qualify to
do business in any jurisdiction where it is not now so qualified or to take any
action which would subject it to general service of process in any jurisdiction
where it is not now so subject.
(g) The Company will, so long as required under the Rules and
Regulations, furnish to its stockholders as soon as practicable after the end of
each fiscal year an annual report (including a balance sheet and statements of
income, stockholders' equity and cash flow of the Company, if any, certified by
independent public accountants) and, as soon as practicable after the end of
each of the first three quarters of each fiscal year (beginning with the fiscal
quarter ending after the effective date of the Registration Statement),
consolidated summary financial information of the Company, if any, for such
quarter in reasonable detail.
(h) During the period of five years commencing on the Effective Date,
the Company will furnish to the Representatives and each other Underwriter who
may so request copies of such financial statements and other periodic and
special reports as the Company may from time to time distribute generally to the
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holders of any class of its capital stock, and will furnish to the
Representatives and each other Underwriter who may so request a copy of each
annual or other report it shall be required to file with the Commission.
(i) The Company will make generally available to holders of its
securities as soon as may be practicable but in no event later than the last day
of the fifteenth full calendar month following the calendar quarter in which the
Effective Date falls, an earnings statement (which need not be audited but shall
be in reasonable detail) for a period of 12 months ended commencing after the
Effective Date, and satisfying the provisions of Section 11(a) of the Act
(including Rule 158 of the Rules and Regulations).
(j) Whether or not the transactions contemplated by this Agreement are
consummated or this Agreement is terminated, the Company and, unless otherwise
paid by the Company, the Selling Stockholders will pay or reimburse if paid by
the Representatives, in such proportions as they may agree upon themselves, all
costs and expenses incident to the performance of the obligations of the Company
and the Selling Stockholders under this Agreement and in connection with the
transactions contemplated hereby, including but not limited to costs and
expenses of or relating to (i) the preparation, printing and filing of the
Registration Statement and exhibits to it, each preliminary prospectus,
Prospectus and any amendment or supplement to the Registration Statement or
Prospectus, (ii) the preparation and delivery of certificates representing the
Shares, (iii) the printing of this Agreement, the Agreement Among Underwriters,
any Selected Dealer Agreements, any Underwriters' Questionnaires, the
Stockholders' Agreements, any Underwriters' Powers of Attorney, and any
invitation letters to prospective Underwriters, (iv) furnishing (including costs
of shipping and mailing) such copies of the Registration Statement, the
Prospectus and any preliminary prospectus, and all amendments and supplements
thereto, as may be requested for use in connection with the offering and sale of
the Shares by the Underwriters or by dealers to whom Shares may be sold, (v) the
listing of the Shares on the NNM, (vi) any filings required to be made by the
Underwriters with the NASD, and the fees, disbursements and other charges of
counsel for the Underwriters in connection therewith, (vii) the registration or
qualification of the Shares for offer and sale under the securities or Blue Sky
laws of such jurisdictions designated pursuant to Section 5(f), including the
fees, disbursements and other charges of counsel to the Underwriters in
connection therewith, and the preparation and printing of preliminary,
supplemental and final Blue Sky memoranda, (viii) fees, disbursements and other
charges of counsel to the Company (but not those of counsel for the
Underwriters, except as otherwise provided herein) and (ix) the transfer agent
for the Shares. The Underwriters may deem the Company to be the primary obligor
with respect to all costs, fees and expenses to be paid by the Company and by
the Selling Stockholders. The Selling Stockholders will pay (directly or by
reimbursement) all fees and expenses incident to the performance of their
obligations under this Agreement that are not otherwise specifically provided
for herein, including but not limited to any fees and expenses of counsel for
such Selling Stockholders, any fees and expenses of the Attorneys-in-Fact and
the Custodian, and all expenses and taxes incident to the sale and delivery of
the Shares to be sold by such Selling Stockholders to the Underwriters
hereunder.
(k) The Company will not at any time, directly or indirectly, take any
action designed or which might reasonably be expected to cause or result in, or
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<PAGE>
which will constitute, stabilization of the price of the shares of Common Stock
to facilitate the sale or resale of any of the Shares.
(l) The Company will apply the net proceeds from the offering and sale
of the Shares to be sold by the Company in the manner set forth in the
Prospectus under "Use of Proceeds."
(m) During the period beginning from the date hereof and continuing to
and including the date 180 days after the date of the Prospectus, without the
prior written consent of Needham & Company, Inc., the Company will not offer,
sell, contract to sell, grant options to purchase or otherwise dispose of any of
the Company's equity securities of the Company or any other securities
convertible into or exchangeable with its Common Stock or other equity security
(other than pursuant to employee stock option plans or the conversion of
convertible securities or the exercise of warrants outstanding on the date of
this Agreement).
(n) During the period of 180 days after the date of the Prospectus,
the Company will not, without the prior written consent of Needham & Company,
Inc., grant options to purchase shares of Common Stock at a price less than the
initial public offering price. During the period of 180 days after the date of
the Prospectus, the Company will not file with the Commission or cause to become
effective any registration statement (other than on Form S-8) relating to any
securities of the Company without the prior written consent of Needham &
Company, Inc.
(o) The Selling Stockholders will, and the Company will cause each of
its officers, directors and certain stockholders designated by the
Representatives to, enter into lock-up agreements with the Representatives to
the effect that they will not, without the prior written consent of Needham &
Company, Inc., sell, contract to sell or otherwise dispose of any shares of
Common Stock or rights to acquire such shares according to the terms set forth
in Schedule III hereto.
(p) The Company will not file with the Commission any registration
statement on Form S-8 relating to shares of its Common Stock prior to 90 days
after the effective date of the Registration Statement.
6. Conditions of the Obligations of the Underwriters. The obligations of
each Underwriter hereunder are subject to the following conditions:
(a) Notification that the Registration Statement has become effective
shall be received by the Representatives not later than 5:00 p.m., New York City
time, on the date of this Agreement or at such later date and time as shall be
consented to in writing by the Representatives and all filings required by Rule
424 and Rule 430A of the Rules and Regulations shall have been made.
(b) (i) No stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that purpose shall be
pending or threatened by the Commission, (ii) no order suspending the
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effectiveness of the Registration Statement or the qualification or registration
of the Shares under the securities or Blue Sky laws of any jurisdiction shall be
in effect and no proceeding for such purpose shall be pending before or
threatened or contemplated by the Commission or the authorities of any such
jurisdiction, (iii) any request for additional information on the part of the
staff of the Commission or any such authorities shall have been complied with to
the satisfaction of the staff of the Commission or such authorities and (iv)
after the date hereof no amendment or supplement to the Registration Statement
or the Prospectus shall have been filed unless a copy thereof was first
submitted to the Representatives and the Representatives do not object thereto
in good faith, and the Representatives shall have received certificates, dated
the Closing Date and, if later, the Option Closing Date and signed by the Chief
Executive Officer and the Chief Financial Officer of the Company (who may, as to
proceedings threatened, rely upon the best of their information and belief), to
the effect of clauses (i), (ii) and (iii) of this paragraph.
(c) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, (i) there shall not have been a
material adverse change in the general affairs, business, business prospects,
properties, management, condition (financial or otherwise) or results of
operations of the Company, whether or not arising from transactions in the
ordinary course of business, in each case other than as described in or
contemplated by the Registration Statement and the Prospectus, and (ii) the
Company shall not have sustained any material loss or interference with its
business or properties from fire, explosion, flood or other casualty, whether or
not covered by insurance, or from any labor dispute or any court or legislative
or other governmental action, order or decree, which is not described in the
Registration Statement and the Prospectus, if in the judgment of the
Representatives any such development makes it impracticable or inadvisable to
consummate the sale and delivery of the Shares by the Underwriters at the
initial public offering price.
(d) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, there shall have been no litigation
or other proceeding instituted against the Company or any of its officers or
directors in their capacities as such, before or by any Federal, state or local
court, commission, regulatory body, administrative agency or other governmental
body, domestic or foreign, in which litigation or proceeding an unfavorable
ruling, decision or finding would, in the judgment of the Representatives,
materially and adversely affect the business, properties, business prospects,
condition (financial or otherwise) or results of operations of the Company.
(e) Each of the representations and warranties of the Company and the
Selling Stockholders contained herein shall be true and correct in all material
respects at the Closing Date and, with respect to the Option Shares, at the
Option Closing Date, and all covenants and agreements contained herein to be
performed on the part of the Company or the Selling Stockholders and all
conditions contained herein to be fulfilled or complied with by the Company or
the Selling Stockholders at or prior to the Closing Date and, with respect to
the Option Shares, at or prior to the Option Closing Date, shall have been duly
performed, fulfilled or complied with.
(f) The Representatives shall have received an opinion, dated the
Closing Date and, with respect to the Option Shares, the Option Closing Date,
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satisfactory in form and substance to the Representatives and counsel for the
Underwriters from Pepper, Hamilton & Scheetz LLP, counsel to the Company and the
Selling Stockholders, with respect to the following matters (except that the
matters set forth in subparagraphs (xx)-(xxii) need not be addressed in the
opinion delivered at the Option Closing Date, if later than the Closing Date):
(i) The Company is a corporation duly organized, validly existing and
in good standing under the laws of its jurisdiction of incorporation; has full
corporate power and authority to conduct all the activities conducted by it, to
own or lease all the assets owed or leased by it and to conduct its business as
described in the Registration Statement and Prospectus; and is duly licensed or
qualified to do business and is in good standing as a foreign corporation in all
jurisdictions in which the nature of the activities conducted by it or the
character of the assets owned or leased by it makes such license or
qualification necessary and where the failure to be licensed or qualified would
have a material and adverse effect on the business or financial condition of the
Company.
(ii) All of the outstanding shares of capital stock of the Company
(including the Selling Stockholder Shares) have been duly authorized, validly
issued and are fully paid and nonassessable, to such counsel's knowledge, were
issued pursuant to exemptions from the registration and qualification
requirements of federal and applicable state securities laws, and were not
issued in violation of or subject to any preemptive or, to such counsel's
knowledge, similar rights.
(iii) The specimen certificate evidencing the Common Stock filed as an
exhibit to the Registration Statement is in due and proper form under
Pennsylvania law, the Shares to be sold by the Company hereunder have been duly
authorized and, when issued and paid for as contemplated by this Agreement, will
be validly issued, fully paid and nonassessable; and no preemptive or similar
rights exist with respect to any of the Shares or the issue and sale thereof.
(iv) To such counsel's knowledge, the Company does not own or control,
directly or indirectly, any shares of stock or any other equity or long-term
debt securities of any corporation or have any equity interest in any
corporation, firm, partnership, joint venture, association or other entity.
(v) The authorized and outstanding capital stock of the Company is as
set forth in the Registration Statement and the Prospectus in the column
entitled "Actual" under the caption "Capitalization" (except for subsequent
issuances, if any, pursuant to this Agreement or pursuant to reservations,
agreements, employee benefit plans or the exercise of convertible securities,
options or warrants referred to in the Prospectus). To such counsel's knowledge,
except as disclosed in or specifically contemplated by the Prospectus, there are
no outstanding options, warrants of other rights calling for the issuance of,
and no commitments, plans or arrangements to issue, any shares of capital stock
of the Company or any security convertible into or exchangeable or exercisable
for capital stock of the Company. The description of the capital stock of the
Company in the Registration Statement and the Prospectus conforms in all
material respects to the terms thereof.
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(vi) The Representatives' Warrants have been duly authorized, executed
and delivered by the Company and the Company has all requisite corporate power
and authority to execute the Representatives' Warrants; the Representatives'
Warrants are enforceable against the Company in accordance with their terms; and
the shares of Common Stock issuable upon the exercise of the Representatives'
Warrants have been duly authorized and reserved for such issuance and, when
issued in accordance with the terms of the Representatives' Warrants, will be
validly issued, fully paid and nonassessable and free of any preemptive or
similar rights.
(vii) To such counsel's knowledge, there are no legal or governmental
proceedings pending or threatened to which the Company is a party or to which
any of its respective properties is subject that are required to be described in
the Registration Statement or the Prospectus but are not so described.
(viii) No consent, approval, authorization or order of, or any filing
or declaration with, any court or governmental agency or body is required for
the consummation by the Company of the transactions on its part contemplated
under this Agreement or the Representatives' Warrants, except such as have been
obtained or made under the Act or the Rules and Regulations and such as may be
required under state securities or Blue Sky laws or the by-laws and rules of the
NASD in connection with the purchase and distribution by the Underwriters of the
Shares.
(ix) The Company has full corporate power and authority to enter into
this Agreement. This Agreement has been duly authorized, executed and delivered
by the Company.
(x) The execution and delivery of this Agreement and or the
Representatives' Warrants, the compliance by the Company with all of the terms
hereof and thereof and the consummation of the transactions contemplated hereby
and thereby does not contravene any provision of applicable law or the
Certificate of Incorporation or By-Laws of the Company, and to the best of such
counsel's knowledge will not result in the creation or imposition of any lien,
charge or encumbrance upon any of the assets of the Company pursuant to the
terms and provisions of, result in a breach or violation of any of the terms or
provisions of, or constitute a default under, or give any party a right to
terminate any of its obligations under, or result in the acceleration of any
obligation under, any indenture, mortgage, deed of trust, voting trust
agreement, loan agreement, bond, debenture, note agreement or other evidence of
indebtedness, lease, contract or other agreement or instrument known to such
counsel to which the Company is a party or by which the Company or any of its
properties is bound or affected, or violate or conflict with (i) any judgment,
ruling, decree or order known to such counsel or (ii) any statute, rule or
regulation of any court or other governmental agency or body, applicable to the
business or properties of the Company.
(xi) To such counsel's knowledge, there is no document or contract of
a character required to be described in the Registration Statement or the
Prospectus or to be filed as an exhibit to the Registration Statement which is
not described or filed or incorporated by reference as required, and each
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description of such contracts and documents that is contained in the
Registration Statement and Prospectus fairly presents in all material respects
the information required under the Act and the Rules and Regulations.
(xii) The statements under the captions "Risk Factors - Effect of
Certain Provisions of the Company's Articles of Incorporation and Pennsylvania
Law," "Risk Factors - Effect of Shares Eligible for Future Sale on Market
Price," "Management - Stock Option Plans," "Management - Classified Board of
Directors", "Management - Simplified Employee Pension/401 Plan," "Management -
Employment Arrangements," "Certain Transactions," "Description of Capital
Stock," and "Shares Eligible for Future Sale" in the Prospectus, insofar as the
statements constitute a summary of documents referred to therein or matters of
law, are accurate summaries and fairly and correctly present, in all material
respects, the information called for with respect to such documents and matters
(provided, however, that such counsel may rely on representations of the Company
with respect to the factual matters contained in such statements, and provided
further that such counsel shall state that nothing has come to the attention of
such counsel which leads them to believe that such representations are not true
and correct in all material respects).
(xiii) The Company is not an "investment company" or an "affiliated
person" of, or "promoter" or "principal underwriter" for, an "investment
company," as such terms are defined in the Investment Company Act of 1940, as
amended.
(xiv) The Selling Stockholder Shares are duly listed on the NNM and
the Company Shares and the shares of Common Stock issuable upon exercise of the
Representatives' Warrants have been duly authorized for listing on the NNM,
subject to notice of issuance.
(xv) To such counsel's knowledge, no holder of securities of the
Company has rights, which have not been waived or satisfied, to require the
register with the Commission shares of Common Stock or other securities, as part
of the offering contemplated hereby.
(xvi) The Registration Statement has become effective under the Act,
and to the best of such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued and no proceeding
for that purpose has been instituted or is pending, threatened or contemplated.
(xvii) The Registration Statement and the Prospectus comply as to form
in all material respects with the requirement of the Act and the Rules and
Regulations (other than the financial statements, schedules and other financial
data contained in the Registration Statement or the Prospectus, as to which such
counsel need express no opinion).
(xviii) Such counsel has participated in the preparation of the
Registration Statement and Prospectus and has no reason to believe that, as of
the Effective Date the Registration Statement, or any amendment or supplement
thereto, (other than the financial statements, schedules and other financial
data contained or incorporated by reference therein, as to which such counsel
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need express no opinion) contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading or that the Prospectus, or any
amendment or supplement thereto, as of its date and the Closing Date and, if
later, the Option Closing Date, contained or contains any untrue statement of a
material fact or omitted or omits to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading (other than the financial statements, schedules and other
financial data contained or incorporated by reference therein, as to which such
counsel need express no opinion).
(xix) This Agreement and the Stockholders' Agreement have each been
duly executed and delivered by or on behalf of each Selling Stockholder; the
Stockholders' Agreement constitutes a valid and binding agreement of such
Selling Stockholder in accordance with its terms, except as enforceability may
be limited by the application of bankruptcy, insolvency or other laws affecting
creditors' rights generally or by general principles of equity; the
Attorneys-in-Fact and the Custodian have been duly authorized by such Selling
Stockholder to deliver the Shares on behalf of such Selling Stockholder in
accordance with the terms of this Agreement; and the sale of the Shares to be
sold by such Selling Stockholder hereunder, the performance by such Selling
Stockholder of this Agreement and the Stockholders' Agreement and the
consummation of the transactions contemplated hereby and thereby will not result
in a breach or violation of any of the terms or provisions of, or constitute a
default under, or give any party a right to terminate any of its obligations
under, or result in the acceleration of any obligation under any indenture,
mortgage, deed of trust, voting trust agreement, loan agreement, bond,
debenture, note agreement or other evidence of indebtedness, lease, contract or
other agreement or instrument to which such Selling Stockholder is a party or by
which such Selling Stockholder or any of its properties is bound or affected, or
violate or conflict with any judgment, ruling, decree, order, statute, rule or
regulation of any court or other governmental agency or body applicable to such
Selling Stockholder or, if such Selling Stockholder is a corporation,
partnership or other entity, the organizational documents of such Selling
Stockholder.
(xx) No consent, approval, authorization or order of, or any filing or
declaration with, any court or governmental agency or body is required for the
consummation by the Selling Stockholders of the transactions on their part
contemplated by this Agreement, except such as have been obtained or made under
the Act or the Rules and Regulations and such as may be required under state
securities or Blue Sky laws or the by-laws and rules of the NASD in connection
with the purchase and distribution by the Underwriters of the Shares.
(xxi) Each Selling Stockholder has full legal right, power and
authority to enter into this Agreement and the Stockholders' Agreement and to
sell, assign, transfer and deliver the Shares to be sold by such Selling
Stockholder hereunder and, upon payment for such Shares and assuming that the
Underwriters are purchasing such Shares in good faith and without notice of any
other adverse claim within the meaning of the Uniform Commercial Code, the
Underwriters will have acquired all rights of such Selling Stockholder in such
Shares free of any adverse claim, any lien in favor of the Company and any
restrictions on transfer imposed by the Company.
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In rendering the opinions in subparagraphs (xx) - (xxii), such counsel
may rely upon opinions of other counsel retained by the Selling Stockholders
reasonably acceptable to the Representatives and as to matters of fact on
certificates of the Selling Stockholders, officers of the Company and
governmental officials and the representations and warranties of the Company and
the Selling Stockholders contained in this Agreement and the Stockholders'
Agreement, provided that the opinion of counsel to the Company and Selling
Stockholders shall state that they are doing so, that they have no reason to
believe that they and the Underwriters are not entitled to rely on such opinions
or certificates and that copies of such opinions or certificates are to be
attached to the opinion.
In rendering such opinion, such counsel may rely upon as to matters of
local law on opinions of counsel satisfactory in form and substance to the
Representatives and counsel for the Underwriters, provided that the opinion of
counsel to the Company and the Selling Stockholders shall state that they are
doing so, that they have no reason to believe that they and the Underwriters are
not entitled to rely on such opinions and that copies of such opinions are to be
attached to the opinion.
(g) The representatives shall have received an opinion, dated the
Closing Date and the Option Closing Date, from Saul, Ewing, Remick & Saul LLP
counsel to the Underwriters, with respect to the Registration Statement, the
Prospectus, or the Representatives' Warrants and this Agreement, which opinion
shall be satisfactory in all respects to the Representatives.
(h) Concurrently with the execution and delivery of this Agreement,
the Accountants shall have furnished to the Representatives a letter, dated the
date of its delivery, addressed to the Representatives and in form and substance
satisfactory to the Representatives, confirming that they are independent
accountants with respect to the Company as required by the Act and the Rules and
Regulations and with respect to certain financial and other statistical and
numerical information contained or incorporated by reference in the Registration
Statement. At the Closing Date and, as to the Option Shares, the Option Closing
Date, the Accountants shall have furnished to the Representatives a letter,
dated the date of its delivery, which shall confirm, on the basis of a review in
accordance with the procedures set forth in the letter from the Accountants,
that nothing has come to their attention during the period from the date of the
letter referred to in the prior sentence to a date (specified in the letter) not
more than five days prior to the Closing Date and the Option Closing Date, as
the case may be, which would require any change in their letter dated the date
hereof if it were required to be dated and delivered at the Closing Date and the
Option Closing Date.
(i) Concurrently with the execution and delivery of this Agreement and
at the Closing Date and, as to the Option Shares, the Option Closing Date, there
shall be furnished to the Representatives a certificate, dated the date of its
delivery, signed by each of the Chief Executive Officer and the Chief Financial
Officer of the Company, in form and substance satisfactory to the
Representatives, to the effect that:
(i) Each signer of such certificate has carefully examined the
Registration Statement and the Prospectus and (A) as of the date of such
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certificate, such documents are true and correct in all material respects and do
not omit to state a material fact required to be stated therein or necessary in
order to make the statements therein not untrue or misleading and (B) in the
case of the certificate delivered at the Closing Date and the Option Closing
Date, since the Effective Date no event has occurred as a result of which it is
necessary to amend or supplement the Prospectus in order to make the statements
therein not untrue or misleading.
(ii) Each of the representations and warranties of the Company
contained in this Agreement were, when originally made, and are, at the time
such certificate is delivered, true and correct.
(iii) Each of the covenants required to be performed by the
Company herein on or prior to the date of such certificate has been duly, timely
and fully performed and each condition herein required to be satisfied or
fulfilled on or prior to the date of such certificate has been duly, timely and
fully satisfied or fulfilled.
(j) Concurrently with the execution and delivery of this Agreement and
at the Closing Date and, as to the Option Shares, the Option Closing Date, there
shall be furnished to the Representatives a certificate, dated the date of its
delivery, signed by the Selling Stockholders (or the Attorneys-in-Fact on their
behalf), in form and substance satisfactory to the Representatives, to the
effect that the representations and warranties of the Selling Stockholders
contained herein are true and correct in all material respects on and as of the
date of such certificate as if made on and as of the date of such certificate,
and each of the covenants and conditions required herein to be performed or
complied with by the Selling Stockholders on or prior to the date of such
certificate has been duly, timely and fully performed or complied with.
(k) The Representatives shall have received from the Company the duly
executed Representatives' Warrants.
(l) On or prior to the Closing Date, the Representatives shall have
received the executed agreements referred to in Section 5(o).
(m) The Shares shall be qualified for sale in such jurisdictions as
the Representatives may reasonably request and each such qualification shall be
in effect and not subject to any stop order or other proceeding on the Closing
Date or the Option Closing Date.
(n) Prior to the Closing Date, the Shares and the shares of Common
Stock issuable upon exercise of the Representatives' Warrants shall have been
duly authorized for listing on the NNM upon official notice of issuance.
(o) The Company and the Selling Stockholders shall have furnished to
the Representatives such certificates, in addition to those specifically
mentioned herein, as the Representatives may have reasonably requested as to the
accuracy and completeness at the Closing Date and the Option Closing Date of any
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statement in the Registration Statement or the Prospectus, as to the accuracy at
the Closing Date and the Option Closing Date of the representations and
warranties of the Company and the Selling Stockholders herein, as to the
performance by the Company and the Selling Stockholders of its and their
respective obligations hereunder, or as to the fulfillment of the conditions
concurrent and precedent to the obligations hereunder of the Representatives.
7. Indemnification.
(a) The Company and each of the Selling Stockholders, jointly and
severally, will indemnify and hold harmless each Underwriter, the directors,
officers, employees and agents of each Underwriter and each person, if any, who
controls each Underwriter within the meaning of Section 15 of the Act or Section
20 of the Exchange Act, from and against any and all losses, claims,
liabilities, expenses and damages (including any and all investigative, legal
and other expenses reasonably incurred in connection with, and any amount paid
in settlement of, any action, suit or proceeding or any claim asserted), to
which they, or any of them, may become subject under the Act, the Exchange Act
or other Federal or state statutory law or regulation, at common law or
otherwise, insofar as such losses, claims, liabilities, expenses or damages
arise out of or are based on any untrue statement or alleged untrue statement of
a material fact contained in any preliminary prospectus, the Registration
Statement or the Prospectus or any amendment or supplement to the Registration
Statement or the Prospectus, or the omission or alleged omission to state in
such document a material fact required to be stated in it or necessary to make
the statements in it not misleading in the light of the circumstances in which
they were made, or arise out of or are based in whole or in part on any
inaccuracy in the representations and warranties of the Company or the Selling
Stockholders contained herein or any failure of the Company or the Selling
Stockholders to perform its or their obligations hereunder or under law in
connection with the transactions contemplated hereby; provided, however, that
(i) the Company and the Selling Stockholders will not be liable to the extent
that such loss, claim, liability, expense or damage arises from the sale of the
Shares in the public offering to any person by an Underwriter and is based on an
untrue statement or omission or alleged untrue statement or omission made in
reliance on and in conformity with information relating to any Underwriter
furnished in writing to the Company by the Representatives, on behalf of any
Underwriter, expressly for inclusion in the Registration Statement, the
preliminary prospectus or the Prospectus; (ii) the Company and the Selling
Stockholders will not be liable to any Underwriter, the directors, officers,
employees or agents of such Underwriter or any person controlling such
Underwriter with respect to any loss, claim, liability, expense, or damage
arising out of or based on any untrue statement or omission or alleged untrue
statement or omission or alleged omission to state a material fact in the
preliminary prospectus which is corrected in the Prospectus if the person
asserting any such loss, claim, liability, charge or damage purchased Shares
from such Underwriter but was not sent or given a copy of the Prospectus at or
prior to the written confirmation of the sale of such Shares to such person; and
(iii) the liability of each Selling Stockholder under this Section 7(a) shall
not exceed the product of the purchase price for each Share set forth in Section
1(a) hereof multiplied by the number of Shares sold by such Selling Stockholder
hereunder. The Company and the Selling Stockholders acknowledge that the
statements set forth under the heading "Underwriting" in the preliminary
prospectus and the Prospectus constitute the only information relating to any
Underwriter furnished in writing to the Company by the Representatives on behalf
of the Underwriters expressly for inclusion in the Registration Statement, the
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preliminary prospectus or the Prospectus. This indemnity agreement will be in
addition to any liability that the Company and the Selling Stockholders might
otherwise have.
(b) Each Underwriter will indemnify and hold harmless the Company,
each director of the Company, each officer of the Company who signs the
Registration Statement, each person, if any, who controls the Company within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act, and each
Selling Stockholder to the same extent as the foregoing indemnity from the
Company and each Selling Stockholder to each Underwriter, as set forth in
Section 7(a), but only insofar as losses, claims, liabilities, expenses or
damages arise out of or are based on any untrue statement or omission or alleged
untrue statement or omission made in reliance on and in conformity with
information relating to any Underwriter furnished in writing to the Company by
the Representatives, on behalf of such Underwriter, expressly for use in the
Registration Statement, the preliminary prospectus or the Prospectus. The
Company and the Selling Stockholders acknowledge that the statements set forth
under the heading "Underwriting" in the preliminary prospectus and the
Prospectus constitute the only information relating to any Underwriter furnished
in writing to the Company by the Representatives on behalf of the Underwriters
expressly for inclusion in the Registration Statement, the preliminary
prospectus or the Prospectus. This indemnity will be in addition to any
liability that each Underwriter might otherwise have.
(c) Any party that proposes to assert the right to be indemnified
under this Section 7 shall, promptly after receipt of notice of commencement of
any action against such party in respect of which a claim is to be made against
an indemnifying party or parties under this Section 7, notify each such
indemnifying party in writing of the commencement of such action, enclosing with
such notice a copy of all papers served, but the omission so to notify such
indemnifying party will not relieve it from any liability that it may have to
any indemnified party under the foregoing provisions of this Section 7 unless,
and only to the extent that, such omission results in the loss of substantive
rights or defenses by the indemnifying party. If any such action is brought
against any indemnified party and it notifies the indemnifying party of its
commencement, the indemnifying party will be entitled to participate in and, to
the extent that it elects by delivering written notice to the indemnified party
promptly after receiving notice of the commencement of the action from the
indemnified party, jointly with any other indemnifying party similarly notified,
to assume the defense of the action, with counsel reasonably satisfactory to the
indemnified party. After notice from the indemnifying party to the indemnified
party of its election to assume the defense, the indemnifying party will not be
liable to the indemnified party for any legal or other expenses except as
provided below and except for the reasonable costs of investigation subsequently
incurred by the indemnified party in connection with the defense. The
indemnified party will have the right to employ its own counsel in any such
action, but the fees, expenses and other charges of such counsel will be at the
expense of such indemnified party unless (i) the employment of counsel by the
indemnified party has been authorized in writing by the indemnifying party, (ii)
the indemnified party has reasonably concluded (based on advice of counsel) that
there may be legal defenses available to it or other indemnified parties that
are different from or in addition to those available to the indemnifying party,
(iii) a conflict or potential conflict exists (based on advice of counsel to the
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indemnified party) between the indemnified party and the indemnifying party (in
which case the indemnifying party will not have the right to direct the defense
of such action on behalf of the indemnified party) or (iv) the indemnifying
party has not in fact employed counsel to assume the defense of such action
within a reasonable time after receiving notice of the commencement of the
action, in each of which cases the reasonable fees, disbursements and other
charges of counsel will be at the expense of the indemnifying party or parties.
It is understood that the indemnifying party or parties shall not, in connection
with any proceeding or related proceedings in the same jurisdiction, be liable
for the reasonable fees, disbursements and other charges of more than one
separate firm admitted to practice in such jurisdiction at any one time for all
such indemnified party or parties. All such fees, disbursements and other
charges will be reimbursed by the indemnifying party promptly as they are
incurred. Any indemnifying party will not be liable for any settlement of any
action or claim effected without its written consent (which consent will not be
unreasonably withheld).
(d) If the indemnification provided for in this Section 7 is
applicable in accordance with its terms but for any reason is held to be
unavailable to or insufficient to hold harmless an indemnified party under
paragraphs (a), (b) and (c) of this Section 7 in respect of any losses, claims,
liabilities, expenses and damages referred to therein, then each applicable
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable (including any investigative, legal and
other expenses reasonably incurred in connection with, and any amount paid in
settlement of, any action, suit or proceeding or any claim asserted, but after
deducting any contribution received by the Company or the Selling Stockholders
from persons other than the Underwriters, such as persons who control the
Company within the meaning of the Act, officers of the Company who signed the
Registration Statement and directors of the Company, who also may be liable for
contribution) by such indemnified party as a result of such losses, claims,
liabilities, expenses and damages in such proportion as shall be appropriate to
reflect the relative benefits received by the Company and the Selling
Stockholders, on the one hand, and the Underwriters, on the other hand. The
relative benefits received by the Company and the Selling Stockholders, on the
one hand, and the Underwriters, on the other hand, shall be deemed to be in the
same proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company and the Selling Stockholders bear to the total
underwriting discounts and commissions received by the Underwriters, in each
case as set forth in the table on the cover page of the Prospectus. If, but only
if, the allocation provided by the foregoing sentence is not permitted by
applicable law, the allocation of contribution shall be made in such proportion
as is appropriate to reflect not only the relative benefits referred to in the
foregoing sentence but also the relative fault of the Company and the Selling
Stockholders, on the one hand, and the Underwriters, on the other hand, with
respect to the statements or omissions which resulted in such loss, claim,
liability, expense or damage, or action in respect thereof, as well as any other
relevant equitable considerations with respect to such offering. Such relative
fault shall be determined by reference to whether the untrue or alleged untrue
statement of a material fact or omission or alleged omission to state a material
fact relates to information supplied by the Company, the Selling Stockholders or
the Representatives on behalf of the Underwriters, the intent of the parties and
their relative knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company, the Selling Stockholders and
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the Underwriters agree that it would not be just and equitable if contributions
pursuant to this Section 7(d) were to be determined by pro rata allocation (even
if the Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take into account the equitable
considerations referred to herein. The amount paid or payable by an indemnified
party as a result of the loss claim, liability, expense or damage, or action in
respect thereof, referred to above in this Section 7(d) shall be deemed to
include, for purposes of this Section 7(d), any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
Section 7(d), no Underwriter shall be required to contribute any amount in
excess of the underwriting discounts received by it and no person found guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
will be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute as
provided in this Section 7(d) are several in proportion to their respective
underwriting obligations and not joint. For purposes of this Section 7(d), any
person who controls a party to this Agreement within the meaning of the Act will
have the same rights to contribution as that party, and each officer of the
Company who signed the Registration Statement will have the same rights to
contribution as the Company, subject in each case to the provisions hereof. Any
party entitled to contribution, promptly after receipt of notice of commencement
of any action against any such party in respect of which a claim for
contribution may be made under this Section 7(d), will notify any such party or
parties from whom contribution may be sought, but the omission so to notify will
not relieve the party or parties from whom contribution may be sought from any
other obligation it or they may have under this Section 7(d). No party will be
liable for contribution with respect to any action or claim settled without its
written consent (which consent will not be unreasonably withheld).
(e) The indemnity and contribution agreements contained in this
Section 7 and the representations and warranties of the Company and the Selling
Stockholders contained in this Agreement shall remain operative and in full
force and effect regardless of (i) any investigation made by or on behalf of the
Underwriters, (ii) acceptance of any of the Shares and payment therefor or (iii)
any termination of this Agreement.
8. Reimbursement of Certain Expenses. In addition to its other obligations
under Section 7(a) of this Agreement, the Company hereby agrees to reimburse on
a quarterly basis the Underwriters for all reasonable legal and other expenses
incurred in connection with investigating or defending any claim, action,
investigation, inquiry or other proceeding arising out of or based upon, in
whole or in part, any statement or omission or alleged statement or omission, or
any inaccuracy in the representations and warranties of the Company or the
Selling Stockholder contained herein or failure of the Company or the Selling
Stockholders to perform its or their respective obligations hereunder or under
law, all as described in Section 7(a), notwithstanding the absence of a judicial
determination as to the propriety and enforceability of the obligations under
this Section 8 and the possibility that such payment might later be held to be
improper; provided, however, that, to the extent any such payment is ultimately
held to be improper, the persons receiving such payments shall promptly refund
them.
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9. Termination. The obligations of the several Underwriters under this
Agreement may be terminated at any time on or prior to the Closing Date (or,
with respect to the Option Shares, on or prior to the Option Closing Date), by
notice to the Company and the Selling Stockholders from the Representatives,
without liability on the part of any Underwriter to the Company if, prior to
delivery and payment for the Firm Shares or Option Shares, as the case may be,
in the sole judgment of the Representatives, (i) trading in any of the equity
securities of the Company shall have been suspended by the Commission or by The
Nasdaq Stock Market, (ii) trading in securities generally on the New York Stock
Exchange or The Nasdaq Stock Market shall have been suspended or limited or
minimum or maximum prices shall have been generally established on such
exchange, or additional material governmental restrictions, not in force on the
date of this Agreement, shall have been imposed upon trading in securities
generally by such exchange, by order of the Commission, any court or other
governmental authority or The Nasdaq Stock Market, (iii) a general banking
moratorium shall have been declared by either Federal or New York State
authorities, or (iv) any material adverse change in the financial or securities
markets in the United States or in political, financial or economic conditions
the United States or any outbreak or material escalation of hostilities or
other calamity or crisis shall have occurred, the effect of which is such as to
make it, in the sole judgment of the Representatives, impracticable or
inadvisable to proceed with completion of the public offering or the delivery of
and payment for the Shares.
If this Agreement is terminated pursuant to this Section 9, neither the
Company nor any Selling Stockholder shall be under any liability to any
Underwriter except as provided in Sections 5(j), 7 and 8 hereof; but, if for any
other reason the purchase of the Shares by the Underwriters is not consummated
or if for any reason the Company shall be unable to perform its obligations
hereunder, the Company and the Selling Stockholders will reimburse the several
Underwriters for all out-of-pocket expenses (including the fees, disbursements
and other charges of counsel to the Underwriters) incurred by them in connection
with the offering of the Shares.
10. Substitution of Underwriters. If any one or more of the Underwriters
shall fail or refuse to purchase any of the Firm Shares which it or they have
agreed to purchase hereunder, and the aggregate number of Firm Shares which such
defaulting Underwriter or Underwriters agreed but failed or refused to purchase
is not more than one-tenth of the aggregate number of Firm Shares, the other
Underwriters shall be obligated, severally, to purchase the Firm Shares which
such defaulting Underwriter or Underwriters agreed but failed or refused to
purchase, in the proportions which the number of Firm Shares which they have
respectively agreed to purchase pursuant to Section 1 bears to the aggregate
number of Firm Shares which all such non-defaulting Underwriters have so agreed
to purchase, or in such other proportions as the Representatives may specify;
provided that in no event shall the maximum number of Firm Shares which any
Underwriter has become obligated to purchase pursuant to Section 1 be increased
pursuant to this Section 10 by more than one-ninth of such number of Firm Shares
without the prior written consent of such Underwriter. If any Underwriter or
Underwriters shall fail or refuse to purchase any Firm Shares and the aggregate
number of Firm Shares which such defaulting Underwriter or Underwriters agreed
but failed or refused to purchase exceeds one-tenth of the aggregate number of
the Firm Shares and arrangements satisfactory to the Representatives and the
Company for the purchase of such Firm Shares are not made within 48 hours after
such default, this Agreement will terminate without liability on the part of any
29
<PAGE>
non-defaulting Underwriter, the Company or the Selling Stockholders for the
purchase or sale of any Shares under this Agreement. In any such case either the
Representatives or the Company shall have the right to postpone the Closing
Date, but in no event for longer than seven days, in order that the required
changes, if any, in the Registration Statement and the Prospectus or in any
other documents or arrangements may be effected. Any action taken pursuant to
this Section 10 shall not relieve any defaulting Underwriter from liability in
respect of any default of such Underwriter under this Agreement.
11. Miscellaneous. Notice given pursuant to any of the provisions of this
Agreement shall be in writing and, unless otherwise specified, shall be mailed
or delivered (a) if to the Company or the Selling Stockholders, at the office of
the Company, 119 Technology Drive, Bethlehem, Pennsylvania 18015, Attention:
Thomas L. Hierl, with a copy to Jeffrey B. Libson, Esq., 3000 Two Logan Square,
Philadelphia, Pennsylvania 19103, or (b) if to the Underwriters, to the
Representatives at the offices of Needham & Company, Inc., 445 Park Avenue, New
York, New York 10022, Attention: Corporate Finance Department, with a copy to
Charles C. Zall, Esq., 3800 Centre Square West, Philadelphia, Pennsylvania
19102. Any such notice shall be effective only upon receipt. Any notice under
such Section 9 or 10 may be made by telex or telephone, but if so made shall be
subsequently confirmed in writing.
12. This Agreement has been and is made solely for the benefit of the
several Underwriters, the Company, the Selling Stockholders and the controlling
persons, directors and officers referred to in Section 7, and their respective
successors and assigns, and no other person shall acquire or have any right
under or by virtue of this Agreement. The term "successors and assigns" as used
in this Agreement shall not include a purchaser, as such purchaser, of Shares
from any of the several Underwriters.
13. Any action required or permitted to be made by the Representatives
under this Agreement may be taken by them jointly or by Needham & Company, Inc.
14. This Agreement shall be governed by and construed in accordance with
the laws of the State of New York applicable to contracts made and to be
performed entirely within such State.
15. This Agreement may be signed in two or more counterparts with the same
effect as if the signatures thereto and hereto were upon the same instrument.
16. In case any provision in this Agreement shall be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
17. The Company and the Underwriters each hereby waive any right they may
have to a trial by jury in respect of any claim based upon or arising out of
this Agreement or the transactions contemplated hereby.
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Please confirm that the foregoing correctly sets forth the agreement
among the Company and the several Underwriters.
Very truly yours,
QUANTUM EPITAXIAL DESIGNS, INC.
By:______________________________
Title:
SELLING STOCKHOLDERS
(named in Schedule II hereto)
By:______________________________
Attorney-in-Fact
Confirmed as of the date first
above mentioned:
NEEDHAM & COMPANY, INC.
JANNEY MONTGOMERY SCOTT INC.
Acting on behalf of themselves
and as the Representatives of
the other several Underwriters
named in Schedule I hereto.
By: NEEDHAM & COMPANY, INC.
By:________________________________
Title:
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SCHEDULE I
UNDERWRITERS
Number of
Firm
Shares
Underwriters to be Purchased
- ------------ ---------------
Needham & Company, Inc...............................
Janney Montgomery Scott Inc..........................
---------
Total..................................... 2,500,000
=========
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SCHEDULE II
Total Number Total Number of
of Firm Shares Option Shares
to be Sold to be Sold
-------------- -------------
Quantum Epitaxial Designs, Inc..................
James C.M. Hwang................................
NEPA Venture Fund, L.P.......................... _____ _____
TOTALS................................... 2,500,000 375,000
========= =======
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SCHEDULE III
FORM OF LOCK-UP AGREEMENT
The undersigned is a holder of securities of Quantum Epitaxial Designs,
Inc., a Pennsylvania corporation (the "Company"), and wishes to facilitate the
public offering of shares of the Common Stock (the "Common Stock") of the
Company (the "Offering"). The undersigned recognizes that such Offering will be
of benefit to the undersigned.
In consideration of the foregoing and in order to induce you to act as
underwriters in connection with the Offering, the undersigned hereby agrees that
he, she or it will not, without the prior written approval of Needham & Company,
Inc., acting on its own behalf and/or on behalf of other representatives of the
underwriters, directly or indirectly, sell, contract to sell, make any short
sale, or otherwise dispose of, or enter into any hedging transaction that is
likely to result in a transfer of, any shares of Common Stock, options to
acquire shares of Common Stock or securities exchangeable for or convertible
into shares of Common Stock of the Company which he, she or it may own, for a
period commencing as of the date hereof and ending on the date which is one
hundred eighty (180) days after the date of the final Prospectus relating to the
Offering; provided, however, that the foregoing shall not prohibit (i) any
transfer by a partnership to its partners, by a corporation to an affiliated
entity or by an individual to a trust for the benefit of his or her spouse,
descendants or heirs, or (ii) any pledge of any shares of Common Stock so long
as, in any such instance, such partners, affiliated entity, trustee or pledgee,
as the case may be, agrees to be bound by the terms of this Agreement. The
undersigned confirms that he, she or it understands that the underwriters and
the Company will rely upon the covenants set forth in this Agreement in
proceeding with the Offering. The undersigned further confirms that the
agreements of the undersigned are irrevocable and shall be binding upon the
undersigned's heirs, legal representatives, successors and assigns. The
undersigned agrees and consents to the entry of stop transfer instructions with
the Company's transfer agent against the transfer of securities held by the
undersigned except in compliance with this Agreement.
This Agreement shall be binding on the undersigned and his, her or its
respective successors, heirs, personal representatives and assigns.
Name:_____________________________________
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<PAGE>
EXHIBIT A
FORM OF REPRESENTATIVES' WARRANTS
WARRANT
THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE
SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT FILED UNDER SUCH ACT OR PURSUANT TO AN EXEMPTION FROM REGISTRATION
UNDER SUCH ACT.
VOID AFTER 5:00 P.M., NEW YORK TIME, ON ________, 2002, OR IF NOT A BUSINESS
DAY, AS DEFINED HEREIN, AT 5:00 P.M., NEW YORK TIME, ON THE NEXT FOLLOWING
BUSINESS DAY.
WARRANT TO PURCHASE
--------
SHARES OF COMMON STOCK
OF
QUANTUM EPITAXIAL DESIGNS, INC.
No. _
This certifies that, for and in consideration of services rendered and
in connection with the initial public offering of Common Stock of the Company
named below (the "Offering") and other good and valuable consideration, Needham
& Company, Inc., and its registered, permitted assigns (collectively, the
"Warrantholder"), is entitled to purchase from Quantum Epitaxial Designs, Inc.,
a corporation incorporated under the laws of the Commonwealth of Pennsylvania
(the "Company"), subject to the terms and conditions hereof, at any time on or
after 9:00 a.m., New York time, on __________________, 1998, and before 5:00
p.m., New York on __________________, 2002 (or, if such day is not a Business
Day, at or before 5:00 p.m., New York time, on the next following Business Day),
the number of fully paid and non-assessable shares of Common Stock of the
Company at the Exercise Price (as defined herein). The Exercise Price and the
number of shares purchasable hereunder are subject to adjustment from time to
time as provided in Article 3 hereof.
ARTICLE 1
1.1 Definition of Terms. As used in this Warrant, the following
capitalized terms shall have the following respective meanings:
(a) Business Day: A day other than a Saturday, Sunday or
other day on which banks in the State of New York are authorized by law to
remain closed.
(b) Common Stock: Common stock, $.001 par value, of the
Company.
(c) Common Stock Equivalents: Securities that are
convertible into or exercisable for shares of Common Stock.
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(d) Demand Registration: See Section 6.2.
(e) Exchange Act: The Securities Exchange Act of 1934, as
amended.
(f) Exercise Price: $____ per Warrant Share, as such
price may be adjusted from time to time pursuant to Article 3 hereof.
(g) Expiration Date: 5:00 p.m., New York time, on
_________________, 2002 or if such day is not a Business Day, the next
succeeding day which is a Business Day.
(h) 25% Holders: At any time as to which a Demand
Registration is requested, the Holder and/or the holders of any other Warrants
and/or the holders of Warrant Shares who have the right to acquire or hold, as
the case may be, not less than 25% of the combined total of Warrant Shares
issuable and Warrant Shares outstanding at the time such Demand Registration is
requested.
(i) Holder: A Holder of Registrable Securities.
(j) NASD: National Association of Securities Dealers,
Inc.
(k) Net Issuance Exercise Date: See Section 2.2.
(l) Net Issuance Right: See Section 2.3.
(m) Net Issuance Warrant Shares: See Section 2.3.
(n) Person: An individual, partnership, joint venture,
corporation, trust, unincorporated organization or government or any department
or agency thereof.
(o) Piggyback Registration: See Section 6.1.
(p) Prospectus: Any prospectus included in any
Registration Statement, as amended or supplemented by any prospectus supplement,
with respect to the terms of the offering of any portion of the Registrable
Securities covered by such Registration Statement and all other amendments and
supplements to the Prospectus, including post-effective amendments and all
material incorporated by reference in such Prospectus.
(q) Public Offering: A public offering of any of the
Company's equity or debt securities pursuant to a Registration Statement under
the Securities Act.
(r) Registration Expenses: Any and all expenses incurred
in connection with any registration or action incident to performance of or
compliance by the Company with Article 6, including, without limitation, (i) all
SEC, national securities exchange and NASD registration and filing fees; all
listing fees and all transfer agent fees; (ii) all fees and expenses of
complying with state securities or blue sky laws (including the fees and
disbursements of counsel of the underwriters in connection with blue sky
qualifications of the Registrable Securities); (iii) all printing, mailing,
messenger and delivery expenses, (iv) all fees and disbursements of counsel for
the Company and of its accountants, including the expenses of any special audits
and/or "cold comfort" letters required by or incident to such performance and
compliance, and (v) any disbursements of underwriters customarily paid by
issuers or sellers of securities including the reasonable fees and expenses of
any special experts retained in connection with the requested registration, but
excluding underwriting discounts and commissions, brokerage fees and transfer
taxes, if any, and fees of counsel or accountants retained by the holders of
Registrable Securities to advise them in their capacity as Holders of
Registrable Securities.
(s) Registrable Securities: Any Warrant Shares issued to
Needham & Company, Inc., and/or its designees or transferees and/or other
securities that may be or are issued by the Company upon exercise of this
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<PAGE>
Warrant, including those which may thereafter be issued by the Company in
respect of any such securities by means of any stock splits, stock dividends,
recapitalizations, reclassifications or the like, and as adjusted pursuant to
Article 3 hereof; provided, however, that as to any particular security
contained in Registrable Securities, such securities shall cease to be
Registrable Securities when (i) a Registration Statement with respect to the
sale of such securities shall have become effective under the Securities Act and
such securities shall have been disposed of in accordance with such Registration
Statement; or (ii) they shall have been sold to the public pursuant to Rule 144
(or any successor provision) under the Securities Act.
(t) Registration Statement: Any registration statement
of the Company filed or to be filed with the SEC which covers any of the
Registrable Securities pursuant to the provisions of this Agreement, including
all amendments (including post-effective amendments) and supplements thereto,
all exhibits thereto and all material incorporated therein by reference.
(u) SEC: The Securities and Exchange Commission or any
other federal agency at the time administering the Securities Act or the
Exchange Act.
(v) Securities Act: The Securities Act of 1933, as
amended.
(w) Warrants: This Warrant, all other warrants issued on
the date hereof and all other warrants that may be issued in its or their place
(together evidencing the right to purchase an aggregate of up to ______ shares
of Common Stock), originally issued as set forth in the definition of
Registrable Securities.
(x) Warrantholder: The person(s) or entity(ies) to whom
this Warrant is originally issued, or any successor in interest thereto, or any
assignee or transferee thereof, in whose name this Warrant is registered upon
the books to be maintained by the Company for that purpose.
(y) Warrant Shares: Common Stock, Common Stock
Equivalents and other securities purchased or purchasable upon exercise of the
Warrants.
ARTICLE 2
DURATION AND EXERCISE OF WARRANT
2.1 Duration of Warrant. The Warrantholder may exercise this
Warrant at any time and from time to time after 9:00 a.m., New York time, on
______________, 1998 and before 5:00 p.m., New York time, on the Expiration
Date. If this Warrant is not exercised on the Expiration Date, it shall become
void, and all rights hereunder shall thereupon cease.
2.2 Method of Exercise.
(a) The Warrantholder may exercise this Warrant, in whole or
in part, by presentation and surrender of this Warrant to the Company at its
corporate office at ____________ or at the office of its stock transfer agent,
if any, with the Exercise Form annexed hereto duly executed and, in the event of
an exercise for cash pursuant to Section 2.3(a), accompanied by payment of the
full Exercise Price for each Warrant Share to be purchased.
(b) Upon receipt of this Warrant with the Exercise Form fully
executed and, in the event of an exercise for cash pursuant to Section 2.3(a),
accompanied by payment of the aggregate Exercise Price for the Warrant Shares
for which this Warrant is then being exercised, the Company shall cause to be
issued certificates for the total number of whole shares of Common Stock for
which this Warrant is being exercised (adjusted to reflect the effect of the
anti-dilution provisions contained in Article 3 hereof, if any, and as provided
in Section 2.4 hereof) in such denominations as are requested for delivery to
the Warrantholder, and the Company shall thereupon deliver such certificates to
the Warrantholder. A net issuance exercise pursuant to Section 2.3(b) shall be
effective upon receipt by the Company of this Warrant together with the
aforesaid written statement, or on such later date as is specified therein (the
"Net Issuance Exercise Date"), and, at the election of the Holder hereof, may be
37
<PAGE>
made contingent upon the closing of the sale of the Company's Common Stock in a
Public Offering. The Warrantholder shall be deemed to be the holder of record of
the shares of Common Stock issuable upon such exercise as of the time of receipt
of the Exercise Form and payment in accordance with the preceding sentence, in
the case of an exercise for cash pursuant to Section 2.3(a), or as of the Net
Issuance Exercise Date, in the case of a net issuance exercise pursuant to
Section 2.3(b), notwithstanding that the stock transfer books of the Company
shall then be closed or that certificates representing such shares of Common
Stock shall not then be actually delivered to the Warrantholder. If at the time
this Warrant is exercised, a Registration Statement is not in effect to register
under the Securities Act the Warrant Shares issuable upon exercise of this
Warrant, the Company may, in the case of an exercise for cash pursuant to
Section 2.3(a), require the Warrantholder to make such representations, and may
place such legends on certificates representing the Warrant Shares, as may be
reasonably required in the opinion of counsel to the Company to permit the
Warrant Shares to be issued without such registration.
(c) In case the Warrantholder shall exercise this Warrant with
respect to less than all of the Warrant Shares that may be purchased under this
Warrant, the Company shall execute as of the exercise date (or, if later, the
Net Issuance Exercise Date) a new warrant in the form of this Warrant for the
balance of such Warrant Shares and deliver such new warrant to the Warrantholder
within thirty (30) days following the exercise date (or, if later, the Net
Issuance Exercise Date).
(d) The Company shall pay any and all stock transfer and
similar taxes which may be payable in respect of the issuance of any Warrant
Shares.
2.3 Exercise of Warrant.
(a) Right to Exercise for Cash. This Warrant may be exercised
by the Holder by delivery of payment to the Company, for the account of the
Company, by cash or by certified or bank cashier's check, of the Exercise Price
for the number of Warrant Shares specified in the Exercise Form in lawful money
of the United States of America.
(b) Right to Exercise on a Net Issuance Basis. In lieu of
exercising this Warrant for cash pursuant to Section 2.3(a), the Holder shall
have the right to exercise this Warrant or any portion thereof (the "Net
Issuance Right") into shares of Common Stock as provided in this Section 2.3(b)
at any time or from time to time during the period specified in Section 2.1
hereof by the surrender of this Warrant to the Company, with a duly executed and
completed Exercise Form marked to reflect net issuance exercise. Upon exercise
of the Net Issuance Right with respect to a particular number of shares subject
to this Warrant and noted on the Exercise Form (the "Net Issuance Warrant
Shares"), the Company shall deliver to the Holder (without payment by the Holder
of any Exercise Price or any cash or other consideration) (X) that number of
shares of fully paid and nonassessable Common Stock equal to the quotient
obtained by dividing the value of this Warrant (or the specified portion hereof)
on the Net Issuance Exercise Date, which value shall be determined by
subtracting (A) the aggregate Exercise Price of the Net Issuance Warrant Shares
immediately prior to the exercise of the Net Issuance Right from (B) the
aggregate fair market value of the Net Issuance Warrant Shares issuable upon
exercise of this Warrant (or the specified portion hereof) on the Net Issuance
Exercise Date (as herein defined) by (Y) the fair market value of one share of
Common Stock on the Net Issuance Exercise Date (as herein defined).
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Expressed as a formula, such net issuance exercise shall be computed as
follows:
X = B - A
------
Y
Where: X = the number of shares of Common Stock that
may be issued to the Holder
Y = the fair market value (FMV) of one share
of Common Stock as of the Net Issuance
Exercise Date
A = the aggregate Exercise Price (i.e., Net
Issuance Warrant Shares x Exercise Price)
B = the aggregate FMV (i.e., FMV x Net Issuance
Warrant Shares)
(c) Determination of Fair Market Value. For purposes of this
Section 2.3, "fair market value" of a share of Common Stock as of the Net
Issuance Exercise Date shall mean:
(i) If the Net Issuance Right is exercised in
connection with and contingent upon a Public Offering, and if the Company's
Registration Statement relating to such Public Offering has been declared
effective by the SEC, then the initial "Price to Public" specified in the final
Prospectus with respect to such offering.
(ii) If the Net Issuance Right is not exercised in
connection with and contingent upon a Public Offering, then as follows:
(A) If traded on a securities exchange,
the Nasdaq National Market, or The Nasdaq SmallCap Market, the fair market value
of the Common Stock shall be deemed to be the last reported sale price of the
Common Stock on such exchange or Market on the trading day immediately prior to
the Net Issuance Exercise Date;
(B) If traded over-the-counter other
than on the Nasdaq National Market or The Nasdaq SmallCap Market, the fair
market value of the Common Stock shall be deemed to be the average of the
closing bid and ask prices of the Common Stock on the trading day immediately
prior to the Net Issuance Exercise Date; and
(C) If there is no public market for the
Common Stock, then fair market value shall be determined by mutual agreement of
the Warrantholder and the Company, and if the Warrantholder and the Company are
unable to so agree, at the Company's sole expense, by an investment banker of
national reputation selected by the Company and reasonably acceptable to the
Warrantholder.
2.4 Reservation of Shares. The Company hereby agrees that at all times
there shall be reserved for issuance and delivery upon exercise of this Warrant
such number of shares of Common Stock or other shares of capital stock of the
Company from time to time issuable upon exercise of this Warrant. All such
shares shall be duly authorized, and when issued upon such exercise, shall be
validly issued, fully paid and non-assessable, free and clear of all liens,
security interests, charges and other encumbrances or restrictions on sale
(except as contemplated by Sections 2.2(b) and 5.2) and free and clear of all
preemptive rights.
2.5 Fractional Shares. The Company shall not be required to issue any
fraction of a share of its capital stock in connection with the exercise of this
Warrant, and in any case where the Warrantholder would, except for the
provisions of this Section 2.5, be entitled under the terms of this Warrant to
receive a fraction of a share upon the exercise of this Warrant, the Company
shall, upon the exercise of this Warrant, pay to the Warrantholder an amount in
cash equal to the fair market value of such fractional share as of the exercise
date (or, if applicable and a later date, the Net Issuance Exercise Date).
2.6 Listing. Prior to the issuance of any shares of Common Stock upon
exercise of this Warrant, the Company shall secure the listing of such shares of
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<PAGE>
Common Stock upon each national securities exchange or automated quotation
system, if any, upon which shares of Common Stock are then listed (subject to
official notice of issuance upon exercise of this Warrant) and shall maintain,
so long as any other shares of Common Stock shall be so listed, such listing of
all shares of Common Stock from time to time issuable upon the exercise of this
Warrant; and the Company shall so list on each national securities exchange or
automated quotation system, and shall maintain such listing of, any other shares
of capital stock of the Company issuable upon the exercise of this Warrant if
and so long as any shares of the same class shall be listed on such national
securities exchange or automated quotation system.
ARTICLE 3
ADJUSTMENT OF SHARES OF COMMON STOCK
PURCHASABLE AND OF EXERCISE PRICE
The Exercise Price and the number and kind of Warrant Shares shall be
subject to adjustment from time to time upon the happening of certain events as
provided in this Article 3.
3.1 Mechanical Adjustments.
(a) If at any time prior to the exercise of this Warrant in
full, the Company shall (i) declare a dividend or make a distribution on the
Common Stock payable in shares of its capital stock (whether shares of Common
Stock or of capital stock of any other class); (ii) subdivide, reclassify or
recapitalize its outstanding Common Stock into a greater number of shares; (iii)
combine, reclassify or recapitalize its outstanding Common Stock into a smaller
number of shares, or (iv) issue any shares of its capital stock by
reclassification of its Common Stock (including any such reclassification in
connection with a consolidation or a merger in which the Company is the
continuing corporation), the number of Warrant Shares issuable upon exercise of
the Warrant and/or the Exercise Price in effect at the time of the record date
of such dividend, distribution, subdivision, combination, reclassification or
recapitalization shall be adjusted so that the Warrantholder shall be entitled
to receive the aggregate number and kind of shares which, if this Warrant had
been exercised in full immediately prior to such event, the Warrantholder would
have owned upon such exercise and been entitled to receive by virtue of such
dividend, distribution, subdivision, combination, reclassification or
recapitalization. Any adjustment required by this Section 3.1(a) shall be made
successively immediately after the record date, in the case of a dividend or
distribution, or the effective date, in the case of a subdivision, combination,
reclassification or recapitalization, to allow the purchase of such aggregate
number and kind of shares.
(b) If at any time prior to the exercise of this Warrant in
full, the Company shall fix a record date for the issuance or making of a
distribution to all holders of the Common Stock (including any such distribution
to be made in connection with a consolidation or merger in which the Company is
to be the continuing corporation) of evidences of its indebtedness, any other
securities of the Company or any cash, property or other assets (excluding a
combination, reclassification or recapitalization referred to in Section 3.1(a),
regular cash dividends or cash distributions paid out of net profits legally
available therefor and in the ordinary course of business or subscription
rights, options or warrants for Common Stock or Common Stock Equivalents (any
such nonexcluded event being herein called a "Special Dividend")), the Exercise
Price shall be decreased immediately after the record date for such Special
Dividend to a price determined by multiplying the Exercise Price then in effect
by a fraction, the numerator of which shall be the then current market price of
the Common Stock (as defined in Section 3.1(e)) on such record date less the
fair market value (as determined by the Company's Board of Directors) of the
evidences of indebtedness, securities or property, or other assets issued or
distributed in such Special Dividend applicable to one share of Common Stock or
of such subscription rights or warrants applicable to one share of Common Stock
and the denominator of which shall be such then current market price per share
of Common Stock (as so determined). Any adjustment required by this Section
3.1(b) shall be made successively whenever such a record date is fixed and in
the event that such distribution is not so made, the Exercise Price shall again
be adjusted to be the Exercise Price that was in effect immediately prior to
such record date.
(c) If at any time prior to the exercise of this Warrant in
full, the Company shall make a distribution to all holders of the Common Stock
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of stock of a subsidiary or securities convertible into or exercisable for such
stock, then in lieu of an adjustment in the Exercise Price or the number of
Warrant Shares purchasable upon the exercise of this Warrant, each
Warrantholder, upon the exercise hereof at any time after such distribution,
shall be entitled to receive from the Company, such subsidiary or both, as the
Company shall determine, the stock or other securities to which such
Warrantholder would have been entitled if such Warrantholder had exercised this
Warrant immediately prior thereto, all subject to further adjustment as provided
in this Article 3, and the Company shall reserve, for the life of the Warrant,
such securities of such subsidiary or other corporation; provided, however, that
no adjustment in respect of dividends or interest on such stock or other
securities shall be made during the term of this Warrant or upon its exercise.
(d) Whenever the Exercise Price payable upon exercise of each
Warrant is adjusted pursuant to either or both of paragraphs (a) and (b) of this
Section 3.1, the Warrant Shares shall simultaneously be adjusted by multiplying
the number of Warrant Shares initially issuable upon exercise of each Warrant by
the Exercise Price in effect on the date thereof and dividing the product so
obtained by the Exercise Price, as adjusted.
(e) For the purpose of any computation under this Section 3.1,
the current market price per share of Common Stock at any date shall be deemed
to be the average of the daily closing prices for 20 consecutive trading days
commencing 30 trading days before such date. The closing price for each day
shall be the last sale price regular way or, in case no such reported sales take
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 admitted to trading or listed, or if not listed or admitted to
trading on such exchange, the representative closing bid price as reported by
Nasdaq, or other similar organization if Nasdaq is no longer reporting such
information, or if not so available, the fair market price as determined in good
faith by the Board of Directors of the Company.
(f) No adjustment in the Exercise Price shall be required
unless such adjustment would require an increase or decrease of at least five
cents ($.05) in such price; provided, however, that any adjustments which by
reason of this paragraph (f) are not required to be made shall be carried
forward and taken into account in any subsequent adjustment. All calculations
under this Section 3.1 shall be made to the nearest cent or to the nearest
one-hundredth of a share, as the case may be. Notwithstanding anything in this
Section 3.1 to the contrary, the Exercise Price shall not be reduced to less
than the then existing par value of the Common Stock as a result of any
adjustment made hereunder.
(g) In the event that at any time, as a result of any
adjustment made pursuant to Section 3.1(a), the Warrantholder thereafter shall
become entitled to receive any shares of the Company other than Common Stock,
thereafter the number of such other shares so receivable upon exercise of any
Warrant shall be subject to adjustment from time to time in a manner and on
terms as nearly equivalent as practicable to the provisions with respect to the
Common Stock contained in Section 3.1(a) or this Section 3.1(g).
3.2 Notices of Adjustment. Whenever the number of Warrant Shares or the
Exercise Period is adjusted as herein provided, the Company shall prepare and
deliver forthwith to the Warrantholder a certificate signed by its President,
and by any Vice President, Treasurer or Secretary, setting forth the adjusted
number of shares purchasable upon the exercise of this Warrant and the Exercise
Price of such shares after such adjustment, setting forth a brief statement of
the facts requiring such adjustment and setting forth the computation by which
adjustment was made.
3.3 No Adjustment for Dividends. Except as provided in Section 3.1 of
this Agreement, no adjustment in respect of any cash dividends shall be made
during the term of this Warrant or upon the exercise of this Warrant.
3.4 Preservation of Purchase Rights in Certain Transactions. In case of
any reclassification, capital reorganization or other change of outstanding
shares of Common Stock (other than a subdivision or combination of the
outstanding Common Stock and other than a change in the par value of the Common
Stock) or in case of any consolidation or merger of the Company with or into
another corporation (other than merger with a subsidiary in which the Company is
the continuing corporation and that does not result in any reclassification,
capital reorganization or other change of outstanding shares of Common Stock of
the class issuable upon exercise of this Warrant) or in the case of any sale,
lease, transfer or conveyance to another corporation of the property and assets
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of the Company as an entirety or substantially as an entirety, the Company may,
as a condition precedent to such transaction cause such successor or purchasing
corporation, as the case may be, to execute with the Warrantholder an agreement
granting the Warrantholder the right thereafter, upon payment of the Exercise
Price in effect immediately prior to such action, to receive upon exercise of
this Warrant the kind and amount of shares and other securities and property
which he would have owned or have been entitled to receive after the happening
of such reclassification, change, consolidation, merger, sale or conveyance had
this Warrant been exercised immediately prior to such action. In the event that
in connection with any such reclassification, capital reorganization, change,
consolidation, merger, sale or conveyance, additional shares of Common Stock
shall be issued in exchange, conversion, substitution or payment, in whole or in
part, for, or of, a security of Company other than Common Stock, any such issue
shall be treated as an issue of Common Stock covered by the provisions of
Article 3. The provisions of this Section 3.4 shall similarly apply to
successive reclassifications, capital reorganizations, consolidations, mergers,
sales or conveyances.
3.5 Form of Warrant After Adjustments. The form of this Warrant need
not be changed because of any adjustments in the Exercise Price or the number or
kind of the Warrant Shares, and Warrants theretofore or thereafter issued may
continue to express the same price and number and kind of shares as are stated
in this Warrant, as initially issued.
3.6 Treatment of Warrantholder. Prior to due presentment for
registration of transfer of this Warrant, the Company may deem and treat the
Warrantholder as the absolute owner of this Warrant (notwithstanding any
notation of ownership or other writing hereon) for all purposes and shall not be
affected by any notice to the contrary.
ARTICLE 4
OTHER PROVISIONS RELATING TO RIGHTS OF WARRANTHOLDER
4.1 No Rights as Shareholders; Notice to Warrantholders. Nothing
contained in this Warrant shall be construed as conferring upon the
Warrantholder or his or its transferees the right to vote or to receive
dividends or to consent or to receive notice as a shareholder in respect of any
meeting of shareholders for the election of directors of the Company or of any
other matter, or any rights whatsoever as shareholders of the Company. The
Company shall give notice to the Warrantholder by registered mail if at any time
prior to the expiration or exercise in full of the Warrants, any of the
following events shall occur:
(a) the Company shall authorize the payment of any dividend
payable in any securities upon shares of Common Stock or authorize the making of
any distribution (other than a cash dividend subject to the parenthetical set
forth in Section 3.1(b)) to all holders of Common Stock;
(b) the Company shall authorize the issuance to all holders of
Common Stock of any additional shares of Common Stock or Common Stock
Equivalents or of rights, options or warrants to subscribe for or purchase
Common Stock or Common Stock Equivalents or of any other subscription rights,
options or warrants;
(c) a dissolution, liquidation or winding up of the Company
shall be proposed; or
(d) a capital reorganization or reclassification of the Common
Stock (other than a subdivision or combination of the outstanding Common Stock
and other than a change in the par value of the Common Stock) or any
consolidation or merger of the Company with or into another corporation (other
than a consolidation or merger in which the Company is the continuing
corporation and that does not result in any reclassification or change of Common
Stock outstanding) or in the case of any sale or conveyance to another
corporation of the property of the Company as an entirety or substantially as an
entirety.
Such giving of notice shall be initiated at least 10 Business
Days prior to the date fixed as a record date or effective date or the date of
closing of the Company's stock transfer books for the determination of the
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shareholders entitled to such dividend, distribution or subscription rights, or
for the determination of the shareholders entitled to vote on such proposed
merger, consolidation, sale, conveyance, dissolution, liquidation or winding up.
Such notice shall specify such record date or the date of closing the stock
transfer books, as the case may be. Failure to provide such notice shall not
affect the validity of any action taken in connection with such dividend,
distribution or subscription rights, or proposed merger, consolidation, sale,
conveyance, dissolution, liquidation or winding up.
4.2 Lost, Stolen, Mutilated or Destroyed Warrants. If this Warrant is
lost, stolen, mutilated or destroyed, the Company may, on such terms as to
indemnity or otherwise as it may in its discretion impose (which shall, in the
case of a mutilated Warrant, include the surrender thereof), issue a new Warrant
of like denomination and tenor as, and in substitution for, this Warrant.
ARTICLE 5
SPLIT-UP, COMBINATION, EXCHANGE AND
TRANSFER OF WARRANTS AND WARRANT SHARES
5.1 Split-Up, Combination and Exchange of Warrants. This Warrant may be
split up, combined or exchanged for another Warrant or Warrants containing the
same terms to purchase a like aggregate number of Warrant Shares. If the
Warrantholder desires to split up, combine or exchange this Warrant, he or it
shall make such request in writing delivered to the Company and shall surrender
to the Company this Warrant and any other Warrants to be so split-up, combined
or exchanged. Upon any such surrender for a split-up, combination or exchange,
the Company shall execute and deliver to the person entitled thereto a Warrant
or Warrants, as the case may be, as so requested. The Company shall not be
required to effect any split-up, combination or exchange which will result in
the issuance of a Warrant entitling the Warrantholder to purchase upon exercise
a fraction of a share of Common Stock or a fractional Warrant. The Company may
require such Warrantholder to pay a sum sufficient to cover any tax or
governmental charge that may be imposed in connection with any split-up,
combination or exchange of Warrants.
5.2 Restrictions on Transfer; Restrictive Legends. Except as otherwise
permitted by this Section 5.2, each stock certificate for Warrant Shares issued
upon the exercise of any Warrant and each stock certificate issued upon the
direct or indirect transfer of any such Warrant Shares shall be stamped or
otherwise imprinted with a legend in substantially the following form:
"THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD OR
OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT FILED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT."
Notwithstanding the foregoing, the Warrantholder may require the
Company to issue a Warrant or a stock certificate for Warrant Shares, in each
case without a legend, if (i) the issuance of such Warrant Shares has been
registered under the Securities Act, (ii) such Warrant or such Warrant Shares,
as the case may be, have been registered for resale under the Securities Act or
sold pursuant to Rule 144 under the Securities Act (or a successor thereto) or
(iii) the Warrantholder has received an opinion of counsel (who may be house
counsel for such Warrantholder) reasonably satisfactory to the Company that such
registration is not required with respect to such Warrant or such Warrant
Shares, as the case may be.
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ARTICLE 6
REGISTRATION UNDER THE SECURITIES ACT OF 1933
6.1 Piggyback Registration.
(a) Right to include Registrable Securities. If at any time or
from time to time prior to the second anniversary of the Expiration Date, the
Company proposes to register any of its securities under the Securities Act on
any form for the registration of securities under such Act, whether or not for
its own account (other than by a registration statement on Form S-8 or other
form which does not include substantially the same information as would be
required in a form for the general registration of securities or would not be
available for the Registrable Securities) (a "Piggyback Registration"), it shall
as expeditiously as possible give written notice to all Holders of its intention
to do so and of such Holders' rights under this Section 6.1. Such rights are
referred to hereinafter as "Piggyback Registration Rights." Upon the written
request of any such Holder made within 20 days after receipt of any such notice
(which request shall specify the Registrable Securities intended to be disposed
of by such Holder), the Company shall include in the Registration Statement the
Registrable Securities which the Company has been so requested to register by
the Holders thereof and the Company shall keep such registration statement in
effect and maintain compliance with each Federal and state law or regulation for
the period necessary for such Holder to effect the proposed sale or other
disposition (but in no event for a period greater than 120 days).
(b) Withdrawal of Piggyback Registration by Company. If, at
any time after giving written notice of its intention to register any securities
in a Piggyback Registration but prior to the effective date of the related
Registration Statement, the Company shall determine for any reason not to
register such securities, the Company shall give notice of such determination to
each Holder and, thereupon, shall be relieved of its obligation to register any
Registrable Securities in connection with such Piggyback Registration. All best
efforts obligations of the Company pursuant to Section 6.4 shall cease if the
Company determines to terminate prior to such effective date any registration
where Registrable Securities are being registered pursuant to this Section 6.1.
(c) Piggyback Registration of Underwritten Public Offerings.
If a Piggyback Registration involves an offering by or through underwriters,
then (i) all Holders requesting to have their Registrable securities included in
the Company's Registration Statement must sell their Registrable Securities to
the underwriters selected by the Company on the same terms and conditions as
apply to other selling shareholders and (ii) any Holder requesting to have his
or its Registrable Securities included in such Registration Statement may elect
in writing, not later than three Business Days prior to the effectiveness of the
Registration Statement filed in connection with such registration, not to have
his or its Registrable Securities so included in connection with such
registration.
(d) Payment of Registration Expenses for Piggyback
Registration. The Company shall pay all Registration Expenses in connection with
each registration of Registrable Securities requested pursuant to a Piggyback
Registration Right contained in this Section 6.1.
(e) Priority in Piggyback Registration. If a Piggyback
Registration involves an offering by or through underwriters, the Company,
except as otherwise provided herein, shall not be required to include
Registrable Shares therein if and to the extent the underwriter managing the
offering reasonably believes in good faith and advises each Holder requesting to
have Registrable Securities included in the company's Registration Statement
that such inclusion would materially adversely affect such offering; provided
that (i) if other selling shareholders who are employees, officers, directors or
other affiliates of the Company have requested registration of securities in the
proposed offering, the Company will reduce or eliminate such other selling
shareholders' securities before any reduction or elimination of Registrable
Securities; and (ii) any such reduction or elimination (after taking into
account the effect of clause (i)) shall be pro rata to all other holders of the
securities of the Company exercising "Piggyback Registration Rights" similar to
those set forth herein in proportion to the respective number of shares they
have requested to be registered. Notwithstanding the foregoing, in any event,
within 60 days of the effective date of the Registration Statement, the Company
shall file such supplements and post effective amendments or take such other
action necessary under Federal and state regulation as may be necessary to
permit such Holders to include all of the Registrable Securities requested to be
registered by the Holders in the offering for a period of 90 days following such
period of delay.
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6.2 Demand Registration.
(a) Request for Registration. If, at any time prior to the
Expiration Date, any 25% Holders request that the Company file a registration
statement under the Securities Act, as soon as practicable thereafter the
Company shall use its best efforts to file a registration statement with respect
to all Warrant Shares that it has been so requested to include and obtain the
effectiveness thereof, and to take all other action necessary under any Federal
or state law or regulation to permit the Warrant Shares that are held and/or
that may be acquired upon the exercise of the Warrants specified in the notices
of the Holders or holders hereof to be sold or otherwise disposed of, and the
Company shall maintain such compliance with each such Federal and state law and
regulation for the period necessary for such Holders or holders to effect the
proposed sale or other disposition; provided, however, the Company shall be
entitled to defer such registration for a period of up to 60 days if and to the
extent that its Board of Directors shall determine that such registration would
interfere with a pending corporate transaction. The Company shall also promptly
give written notice to the Holders and the holders of any other Warrants and/or
the holders of any Warrant Shares who or that have not made a request to the
Company pursuant to the provisions of this Section 6.2(a) of its intention to
effect any required registration or qualification, and shall use its best
efforts to effect as expeditiously as possible such registration or
qualification of all such other Warrant Shares that are then held and/or that
may be acquired upon the exercise of the Warrants, the Holder or holders of
which have requested such registration or qualification, within 15 days after
such notice has been given by the Company, as provided in the preceding
sentence. The Company shall be required to effect a registration or
qualification pursuant to this Section 6.2(a) on one occasion only.
(b) Payment of Registration Expenses for Demand Registration.
The Company shall pay all Registration Expenses in connection with the Demand
Registration.
(c) Selection of Underwriters. If any Demand Registration is
requested to be in the form of an underwritten offering, the managing
underwriter shall be Needham & Company, Inc. and the co-manager (if any) and the
independent pricer required under the rules of the NASD (if any) shall be
selected and obtained by the Holders of a majority of the Warrant Shares to be
registered. Such selection shall be subject to the company's consent, which
consent shall not be unreasonably withheld. All fees and expenses (other than
Registration Expenses otherwise required to be paid) of any managing
underwriter, any co-manager or any independent underwriter or other independent
pricer required under the rules of the NASD shall be paid for by such
underwriters or by the Holders or holders whose shares are being registered. If
Needham & Company, Inc. should decline to serve as managing underwriter, the
Holders of a majority of the Warrant Shares to be registered may select and
obtain one or more managing underwriters. Such selection shall be subject to the
Company's consent, which shall not be unreasonably withheld.
(d) Procedure for Requesting Demand Registration. Any request
for a Demand Registration shall specify the aggregate number of the Registrable
Securities proposed to be sold and the intended method of disposition. Within
ten (10) days after receipt of such a request the Company will give written
notice of such registration request to all Holders, and, subject to the
limitations of Section 6.2(b), the Company will include in such registration all
Registrable Securities with respect to which the Company has received written
requests for inclusion therein within 15 Business Days after the date on which
such notice is given. Each such request shall also specify the aggregate number
of Registrable Securities to be registered and the intended method of
disposition thereof.
6.3 Buy-outs of Registration Demand. In lieu of carrying out its
obligations to effect a Piggyback Registration or Demand Registration of any
Registrable Securities pursuant to this Article 6, the Company may carry out
such obligation by offering to purchase and purchasing such Registrable
Securities requested to be registered at an amount in cash equal to the
difference between (a) 95% of the last sale price of the Common Stock on the day
the request for registration is made and (b) the Exercise Price in effect on
such day; provided, however, that the Holder or Holders may withdraw such
request for registration rather than accept such offer by the Company.
6.4 Registration Procedures. If and whenever the Company is required to
use its best efforts to take action pursuant to any Federal or state law or
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regulation to permit the sale or other disposition of any Registrable Securities
that are then held or that may be acquired upon exercise of the Warrants in
order to effect or cause the registration of any Registrable Securities under
the Securities Act as provided in this Article 6, the Company shall, as
expeditiously as practicable:
(a) Prepare and file with the SEC, as soon as practicable
within ninety (90) days after the end of the period within which requests for
registration may be given to the Company (but subject to the provision for
deferral contained in Section 6.2(a) hereof) a Registration Statement or
Registration Statements relating to the registration on any appropriate form
under the Securities Act, which form shall be available for the sale of the
Registrable Securities in accordance with the intended method or methods of
distribution thereof, subject to Section 6.1(e) hereof, and use its best efforts
to cause such Registration Statements to become effective; provided that before
filing a Registration Statement or Prospectus or any amendment or supplements
thereto, including documents incorporated by reference after the initial filing
of any Registration Statement, the Company will furnish to the Holders of the
Registrable Securities covered by such Registration Statement and the
underwriters, if any, copies of all such documents provided to be filed, which
documents will be subject to the review of such Holders and underwriters;
(b) prepare and file with the SEC such amendments and
post-effective amendments to a Registration Statement as may be necessary to
keep such Registration Statement effective for a reasonable period not to exceed
180 days; cause the related Prospectus to be supplemented by any required
Prospectus supplement, and as so supplemented to be filed pursuant to Rule 424
under the Securities Act; and comply with the provisions of the Securities Act
with respect to the disposition of all securities covered by such Registration
Statement during such period in accordance with the intended methods of
disposition by the sellers thereof set forth in such Registration Statement or
supplement to such Prospectus;
(c) notify the selling Holders of Registrable Securities and
the managing underwriters, if any, promptly, and (if requested by any such
Person) confirm such advice in writing, (i) when a Prospectus or any Prospectus
supplement or post-effective amendment has been filed, and, with respect to a
Registration Statement or any post-effective amendment, when the same has become
effective; (ii) of any request by the SEC for amendments or supplements to a
Registration Statement or related Prospectus or for additional information;
(iii) of the issuance by the SEC of any stop order suspending the effectiveness
of a Registration Statement or the initiation of any proceedings for that
purpose; (iv) if at any time the representations and warranties of the Company
contemplated by paragraph (n) below ceases to be true and correct in all
material respects; (v) of the receipt by the Company of any notification with
respect to the suspension of the qualification of any of the Registrable
Securities for sale in any jurisdiction or the initiation or threatening of any
proceeding for such purpose, and (vi) of the happening of any event that makes
any statement of a material fact made in the Registration Statement, the
Prospectus or any document incorporated therein by reference untrue or which
requires the making of any changes in the Registration Statement or Prospectus
so that they will not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading;
(d) make every reasonable effort to obtain the withdrawal of
any order suspending the effectiveness of a Registration Statement at the
earliest possible moment;
(e) if reasonably requested by the managing underwriters,
immediately incorporate in a Prospectus supplement or post-effective amendment
such information as the managing underwriters believe (on advice of counsel)
should be included therein as required by applicable law relating to such sale
of Registrable Securities, including, without limitation, information with
respect to the purchase price being paid for the Registrable Securities by such
underwriters and with respect to any other terms of the underwritten (or
"best-efforts" underwritten) offering; and make all required filings of such
Prospectus supplement or post-effective amendment as soon as notified of the
matters to be incorporated in such Prospectus supplement or post-effective
amendment;
(f) furnish to each selling Holder of Registrable Securities
and each managing underwriter, without charge, at least one signed copy of the
Registration Statement and any post-effective amendment thereto, including
financial statements and schedules, all documents incorporated therein by
reference and all exhibits (including those incorporated by reference);
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(g) deliver to each selling Holder of Registrable Securities
and the underwriters, if any, without charge, as many copies of the Prospectus
or Prospectuses (including each preliminary Prospectus) any amendment or
supplement thereto as such Persons may reasonably request; the Company consents
to the use of such Prospectus or any amendment or supplement thereto by each of
the selling Holders of Registrable Securities and the underwriters, if any, in
connection with the offering and sale of the Registrable Securities covered by
such Prospectus or any Amendment or supplement thereto;
(h) prior to any public offering of Registrable Securities,
cooperate with the selling Holders of Registrable Securities, the underwriters,
if any, and their respective counsel in connection with the registration or
qualification of such Registrable Securities for offer and sale under the
securities or Blue Sky laws of such jurisdictions within the United States as
any selling Holder or underwriter reasonably requests in writing, keep each such
registration or qualification effective during the period such Registration
Statement is required to be kept effective and do any and all other acts or
things necessary or advisable to enable the disposition in such jurisdictions of
the Registrable Securities covered by the applicable Registration Statement;
provided that the Company will not be required to qualify to do business in any
jurisdiction where it is not then so qualified or to take any action which would
subject the Company to general service of process in any jurisdiction where it
is not at the time so subject;
(i) cooperate with the selling Holders of Registrable
Securities and the managing underwriters, if any, to facilitate the timely
preparation and delivery of certificates representing Registrable Securities to
be sold and not bearing any restrictive legends; and enable such Registrable
Securities to be in such denominations and registered in such names as the
managing underwriters may request at least two Business Days prior to any sale
of Registrable Securities to the underwriters;
(j) use its best efforts to cause the Registrable Securities
covered by the applicable Registration Statement to be registered with or
approved by such other governmental agencies or authorities within the United
States as may be necessary to enable the seller or sellers thereof or the
underwriters, if any, to consummate the disposition of such Registrable
Securities;
(k) upon the occurrence of any event contemplated by Section
6.4(c)(vi) above, prepare a supplement or post-effective amendment to the
applicable Registration Statement or related Prospectus or any document
incorporated therein by reference or file any other required document so that,
as thereafter delivered to the purchasers of the Registrable Securities being
sold thereunder, such Prospectus will not contain an untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein not misleading;
(l) with respect to each issue or class of Registrable
Securities, use its best efforts to cause all Registrable Securities covered by
the Registration Statements to be listed on each securities exchange, if any, on
which similar securities issued by the Company are then listed if requested by
the Holders of a majority of such issue or class of Registrable Securities;
(m) enter into such agreements (including an underwriting
agreement) and take all such other action reasonably required in connection
therewith in order to expedite or facilitate the disposition of such Registrable
Securities and in such connection, if the registration is in connection with an
underwritten offering (i) make such representations and warranties to the
underwriters, in such form, substance and scope as are customarily made by
issuers to underwriters in underwritten offering and confirm the same if and
when requested; (ii) obtain opinions of counsel to the Company and updates
thereof (which counsel and opinions in form, scope and substance shall be
reasonably satisfactory to the underwriters) addressed to the underwriters
covering the matters customarily covered in opinions requested in underwritten
offerings and such other matters as may be reasonably requested by such
underwriters; (iii) obtain "cold comfort" letters and updates thereof from the
Company's accountants addressed to the underwriters, such letters to be in
customary form and covering matters of the type customarily covered in "cold
comfort" letters by underwriters in connection with underwritten offerings; (iv)
set forth in full in any underwriting agreement entered into the indemnification
provisions and procedures of Section 6.5 hereof with respect to all parties to
be indemnified pursuant to said Section; and (v) deliver such documents and
certificates as may be reasonably requested by the underwriters to evidence
compliance with clause (i) above and with any customary conditions contained in
the underwriting agreement or other agreement entered into by the Company; the
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above shall be done at each closing under such underwriting or similar agreement
or as and to the extent required hereunder;
(n) make available for inspection by one or more
representatives of the Holders of Registrable Securities being sold, any
underwriter participating in any disposition pursuant to such registration, and
any attorney or accountant retained by such Holders or underwriter, all
financial and other records, pertinent corporate documents and properties of the
Company, and cause the Company's officers, directors and employees to supply all
information reasonably requested by any such representatives, in connection with
such; and
(o) otherwise use its best efforts to comply with all
applicable Federal and state regulations; and take such other action as may be
reasonably necessary to or advisable to enable each such Holder and each such
underwriter to consummate the sale or disposition in such jurisdiction or
jurisdiction in which any such Holder or underwriter shall have requested that
the Registrable Securities be sold.
Except as otherwise provided in this Agreement, the Company shall have
sole control in connection with the preparation, filing, withdrawal, amendment
or supplementing of each Registration Statement, the selection of underwriters,
and the distribution of any preliminary prospectus included in the Registration
Statement, and may include within the coverage thereof additional shares of
Common Stock or other securities for its own account or for the account of one
or more of its other security holders.
The Company may require each Seller of Registrable Securities as to
which any registration is being effected to furnish to the Company such
information regarding the distribution of such securities and such other
information as may otherwise be required by the Securities Act to be included in
such Registration Statement.
6.5 Indemnification.
(a) Indemnification by Company. In connection with each
Registration Statement relating to disposition of Registrable Securities, the
Company shall indemnify and hold harmless each Holder and each underwriter of
Registrable Securities and each Person, if any, who controls such Holder or
underwriter (within the meaning of Section 15 of the Securities Act or Section
20 of the Exchange Act) against any and all losses, claims, damages and
liabilities, joint or several (including any reasonable investigation, legal and
other expenses incurred in connection with, and any amount paid in settlement of
any action, suit or proceeding or any claim asserted), to which they, or any of
them, may become subject under the Securities Act, the Exchange Act or other
Federal or state law or regulation, at common law or otherwise, insofar as such
losses, claims, damages or liabilities arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact contained in any
Registration Statement, Prospectus or preliminary prospectus or any amendment
thereof or supplement thereto, or arise out of or are based upon any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading; provided, however,
that such indemnity shall not inure to the benefit of any Holder or underwriter
(or any person controlling such Holder or underwriter within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act) on account
of any losses, claims, damages or liabilities arising from the sale of the
Registrable Securities if such untrue statement or omission or alleged untrue
statement or omission was made in such Registration Statement, Prospectus or
preliminary prospectus, or such amendment or supplement, in reliance upon and in
conformity with information furnished in writing to the Company by such Holder
or underwriter specifically for use therein. The Company shall also indemnify
selling brokers, dealer managers and similar securities industry professionals
participating in the distribution, their officers and directors and each Person
who controls such Persons (within the meaning of Section 15 of the Securities
Act or Section 20 of the Exchange Act) to the same extent as provided above with
respect to the indemnification of the Holders of Registrable Securities, if
requested. This indemnity agreement shall be in addition to any liability which
the Company may otherwise have.
(b) Indemnification by Holder. In connection with each
Registration Statement, each Holder shall indemnify, to the same extent as the
indemnification provided by the Company in Section 6.5(a), the Company, its
directors and each officer who signs the Registration Statement and each Person
who controls the Company (within the meaning of Section 15 of the Securities Act
and Section 20 of the Exchange Act) but only insofar as such losses, claims,
damages and liabilities arise out of or are based upon any untrue statement or
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omission or alleged untrue statement or omission which was made in the
Registration Statement, the Prospectus or preliminary prospectus or any
amendment thereof or supplement thereto, in reliance upon and in conformity with
information furnished in writing by such Holder to the Company specifically for
use therein. In no event shall the liability of any selling Holder of
Registrable Securities hereunder be greater in amount than the dollar amount of
the net proceeds received by such Holder upon the sale of the Registrable
Securities giving rise to such indemnification obligation. The Company shall be
entitled to receive indemnities from underwriters, selling brokers, dealer
managers and similar securities industry professionals participating in the
distribution, to the same extent as provided above, with respect to information
so furnished in writing by such Persons specifically for inclusion in any
Prospectus, Registration Statement or preliminary prospectus or any amendment
thereof or supplement thereto.
(c) Conduct of Indemnification Procedure. Any party that
proposes to assert the right to be indemnified hereunder will, promptly after
receipt of notice of commencement of any action, suit or proceeding against such
party in respect of which a claim is to be made against an indemnifying party or
parties under this Section, notify each such indemnifying party of the
commencement of such action, suit or proceeding, enclosing a copy of all papers
served. In case any such action, suit or proceeding shall be brought against any
indemnified party and it shall notify the indemnifying party of the commencement
thereof, the indemnifying party shall be entitled to participate in, and, to the
extent that it shall wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel 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 and the
approval by the indemnified party of such counsel, the indemnifying party shall
not be liable to such indemnified party for any legal or other expenses, except
as provided below and except for the reasonable costs of investigation
subsequently incurred by such indemnified party in connection with the defense
thereof. The indemnified party shall have the right to employ its counsel in any
such action, but the fees and expenses of such counsel shall be at the expense
of such indemnified party unless (i) the employment of counsel by such
indemnified party has been authorized in writing by the indemnifying parties,
(ii) the indemnified party shall have reasonably concluded that there may be a
conflict of interest between the indemnifying parties and the indemnified party
in the conduct of the defense of such action (in which case the indemnifying
parties shall not have the right to direct the defense of such action on behalf
of the indemnified party) or (iii) the indemnifying parties shall not have
employed counsel to assume the defense of such action within a reasonable time
after notice of the commencement thereof, in each of which cases the fees and
expenses of counsel shall be at the expense of the indemnifying parties. An
indemnified party shall not be liable for any settlement of any action, suit,
proceeding or claim effected without its written consent.
(d) Contribution. In connection with each Registration
Statement relating to the disposition of Registrable Securities, if the
indemnification provided for in subsection a. hereof is unavailable to an
indemnified party thereunder in respect to any losses, claims, damages or
liabilities referred to therein, then the indemnifying party shall contribute to
the amount paid or payable by such indemnified party as a result of the losses,
claims, damages or liabilities referred to in paragraphs (a) or (b) of this
Section 6.5 in such proportion as is appropriate to reflect the relative fault
of the indemnifying party on the one hand and of the indemnified party on the
other in connection with the statements or omissions that resulted in such
losses, claims, damages or liabilities, or actions in respect thereof, as well
as any other relevant equitable considerations. Relative fault shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the indemnifying party or the
indemnified party and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission. The amount paid or payable by an indemnified party as a result of the
losses, claims, damages or liabilities (or actions in respect thereof) referred
to above in this paragraph (d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim.
(e) Underwriting Agreement to Control. Notwithstanding the
foregoing provisions of this Section 6.5, to the extent that the provisions on
indemnification and contribution contained in any underwriting agreement entered
into in connection with the underwritten public offering of the Registrable
Securities are in conflict with the foregoing provisions, the provisions in such
underwriting agreement shall control.
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(f) Specific Performance. The Company and the Holder
acknowledge that remedies at law for the enforcement of this Section 6.5 may be
inadequate and intend that this Section 6.5 shall be specifically enforceable.
(g) Survival of Obligations. The obligations of the Company
and the Holder under this Section 6.5 shall survive the completion of any
offering of Registrable Securities pursuant to a Registration Statement under
this Article 6, and otherwise.
6.6 Reports Under Securities Exchange Act of 1934. With a view
to making available to the Holders the benefits of Rule 144 promulgated under
the Securities Act and any other rule or regulation of the SEC that may at any
time permit a Holder to sell securities of the Company to the public without
registration or pursuant to a registration on Form S-3, the Company agrees to:
(a) make and keep public information available, as those terms
are understood and defined in SEC Rule 144, at all times [after 90 days after
the effective date of the first registration statement filed by the Company for
the offering of its securities to the general public];
(b) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act;
and
(c) furnish to any Holder, so long as the Holder owns any
Registrable Securities, forthwith upon request (i) a written statement by the
Company that it has complied with the reporting requirements of SEC Rule 144
[(at any time after 90 days after the effective date of the first registration
statement filed by the Company)], the Securities Act and the Exchange Act [(at
any time after it has become subject to such reporting requirements)], or that
it qualifies as a registrant whose securities may be resold pursuant to Form S-3
(at any time after it so qualifies), (ii) a copy of the most recent annual or
quarterly report of the Company and such other reports and documents so filed by
the Company and (iii) such other information as may be reasonably requested in
availing any Holder of any rule or regulation of the SEC which permits the
selling of any such securities without registration or pursuant to such form.
ARTICLE 7
OTHER MATTERS
7.1 Binding Effects; Benefits. This Warrant shall inure to the benefit
of and shall be binding upon the Company and the Warrantholder and their
respective heirs, legal representatives, successors and assigns. Nothing in this
Warrant, expressed or implied, is intended to or shall confer on any person
other than the Company and the Warrantholder, or their respective heirs, legal
representatives, successors or assigns, any rights, remedies, obligations or
liabilities under or by reason of this Warrant.
7.2 No Inconsistent Agreements. The Company will not on or after the
date of this Warrant enter into any agreement with respect to its securities
which is inconsistent with the rights granted to the Holders in this Warrant or
otherwise conflicts with the provisions hereof. The rights granted to the
Holders hereunder do not in any way conflict with and are not inconsistent with
the rights granted to holders of the Company's securities under any other
agreements.
7.3 Adjustments Affecting Registrable Securities. The Company will not
take any action outside the ordinary course of business, or permit any change
within its control to occur outside the ordinary course of business, with
respect to the Registrable Securities which is without a bona fide business
purpose, and which is intended to interfere with the ability of the Holders of
Registrable Securities to include such Registrable Securities in a registration
undertaken pursuant to this Agreement.
7.4 Integration/Entire Agreement. This Warrant is intended by the
parties as a final expression of their agreement and intended to be a complete
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and exclusive statement of the agreement and understanding of the parties hereto
in respect of the subject matter contained herein. There are no restrictions,
promises, warranties or undertakings, other than those set forth or referred to
herein with respect to the registration rights granted by the Company with
respect to the Warrants. This Warrant supersedes all prior agreements and
understandings between the parties with respect to such subject matter (other
than warrants previously issued by the Company to the Warrantholder).
7.5 Amendments and Waivers. The provisions of this Warrant, including
the provisions of this sentence, may not be amended, modified or supplemented,
and waiver or consents to departures from the provisions hereof may not be given
unless the Company has obtained the written consent of holders of at least a
majority of the outstanding Registrable Securities. Holders shall be bound by
any consent authorized by this Section whether or not certificates representing
such Registrable Securities have been marked to indicate such consent.
7.6 Counterparts. This Warrant may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
so executed shall be deemed to be an original and all of which taken together
shall constitute one and the same agreement.
7.7 Governing Law. This Warrant shall be governed by and construed in
accordance with the laws of the State of New York.
7.8 Severability. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstances, is held
invalid, illegal or unenforceable, the validity, legality and enforceability of
any such provisions in every other respect and of the remaining provisions
contained herein shall not be affected or impaired thereby.
7.9 Attorneys' Fees. In any action or proceeding brought to enforce any
provisions of this Warrant, or where any provision hereof is validly asserted as
a defense, the successful party shall be entitled to recover reasonable
attorneys' fees and disbursements in addition to its costs and expenses and any
other available remedy.
7.10 Computations of Consent. Whenever the consent or approval of
Holders of a specified percentage of Registrable Securities is required
hereunder, Registrable Securities held by the Company or its affiliates (other
than the Warrantholder or subsequent Holders if they are deemed to be such
affiliates solely by reason of their holdings of such Registrable Securities)
shall not be counted in determining whether such consent or approval was given
by the Holders of such required percentage.
7.11 Notice. Any notices or certificates by the Company to the Holder
and by the Holder to the Company shall be deemed delivered if in writing and
delivered in person or by registered mail (return receipt requested) to the
Holder addressed to him in care of Needham & Company, Inc., 445 Park Avenue, New
York, New York 10022 or, if the Holder has designated, by notice in writing to
the Company, any other address, to such other address, and if to the Company,
addressed to it at: 119 Technology Drive, Bethlehem, PA 18015 or if the Company
has designated, by notice in writing to the Holder, any other address, to such
other address.
The Company may change its address by written notice to the Holder and the
Holder may change its address by written notice to the Company.
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IN WITNESS WHEREOF, this Warrant has been duly executed by the Company
under its corporate seal as of the ____ day of ___________________, 1997.
QUANTUM EPITAXIAL DESIGNS, INC.
By:____________________________________
Title:_________________________________
Attest:________________________________
Secretary
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EXERCISE FORM
(To be executed upon exercise of Warrant)
Quantum Epitaxial Designs, Inc.:
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant, to purchase Warrant Shares and (check one):
___ herewith tenders payment for _______ of the Warrant Shares to
the order of Quantum Epitaxial Designs, Inc. in the amount of
$_________ in accordance with the terms of this Warrant; or
___ herewith tenders this Warrant for _______ Warrant Shares
pursuant to the net issuance exercise provisions of Section
2.3(b) of this Warrant.
Please issue a certificate or certificates for such Warrant Shares in
the name of, and pay any cash for any fractional share to:
Name _______________________________________________
_______________________________________________
_______________________________________________
_______________________________________________
(Please print Name, Address and Social Security No.)
Signature ______________________________________________
Note: The above signature should correspond exactly with
the name on the first page of this Warrant
Certificate or with the name of the assignee
appearing in the assignment form below.
If said number of shares shall not be all the shares purchasable under
the within Warrant Certificate, a new Warrant Certificate is to be issued in the
name of said undersigned for the balance remaining of the shares purchasable
thereunder.
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ASSIGNMENT
(To be executed only upon assignment of Warrant)
For value received, ______________________________ hereby sells,
assigns and transfers unto the Assignee(s) named below the rights represented by
such Warrant to purchase number of Warrant Shares listed opposite the respective
name(s) of the Assignee(s) named below and all other rights of the Warrantholder
under the within Warrant (including, without limitation, the registration rights
provided in Section 6 of the within Warrant), and does hereby irrevocably
constitute and appoint _____________________________ attorney, to transfer said
Warrant on the books of the within-named Company with respect to the number of
Warrant Shares set forth below, with full power of substitution in the premises:
Name(s) of
Assignee(s) Address No. of Warrant Shares
----------- ------- ---------------------
And if said number of Warrant Shares shall not be all the Warrant Shares
represented by the Warrant, a new Warrant is to be issued in the name of said
undersigned for the balance remaining of the Warrant Shares registered by said
Warrant.
Dated: , 19__ Signature _________________________________________
Note: The above signature should
correspond exactly with
the name on the face of
this Warrant
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AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
QUANTUM EPITAXIAL DESIGNS, INC.
QUANTUM EPITAXIAL DESIGNS, INC., a corporation organized and
existing under and by virtue of the provisions of the Business Corporation Law,
Act of May 5, 1933 (P.L. 362) of the Commonwealth of Pennsylvania (the
"Corporation"), hereby states as follows:
FIRST: These Amended and Restated Articles of Incorporation
were duly adopted by the Corporation's board of directors (the "Board") and
shareholders in accordance with the provisions of Section 1912(a) and Section
1914(a) of the Business Corporations Law of 1988 of the Commonwealth of
Pennsylvania, as amended (the "BCL"), respectively, by the unanimous written
consent of the Board in accordance with Section 1727(b) and by the partial
written consent of the shareholders in accordance with Section 1766(b).
SECOND: The text of the Corporation's original Articles of
Incorporation filed on December 23, 1988, and all amendments thereto, is hereby
superseded and restated in its entirety to read as follows:
ARTICLE I
NAME; STATUTE OF INCORPORATION
The name of the Corporation is Quantum Epitaxial Designs, Inc. The
Corporation is incorporated under the provisions of Business Corporation Law,
Act of May 5, 1933 (P.L.
364).
ARTICLE II
REGISTERED OFFICE
The Corporation's registered office in this Commonwealth is 119
Technology Drive, Bethlehem, Pennsylvania 18015, Northampton County.
ARTICLE III
CAPITAL STOCK
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 (the "Common Shares"),
and 5,420,000 shall be preferred stock, par value $0.01 per share. (the
"Preferred Shares").
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Part A. Common Stock
A.1 General. The voting, dividend and liquidation rights of the holders
of Common Shares are subject to and qualified by the rights of holders of
Preferred Shares of any series as may be designated by the Board upon the
issuance of Preferred Shares of any series.
A.2 Voting. The holders of Common Shares are entitled to one vote for
each share held at all meetings of stockholders. None of the Common Shares shall
be entitled to cumulative voting.
A.3 Dividends. Dividends may be declared and paid on the Common Shares
from funds lawfully available therefore as and when determined by the Board and
subject to any preferential dividend rights of any then outstanding Preferred
Shares.
A.4 Liquidation. Upon the voluntary or involuntary dissolution or
liquidation of the Corporation, holders of Common Shares will be entitled to
receive all of the Corporation's assets available for distribution to its
shareholders, subject to any preferential rights of any then outstanding
Preferred Shares.
Part B. Preferred Shares
The Board 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 series of Preferred Shares 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
series of Preferred Shares 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 BCL. None of the Preferred Shares shall be
entitled to cumulative voting. Without limiting the generality of the foregoing,
the resolution or resolutions providing for issuance of any series of Preferred
Shares may provide that such series shall be superior or rank equally or be
junior to the Preferred Shares of any other series to the extent permitted by
law. Except as otherwise expressly provided in these Amended and Restated
Articles of Incorporation, no vote of the holders of Preferred Shares or Common
Shares shall be a prerequisite to the designation or issuance of any shares of
any series of Preferred Shares authorized by and complying with the conditions
of these Articles of Incorporation, the right to have such vote being expressly
waived by all present and future holders of the capital stock of the
Corporation.
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ARTICLE IV
BYLAWS
In furtherance and not in limitation of the powers conferred by the
laws of the Commonwealth of Pennsylvania, the Board is expressly authorized to
adopt, amend or repeal any or all of the Corporation's bylaws.
ARTICLE V
LIMITATION OF LIABILITY
No person who is or was a director of the Corporation shall be
personally liable as such 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 BCL, and (b) such breach or
failure to perform constitutes self-dealing, willful misconduct or recklessness.
The foregoing limitation of liability shall not apply to (i) the responsibility
or liability of a director pursuant to any criminal statute, or (ii) the
liability of a director for the payment of taxes pursuant to federal, state or
local law. No amendment to or repeal of this Article, and no adoption of any
provision in the Corporation's Articles of Incorporation inconsistent with this
Article, shall apply to or affect in any respect the liability or alleged
liability of any director of the Corporation for or with respect to any act or
failure to act on the part of such director occurring prior to such amendment,
repeal or adoption.
ARTICLE VI
INDEMNIFICATION
Section 6.1 Officers and Directors - Direct Actions. The
Corporation shall indemnify any director or officer of the Corporation (as used
in this Article, the phrase "director or officer of the Corporation" shall mean
any person who 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), who was or is a party (other 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) by reason of the fact that he or she is
or was a director or officer of the Corporation, 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 (i) 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
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(ii) with respect to any criminal proceeding, had reasonable cause to believe
that his or her conduct was unlawful.
Section 6.2 Officers and Directors - Derivative Actions. The
Corporation shall indemnify any director or officer of the Corporation 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,
suit or proceeding by or in the right of the Corporation to procure a judgment
in the Corporation's favor by reason of the fact that he or she is or was a
director or officer of the Corporation, against expenses (including attorneys'
fees) actually and reasonably incurred by him or her in connection with the
defense or settlement of the action, suit or proceeding 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 under this Section in respect of any claim,
issue or matter as to which the director or officer of the Corporation 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, suit or proceeding 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 6.3 Employees and Agents. The Corporation may, to the
extent permitted by the BCL, indemnify any employee or agent of the Corporation
(as used in this Article, the phrase "employee or agent of the Corporation"
shall mean any person who is or was an employee or agent of the Corporation,
other than a director or officer of the Corporation, or is or was serving at the
request of the Corporation as such an employee or agent of another domestic or
foreign corporation for profit or not-for-profit, partnership, joint venture,
trust or other enterprise) who was or is a party (other 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, 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 by reason of the fact that he or she is or was an employee or agent
of the Corporation; provided that he or she has met the applicable standard of
conduct set forth in Sections 6.1 and 6.2, subject to the limitations set forth
in Section 6.2 in the case of an action, suit or proceeding by or in the right
of the Corporation to procure a judgment in the Corporation's favor.
Section 6.4 Mandatory Indemnification. To the extent that a
director or officer of the Corporation or any employee or agent of the
Corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in Sections 6.1, 6.2 or 6.3, 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.
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Section 6.5 Advancing Expenses. Expenses (including attorneys'
fees) incurred by a director or officer of the Corporation or an employee or
agent of the Corporation in defending any action, suit or proceeding referred to
in Sections 6.1, 6.2 or 6.3 may be paid by the Corporation in advance of the
final disposition of the action, suit 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 VI.
Section 6.6 Procedure.
(a) Unless ordered by a court, any indemnification
under Section 6.1, 6.2 or 6.3 or advancement of expenses under Section 6.5 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 Section 6.1, 6.2 or 6.3.
(b) All determinations under this Section 6.6 shall
be made:
(1) With respect to indemnification under
Section 6.3 and advancement of expenses to an employee or agent of the
Corporation, by the Board by a majority vote.
(2) With respect to indemnification under
Section 6.1 or 6.2 and advancement of expenses to a director or officer of the
Corporation,
(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, by independent legal counsel in a written
opinion, or
(C) By the shareholders.
Section 6.7 Nonexclusivity of Indemnification.
(a) The indemnification and advancement of expenses
provided by, or granted pursuant to, this Article VI 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 BCL,
or any successor section, shall be applicable to any Bylaw, contract or
transaction authorized by the directors under this Section 6.7. The Corporation
may create a fund of any nature, which may, but need not be, under the control
of a trustee, or otherwise secure or insure in any
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manner its indemnification obligations, whether arising under or pursuant to
this Article VI or otherwise.
(b) Indemnification pursuant to Section 6.7(a) hereof
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 6.7(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 6.7, 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 6.8 Insurance. The Corporation shall have power to
purchase and maintain insurance on behalf of any person who is or was a director
or officer of the Corporation or an employee or agent of the Corporation,
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 VI or otherwise.
Section 6.9 Past Officers and Directors. The indemnification
and advancement of expenses provided by, or granted pursuant to, this Article VI
shall continue as to a person who has ceased to be a director or officer of the
Corporation or an employee or agent of the Corporation and shall inure to the
benefit of the heirs and personal representatives of that person.
Section 6.10 Surviving or New Corporations. References to "the
Corporation" in this Article VI include all constituent corporations absorbed in
a consolidation, merger or division, as well as the surviving or new corporation
resulting therefrom, so that any director, officer, employee or agent of the
constituent, surviving or new corporation shall stand in the same position under
the provisions of this Article VI with respect to the surviving or new
corporation as he or she would if he or she had served the surviving or new
corporation in the same capacity.
Section 6.11 Application to Employee Benefit Plans. For
purposes of this
Article VI:
(a) References to "other enterprises" shall include
employee benefit plans and references to "serving at the request of the
Corporation" shall include any service as a director, officer, employee or agent
of the Corporation that imposes duties on, or involves services by, the person
with respect to an employee benefit plan, its participants or beneficiaries.
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(b) Excise taxes assessed on a person with respect to
an employee benefit plan pursuant to applicable law shall be deemed "fines."
(c) Action with respect to an employee benefit plan
taken or omitted in good faith by a director, officer, employee or agent of the
Corporation in a manner he or she reasonably believed to be in the interest of
the participants and beneficiaries of the plan shall be deemed to be action in a
manner that is not opposed to the best interests of the Corporation.
No amendment to or repeal of this Article, and no adoption of any provision in
the Corporation's Articles of Incorporation inconsistent with this Article,
shall apply to or affect in any respect the liability or alleged liability of
any director of the Corporation for or with respect the indemnification of any
director or officer of the Corporation or of any employee or agent of the
Corporation with respect to any act or failure to act occurring prior to such
amendment, repeal or adoption.
IN TESTIMONY WHEREOF, the undersigned has caused these Amended and
Restated Articles of Incorporation to be duly executed on its behalf as of
October ___, 1997.
QUANTUM EPITAXIAL DESIGNS, INC.
By:
-------------------------------
Thomas L. Hierl
President
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AMENDED AND RESTATED BYLAWS FOR
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 be amended from time to time (the "Articles"), or at
such other place as the Corporation's Board of Directors (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 and the transaction of such other business as may
properly be brought before the meeting (as determined in accordance with Section
2.3 of these Bylaws) shall be held once each calendar year within one hundred
eighty (180) days after the close of the Corporation's fiscal year on such date
as the Board shall determine. If the annual meeting is not called and held
within six months after the designated time for such meeting, then any
shareholder may call the meeting at any time after the expiration of such
six-month period.
Section 2.3. Matters to be Considered at Annual Meetings. At
any annual meeting of shareholders, only such business shall be conducted, and
only such proposals shall be acted upon, as shall have been properly brought
before such annual meeting. To be considered as properly brought before an
annual meeting of the shareholders, business must be: (a) specified in the
notice of meeting (or any supplement thereto), or (b) otherwise properly brought
before the meeting by, or at the direction of, the Board of Directors, or (c)
otherwise properly brought by a holder of record (both as of the time notice of
such proposal is given by the shareholder as set forth below and as of the
record date for the annual meeting in question) of any shares of capital stock
of the Corporation entitled to vote at such annual meeting who complies with the
requirements set forth in this Section.
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In addition to any other applicable requirements, for business
to be properly brought before an annual meeting of the shareholders by a
shareholder of record of any shares of capital stock entitled to vote at such
annual meeting, such shareholder shall: (i) give timely notice as required by
this Section to the Secretary of the Corporation and (ii) be present at such
meeting, either in person or by a representative. For the first annual meeting
following the initial public offering of common stock of the Corporation, a
shareholder's notice shall be timely if hand-delivered to, or mailed (with
proper postage prepaid) to and received by, the Corporation at its principal
executive office not later than the close of business on the later of (a) the
75th day prior to the scheduled date of such annual meeting or (b) the 15th day
following the day on which public announcement of the date of such annual
meeting is first made by the Corporation. For all subsequent annual meetings of
the shareholders, a shareholder's notice shall be timely if hand-delivered to,
or mailed (with proper postage prepaid) to and received by, the Corporation at
its principal executive office not less than 75 days nor more than 120 days
prior to the anniversary date of the immediately preceding annual meeting;
provided, however, that in the event the annual meeting is scheduled to be held
on a date more than 30 days before such anniversary date or more than 60 days
after such anniversary date, a shareholder's notice shall be timely if
hand-delivered to, or mailed (with proper postage prepaid) to and received by,
the Corporation at its principal executive office not later than the close of
business on the later of (a) the 75th day prior to the scheduled date of such
annual meeting or (b) the 15th day following the day on which public
announcement of the date of such annual meeting is first made by the
Corporation.
For purposes of these By-laws, "public announcement" shall
mean: (i) disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national news service, (ii) a report or other
document filed publicly with the Securities and Exchange Commission (including,
without limitation, a Form 8-K), or (iii) a letter or report sent to
shareholders of record of the Corporation at the time of the mailing of such
letter or report.
Such a shareholder's notice to the Secretary shall set forth
as to each matter proposed to be brought before an annual meeting of the
shareholders: (i) a brief description of the business the shareholder desires to
bring before such annual meeting and the reasons for conducting such business at
such annual meeting; (ii) the name and address, as they appear on the
Corporation's stock transfer books, of the shareholder proposing such business;
(iii) the class and number of shares of the Corporation's capital stock
beneficially owned by the shareholder proposing such business; (iv) the names
and addresses of the beneficial owners, if any, of any capital stock of the
Corporation registered in such shareholder's name on such books, and the class
and number of shares of the Corporation's capital stock beneficially owned by
such beneficial owners; (v) the names and addresses of other shareholders known
by the shareholder proposing such business to support such proposal, and the
class and number of shares of the Corporation's capital stock beneficially owned
by such other shareholders; and (vi) any material interest of the shareholder
proposing to bring such
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business before such meeting (or any other shareholders known to be supporting
such proposal) in such proposal.
If the Board or a designated committee thereof determines that
any shareholder proposal was not made in a timely fashion in accordance with the
provisions of this Section or that the information provided in a shareholder's
notice does not satisfy the information requirements of this Section in any
material respect, then such proposal shall not be presented for action at the
annual meeting in question. If neither the Board nor such committee makes a
determination as to the validity of any shareholder proposal in the manner set
forth above, then the presiding officer of the annual meeting shall determine
whether the shareholder proposal was made in accordance with the terms of this
Section. If the presiding officer determines that any shareholder proposal was
not made in a timely fashion in accordance with the provisions of this Section
or that the information provided in a shareholder's notice does not satisfy the
information requirements of this Section in any material respect, then such
proposal shall not be presented for action at the annual meeting in question. If
the Board, a designated committee thereof, or the presiding officer determines
that a shareholder proposal was made in accordance with the requirements of this
Section, then the presiding officer shall so declare at the annual meeting and
ballots shall be provided for use at the meeting with respect to such proposal.
Notwithstanding the foregoing provisions of this Section, a
shareholder shall also comply with all applicable requirements of the Securities
Exchange Act of 1934, as amended, and the rules and regulations thereunder, as
amended (the "Exchange Act") with respect to the matters set forth in this
Section, and nothing in this Section shall be deemed to affect any rights of
shareholders to request inclusion of proposals in the Corporation's proxy
statement in compliance with Rule 14a-8 (or any successor thereto) under the
Exchange Act.
Section 2.4. Written Ballot. Unless required by vote of the
shareholders before the voting begins, elections of directors need not be by
written ballot.
Section 2.5. Special Meetings. Special meetings of the
shareholders, for any purpose or purposes, may be called at any time by the
Chairman of the Board or the President, and shall be called by the President or
Secretary at the request in writing of a majority of the Board of Directors. In
addition, an "interested shareholder" (as defined in section 2553 of the
Pennsylvania Business Corporation Law of 1988, as it may from time to time be
amended (the "1988 BCL")) may, upon written request delivered to the Secretary
of the Corporation, call a special meeting for the purpose of approving a
business combination under either subsection (3) or (4) of section 2555 of the
1988 BCL. 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 to give notice, in a manner consistent
with Section 2.7 of these Bylaws, of a special meeting of the shareholders to be
held at such time as the Secretary 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
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Secretary shall neglect or refuse to fix the date of the meeting and give notice
thereof, then the person or persons calling the meeting may do so.
Section 2.6. Scope of Special Meetings. Business transacted at
any special meeting shall be confined to the business stated in the notice.
Section 2.7. 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 12.4 of these Bylaws at the direction of the 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 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 tenth (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 may
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 2.8 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 2.8. 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 proxy may, except as otherwise provided by
the 1988 BCL and subject to the provisions of Section 2.9 of these Bylaws,
adjourn the meeting to such time and place as they may determine.
Section 2.9. Adjournment. Any meeting of the shareholders,
including one at which directors are to be elected, may be adjourned for such
period as the shareholders present in person or by proxy and entitled to vote
shall direct. Other than as provided in the last sentence of Section 2.7 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
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at which a quorum is present, any business may be transacted that might have
been transacted at the meeting as originally noticed.
Those shareholders entitled to vote present in person or by
proxy, although less than a quorum pursuant to Section 2.8 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, in the case of (b), that such original notice
shall have complied with the last sentence of Section 2.7 of these Bylaws.
Section 2.10. 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 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 2.11. 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 vote for each share having voting power
standing in his or her name on the books of the Corporation. Shares of the
Corporation owned by it, directly or indirectly, and controlled by the Board,
directly or indirectly, shall not be voted.
Section 2.12. Proxies. Every shareholder entitled to vote at a
meeting of the shareholders 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
by a proxy of, a shareholder shall constitute the presence of, or vote or action
by 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 in such proxy.
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.
Section 2.13. 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
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meeting. If the Corporation has five thousand (5000) or more shareholders, it
may make such information available at the meeting by any other means.
Section 2.14. 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 (3) 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 2.15. Participation by Conference Call. No shareholder
may participate in any meeting of shareholders by means of conference telephone
or similar communications equipment.
ARTICLE III
THIS ARTICLE INTENTIONALLY LEFT BLANK
ARTICLE IV
DIRECTORS
Section 4.1. Number and Qualifications. The Board shall
consist of one or more directors as determined from time to time by the Board.
Until such time as the Board shall fix a different number of directors pursuant
to the immediately preceding sentence, the Board shall consist of five (5)
directors. 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 shareholders of the Corporation.
Section 4.2. Term and Classification. The directors shall be
classified with respect to the time for which they shall severally hold office
by dividing them into three classes as nearly equal in number as possible. Such
classes shall originally consist of one class of two directors whose terms shall
expire at the annual meeting of stockholders to be held in 2000 and upon the
election and qualification of his or her successor; a second class of two
directors whose terms shall expire at the annual meeting of stockholders to be
held in 1999 and upon the election and qualification of his or
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her successor; and a third class of one director whose term shall expire at the
annual meeting of stockholders to be held in 1998 and upon the election and
qualification of his or her successor. The Board shall increase or decrease the
number of directors pursuant to this Article IV, Section 4.2 in order to ensure
that the three classes shall be as nearly equal in number as possible. At each
annual meeting of the shareholders, the successors to the class of directors
whose term expires that year shall be elected to hold office for a term of three
years and until a successor is elected and qualified or until the director's
earlier death, resignation or removal, so that the term of office of one class
of directors expires in each year. If at any meeting of shareholders, directors
of more than one class are to be elected, each class of directors shall be
elected in a separate election.
Section 4.3. Nominations of Directors. Nominations of
candidates for election as directors of the Corporation at any meeting of the
shareholders during which directors are to be elected may be made only (a) by,
or at the direction of, a majority of the Board or a committee thereof to which
the Board has delegated the authority to make such selection pursuant to Section
4.11 of these Bylaws, or (b) by a holder of record (both as of the time of
notice of such nomination is given by the shareholder as set forth below and as
of the record date for the meeting in question) of any shares of the capital
stock of the Corporation entitled to vote at such meeting who complies with the
timing, informational and other requirements set forth in this Section. Any
shareholder who has complied with the timing, informational and other
requirements set forth in this Section and who seeks to make such a nomination,
or his, her or its representative, must be present in person at the meeting in
question. Only persons nominated in accordance with the procedures set forth in
this Section shall be eligible for election as directors at a meeting of the
shareholders during which directors are to be elected.
Nominations, other than those made by, or at the direction of,
the Board or any designated committee thereof, shall be made pursuant to timely
notice in writing to the Secretary of the Corporation as set forth in this
Section. For the first meeting of the shareholders during which directors are to
be elected following the initial public offering of common stock of the
Corporation, a shareholder's notice shall be timely if hand-delivered to, or
mailed (with proper postage prepaid) to and received by, the Corporation at its
principal executive office not later than the close of business on the later of
(a) the 75th day prior to the scheduled date of such meeting or (b) the 15th day
following the day on which public announcement of the date of such meeting is
first made by the Corporation. For all subsequent meetings during which
directors are to be elected, a notice shall be timely if hand-delivered to, or
mailed (with proper postage prepaid) to and received by, the Corporation at its
principal executive office not less than 75 days nor more than 120 days prior to
the anniversary date of the immediately preceding meeting of the shareholders
during which the directors were elected; provided, however, that in the event
the meeting of the shareholders during which directors are to be elected is
scheduled to be held on a date more than 30 days before such anniversary date or
more than 60 days after such anniversary date, a shareholder's notice shall be
timely if hand-delivered to, or mailed (with proper postage prepaid) to and
received by, the Corporation at its principal executive office not later than
the close of business on the later of (i) the
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75th day prior to the scheduled date of such meeting or (ii) the 15th day
following the day on which public announcement of the date of such meeting is
first made by the Corporation.
Such a shareholder's notice to the Secretary shall set forth
or contain as to each nominee whom the shareholder proposes to nominate for
election or re-election as a director: (i) the name, age, business address and
residence address of such nominee; (ii) the principal occupation or employment
of such nominee; (iii) the class and number of shares of the Corporation's
capital stock which are beneficially owned by such nominee on the date of such
stockholder notice; (iv) the signed written consent of such nominee to serve as
a director if elected; and (v) any other information concerning the nominee that
must be disclosed as to nominees in proxy solicitations pursuant to Regulation
14A (or any successor thereto) under the Exchange Act. A shareholder's notice to
the Secretary shall further set forth as to the shareholder giving such notice:
(a) the name and address, as they appear on the Corporation's stock transfer
books, of such shareholder and of the beneficial owners (if any) of the
Corporation's capital stock registered in such shareholder's name and the name
and address of other shareholders known by such shareholder to be supporting
such a nominee(s); (b) the class and number of shares of the Corporation's
capital stock which are held of record, beneficially owned or represented by
proxy by such shareholder and by any other shareholders known by such
shareholder to be supporting such nominee(s) on the record date for the meeting
in question (if such date shall then have been made publicly available) and on
the date of such shareholder's notice; and (c) a description of all arrangements
or understandings between such shareholder and each nominee and any other person
or persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by such shareholder.
If the Board or any designated committee thereof determines
that any shareholder nomination was not made in accordance with the terms of
this Section or that the information provided in a shareholder's notice does not
satisfy the informational requirements of this Section in any material respect,
then such nomination shall not be considered at the meeting in question. If
neither the Board nor such committee makes a determination as to whether a
nomination was made in accordance with the provisions of this Section, then the
presiding officer of the meeting shall determine whether a nomination was made
in accordance with such provisions. If the presiding officer determines that any
shareholder nomination was not made in accordance with the terms of this Section
or that the information provided in a shareholder's notice does not satisfy the
informational requirements of this Section in any material respect, then such
nomination shall not be considered at the meeting in question. If the Board, a
designated committee thereof, or the presiding officer determines that a
nomination was made in accordance with the terms of this Section, then the
presiding officer shall so declare at the meeting and ballots shall be provided
for use at the meeting with respect to such nominee.
Notwithstanding anything to the contrary in the third sentence
of the second paragraph of this Section, in the event that the number of
directors to be elected to the Board is increased and there is no public
announcement by the Corporation naming all of the nominees for director or
specifying the size of the increased Board at least 75 days prior to the
anniversary date of the
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immediately preceding meeting of the shareholders during which directors were
elected, a shareholder's notice required by this Section shall also be
considered timely, but only with respect to nominees for any new positions
created by such increase, if such notice shall be hand-delivered to, or mailed
(with proper postage prepaid) to and received by, the Corporation at its
principal executive office not later than the close of business on the 15th day
following the day on which such public announcement is first made by the
Corporation.
No person shall be elected by the shareholders as a director
of the Corporation unless nominated in accordance with the procedures set forth
in this Section.
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 until the next selection of the class for which such
director has been chosen and until his or her successor has been selected and
qualified. If one 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. 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 4.6. 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 4.7. 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 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 4.8 of these Bylaws with
respect to notice of regular meetings of the Board.
Section 4.8. 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. Notice of each regular
meeting of the Board shall specify the date, place and hour of the meeting and
shall be given to each director, to his or her address or telex, TWX, telecopier
or telephone number as supplied by such director to the Corporation for the
purpose of notice, at least 24 hours before the meeting if given personally or
by telephone, telex, TWX (with answerback received) or telecopier,
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at least 48 hours before the meeting if given by telegram (with messenger
service specified), express mail (with postage prepaid) or courier service
(charges prepaid), and at least five days before the meeting if given by first
class mail (with postage prepaid). 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, or in the case of telex
or TWX, when dispatched.
Section 4.9. Special Board Meetings; Notice. Special meetings
of the Board may be called by the Chairman of the Board or the President on
notice to each director, specifying the purpose, 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 4.8 of these Bylaws. Special meetings
shall be called by the Secretary in like manner and on like notice on the
written request of two directors.
Section 4.10. 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 shall adjourn the meeting. It
shall not be necessary to 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 4.11. Committees of Directors. The Board may, by
resolution adopted by a majority of the directors then in office, establish one
or more committees, each committee to consist of one 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 adopt a
resolution proposing an amendment to the Articles; or (g) adopt a plan or an
agreement of merger or consolidation, share exchange, asset sale or division. 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 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
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shall serve at the pleasure of the Board.
Section 4.12. Participation in Board Meetings by Telephone.
One 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 4.13. 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 then in office or the members of the committee,
as the case may be, and filed with the Secretary of the Corporation.
Section 4.14. 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.
ARTICLE V
OFFICERS
Section 5.1. Principal Officers. The officers of the
Corporation shall be chosen by the Board, and shall include a President, one or
more Vice Presidents, a Secretary and a Chief Financial Officer to serve as
treasurer (the "Treasurer"; and collectively, the "Principal Officers"). 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.
Section 5.2. Electing Principal Officers. At the first meeting
of each newly elected Board, the Board shall elect the Principal Officers of the
Corporation, none of whom need be members of the Board.
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 may from time to time determine. The Board
may delegate to any Principal Officer 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. Term of Office; Removal. Each officer of the
Corporation shall hold office until his or her successor has been chosen and
qualified or until his or her earlier death, resignation or removal. Vacancies
of any office shall be filled by the Board. Any officer or agent may be removed
by the Board 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 5.6. 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, shall supervise and direct all business and affairs
of the Corporation, and shall see that all orders and resolutions of the Board
are carried into effect.
Section 5.7. The Vice Presidents. The Vice-President or
Vice-Presidents, in the order designated 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 as the Board may prescribe or the
President may delegate to them.
Section 5.8. 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 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 5.9. 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 5.10. 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,
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vouchers, money and other property of whatever kind in his or her possession or
under his or her control belonging to the Corporation.
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.
Each share 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, 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.
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 or its transfer agent has
received a demand from an appropriate person to make an indorsement on such
certificate that the Corporation or its transfer agent not register transfer; or
(b) the Corporation or its transfer agent 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 or its
transfer agent 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)
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above shall be effective unless it is received by the Corporation or its
transfer agent at a time and in a manner affording the Corporation or its
transfer agent 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 or its transfer
agent not register transfer of such certificate has become effective pursuant to
Section 7.1 of these Bylaws, then the Corporation or its transfer agent 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 or its transfer agent not register
transfer of such certificate had previously been received; and (c) the
Corporation or its transfer agent 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. Neither the Corporation
nor its transfer agent shall be liable to a person who initiated a demand that
the Corporation or its transfer agent 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 or its transfer agent from registering the transfer,
or (b) file with the Corporation or its transfer agent an indemnity bond,
sufficient in the Corporation's or its transfer agent's judgment 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 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.
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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 or time 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.
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 by 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. 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 12.2. Fiscal Year. The fiscal year of the
Corporation shall be as determined by the Board.
Section 12.3. 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 12.4. 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
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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. If mailed at least twenty (20) days prior to the
meeting or corporate action to be taken, then notice may be sent by any class of
post paid mail (including bulk mail).
Section 12.5. 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
nor the purpose of a meeting need be specified in the waiver of notice of the
meeting. Attendance of a 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 or by a majority vote of the members of the Board at any regular or
special meeting duly convened, subject only to the power of the shareholders to
change such action by the directors. Whenever the Bylaws require for the taking
of any action by the shareholders or a class of shareholders a specific number
or percentage of votes, the provision of the Bylaws setting forth that
requirement shall not be amended or repealed by any lesser number or percentage
of votes of the shareholders or of the class of shareholders. 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 a 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 14.1. Officers and Directors - Direct Actions. The
Corporation shall indemnify any director or officer of the Corporation (as used
in this Article, the phrase "director or officer of the Corporation" shall mean
any person who 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
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enterprise), who was or is a party (other 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) by reason of the fact that he or she is or was a
director or officer of the Corporation, 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 (i) 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 (ii) 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 director or officer of the Corporation 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,
suit or proceeding by or in the right of the Corporation to procure a judgment
in the Corporation's favor by reason of the fact that he or she is or was a
director or officer of the Corporation, against expenses (including attorneys'
fees) actually and reasonably incurred by him or her in connection with the
defense or settlement of the action, suit or proceeding 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 under this Section in respect of any claim,
issue or matter as to which the director or officer of the Corporation 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, suit or proceeding 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 employee or agent of the
Corporation (as used in this Article, the phrase "employee or agent of the
Corporation" shall mean any person who is or was an employee or agent of the
Corporation, other than a director or officer of the Corporation, or is or was
serving at the request of the Corporation as such an employee or agent of
another domestic or foreign corporation for profit or not-for-profit,
partnership, joint venture, trust or other enterprise) who was or is a party
(other 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, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him or her in
connection
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with such action, suit or proceeding by reason of the fact that he or she is or
was an employee or agent of the Corporation; provided that he or she has met the
applicable standard of conduct set forth in Sections 14.1 and 14.2, subject to
the limitations set forth in Section 14.2 in the case of an action, suit or
proceeding by or in the right of the Corporation to procure a judgment in the
Corporation's favor.
Section 14.4. Mandatory Indemnification. To the extent that a
director or officer of the Corporation or any employee or agent of the
Corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in Sections 14.1, 14.2 or 14.3, 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 Expenses. Expenses (including
attorneys' fees) incurred by a director or officer of the Corporation or an
employee or agent of the Corporation in defending any action, suit or proceeding
referred to in Sections 14.1, 14.2 or 14.3 may be paid by the Corporation in
advance of the final disposition of the action, suit 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 Section 14.1, 14.2 or 14.3 or advancement of expenses under Section 14.5
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 Section 14.1, 14.2 or 14.3.
(b) All determinations under this Section 14.6 shall
be made:
(1) With respect to indemnification under
Section 14.3 and advancement of expenses to an employee or agent of the
Corporation, by the Board by a majority vote.
(2) With respect to indemnification under
Section 14.1 or 14.2 and advancement of expenses to a director or officer of the
Corporation,
(A) By the Board by a majority vote
of a quorum consisting of directors who were not parties to such action or
proceeding, or
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(B) If such a quorum is not
obtainable, or, if obtainable and if a majority vote of a quorum of
disinterested directors so directs, 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, or any successor section, 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 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)
hereof 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
or officer of the Corporation or an employee or agent of the Corporation,
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 or otherwise.
Section 14.9. Past Officers and Directors. The indemnification
and advancement of expenses provided by, or granted pursuant to, this Article
XIV shall continue as to a person who has ceased to be a director or officer of
the Corporation or an 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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Section 14.10. Surviving or New Corporations. References to
"the Corporation" in this Article XIV include all constituent corporations
absorbed in a consolidation, merger or division, as well as the surviving or new
corporation resulting therefrom, so that any director, officer, employee or
agent of the constituent, surviving or new corporation shall stand in the same
position under the provisions of this Article XIV with respect to the surviving
or new corporation as he or she would if he or she had served the surviving or
new corporation in the same capacity.
Section 14.11. Application to Employee Benefit Plans. For
purposes of this Article XIV:
(a) References to "other enterprises" shall include
employee benefit plans and references to "serving at the request of the
Corporation" shall include any service as a director, officer, employee or agent
of the Corporation that imposes duties on, or involves services by, the person
with respect to an employee benefit plan, its participants or beneficiaries.
(b) Excise taxes assessed on a person with respect to
an employee benefit plan pursuant to applicable law shall be deemed "fines."
(c) Action with respect to an employee benefit plan
taken or omitted in good faith by a director, officer, employee or agent of the
Corporation in a manner he or she reasonably believed to be in the interest of
the participants and beneficiaries of the plan shall be deemed to be action in a
manner that is not opposed to the best interests of the Corporation.
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QUANTUM EPITAXIAL DESIGNS, INC.
1996 STOCK OPTION PLAN
Section 1. Purposes.
The purposes of the Plan are (a) to recognize and compensate
selected Directors of the Company and 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 Plan is
intended to comply with the conditions and requirements for employee benefit
plans under Rule 16b-3, promulgated under Section 16 of the Exchange Act. The
Options issued pursuant to the Plan are intended to constitute either
Incentive Stock Options, or non-qualified stock options, as determined by the
Committee, or the Board, if no Committee has been appointed, at the time of
Award. The type of Options Awarded will be specified in the Option Agreement
between the Company and the Optionee. The terms of this Plan shall be
incorporated into the Option Agreement to be executed by the Optionee.
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 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
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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.
(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,
$.001 par value per share.
(h) "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
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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.
(i) "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. Additionally, solely for purposes of
determining those persons eligible under the Plan to be recipients of Awards
of Options, which Options shall be limited to non-qualified stock options, and
not for the purpose of affecting the status of the relationship between such
person and the Company, the term "Employee" shall include directors and
independent contractors of and consultants to the Company, provided that the
term "Employee" shall not include directors of the Company who are
Non-Employee Directors at any time from the effective date of registration
under Section 12 of the Exchange Act of a class of equity securities of the
Company until six months after the termination of such registration.
(j) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
(k) "Fair Market Value" shall mean the fair market value of
a share of Common Stock, as determined pursuant to Section 8 hereof.
(l) "Grant Date" means (i) the effective date of
registration under Section 12 of the Exchange Act of a class of equity
securities of the Company and (ii) each date thereafter prescribed under the
Company's Articles of Incorporation and By-laws for the election of directors
which falls before the earlier of (A) the date six months after the
termination of such registration, or (B) the tenth anniversary of the date on
which this Plan is adopted by the Board.
(m) "Incentive Stock Option" shall mean an Option which is
an incentive stock option within the meaning of Section 422 of the Code.
(n) "Non-Employee Director" shall have the meaning set forth
in Rule 16b-3(b)(3), promulgated under Section 16 of the Exchange Act.
(o) "Option" shall mean an Incentive Stock Option or a
non-qualified stock option to purchase Shares that is Awarded pursuant to the
Plan.
(p) "Option Agreement" shall mean written agreements
substantially in the form of Exhibits A-1 and A-2, or such other 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.
(q) "Optionee" shall mean an Employee to whom an Option is
Awarded.
(r) "Parent" shall mean a "parent corporation" whether now
or hereafter existing, as defined in Sections 424(e) and (g) of the Code.
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(s) "Plan" shall mean the Quantum Epitaxial Designs, Inc.
1996 Stock Option Plan, as amended from time to time.
(t) "Pool" shall mean the pool of shares of Common Stock
subject to the Plan, as described and set forth in Section 6 hereof.
(u) "Securities Act" shall mean the Securities Act of 1933,
as amended.
(v) "Shares" shall mean shares of Common Stock contained in
the Pool, as adjusted in accordance with Section 9 of the Plan.
(w) "Stock Purchase Agreement" shall mean an agreement
substantially in the form attached hereto as Exhibit B, or such other form as
the Board (subject to the terms and conditions of this Plan) may from time to
time approve, which an Optionee shall be required to execute as a condition of
purchasing Shares upon the exercise of an Option.
(x) "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, Consultants and Independent Contractors.
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.
(b) Outside Directors. In the event the Company has a class
of equity securities registered under Section 12 of the Exchange Act, from the
effective date of such registration until six months after the termination of
such registration, no Awards of Options shall be made under the Plan to any
director of the Company who is a Non-Employee Director except pursuant to this
Section 3(b):
(i) Automatic Awards. Awards of Options to directors of
the Company who are Non-Employee Directors shall be granted, without any
further action by the Committee, as follows. Upon the effective date of the
Company's registration of a class of equity securities under Section 12 of the
Exchange Act, and on each Grant Date thereafter, each director of the Company
who is a Non-Employee Director shall receive an Award of a non-qualified stock
Option to purchase 1,000 Shares.
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(ii) Option Price. The price per Share with on the
exercise of any Option granted under this Section 3(b) shall be 100% of the
Fair Market Value of such Share on the Grant Date.
(iii) 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.
(iv) Exercise of Options. Any Option Awarded hereunder
shall be immediately exercisable in full.
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
3(b)(iii) 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,
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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.
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.
(v) Termination of Options. Unless sooner terminated as
provided in this Plan, each Option shall be exercisable for 10 years from the
date of the Award, and shall be void and unexercisable thereafter.
(vii) Forfeiture. Notwithstanding any other provision of
this Plan, 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 has otherwise breached any fiduciary duty owed to
the Company, 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 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.
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
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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 to eligible officers or directors of the Company shall be
made solely by the Board, only if each member is a Non-Employee Director, or,
otherwise, by a Committee of two or more directors, each of whom is a
Non-Employee Director.
(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 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.
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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 Twenty Thousand (320,000) Shares (collectively, the
"Pool"). Options Awarded from the Pool may be either Incentive Stock Options
or non-qualified stock options, as determined by the Board. If 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,
the unpurchased or repurchased Shares which were subject thereto shall, unless
the Plan shall have been terminated, return to the Plan and become available
for future Award under the Plan.
Section 7. Terms and Conditions of Options Awarded to
Employees, Consultants and Independent Contractors.
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 any Option which is an Incentive Stock Option shall be stated in
the Option Agreement and shall be no less than the Fair Market Value per share
of the Common Stock on the date such Option is Awarded, without regard to any
restriction other than a restriction which will never lapse. Notwithstanding
the foregoing, if an Option which is an Incentive Stock Option shall be
Awarded under this Plan to any Employee who, at the time of the Award of such
Option, owns stock possessing more than 10% of the total combined voting power
of all classes of the stock of the Company (or its Parent or Subsidiaries),
the price per Share payable upon exercise of such Option shall be no less than
110 percent (110%) of the Fair Market Value of the stock on the date such
Option is Awarded. The price per Share payable on the exercise of an Option
which is a non-qualified stock 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
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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.
(d) Form of Option. The Option Agreement will state whether
the Option Awarded is an Incentive Stock Option or a non-qualified stock
Option, and will constitute a binding determination as to the form of Option
Awarded.
(e) 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
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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.
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.
(f) 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; provided, however, that if an Incentive
Stock Option shall be Awarded under this Plan to any Employee who, at the time
of the Award of such Option, owns stock possessing more than 10% of the total
combined voting power for all classes of the stock of he Company (or its
Parent or Subsidiaries), the foregoing clause (B) shall be deemed modified by
substituting "five (5) years" for the term "ten (10) years" that appears
therein.
(ii) No Option Awarded to any Optionee shall be treated
as an Incentive Stock Option, to the extent such Option would cause the
aggregate Fair Market Value of all Shares with respect to which Incentive
Stock Options are exercisable by such Optionee for the first time during any
calendar year (determined as of the date of Award of each such Option) to
exceed $100,000. For purposes of determining whether an Incentive Stock Option
would cause such aggregate Fair Market Value to exceed the $100,000
limitation, such Incentive Stock Options shall be taken into account in the
order Awarded. For purposes of this subsection, Incentive Stock Options
include all incentive stock options under all plans of the Company and its
Parent and Subsidiaries that are incentive stock option plans within the
meaning of Section 422 of the Code. 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.
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(g) 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 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.
(h) 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, if the Optionee is a director, has otherwise
breached any fiduciary duty owed to the Company, 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
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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.
Section 8. 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 the
NASDAQ National Market, 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 the
NASDAQ National Market, 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.
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
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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, (a)
no modification of an Option which adversely affects the Optionee shall be
made without the consent of the Optionee, and (b) no Incentive Stock Option
may be modified, extended or renewed if such action would cause it to cease to
be an "incentive stock option" within the meaning of Section 422 of the Code.
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 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
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<PAGE>
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.
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
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<PAGE>
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.
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 Incentive Stock Options or 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.
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<PAGE>
Section 20. Approval of Stockholders.
This Plan shall become effective on the date that it is
adopted by the Board; provided, however, that it shall become limited to a
non-qualified stock option plan if it is not approved by the holders of a
majority of the Company's outstanding voting stock within one year (365 days)
of its adoption by the Board. The Board may Award Options hereunder prior to
approval of the Plan or any material amendments thereto by the holders of a
majority of the Company's outstanding voting stock; provided, however, that
any and all Options so Awarded automatically shall be converted into
non-qualified stock options if the Plan is not approved by such stockholders
within 365 days of its adoption or material amendment.
Section 21. 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 22. 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
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<PAGE>
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 23. 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 24. 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.
(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 25. 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
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<PAGE>
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 26. 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.
Section 27. 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 28. 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 29. 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.
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<PAGE>
Section 30. Applicable Law.
This Plan shall be governed by and construed in accordance
with the laws of the Commonwealth of Pennsylvania.
Section 31. 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).
ADOPTION AND APPROVAL OF PLAN
Date Plan initially adopted by Board: October 3, 1996
Date Plan approved by Stockholders: September 26, 1997
Effective Date of Plan: October 3, 1996
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<PAGE>
SEE RESTRICTIVE LEGENDS SET FORTH ON THE LAST PAGE HEREOF
QUANTUM EPITAXIAL DESIGNS, INC.
NON-QUALIFIED STOCK OPTION AGREEMENT
Quantum Epitaxial Designs, Inc., a Pennsylvania corporation
(the "Company"), hereby grants to ______________________________ (the
"Optionee") an option to purchase a total of
_________________________________________ (___________) shares of Common Stock
(the "Shares") of the Company, at the price and on the terms set forth herein,
and in all respects subject to the terms and provisions of the Company's 1996
Stock Option Plan (the "Plan") applicable to non-qualified stock options,
which terms and provisions are hereby incorporated by reference herein. Unless
the context herein otherwise requires, the terms defined in the Plan shall
have the same meanings herein.
1. Nature of the Option. This Option is intended to be a
nonstatutory stock option and is not intended to be an incentive stock option
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), or to otherwise qualify for any special tax benefits to
the Optionee.
2. Date of Grant; Term of Option. This Option is granted this
_____ day of _____________________, 19____, and it may not be exercised later
than ______________________________, subject to earlier termination, among other
things, in the event of a Change of Control, as described in Section 16 of the
Plan.
3. Option Exercise Price. The Option exercise price is
_____________________________________ ($________) per Share.
4. Exercise of Option. This Option shall be exercisable during
its term only in accordance with the terms and provisions of the Plan and this
Option as follows:
(a) Right to Exercise. This Option shall vest and be
exercisable cumulatively, as follows:___________________________________________
________________________________________________________________________________
__________.
(b) Method of Exercise. This Option shall be exercisable by
written notice which shall state the election to exercise this Option, the
number of Shares in respect to which this Option is being exercised and such
other representations and agreements as to the
<PAGE>
Optionee's investment intent with respect to such Shares as may be required by
the Company hereunder or pursuant to the provisions of the Plan. Such written
notice shall be signed by the Optionee and shall be delivered in person or by
certified mail to the Secretary of the Company or such other person as may be
designated by the Company. The written notice shall be accompanied by payment
of the purchase price and an executed Stock Purchase Agreement in the form
attached hereto. Payment of the purchase price shall be by check or such
consideration and method of payment authorized by the Board pursuant to the
Plan. The certificate or certificates for the Shares as to which the Option
shall be exercised shall be registered in the name of the Optionee and shall
be legended as required under the Plan, the Stock Purchase Agreement, and/or
applicable law.
(c) Restrictions on Exercise. This Option may not be
exercised if the issuance of the Shares upon such exercise would constitute a
violation of any applicable federal or state securities laws or other laws or
regulations. As a condition to the exercise of this Option, the Company may
require the Optionee to make any representation and warranty to the Company as
may be required by any applicable law or regulation.
5. Investment Representations. Unless the Shares have been
registered under the Securities Act of 1933, in connection with the acquisition
of this Option, the Optionee represents and warrants as follows:
(a) The Optionee is acquiring this Option, and upon
exercise of this Option, he will be acquiring the Shares for investment for his
own account, not as a nominee or agent, and not with a view to, or for resale in
connection with, any distribution thereof.
(b) The Optionee has a preexisting business or personal
relationship with the Company or one of its directors, officers or controlling
persons and by reason of his business or financial experience, has, and could be
reasonably assumed to have, the capacity to protect his interests in connection
with the acquisition of this Option and the Shares.
6. Termination of Relationship with the Company. Subject to
the provisions of Section 7 hereof, if the Optionee ceases to serve the Company
or its Subsidiaries for any reason other than death or Disability and thereby
terminates his status as an Employee, the Optionee shall have the right to
exercise this Option at any time within the three (3) month period after the
date of such termination to the extent that the Optionee was entitled to
exercise the Option at the date of such termination. If the Optionee ceases to
serve the Company due to death or Disability, this Option may be exercised at
any time within one (1) year after the date of death or termination of
employment due to Disability, in the case of death, by the Optionee's estate or
by a person who acquired the right to exercise this Option by bequest or
inheritance, or, in the case of Disability, by the Optionee or his legal
guardian or representative, but in any case only to the extent the Optionee was
entitled to exercise this Option at the date of such
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<PAGE>
termination; 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, this Option shall terminate immediately upon the commencement
thereof. To the extent that the Optionee was not entitled to exercise the Option
at the date of termination, or to the extent the Option is not exercised within
the time specified herein, this Option shall terminate. Notwithstanding the
foregoing, this Option shall not be exercisable after the expiration of the term
set forth in Section 2 hereof.
7. Forfeiture of Option. Notwithstanding any other provision
of this Option, 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, but, if the Optionee is not a party to
either such agreement, then, as such term is defined in the Stock Purchase and
Restriction Agreement) or if the Board of Directors 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, if the Optionee is a director, has otherwise breached any
fiduciary duty owed to the Company, 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 the Company in respect of confidentiality,
non-disclosure, non-competition or otherwise, all unexercised Options shall
terminate on the earlier of the date of termination for "cause" or the date of
such determination. In the event of such a determination, in addition to
immediate termination of all unexercised Options, the Optionee shall forfeit all
Option shares for which the Company has not yet delivered share certificates to
the Optionee and the Company shall refund to the Optionee the Option 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 determination resulting in forfeiture.
8. Nontransferability of Option. This Option may not be sold,
pledged, assigned, hypothecated, gifted, transferred or disposed of in any
manner either voluntarily or involuntarily by operation of law, other than by
will or by the laws of descent or distribution, and may be exercised during the
lifetime of the Optionee only by such Optionee. Subject to the foregoing and the
terms of the Plan, the terms of this Option shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
9. Continuation of Employment or Engagement. Neither the Plan
nor this Option shall confer upon any Optionee any right to continue in the
service of the Company or any of its Subsidiaries or limit, in any respect, the
right of the Company to discharge the Optionee at any time, with or without
cause and with or without notice.
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<PAGE>
10. Withholding. The Company reserves the right to withhold,
in accordance with any applicable laws, from any consideration payable to
Optionee any taxes required to be withheld by federal, state or local law as a
result of the grant or exercise of this Option or the sale or other disposition
of the Shares issued upon exercise of this Option. If the amount of any
consideration payable to the Optionee is insufficient to pay such taxes or if no
consideration is payable to the Optionee, upon the request of the Company, the
Optionee (or such other person entitled to exercise the Option pursuant to
Section 6 hereof) shall pay to the Company an amount sufficient for the Company
to satisfy any federal, state or local tax withholding requirements it may
incur, as a result of the grant or exercise of this Option or the sale or other
disposition of the Shares issued upon the exercise of this Option.
11. The Plan. This Option is subject to, and the Company and
the Optionee agree to be bound by, all of the terms and conditions of the Plan
as such Plan may be amended from time to time in accordance with the terms
thereof, provided that no such amendment shall deprive the Optionee, without his
consent, of this Option or any rights hereunder. Pursuant to the Plan, the Board
of Directors of the Company is authorized to adopt rules and regulations not
inconsistent with the Plan as it shall deem appropriate and proper. A copy of
the Plan in its present form is available for inspection during business hours
by the Optionee or the persons entitled to exercise this Option at the Company's
principal office.
12. Entire Agreement. This Agreement, together with the Plan
and the other exhibits attached thereto or hereto, represents the entire
agreement between the parties.
13. Governing Law. This Agreement shall be construed in
accordance with the laws of the Commonwealth of Pennsylvania.
14. Amendment. Subject to the provisions of the Plan, this
Agreement may only be amended by a writing signed by each of the parties hereto.
Date: ____________________ QUANTUM EPITAXIAL DESIGNS, INC.
By:______________________________
Title:___________________________
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<PAGE>
ACKNOWLEDGEMENT
---------------
The Optionee acknowledges receipt of a copy of the Plan, a
copy of which is attached hereto, and represents that he has read and is
familiar with the terms and provisions thereof, and hereby accepts this Option
subject to all of the terms and provisions thereof. The Optionee hereby agrees
to accept as binding, conclusive and final all decisions or interpretations of
the Board of Directors or the Committee upon any questions arising under the
Plan.
Date: ____________________ _________________________
Signature of Optionee
_________________________
Address
_________________________
City, State, Zip
THIS OPTION AND THE SECURITIES WHICH MAY BE PURCHASED UPON
EXERCISE OF THIS OPTION HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW
TO, OR IN CONNECTION WITH, THE SALE, TRANSFER OR DISTRIBUTION THEREOF. NO SUCH
SALE, TRANSFER OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE
REGISTRATION STATEMENT RELATING THERETO OR A SATISFACTORY OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
THE SHARES WHICH MAY BE PURCHASED UPON EXERCISE OF THIS
OPTION MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF A STOCK
PURCHASE AGREEMENT TO BE ENTERED INTO BETWEEN THE HOLDER OF THIS OPTION AND
THE COMPANY UPON EXERCISE OF THIS OPTION, A COPY OF WHICH AGREEMENT IS ON FILE
WITH THE SECRETARY OF THE COMPANY.
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<PAGE>
SEE RESTRICTIVE LEGENDS SET FORTH ON THE LAST PAGE HEREOF
QUANTUM EPITAXIAL DESIGNS, INC.
NON-QUALIFIED STOCK OPTION AGREEMENT
Quantum Epitaxial Designs, Inc., a Pennsylvania corporation
(the "Company"), hereby grants to ______________________________ (the
"Optionee") an option to purchase a total of one thousand (1,000) shares of
Common Stock (the "Shares") of the Company, at the price and on the terms set
forth herein, and in all respects subject to the terms and provisions of the
Company's 1996 Stock Option Plan (the "Plan") applicable to non-qualified stock
options, which terms and provisions are hereby incorporated by reference herein.
Unless the context herein otherwise requires, the terms defined in the Plan
shall have the same meanings herein.
1. Nature of the Option. This Option is intended to be a
nonstatutory stock option and is not intended to be an incentive stock option
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), or to otherwise qualify for any special tax benefits to
the Optionee.
2. Date of Grant; Term of Option. This Option is granted this
_____ day of _____________________, 19____, and it may not be exercised later
than ______________________________, subject to earlier termination, among other
things, in the event of a Change of Control, as described in Section 16 of the
Plan.
3. Option Exercise Price. The Option exercise price is
_____________________________________ ($________) per Share.
4. Exercise of Option. This Option shall be exercisable during
its term only in accordance with the terms and provisions of the Plan and this
Option as follows:
(a) Right to Exercise. This Option shall be fully and
immediately vested and exercisable.
(b) Method of Exercise. This Option shall be exercisable by
written notice which shall state the election to exercise this Option, the
number of Shares in respect to which this Option is being exercised and such
other representations and agreements as to the Optionee's investment intent with
respect to such Shares as may be required by the Company hereunder or pursuant
to the provisions of the Plan. Such written notice shall be signed by the
Optionee and shall be delivered in person or by certified mail to the Secretary
of the Company or
<PAGE>
such other person as may be designated by the Company. The written notice shall
be accompanied by payment of the purchase price and an executed Stock Purchase
Agreement in the form attached hereto. Payment of the purchase price shall be by
check or such consideration and method of payment authorized by the Board
pursuant to the Plan. The certificate or certificates for the Shares as to which
the Option shall be exercised shall be registered in the name of the Optionee
and shall be legended as required under the Plan, the Stock Purchase Agreement,
and/or applicable law.
(c) Restrictions on Exercise. This Option may not be
exercised if the issuance of the Shares upon such exercise would constitute a
violation of any applicable federal or state securities laws or other laws or
regulations. As a condition to the exercise of this Option, the Company may
require the Optionee to make any representation and warranty to the Company as
may be required by any applicable law or regulation.
5. Investment Representations. Unless the Shares have been
registered under the Securities Act of 1933, in connection with the acquisition
of this Option, the Optionee represents and warrants as follows:
(a) The Optionee is acquiring this Option, and upon
exercise of this Option, he will be acquiring the Shares for investment for his
own account, not as a nominee or agent, and not with a view to, or for resale in
connection with, any distribution thereof.
(b) The Optionee has a preexisting business or personal
relationship with the Company or one of its directors, officers or controlling
persons and by reason of his business or financial experience, has, and could be
reasonably assumed to have, the capacity to protect his interests in connection
with the acquisition of this Option and the Shares.
6. Termination of Relationship with the Company. Subject to
the provisions of Section 7 hereof, if the Optionee ceases to serve the Company
or its Subsidiaries for any reason, the Optionee shall continue to have the
right to exercise this Option at any time. If the Optionee dies, this Option may
be exercised at any time by the Optionee's estate or by a person who acquired
the right to exercise this Option by bequest or inheritance. Notwithstanding the
foregoing, this Option shall not be exercisable after the expiration of the term
set forth in Section 2 hereof.
7. Forfeiture of Option. Notwithstanding any other provision
of this Option, if the Board of Directors 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 service, or has otherwise breached any fiduciary duty owed to the Company,
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
the Company in respect of
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<PAGE>
confidentiality, non-disclosure, non-competition or otherwise, all unexercised
Options shall terminate on the date of such determination. In the event of such
a determination, in addition to immediate termination of all unexercised
Options, the Optionee shall forfeit all Option shares for which the Company has
not yet delivered share certificates to the Optionee and the Company shall
refund to the Optionee the Option 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 determination
resulting in forfeiture.
8. Nontransferability of Option. This Option may not be sold,
pledged, assigned, hypothecated, gifted, transferred or disposed of in any
manner either voluntarily or involuntarily by operation of law, other than by
will or by the laws of descent or distribution, and may be exercised during the
lifetime of the Optionee only by such Optionee. Subject to the foregoing and the
terms of the Plan, the terms of this Option shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
9. Continuation of Employment or Engagement. Neither the Plan
nor this Option shall confer upon any Optionee any right to continue in the
service of the Company or any of its Subsidiaries.
10. Withholding. The Company reserves the right to withhold,
in accordance with any applicable laws, from any consideration payable to
Optionee any taxes required to be withheld by federal, state or local law as a
result of the grant or exercise of this Option or the sale or other disposition
of the Shares issued upon exercise of this Option. If the amount of any
consideration payable to the Optionee is insufficient to pay such taxes or if no
consideration is payable to the Optionee, upon the request of the Company, the
Optionee (or such other person entitled to exercise the Option pursuant to
Section 6 hereof) shall pay to the Company an amount sufficient for the Company
to satisfy any federal, state or local tax withholding requirements it may
incur, as a result of the grant or exercise of this Option or the sale or other
disposition of the Shares issued upon the exercise of this Option.
11. The Plan. This Option is subject to, and the Company and
the Optionee agree to be bound by, all of the terms and conditions of the Plan
as such Plan may be amended from time to time in accordance with the terms
thereof, provided that no such amendment shall deprive the Optionee, without his
consent, of this Option or any rights hereunder. Pursuant to the Plan, the Board
of Directors of the Company is authorized to adopt rules and regulations not
inconsistent with the Plan as it shall deem appropriate and proper. A copy of
the Plan in its present form is available for inspection during business hours
by the Optionee or the persons entitled to exercise this Option at the Company's
principal office.
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<PAGE>
12. Entire Agreement. This Agreement, together with the Plan
and the other exhibits attached thereto or hereto, represents the entire
agreement between the parties.
13. Governing Law. This Agreement shall be construed in
accordance with the laws of the Commonwealth of Pennsylvania.
14. Amendment. Subject to the provisions of the Plan, this
Agreement may only be amended by a writing signed by each of the parties hereto.
Date: ____________________ QUANTUM EPITAXIAL DESIGNS, INC.
By:______________________________
Title:___________________________
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<PAGE>
ACKNOWLEDGEMENT
---------------
The Optionee acknowledges receipt of a copy of the Plan, a
copy of which is attached hereto, and represents that he has read and is
familiar with the terms and provisions thereof, and hereby accepts this Option
subject to all of the terms and provisions thereof. The Optionee hereby agrees
to accept as binding, conclusive and final all decisions or interpretations of
the Board of Directors or the Committee upon any questions arising under the
Plan.
Date:____________________ _________________________
Signature of Optionee
_________________________
Address
_________________________
City, State, Zip
THIS OPTION AND THE SECURITIES WHICH MAY BE PURCHASED UPON
EXERCISE OF THIS OPTION HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW
TO, OR IN CONNECTION WITH, THE SALE, TRANSFER OR DISTRIBUTION THEREOF. NO SUCH
SALE, TRANSFER OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE
REGISTRATION STATEMENT RELATING THERETO OR A SATISFACTORY OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
THE SHARES WHICH MAY BE PURCHASED UPON EXERCISE OF THIS
OPTION MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF A STOCK
PURCHASE AGREEMENT TO BE ENTERED INTO BETWEEN THE HOLDER OF THIS OPTION AND
THE COMPANY UPON EXERCISE OF THIS OPTION, A COPY OF WHICH AGREEMENT IS ON FILE
WITH THE SECRETARY OF THE COMPANY.
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<PAGE>
SEE RESTRICTIVE LEGENDS SET FORTH ON THE LAST PAGE HEREOF
QUANTUM EPITAXIAL DESIGNS, INC.
INCENTIVE STOCK OPTION AGREEMENT
Quantum Epitaxial Designs, Inc., a Pennsylvania corporation
(the "Company"), hereby grants to ______________________________ (the
"Optionee") an option to purchase a total of
_______________________________________ (___________) shares of Common Stock
(the "Shares") of the Company, at the price and on the terms set forth herein,
and in all respects subject to the terms and provisions of the Company's 1996
Stock Option Plan (the "Plan") applicable to incentive stock options, which
terms and provisions are hereby incorporated by reference herein. Unless the
context herein otherwise requires, the terms defined in the Plan shall have
the same meanings herein.
1. Nature of the Option. This Option is intended to be an
incentive stock option within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code").
2. Date of Grant; Term of Option. This Option is granted
this ____ day of ___________________, 19____, and it may not be exercised
later than __________________________________, subject to earlier termination,
among other things, in the event of a Change of Control, as described in
Section 16 of the Plan.
3. Option Exercise Price. The Option exercise price is
____________________________________ ($__________) per Share.
4. Exercise of Option. This Option shall be exercisable
during its term only in accordance with the terms and provisions of the Plan
and this Option as follows:
(a) Right to Exercise. This Option shall vest and be
exercisable cumulatively, as follows:________________________________________
_____________________________________________________________________________
_________ .
(b) Method of Exercise. This Option shall be exercisable
by written notice which shall state the election to exercise this Option, the
number of Shares in respect to which this Option is being exercised and such
other representations and agreements as to the Optionee's investment intent
with respect to such Shares as may be required by the Company
<PAGE>
hereunder or pursuant to the provisions of the Plan. Such written notice shall
be signed by the Optionee and shall be delivered in person or by certified
mail to the Secretary of the Company or such other person as may be designated
by the Company. The written notice shall be accompanied by payment of the
purchase price and an executed Stock Purchase Agreement in the form attached
hereto. Payment of the purchase price shall be by check or such consideration
and method of payment authorized by the Board pursuant to the Plan. The
certificate or certificates for the Shares as to which the Option shall be
exercised shall be registered in the name of the Optionee and shall be
legended as required under the Plan, the Stock Purchase Agreement, and/or
applicable law.
(c) Restrictions on Exercise. This Option may not be
exercised if the issuance of the Shares upon such exercise would constitute a
violation of any applicable federal or state securities laws or other laws or
regulations. As a condition to the exercise of this Option, the Company may
require the Optionee to make any representation and warranty to the Company as
may be required by any applicable law or regulation.
5. Investment Representations. Unless the Shares have been
registered under the Securities Act of 1933, in connection with the
acquisition of this Option, the Optionee represents and warrants as follows:
(a) The Optionee is acquiring this Option, and upon
exercise of this Option, he will be acquiring the Shares for investment for
his own account, not as a nominee or agent, and not with a view to, or for
resale in connection with, any distribution thereof.
(b) The Optionee has a preexisting business or personal
relationship with the Company or one of its directors, officers or controlling
persons and by reason of his business or financial experience, has, and could
be reasonably assumed to have, the capacity to protect his interests in
connection with the acquisition of this Option and the Shares.
6. Termination of Status as an Employee. Subject to the
provisions of Section 7 hereof, if the Optionee ceases to serve as an employee
of the Company or its Subsidiaries for any reason other than death or
Disability and thereby terminates his status as an Employee, the Optionee
shall have the right to exercise this Option at any time within the three (3)
month period after the date of such termination to the extent that the
Optionee was entitled to exercise the Option at the date of such termination.
If the Optionee ceases to serve as an employee due to death or Disability,
this Option may be exercised at any time within one (1) year after the date of
death or termination of employment due to Disability, in the case of death, by
the Optionee's estate or by a person who acquired the right to exercise this
Option by bequest or inheritance, or, in the case of Disability, by the
Optionee or his legal guardian or representative, but in any case only to the
extent the Optionee was entitled to exercise this Option at the date of
-2-
<PAGE>
such termination; 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, this Option shall terminate immediately upon the
commencement thereof. To the extent that the Optionee was not entitled to
exercise the Option at the date of termination, or to the extent the Option is
not exercised within the time specified herein, this Option shall terminate.
Notwithstanding the foregoing, this Option shall not be exercisable after the
expiration of the term set forth in Section 2 hereof.
7. Forfeiture of Option. Notwithstanding any other provision
of this Option, if the Optionee's employment is terminated for "cause" (as
such term is defined in the Optionee's employment agreement or invention and
non-disclosure agreement, but, if the Optionee is not a party to either such
agreement, then, as such term is defined in the Stock Purchase and Restriction
Agreement) or if the Board of Directors 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 (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 the Company in respect of confidentiality, non-disclosure,
non-competition or otherwise, all unexercised Options shall terminate on the
earlier of the date of termination for "cause" or the date of such
determination. In the event of such a determination, in addition to immediate
termination of all unexercised Options, the Optionee shall forfeit all Option
shares for which the Company has not yet delivered share certificates to the
Optionee and the Company shall refund to the Optionee the Option 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 determination resulting in forfeiture.
8. Nontransferability of Option. This Option may not be
sold, pledged, assigned, hypothecated, gifted, transferred or disposed of in
any manner either voluntarily or involuntarily by operation of law, other than
by will or by the laws of descent or distribution, and may be exercised during
the lifetime of the Optionee only by such Optionee. Subject to the foregoing
and the terms of the Plan, the terms of this Option shall be binding upon the
executors, administrators, heirs, successors and assigns of the Optionee.
9. Continuation of Employment. Neither the Plan nor this
Option shall confer upon any Optionee any right to continue in the employment
of the Company or any of its Subsidiaries or limit in any respect the right of
the Company to discharge the Optionee at any time, with or without cause and
with or without notice.
-3-
<PAGE>
10. Withholding. The Company reserves the right to withhold,
in accordance with any applicable laws, from any consideration payable to
Optionee any taxes required to be withheld by federal, state or local law as a
result of the grant or exercise of this Option or the sale or other
disposition of the Shares issued upon exercise of this Option. If the amount
of any consideration payable to the Optionee is insufficient to pay such taxes
or if no consideration is payable to the Optionee, upon the request of the
Company, the Optionee (or such other person entitled to exercise the Option
pursuant to Section 6 hereof) shall pay to the Company an amount sufficient
for the Company to satisfy any federal, state or local tax withholding
requirements it may incur, as a result of the grant or exercise of this Option
or the sale or other disposition of the Shares issued upon the exercise of
this Option.
11. The Plan. This Option is subject to, and the Company and
the Optionee agree to be bound by, all of the terms and conditions of the Plan
as such Plan may be amended from time to time in accordance with the terms
thereof, provided that no such amendment shall deprive the Optionee, without
his consent, of this Option or any rights hereunder. Pursuant to the Plan, the
Board of Directors of the Company is authorized to adopt rules and regulations
not inconsistent with the Plan as it shall deem appropriate and proper. A copy
of the Plan in its present form is available for inspection during business
hours by the Optionee or the persons entitled to exercise this Option at the
Company's principal office.
12. Conversion to Non-Qualified Option. Notwithstanding
anything to the contrary set forth herein, this Option is being granted
subject to the condition that in the event the Plan is not approved by the
stockholders of the Company within 365 days of the date that the Plan was
adopted by the Board of Directors of the Company, this Option shall
automatically be converted into a non-qualified stock option.
13. Early Disposition of Stock. Subject to the fulfillment
by Optionee of any conditions upon the disposition of Shares received under
this Option, Optionee hereby agrees that if he disposes of any Shares received
under this Option within one (1) year after such Shares were transferred to
him, he will notify the Company in writing within thirty (30) days after the
date of such disposition.
14. Entire Agreement. This Agreement, together with the Plan
and the other exhibits attached thereto or hereto, represents the entire
agreement between the parties.
15. Governing Law. This Agreement shall be construed in
accordance with the laws of the Commonwealth of Pennsylvania.
16. Amendment. Subject to the provisions of the Plan, this
Agreement may only be amended by a writing signed by each of the parties
hereto.
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<PAGE>
Date: ____________________ QUANTUM EPITAXIAL DESIGNS, INC.
By: ______________________________
Title: ___________________________
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<PAGE>
ACKNOWLEDGEMENT
The Optionee acknowledges receipt of a copy of the Plan, a
copy of which is attached hereto, and represents that he has read and is
familiar with the terms and provisions thereof, and hereby accepts this Option
subject to all of the terms and provisions thereof. The Optionee hereby agrees
to accept as binding, conclusive and final all decisions or interpretations of
the Board of Directors or the Committee upon any questions arising under the
Plan.
Date: ____________________ _________________________
Signature of Optionee
_________________________
Address
__________________________
City, State, Zip
THIS OPTION AND THE SECURITIES WHICH MAY BE PURCHASED UPON
EXERCISE OF THIS OPTION HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW
TO, OR IN CONNECTION WITH, THE SALE, TRANSFER OR DISTRIBUTION THEREOF. NO SUCH
SALE, TRANSFER OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE
REGISTRATION STATEMENT RELATING THERETO OR A SATISFACTORY OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
THE SHARES WHICH MAY BE PURCHASED UPON EXERCISE OF THIS
OPTION MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF A STOCK
PURCHASE AGREEMENT TO BE ENTERED INTO BETWEEN THE HOLDER OF THIS OPTION AND
THE COMPANY UPON EXERCISE OF THIS OPTION, A COPY OF WHICH AGREEMENT IS ON FILE
WITH THE SECRETARY OF THE COMPANY.
-6-
<PAGE>
QUANTUM EPITAXIAL DESIGNS, INC.
STOCK PURCHASE AND RESTRICTION AGREEMENT
This Agreement is made this _____ day of _______________, 19__, by
and between Quantum Epitaxial Designs, Inc., a Pennsylvania corporation (the
"Company"), and
_____________________________________________________________________________
("Stockholder").
R E C I T A L S:
A. Stockholder was granted a Stock Option (the "Option") on
________________, 19___ pursuant to the Company's 1996 Stock Option Plan (the
"Plan"), the terms and conditions of which are incorporated herein by
reference.
B. Pursuant to said Option, Stockholder was granted the right to
purchase _____________ shares of the Company's Common Stock, as adjusted in
accordance with the Plan (the "Optioned Shares").
C. Stockholder has elected to exercise the Option to purchase
_______________________ (________) of such Optioned Shares (herein referred to
as the "Shares") under the Stock Option Agreement evidencing said Option (the
"Option Agreement").
D. As required by the Plan and the Option Agreement, as a condition
to Stockholder's exercise of the Option, Stockholder is required to execute
this Agreement, which gives the Company certain rights, including, but not
limited to, transfer restrictions with respect to the Shares, rights of first
refusal upon a proposed sale or transfer of the Shares and other rights to
repurchase the Shares being issued pursuant to the terms hereof.
NOW, THEREFORE, for good and valuable consideration, the receipt of
which is hereby acknowledged, the parties hereto do hereby agree as follows:
SECTION 1. Definitions.
As used in this Agreement, the following terms shall have the
following respective meanings:
<PAGE>
"Cause" shall mean (i) Employee's conviction of a crime (A)
which is predicated on either fraud or embezzlement or (B) involving moral
turpitude or which constitutes a felony and in either such case can reasonably
be expected to have an adverse effect on the business or affairs of the
Company; (ii) an act of fraud or dishonesty against, or in connection with the
services rendered to, the Company which, in any of the foregoing cases, can
reasonably be expected to have an adverse effect on the business or affairs of
the Company; (iii) misconduct, neglect or failure by Employee to perform his
duties and fulfill his obligations to the Company or any of its subsidiaries
which, in any of the foregoing cases, can reasonably be expected to have an
adverse effect on the business or affairs of the Company; or (iv) breach by
the Employee in any material respect of a duty to the Company or of his
employment agreement (if one exists) or his employee non-disclosure agreement
(whether occurring before or after Termination of Employment.
"Company" shall mean Quantum Epitaxial Designs, Inc., a
Pennsylvania corporation. For purposes of Sections 3, 6 and 7 hereof, the term
Company shall include Person(s) designated by the Company.
"Fair Value Per Share" shall mean "Fair Value Per Share," as
such term is defined in the Plan.
"Original Cost Per Share" shall mean the purchase price
actually paid by the Employee for a particular share of the capital stock of
the Company.
"Person" shall mean and include a natural person, a
corporation, a partnership, a trust, an unincorporated organization and a
government or any department, agency or political subdivision thereof.
"Securities Act" shall mean the Securities Act of 1933, as
amended, and any successor statute and the rules and regulations of the
Securities and Exchange Commission thereunder, as shall be in effect at the
applicable time.
"Shares" shall mean the Common Stock purchased by the
Employee hereunder, subject to adjustment, as set forth in Section 3(b)
hereof.
"Termination of Employment" shall mean the termination or
cessation of the Employee's employment with or engagement by the Company (or
any subsidiary thereof).
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<PAGE>
"Transfer" shall include any direct or indirect sale,
assignment, transfer, pledge, hypothecation or other disposition of any Shares
or of any legal or beneficial interest therein.
SECTION 2. Exercise of Option. Subject to the terms and
conditions hereof, Stockholder hereby agrees to exercise his Option or a
portion thereof to purchase ________________________ Shares at a purchase
price of $_________ per Share (or $________, in the aggregate), subject to and
in accordance with the terms set forth in this Agreement, payable in
accordance with the terms and provisions of the Option Agreement.
SECTION 3. Termination of Employment. (a) (i) In the event
of the Termination of Employment of the Stockholder for any reason other than
Cause, including, but not limited to, resignation, withdrawal, discharge
(without Cause), death or disability, the Company shall have the right to
purchase from, and if the Company exercises its option pursuant to
subparagraph (c) below, the Stockholder shall sell to the Company upon the
exercise of such right at a purchase price per Share equal to the Fair Value
Per Share, all of the Shares owned by the Stockholder.
(ii) In the event of the Termination of Employment of
the Stockholder for Cause the Company shall have the right to purchase from,
and if the Company exercises its option pursuant to subparagraph (c) below,
the Stockholder shall sell to the Company upon the exercise of such right, at
a purchase price per Share equal to the Original Cost Per Share, all of the
Shares owned by the Stockholder.
(b) The number of Shares subject to repurchase pursuant to
Sections 3(a) shall be adjusted to give effect to any stock dividend, or other
distribution of stock made on or in respect of such Shares, or any
subdivision, combination or reclassification of the outstanding capital stock
of the Company or received in exchange for the Shares.
(c) In order to exercise the option to purchase
Stockholder's Shares under this Section 3, the Company shall deliver a written
notice to the Stockholder indicating its election to purchase the Shares and
specifying the number of Shares which it elects to purchase and the purchase
price therefor.
(d) If the Company elects not to exercise its rights
pursuant to this Section 3 or if the Company is legally prohibited from or
unable to repurchase the Shares during the period referred to below, it shall
notify the Stockholder within the 90-day period following the Termination of
Employment of the Stockholder.
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<PAGE>
(e) The repurchase of Shares hereunder shall be made on a
date selected by the Company within 100 days of the Termination of Employment,
by delivery of payment to the Stockholder, by check or wire transfer, against
receipt of one or more certificates, properly endorsed, evidencing the
Stockholder's Shares to be so repurchased.
(f) Anything contained herein to the contrary
notwithstanding, any purchaser of Shares pursuant to Section 3 which is not
the Company shall agree in writing, in advance, with the parties hereto to be
bound by and comply with all applicable provisions of this Agreement and shall
be deemed to be a Stockholder for all purposes of this Agreement.
SECTION 4. Legends. All certificates representing any Shares
subject to the provisions of this Agreement shall have endorsed thereon the
following legend unless in the opinion of counsel to the Company that such
legend is no longer necessary:
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 AND THE TERMS OF A CERTAIN STOCK
RESTRICTION AGREEMENT, 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
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<PAGE>
SUCH AGREEMENTS ARE INCORPORATED BY
REFERENCE IN THIS CERTIFICATE.
SECTION 5. Investment Representations. Unless the Shares
have been registered under the Securities Act of 1933, as amended (the "Act"),
in which event the Company will so advise Stockholder in writing, Stockholder
agrees, represents and warrants, in connection with the proposed purchase of
the Shares, that:
(a) he is purchasing the Shares solely for his own account
for investment and not with a view to, or for resale in connection with any
distribution thereof within the meaning of the Act. Stockholder further
represents that he does not have any present intention of selling, offering to
sell or otherwise disposing of or distributing the Shares or any portion
thereof; and that the entire legal and beneficial interest of the Shares he is
purchasing is being purchased for, and will be held for the account of,
Stockholder only and neither in whole nor in part for any other person;
(b) he is aware of the Company's business affairs and
financial condition and has acquired sufficient information about the Company
to reach an informed and knowledgeable decision to acquire the Shares.
Stockholder further represents that he has a preexisting personal or business
relationship with the officers and directors of the Company and that he has
such knowledge and experience in business and financial matters to enable him
to evaluate the risks of the prospective investment and to make an informed
investment decision with respect thereto and that he has the capacity to
protect his own interests in connection with the purchase of the Shares.
Stockholder further represents and warrants that he has discussed the Company
and its plans, operations and financial condition with its officers, has
received all such information as he deems necessary and appropriate to enable
him to evaluate the financial risk inherent in making an investment in the
Shares and has received satisfactory and complete information concerning the
business and financial condition of the Company in response to all inquiries
in respect thereof;
(c) he realizes that his purchase of the Shares will be a
speculative investment and that he is able, without impairing his financial
condition, to hold the Shares for an indefinite period of time and to suffer a
complete loss on his investment;
(d) the Company has disclosed to him in writing: (i) the
sale of the Shares has not been registered under the Act, and the Shares must
be held indefinitely unless a transfer of them is subsequently registered
under the Act or an exemption from such registration is available, and that
the Company is under no obligation to register the Shares; and (ii) the
Company shall make a notation in its records of the aforementioned
restrictions on transfer and legends;
-5-
<PAGE>
(e) he is aware of the provisions of Rule 144, promulgated
under the Act, which, in substance, permits limited public resale of
"restricted securities" acquired, directly or indirectly, from the issuer
thereof (or an affiliate of such issuer) in a non-public offering subject to
the satisfaction of certain conditions, including among other things: the
resale occurring not less than two (2) years from the date Stockholder has
purchased and paid for the Shares; the availability of certain public
information concerning the Company; the sale being through a broker in an
unsolicited "brokers' transaction" or in a transaction directly with a market
maker (as said term is defined under the Securities Exchange Act of 1934); and
that any sale of the Shares may be made by him, if he is an affiliate of the
Company, only in limited amounts during any three-month period not exceeding
specified limitations. Stockholder further represents that he understands that
at the time he wishes to sell the Shares there may be no public market upon
which to make such a sale, and that, even if such public market then exists,
the Company may not be satisfying the current public information requirements
of Rule 144, and that, in such event, he would be precluded from selling the
Shares under Rule 144 even if the two-year minimum holding period had been
satisfied. Stockholder represents that he understands that in the event all of
the requirements of Rule 144 are not satisfied, registration under the Act,
compliance with Regulation A, or some other registration exemption will be
required; and that, notwithstanding the fact that Rule 144 is not exclusive,
the Staff of the SEC has expressed its opinion that persons proposing to sell
private placement securities other than in a registered offering and otherwise
than pursuant to Rule 144 will have a substantial burden of proof in
establishing that an exemption from registration is available for such offers
or sales, and that such persons and their respective brokers who participate
in such transactions do so at their own risk;
(f) without in any way limiting Stockholder's
representations, warranties and agreements set forth herein, Stockholder
further agrees that he shall in no event make any Transfer of all or any
portion of the Shares which he is purchasing unless and until:
(i) There is then in effect a Registration Statement
under the Act covering such proposed disposition and such disposition
is made in accordance with said Registration Statement; or
(ii) Stockholder shall have (x) notified the Company of
the proposed disposition and furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition,
and (y) furnished the Company with an opinion of his own counsel
(satisfactory to the Company) to the effect that such disposition
will not require registration of such shares under the Act, and such
opinion of his counsel shall have been concurred in by counsel for
the Company and the Company shall have advised Stockholder of such
concurrence.
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<PAGE>
(g) If the proposed Transfer of Shares may be effected
without registration or qualification under the Securities Act and any
applicable state securities laws, then the registered holder of such Shares
shall be entitled to Transfer such Shares subject to and in accordance with
Section 6 hereof.
(h) If the proposed Transfer of such Shares may not be
effected without registration under the Securities Act or registration or
qualification under any applicable state securities laws, the registered
holder of such Shares shall not be entitled to Transfer such Shares, until the
requisite registration or qualification is effective and the Employee complies
with Section 6 hereof.
SECTION 6. Restrictions on Transfer.
6.1 Prohibited Transfers. (a) Stockholder agrees that he shall not
Transfer any of his Shares except as otherwise specifically provided for
herein.
(b) Anything to the contrary herein notwithstanding, the
Stockholder shall not at any time Transfer any Shares which remain subject to
the Company's repurchase option under this Agreement, except pursuant to
Section 6.1(c).
(c) Notwithstanding anything to the contrary contained
herein, the Stockholder may Transfer all or any of his Shares to the spouse,
parents, siblings or lineal descendants of the Stockholder or to any trust for
the exclusive benefit of any of the foregoing or of the Stockholder; provided
that any such transferee shall agree in writing with the Company, prior to and
as a condition precedent to such transfer, to be bound by all of the
provisions of this Agreement to the same extent as if such transferee was the
Stockholder (including, but not limited to, being affected hereunder by all
subsequent occurrences giving rise to repurchase rights of the Company to
purchase the Shares of the original Stockholder/transferor then held by the
permitted transferee) and provided, further, that the interests in such trusts
shall be non-transferable.
(d) If requested in writing by the managing underwriters, if
any, of any public offering of the Company's Common Stock, the Stockholder
agrees not to offer, sell, contract to sell or otherwise dispose of any Shares
except as part of such public offering within thirty (30) days before and up
to three hundred and sixty-five (365) days after the effective date of the
registration statement filed with respect to said public offering.
-7-
<PAGE>
6.2 Right of First Refusal on Dispositions.
(a) If the Stockholder desires to sell all or any part of
his Shares pursuant to a bona fide, arm's length offer from a credit worthy
third party (the "Proposed Transferee"), the Stockholder shall submit a
written offer (the "Offer") to sell such Shares (the "Offered Shares") to the
Company, on terms and conditions, including price, not less favorable to the
Company than those on which the Stockholder proposes to sell the Offered
Shares to the Proposed Transferee. The Offer shall disclose the identity of
the Proposed Transferee, the number of Offered Shares proposed to be sold, the
total number of Shares owned by the Stockholder, the terms and conditions,
including price, of the proposed sale, the address of the Stockholder and any
other material facts relating to the proposed sale.
(b) If the Company desires to purchase all of the Offered
Shares, the Company shall communicate in writing its election to purchase (an
"Acceptance") to the Stockholder, which Acceptance shall be delivered in
person or mailed to the Stockholder within twenty (20) days of the date the
Offer was made.
(c) If the Company accepts the Offer as to all of the
Offered Shares, the sale of the Offered Shares to be sold to the Company
pursuant to this Section 6.2 shall be made at the offices of the Company on
the thirtieth (30th) day following the expiration of the 20-day period, after
the Offer is made (or if such thirtieth (30th) day is not a business day, then
on the next succeeding business day). Such sales shall be effected by the
Stockholder's delivery to the Company of a certificate or certificates
evidencing the Offered Shares to be purchased by it or him, duly endorsed for
transfer to the Company, which Shares shall be delivered free and clear of all
liens, charges, claims and encumbrances of any nature whatsoever, against
payment to the Stockholder of the purchase price therefor by the Company.
Payment for the Offered Shares shall be made as provided in the Offer or by
wire transfer or certified check.
(d) If the Company does not agree to purchase all of the
Offered Shares, then, the Offered Shares may be sold by the Stockholder at any
time within ninety (90) days after the date the Offer was made. Any such sale
shall be to the Proposed Transferee, at not less than the price and upon other
terms and conditions, if any, not more favorable to the Proposed Transferee
than those specified in the Offer. Any Offered Shares not sold within such
90-day period shall continue to be subject to the requirements of a prior
offer pursuant to this Section 6.2.
SECTION 7. Failure to Deliver Shares. If the Stockholder
becomes obligated to sell any Shares ("Defaulting Stockholder") to the Company
under this Agreement and fails to deliver such Shares in accordance with the
terms of this Agreement, the Company, at its option,
-8-
<PAGE>
in addition to all other remedies it or he may have, send to the Stockholder
the purchase price for such Shares as is herein specified. Thereupon, the
Company, upon written notice to the Stockholder, shall (i) cancel on its books
the certificate or certificates representing the Shares to be sold.
SECTION 8. Escrow. As security for his faithful performance
of the terms of this Agreement and to insure the availability for delivery of
Stockholder's Shares upon exercise, under this Agreement, of the rights of the
Company and the rights of the other beneficiaries to this Agreement,
Stockholder agrees, if requested in writing by the Company, to deliver to and
deposit with the Secretary of the Company or his nominee ("Escrow Holder"), as
Escrow Holder in this transaction, five Stock Assignments duly endorsed (with
date and number of shares blank) in the form attached hereto as Attachment A,
together with the certificate or certificates evidencing the Shares; said
documents are to be held by the Escrow Holder and delivered to said Escrow
Holder pursuant to the Joint Escrow Instructions of the Company and
Stockholder set forth in Attachment B attached hereto and incorporated herein
by this reference, which instructions shall also be delivered to the Escrow
Holder at the closing hereunder.
SECTION 9. Withholding. (a) Upon the request of the Company,
the Stockholder shall promptly pay to the Company, or make arrangements
satisfactory to the Company regarding payment of, any Federal, state or local
taxes of any kind required by law to be withheld with respect to the Shares
(or any distributions of other securities or property (including cash) thereon
or issued in replacement thereof).
(b) In order to effect Section 9(a) above, (i) the Company
shall, to the extent permitted by law, have the right to deduct from any
payments of any kind otherwise due to the Stockholder any Federal, state or
local taxes of any kind required by law to be withheld with respect to the
Shares; and (ii) if payment of the required tax is not made by the
Stockholder, the Company may, at its option, redeem and cancel at the rate of
the Fair Value Per Share a sufficient number of Shares to pay any tax required
to be withheld.
SECTION 10. Violative Transfers. The Company shall not be
required (i) to transfer on its books any Shares which shall have been sold or
transferred in violation of any of the provisions set forth in this Agreement,
or (ii) to treat as owner of such Shares or to accord the right to vote as
such owner or to pay dividends to any transferee to whom such Shares shall
have been so transferred.
SECTION 11. Rights as Stockholder. Subject to the provisions
of this Agreement, Stockholder shall, during the term of this Agreement,
exercise all rights and privileges of a stockholder of the Company with
respect to the purchased Shares.
-9-
<PAGE>
SECTION 12. Further Assurances. The parties agree to execute
such further instruments and to take such further action as may reasonably be
necessary to carry out the intent of this Agreement.
SECTION 13. Remedies, Injunctive Relief.
(a) In case any one or more of the covenants and/or
agreements set forth in this Agreement shall have been breached by any party
hereto, the party or parties entitled to the benefit of such covenants or
agreements 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
and/or a temporary or permanent injunction, in any case without showing any
actual damage. The rights, powers and remedies of the parties under this
Agreement are cumulative and not exclusive of any other right, power or remedy
which such parties may have under any other agreement or law. No single or
partial assertion or exercise of any right, power or remedy of a party
hereunder shall preclude any other or further assertion or exercise thereof.
Any purported Transfer in violation of the provisions of this Agreement shall
be void ab initio.
(b) Stockholder agrees that, until a public market for the
Shares exists, the Shares cannot be readily purchased, sold, or evaluated in
the open market, that they have a unique and special value, and that the
Company and its stockholders would be irreparably damaged if the terms of this
Agreement were not capable of being specifically enforced, and for this
reason, among others, Stockholder agrees that the Company shall be entitled to
a decree of specific performance of the terms hereof or an injunction
restraining violation of this Agreement, said right to be in addition to any
other remedies of the Company.
SECTION 14. Savings Provisions. (a) If any provision of this
Agreement is held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remaining provisions shall nevertheless continue in full
force and effect without being impaired or invalidated in any way and shall be
construed in accordance with the purposes and tenor and effect of this
Agreement.
(b) Any provision of this Agreement that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability. Such
prohibition or unenforceability in any one jurisdiction shall not invalidate
or render unenforceable such provision in any other jurisdiction.
-10-
<PAGE>
SECTION 15. No Right To Retention. This Agreement shall not
entitle the Stockholder to any right or claim to be retained by the Company or
limit the right of the Company to terminate the Stockholder's association with
the Company or to change the terms of such association.
SECTION 16. Duration of Agreement. The rights and obligations
of the Stockholder under this Agreement shall terminate as to such Stockholder
upon the earlier to occur of (a) the sale of all Shares owned by such
Stockholder in accordance with the terms set forth herein (provided that any
transferee of Shares has agreed in writing to be bound by the terms and
restrictions set forth herein) or (b) on the fifteenth anniversary of the date
that such Stockholder first became a party hereto. Notwithstanding anything
contained in this Agreement to the contrary, (y) the restrictions imposed upon
the Shares in Section 3 and Section 6.2 of this Agreement shall terminate upon
the consummation of an underwritten public offering of the Company's
authorized but unissued shares of Common Stock, underwritten on a firm
commitment basis by one of more underwriters, pursuant to a registration
statement filed with and declared effective by the Securities and Exchange
Commission and (z) the obligations of the Stockholder set forth in Section
6.1(d) hereof shall survive the termination hereof.
SECTION 17. Successors and Assigns. Except as otherwise
expressly provided herein, this Agreement shall bind and inure to the benefit
of the Company, the Stockholder, the respective successors or heirs and
personal representatives and permitted assigns of the Company and the
Stockholder, and each other person who shall properly become a registered
holder of any Shares that have not theretofore been sold to the public
pursuant to a registration statement under the Securities Act or Rule 144 or
Rule 144A (or any similar or successor rule). The Stockholder agrees further
that, except in connection with Transfers by the Stockholder pursuant to
Sections 4, 5(f), 5(g), 5(h) and 6, he shall not sell any Shares to any Person
not a party to this Agreement.
SECTION 18. Entire Agreement. This Agreement, contains the
entire agreement among the parties with respect to the subject matter hereof
and supersedes other prior and contemporaneous arrangements or understandings
with respect thereto.
SECTION 19. Notices. All notices, consents and other
communications under this Agreement shall be in writing and shall be deemed to
have been duly given (a) when delivered by hand, (b) one business day after
the business day of transmission if sent by telex or telecopier (with receipt
confirmed), provided that a copy is mailed by registered mail, return receipt
requested, or (c) one business day after the business day of deposit with the
carrier, if sent by Express Mail, Federal Express or other express delivery
service (receipt requested), in each case to the appropriate addresses, telex
numbers and telecopier numbers set forth below (or to
-11-
<PAGE>
such other addresses, telex numbers and telecopier numbers as a party may
designate as to itself by notice to the other parties):
(a) If to the Stockholder:
__________________
_________________
__________________
(b) If to the Company:
Quantum Epitaxial Designs, Inc.
119 Technology Drive
Bethlehem, Pennsylvania 18015
Telecopier No.: (610) 861-5273
Attention: Thomas L. Hierl
with a copy to:
Pepper, Hamilton & Scheetz
1235 Westlakes Drive, Suite 400
Berwyn, Pennsylvania 19312-2401
Telecopier: (610) 640-7835
Attention: Jeffrey P. Libson, Esq.
SECTION 20. Changes. The terms and provisions of this
Agreement may not be modified or amended, or any of the provisions hereof
waived, temporarily or permanently, without the prior written consent of each
of the parties hereto.
SECTION 21. Counterparts. This Agreement may be executed in
any number of counterparts, and each such counterpart shall be deemed to be an
original instrument, but all such counterparts together shall constitute but
one agreement.
SECTION 22. Headings. The headings of the various sections
of this Agreement have been inserted for convenience of reference only and
shall not be deemed to be part of this Agreement.
SECTION 23. 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.
-12-
<PAGE>
SECTION 24. Governing Law; Jurisdiction. This Agreement
shall be governed by, and construed in accordance with the laws of the
Commonwealth of Pennsylvania applicable to contracts made and to be performed
wholly therein.
SECTION 25. Forfeiture. Notwithstanding (i) the execution
and delivery of this Agreement by the parties hereto or (ii) anything to the
contrary contained herein, if Stockholder's employment or engagement is
terminated for Cause or if the Board of Directors makes a determination that
the Stockholder (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, if Stockholder is a director of
the Company, has otherwise breached any fiduciary duty owed to the Company,
(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, the Stockholder shall forfeit all shares for
which the Company has not yet delivered share certificates to the Stockholder
or Escrow Holder, as the case may be, and the Company shall refund to the
Stockholder the Option purchase price paid to it. In addition, the Company may
withhold delivery of share certificates pending the resolution of any inquiry
that could lead to a determination resulting in forfeiture.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the day and year first above-written.
QUANTUM EPITAXIAL DESIGNS, INC.
By: ______________________________
Title: ___________________________
STOCKHOLDER:
__________________________________
(Signature)
__________________________________
(Print Name)
Address: __________________________
__________________________
-13-
<PAGE>
CONSENT
The undersigned spouse of Stockholder agrees that his or her
interest, if any, in the Shares subject to the foregoing Agreement shall be
irrevocably bound by this Agreement and further understands and agrees that
any community property interest, if any, shall be similarly bound by this
Agreement.
Date: ________________ _______________________
Spouse of Stockholder
-14-
<PAGE>
ATTACHMENT A
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED _________________________ hereby sells, assigns
and transfers unto ________________________________
_________________________________________ (_________) shares of the Common
Stock (the "Shares") of Quantum Epitaxial Designs, Inc., a Pennsylvania
corporation (the "Company"), standing in the undersigned's name on the books
of the Company represented by Certificate No. __________ herewith, and does
hereby irrevocably constitute and appoint __________________________ attorney
to transfer the said shares on the books of the Company with full power of
substitution in the premises.
Dated: ________________ Signature: ________________________
<PAGE>
ATTACHMENT B
JOINT ESCROW INSTRUCTIONS
__________, 19__
_______________________________
Secretary,
Quantum Epitaxial Designs, Inc.
119 Technology Drive
Bethlehem, Pennsylvania 18015
Dear _____________________:
As Escrow Agent for both Quantum Epitaxial Designs, Inc., a
Pennsylvania corporation (the "Company"), and the undersigned grantee of an
option to purchase stock of the Company ("Optionee"), you are hereby
authorized and directed to hold the documents delivered to you pursuant to the
terms of that certain Stock Purchase and Restriction Agreement dated
_______________, 19__, to which a copy of these Joint Escrow Instructions is
attached as Attachment B (the "Agreement"), in accordance with the following
instructions:
1. In the event the Company and/or any assignee or designee
of the Company (referred to collectively for convenience herein as the
"Company") and/or any other signatory to or beneficiary of rights set forth in
the Agreement shall elect to exercise any rights of first refusal, other
rights of repurchase and/or other rights (collectively, "Rights") set forth in
the Agreement, the Company shall give to Optionee and you a written notice
specifying the number of shares of stock to be purchased, the purchase price,
and the time for a closing hereunder at the principal executive office of the
Company. Optionee and the Company hereby irrevocably authorize and direct you
to close the transaction contemplated by such notice in accordance with the
terms of said notice.
2. At the closing, you are directed (a) to date the stock
assignments necessary for the transfer in question, (b) to fill in the number
of shares being transferred, (c) to deliver same, together with the
certificate evidencing the shares of stock to be transferred, to the Company
or other applicable purchaser against the simultaneous delivery to you of the
purchase price (by check, delivery of shares of common stock of the Company
having a fair market value equal to the purchase price, or some combination
thereof) for the number of shares of stock being purchased pursuant to the
exercise of the Rights, and (d) to take any and all other actions deemed by
you to be necessary, appropriate or desirable to effect the terms of or
contemplated by the Agreement.
<PAGE>
3. Optionee irrevocably authorizes the Company to deposit
with you any certificates evidencing shares of stock (and stock assignments)
to be held by you hereunder and any additions and substitutions to said stock
as defined in the Agreement. Optionee does hereby irrevocably constitute and
appoint you as his attorney-in-fact and agent for the term of this escrow to
execute with respect to such securities all stock certificates, stock
assignments, or other documents necessary or appropriate to make such
securities negotiable and complete any transaction contemplated herein or in
the Agreement or the Company's 1996 Stock Option Plan.
4. This escrow shall terminate at such time as there are no
longer any shares of stock subject to the Rights.
5. The Employee shall have the right to vote the shares of
stock deposited hereunder (the "Shares"). Subject to the next succeeding
sentence, all dividends and other distributions of cash or property, other
than securities (which are addressed below), paid or made with respect to the
Shares held in escrow shall be accumulated and held in escrow by the Company
for the benefit of the Optionee and will, upon termination of the escrow, be
paid over to the Optionee, together with interest actually earned thereon from
the date of payment of such dividends or distributions through the date as of
which such dividends or distributions are paid over. If and to the extent any
Shares are repurchased by the Company, all undistributed dividends and other
distributions attributable to the Shares so repurchased, as well as the
interest actually earned thereon, shall become the sole property of the
Company, free and clear of any claim by the Optionee. If, from time to time
during the term of the escrow arrangement, there is (i) any stock dividend,
stock split or other change in the Shares, or (ii) any merger or sale of all
or substantially all of the assets or other acquisition of the company, any
and all new, substituted or additional securities to which the Optionee is
entitled by reason of his ownership of the Shares shall be immediately subject
to this escrow, deposited with the Escrow Agent and included thereafter as
Shares subject to repurchase for purposes of the Agreement.
6. If at the time of termination of this escrow you should
have in your possession any documents, securities, or other property belonging
to Optionee, you shall deliver all of same to Optionee and shall be discharged
of all further obligations hereunder.
7. Your duties hereunder may be altered, amended, modified
or revoked only by a writing signed by all of the parties hereto, provided,
however, that the Company may, at any time, elect to terminate this escrow by
notice to the Optionee and you.
8. You shall be obligated only for the performance of such
duties as are specifically set forth herein and may rely and shall be
protected in relying or refraining from acting on any instrument reasonably
believed by you to be genuine and to have been signed or presented by the
proper party or parties. You shall not be personally liable for any act you
may do or omit to do hereunder as Escrow Agent or as attorney-in-fact for
Optionee while acting in good faith and in the exercise of your own good
judgment, and any act done or omitted by you pursuant to the advice of your
own attorneys, who may be counsel to the Company, shall be conclusive evidence
of such good faith.
-2-
<PAGE>
9. You are hereby expressly authorized to disregard any and
all directions, notices and/or warnings given by any of the parties hereto or
by any other person or corporation, excepting only orders or process of courts
of law, and are hereby expressly authorized to comply with and obey orders,
judgments or decrees of any court. In case you obey or comply with any such
order, judgment or decree of any court, you shall not be liable to any of the
parties hereto or to any other person, firm or corporation by reason of such
compliance, notwithstanding any such order, judgment or decree being
subsequently reversed, modified, annulled, set aside, vacated or found to have
been entered without jurisdiction.
10. You shall not be liable in any respect on account of the
identity, authorities or rights of the parties executing or delivering or
purporting to execute or deliver the Agreement or any documents or papers
deposited or called for hereunder.
11. You shall not be liable for the unenforceability or
outlawing of any rights with respect to these Joint Escrow Instructions, the
Agreement or any documents deposited with you nor shall you be liable for the
running of any statute of limitations with respect to any such rights.
12. You may, but need not, submit a memorandum to the
Optionee and to the Company setting forth action you intend to take with
respect to the escrow of the Shares and requesting the parties to acknowledge
the propriety of the intended action. If, in any such case, either party fails
or refuses to acknowledge the propriety of the intended action, you may engage
and seek the advice of counsel, who may be counsel to the Company, and other
experts (and may pay such counsel and experts reasonable compensation and
expenses), and any action taken in accordance with the written advice of such
counsel and/or experts shall be full protection to you in respect thereto
against any person. It is agreed that in any event you shall not be liable for
any action or failure to act taken in good faith, and that your liability
shall be limited to actions or inaction constituting gross negligence or
willful misconduct.
13. All reasonable costs, fees and disbursements incurred by
the Escrow Holder in connection with the performance of his duties hereunder
shall be borne by the Company.
14. Your responsibilities as Escrow Agent hereunder shall
terminate if you shall cease to be Secretary of the Company or if you shall
resign by written notice to each party. In the event of any such termination
or resignation, the Company shall have the right to appoint any officer of the
company as successor Escrow Agent.
15. If you reasonably require other or further instruments
in connection with these Joint Escrow Instructions or obligations in respect
hereto, the necessary parties hereto shall join in furnishing such
instruments.
16. It is understood and agreed that should any dispute
arise with respect to the delivery and/or ownership or right to possession of
the securities held by you hereunder, you are
-3-
<PAGE>
authorized and directed to retain in your possession without liability to
anyone all or any part of said securities until such dispute shall have been
settled either by a mutual written agreement of the parties concerned or by a
final order, decree or judgment of a court of competent jurisdiction after the
time for appeal has expired and no appeal has been perfected, but you shall be
under no duty whatsoever to institute or defend any such proceedings.
17. Any notice required or permitted hereunder shall be
given in writing and shall be deemed effectively given upon personal delivery
or upon deposit in the United States Post office, by registered or certified
mail with postage and fees prepaid, addressed to each of the other parties
thereunto entitled at the following addresses, or at such other address as a
party may designate by ten (10) days' advance written notice to each of the
other parties hereto.
COMPANY: Quantum Epitaxial Designs, Inc.
119 Technology Drive
Bethlehem, Pennsylvania 18015
OPTIONEE: ______________________________
______________________________
______________________________
ESCROW AGENT: Secretary
Quantum Epitaxial Designs, Inc.
c/o Jeffrey P. Libson, Esquire
Pepper, Hamilton & Scheetz
1235 Westlakes Drive - Suite 400
Berwyn, Pennsylvania 19312
18. By signing these Joint Escrow Instructions, you become a
party hereto only for the purpose of said Joint Escrow Instructions; you do
not become a party to the Agreement.
19. The parties hereto understand that in the event that the
Escrow Agent is legal counsel to the Company, said counsel may continue to act
as such in the event of any dispute in connection with these Joint Escrow
Instructions or any other transaction contemplated herein or affected hereby.
-4-
<PAGE>
20. This instrument shall be binding upon and inure to the
benefit of the parties hereto, and their respective successors and permitted
assigns.
Very truly yours,
QUANTUM EPITAXIAL DESIGNS, INC.
By: ________________________________
Title: _____________________________
Optionee:
____________________________________
(signature)
Name: ___________________________
Address: ___________________________
___________________________
Agreed to and accepted as of the
date set forth above.
Escrow Agent
By: _________________________________
Secretary of
QUANTUM EPITAXIAL DESIGNS, INC.
Name: ________________________________
-5-
<PAGE>
EXHIBIT 11.1
QUANTUM EPITAXIAL DESIGNS, INC.
PRO FORMA AND SUPPLEMENTAL PRO FORMA
NET INCOME (LOSS) PER SHARE CALCULATION
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, 1996 September 30, 1997
------------------- -------------------
<S> <C> <C>
Pro forma net loss per share
Pro forma net loss per statement of operations .............................. $ (61,676) $ (446,381)
Reduction of interest expense, net of tax .................................... -- 71,000
---------- -----------
Pro forma net loss ......................................................... $ (61,676) $ (375,381)
---------- -----------
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) $ (0.19)
========== ===========
Supplemental pro forma net income (loss) per share
Pro forma net income (loss) ................................................ $ (61,676) $ (446,381)
Reduction in interest expense, net of tax ................................. 128,000 216,000
---------- -----------
Supplemental pro forma net income (loss) .................................... $ 66,324 $ (230,381)
---------- -----------
Shares used in computing pro forma net income (loss) per share ............... 1,978,505 1,978,505
Assumed repayment of bank debt ............................................. 366,484 467,737
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 2,446,242
---------- -----------
Supplemental pro forma net income (loss) per share ........................ $ 0.02 $ (0.09)
========== ===========
</TABLE>
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of
Quantum Epitaxial Designs, Inc. (the "Company") 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 the Company's Registration Statement No. 333-37457, 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.
/s/ MICHAEL G BOLTON
October 17, 1997 ---------------------------
Michael G. Bolton
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> SEP-30-1997 DEC-31-1996
<CASH> 256 78
<SECURITIES> 0 0
<RECEIVABLES> 1,598 1,124
<ALLOWANCES> 55 40
<INVENTORY> 832 830
<CURRENT-ASSETS> 2,809 2,132
<PP&E> 10,485 8,558
<DEPRECIATION> 3,734 2,765
<TOTAL-ASSETS> 9,803 8,481
<CURRENT-LIABILITIES> 3,299 4,100
<BONDS> 4,885 2,154
0 0
0 0
<COMMON> 2 2
<OTHER-SE> 1,617 2,226
<TOTAL-LIABILITY-AND-EQUITY> 9,803 8,481
<SALES> 5,871 6,312
<TOTAL-REVENUES> 6,474 6,902
<CGS> 4,634 4,691
<TOTAL-COSTS> 6,791 6,787
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 406 213
<INCOME-PRETAX> (722) (98)
<INCOME-TAX> (276) (36)
<INCOME-CONTINUING> (446) (62)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (446) (62)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
