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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 21, 1999
REGISTRATION NO. 333-71791
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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EMCORE CORPORATION
(Exact name of Registrant as specified in its charter)
NEW JERSEY 22-2746503
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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394 ELIZABETH AVENUE, SOMERSET, NEW JERSEY 08873
(732) 271-9090
(Address, including zip code, and telephone number, including
area code, of registrant's agent for service and principal executive offices)
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THOMAS G. WERTHAN
EMCORE CORPORATION
394 ELIZABETH AVENUE
SOMERSET, NEW JERSEY 08873
(732) 271-9090
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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WITH COPIES TO:
JORGE L. FREELAND, ESQ. ELLEN B. CORENSWET, ESQ.
WHITE & CASE LLP KENNETH R. MCVAY, ESQ.
200 SOUTH BISCAYNE BLVD. BROBECK, PHLEGER & HARRISON, LLP
MIAMI, FLORIDA 33131 1633 BROADWAY, 47TH FLOOR
TEL: (305) 371-2700 NEW YORK, NEW YORK 10019
FAX: (305) 358-5744 TEL: (212) 581-1600
FAX: (212) 586-7878
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: as soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, 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 of 1933, please check the
following box and list the Securities Act of 1933 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 of 1933, check the following box and list the
Securities Act of 1933 registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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SUBJECT TO COMPLETION -- MAY 21, 1999
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PROSPECTUS
, 1999
(EMCORE LOGO) EMCORE CORPORATION
3,897,441 SHARES OF COMMON STOCK
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EMCORE CORPORATION:
- EMCORE Corporation
394 Elizabeth Avenue
Somerset, New Jersey 08873
(732) 271-9090
- NASDAQ SYMBOL: EMKR
THE OFFERING:
- - EMCORE is offering 3,000,000 of the shares and existing shareholders are
offering 897,441 of the shares.
- - The underwriters have an option to purchase an additional 584,616 shares
from EMCORE to cover over-allotments.
- - There is an existing trading market for these shares. The reported last
sale price on May 19, 1999 was $19.63 per share.
- - We plan to use the proceeds from this offering to repay debt and for
general corporate purposes. We will not receive any proceeds from the
shares sold by the selling shareholders.
- - Closing: , 1999.
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Public offering price: $ $
Underwriting fees:
Proceeds to EMCORE:
Proceeds to selling shareholders:
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THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 8.
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Neither the SEC nor any state securities commission has determined whether this
prospectus is truthful or complete. Nor have they made, nor will they make, any
determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
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DONALDSON, LUFKIN & JENRETTE
PRUDENTIAL SECURITIES
NEEDHAM & COMPANY, INC.
SOUNDVIEW TECHNOLOGY GROUP
THE UNDERSIGNED IS FACILITATING INTERNET DISTRIBUTION.
DLJDIRECT INC.
WE WILL AMEND AND COMPLETE THE INFORMATION IN THIS PROSPECTUS. ALTHOUGH WE ARE
PERMITTED BY US FEDERAL SECURITIES LAWS TO OFFER THESE SECURITIES USING THIS
PROSPECTUS, WE MAY NOT SELL THEM OR ACCEPT YOUR OFFER TO BUY THEM UNTIL THE
DOCUMENTATION FILED WITH THE SEC RELATING TO THESE SECURITIES HAS BEEN DECLARED
EFFECTIVE BY THE SEC. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES
OR OUR SOLICITATION OF YOUR OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION
WHERE THAT WOULD NOT BE PERMITTED OR LEGAL.
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[Artwork depicts a cellular relay station antenna, fiber optics, an automobile
line drawing showing engine components, a cellular phone handset, a bar code, a
satellite, light-emitting diodes, Cds, and, the lights of Times Square at night.
Text of artwork states "Leading manufacturers throughout the world use EMCORE's
production systems and process technology, wafers and devices for a variety of
advanced electronic applications. Below the artwork text states "Illustrated
above are examples of current and future end-use product applications that
incorporate the compound semiconductor process, technology or equipment
developed and sold by EMCORE Corporation. This illustration contains products
of companies other then EMCORE Corporation. (EMCORE logo).]
[Fold out artwork depicts a diagram of flow and heat patterns inside a
TurboDisc reactor under heading Technology with text stating EMCORE has
developed its compound semiconductor processes and higher performance production
systems through substantial investments in research and development. EMCORE
works closely with its customers to identify specific performance criteria in
its production systems, wafers and devices.
Surrounding the EMCORE logo and "Integrated Compound Semiconductor Solutions"
TECHNOLOGY
EMCORE has developed its compound semiconductor processes and higher performance
production systems through substantial investments in research and development.
EMCORE works closely with its customers to identity specific performance
criteria in its production systems, wafers, and devices.
WAFERS AND DEVICES
EMCORE provides its customers with materials science expertise, process
technology and metal-organic chemical vapor deposition (MOCVD) systems that
enable the manufacture of commercial volumes of high-performance compound
semiconductor wafers and devices. (Pictures of MR Sensors, VCSELs, Solar
Cells, 3 LEDs and RF Materials.)
The Company is working with its customers and JV partners to design, engineer
and manufacture commercial quantities of compound semiconductor devices and
materials. The devices are fabricated from materials grown in our production
equipment; and then tested according to specifications worked out in
partnership with customers or JV partners.
SYSTEMS
EMCORE provides production-scale metal organic chemical vapor deposition,
MOCVD, equipment using its proprietary TURBODISC technology. By combining
material science expertise and proven process technology, EMCORE offers key
enabling technology for the low cost, high-volume production of a variety of
compound semiconductor wafers and devices. (Picture of TurboDisc System)]
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TABLE OF CONTENTS
Page
Prospectus Summary.............. 4
Risk Factors.................... 8
Use of Proceeds................. 18
Price Range of Common Stock and
Dividend Policy............... 19
Capitalization.................. 20
Selected Consolidated Financial
Data.......................... 21
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations.................... 23
Business........................ 42
Management...................... 60
Page
Certain Relationships and
Related Transactions.......... 64
Principal and Selling
Shareholders.................. 66
Underwriting.................... 68
Legal Matters................... 70
Experts......................... 70
Pro Forma Consolidated Statement
of Operations (Unaudited)..... 71
Incorporation of Certain
Documents by Reference........ 73
Available Information........... 74
Index to Financial Statements... F-1
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PROSPECTUS SUMMARY
This summary is qualified by more detailed information appearing in other
sections of this prospectus. The other information is important, so please read
this entire prospectus carefully. Unless otherwise indicated, all information in
this prospectus: (a) gives effect to a 3.4-for-1 reverse stock split that was
completed on February 3, 1997 and (b) assumes that the underwriters do not
exercise their over-allotment option. References to EMCORE's fiscal years refer
to fiscal years ended on September 30.
EMCORE CORPORATION
EMCORE designs, develops and manufactures compound semiconductor wafers and
devices and is a leading developer and manufacturer of the tools and
manufacturing processes used to fabricate compound semiconductor wafers and
devices. Our products and technology enable our customers, both in the United
States and internationally, to manufacture commercial volumes of
high-performance electronic devices using compound semiconductors. Our products
are used in a wide variety of applications in the communications (satellite,
data, telecommunications and wireless), consumer and automotive electronics,
computers and peripherals, and lighting markets. EMCORE's customers include AMP
Incorporated, Hewlett Packard, General Motors, Hughes-Spectrolab, Lucent
Technologies, Inc., Siemens AG and 12 of the largest electronics manufacturers
in Japan.
Compound semiconductors are the key components of electronic systems and
electronic circuits and are now used in today's most advanced information
systems. Compound semiconductors are composed of two or more elements and
usually consist of a metal such as gallium, aluminum or indium and a non-metal
such as arsenic, phosphorus or nitrogen. These elements are combined in our
proprietary manufacturing process to create a round disk, or wafer, that has
multiple layers of thin films of semiconductors on it. The wafers are further
processed to create devices that are ready to be packaged by our customers for
use in their products, such as solar cells, lasers and transistors. Many
compound semiconductor materials have unique physical properties that allow
electrons to move at least four times faster than through semiconductors based
on silicon. Advantages of compound semiconductor devices over silicon devices
include:
- operation at higher speeds;
- lower power consumption;
- less noise and distortion; and
- the ability to emit and detect light, known as optoelectronic properties.
Although compound semiconductors are more expensive to manufacture than the
more traditional silicon-based semiconductors that are used in most computers,
electronics manufacturers are increasingly integrating compound semiconductors
into their products in order to achieve higher performance.
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We manufacture and sell, either alone or with our joint venture partners,
the following products:
PRODUCT CURRENT AND POTENTIAL APPLICATIONS
Solar cells Solar panels in communications
satellite power systems
Compound semiconductor devices that Traffic lights
emit light, called high-brightness Miniature lamps
light-emitting diodes Automotive lighting
(HB LEDs)* Flat panel displays
Compound semiconductor lasers that emit High performance data and
light in a cylindrical beam, called telecommunications lines including
vertical cavity surface emitting fiber optic cables and other network
lasers (VCSELs) applications
Compound semiconductor sensor devices Cam and crank shaft sensors for
that can detect a magnetic field and automobiles
position of a metal object called Antilock brake systems
magneto resistive sensors Brushless motors
(MR sensors) Engine timing sensors
Compound semiconductor materials that Cellular phone handsets
transmit and receive communications Fiber optics
called radio frequency materials Satellite transmitters and receivers
(RF materials)
TurboDisc production systems Platform technology for all of the
above
* Products under development
Our objective is to capitalize on our position as a leading developer and
manufacturer of compound semiconductor tools and manufacturing processes to
become the leading supplier of compound semiconductor wafers and devices. The
key elements of our strategy are to:
- apply our core scientific and manufacturing technology across multiple
product applications;
- target high growth opportunities;
- partner with key industry participants; and
- continue our investment to maintain technology leadership.
We have recently established a number of strategic relationships through
joint ventures and long-term supply agreements including:
- an agreement with General Electric Lighting, to form a joint venture to
develop and market white light and colored HB LED lighting products.
- a long-term purchase agreement for solar cells with Space Systems/Loral,
a wholly-owned subsidiary of Loral Space & Communications.
- a cooperative development agreement and a three-year purchase agreement
with Sumitomo Electric to provide certain RF materials for use in
cellular handsets.
We were incorporated in the State of New Jersey in September 1986. Our
World Wide Web site is www.emcore.com. Our web site is not part of this
prospectus. EMCORE and TurboDisc are registered trademarks of EMCORE and
Gigalase, Gigarray and the EMCORE logo are trademarks of EMCORE. Each trademark,
trade name or service mark of any other company appearing in this prospectus
belongs to its holder.
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THE OFFERING
Common stock offered:
By EMCORE............................ 3,000,000 shares
By the selling shareholders.......... 897,441 shares
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Total........................... 3,897,441 shares
Common stock to be outstanding after this 13,014,204 shares
offering................................
Use of proceeds by EMCORE................. To repay approximately $36.8 million of debt and for
general corporate purposes. See "Use of Proceeds."
Nasdaq National Market symbol............. EMKR
The number of shares of common stock to be outstanding after this offering
is based on the 9,500,086 shares outstanding as of May 1, 1999, as further
described under "Capitalization."
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SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL YEARS SIX MONTHS ENDED
ENDED SEPTEMBER 30, MARCH 31,
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1996 1997 1998(*) 1998(*) 1999
STATEMENT OF OPERATIONS DATA:
Revenues....................... $27,779 $47,753 $ 43,760 $ 26,165 $ 26,197
Gross profit................... 9,172 17,659 19,084 12,255 10,978
Operating loss................. (2,753) (689) (34,647) (20,332) (7,859)
Net loss....................... (3,176) (5,619) (36,419) (20,661) (10,856)
Net loss per basic and diluted
share(1).................... $ (1.06) $ (1.20) $ (4.15) $ (2.52) $ (1.17)
Weighted average shares used in
calculating net loss per
share....................... 2,994 4,669 8,775 8,189 9,409
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(*) As restated -- See Note 20 to the consolidated financial statements
AS OF MARCH 31, 1999
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ACTUAL AS ADJUSTED(2)
BALANCE SHEET DATA:
Working capital....................................... $ 6,663 $ 31,512
Total assets.......................................... 85,071 109,920
Long-term liabilities................................. 32,570 1,567
Redeemable convertible preferred stock................ 21,369 14,088
Shareholders' equity.................................. 8,967 72,044
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(1) Basic and diluted earnings per share have been restated for all periods
presented to give effect to the Commission's Staff Accounting Bulletin No.
98, which eliminated certain computational requirements of the Commission's
Staff Accounting Bulletin No. 64.
(2) Reflects the sale by EMCORE of 3,000,000 shares of common stock offered by
this prospectus, repayment of all long-term debt, the conversion of 364,000
shares of convertible preferred stock into 364,000 shares of common stock
and the exercise of 19,898 warrants at $4.08 per share and 130,220 warrants
at $10.20 per share into 150,118 shares of common stock.
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RISK FACTORS
You should carefully consider the following risks, together with the other
information contained in this prospectus, before you decide whether to purchase
shares of our common stock. If any of the following risks actually occur, our
business, financial condition or results of operations would likely suffer. In
such case, the trading price of our common stock could decline, and you may lose
all or part of the money you paid to buy our common stock.
This prospectus contains forward-looking statements based on our current
expectations, assumptions, estimates and projections about EMCORE and our
industry. These forward-looking statements involve numerous risks and
uncertainties. Our actual results could differ materially from those anticipated
in such forward-looking statements as a result of certain factors, as more fully
described in this section and elsewhere in this prospectus. We undertake no
obligation to update publicly any forward-looking statements for any reason,
even if new information becomes available or other events occur in the future.
WE EXPECT TO CONTINUE TO INCUR OPERATING LOSSES.
We started operations in 1984 and as of March 31, 1999 had an accumulated
deficit of $71.2 million. We incurred net losses of $3.2 million in fiscal 1996,
$5.6 million in fiscal 1997, $36.4 million in fiscal 1998 and $10.9 million in
the first six months of fiscal 1999. We expect to continue to incur losses. To
support our growth, we have increased our expense levels and our investments in
inventory and capital equipment. As a result, we will need to significantly
increase revenues and profit margins to become and stay profitable. If our sales
and profit margins do not increase to support the higher levels of operating
expenses and if our new product offerings are not successful, our business,
financial condition and results of operations will be materially and adversely
affected. Please see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Financial Statements and the Notes
thereto for detailed information on our history of losses.
OUR RAPID GROWTH PLACES A STRAIN ON OUR RESOURCES.
We are experiencing rapid growth, having added a significant number of new
employees, acquired MicroOptical Devices, Inc., or MODE, and entered into joint
ventures with General Electric Lighting (pending), Uniroyal Technology
Corporation, Optek Technology, Inc. and Union Miniere Inc. We have expanded our
facilities to include two manufacturing facilities in Albuquerque, New Mexico in
addition to our original facility in Somerset, New Jersey. Our joint venture
with Uniroyal Technology Corporation has leased a manufacturing facility in
Tampa, Florida. This growth has placed and will continue to place a significant
strain on our management, financial, sales and other employees and on our
internal systems and controls. If we are unable to effectively manage multiple
facilities and multiple joint ventures in geographically distant locations, our
business, financial condition and results of operations will be materially and
adversely affected. We are also in the process of installing new manufacturing
software for all of our facilities and are evaluating replacing our accounting
and purchasing systems. Most of the new manufacturing software is
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customized to our particular business and manufacturing processes. It will take
time and require evaluation to eliminate all of the bugs in the software and to
train personnel to use the new software. In this transition we may experience
delays in production, cost overruns and disruptions in our operations.
Please see "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for more information.
SINCE THE TECHNOLOGY IN THE COMPOUND SEMICONDUCTOR INDUSTRY RAPIDLY CHANGES, WE
MUST CONTINUALLY IMPROVE EXISTING PRODUCTS, DESIGN AND SELL NEW PRODUCTS AND
MANAGE THE COSTS OF RESEARCH AND DEVELOPMENT IN ORDER TO EFFECTIVELY COMPETE.
We compete in markets characterized by rapid technological change, evolving
industry standards and continuous improvements in products. Due to constant
changes in these markets, our future success depends on our ability to improve
our manufacturing processes and tools and our products. For example, our
TurboDisc production systems must remain competitive on the basis of cost of
ownership and process performance. To remain competitive we must continually
introduce manufacturing tools with higher capacity and better production yields.
We have recently introduced a number of new products and, in connection
with recent joint ventures and internal development, we will be introducing
additional new products in the near future. The commercialization of new
products involves substantial expenditures in research and development,
production and marketing. We may be unable to successfully design or manufacture
these new products and may have difficulty penetrating new markets. In addition,
many of our new products are being incorporated into our customers' new products
for new applications, such as high speed computer networks.
Because it is generally not possible to predict the amount of time required
and the costs involved in achieving certain research, development and
engineering objectives, actual development costs may exceed budgeted amounts and
estimated product development schedules may be extended. Our business, financial
condition and results of operations may be materially and adversely affected if:
- we are unable to improve our existing products on a timely basis;
- our new products are not introduced on a timely basis;
- we incur budget overruns or delays in our research and development
efforts; or
- our new products experience reliability or quality problems.
FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS MAY NEGATIVELY IMPACT OUR STOCK
PRICE.
Our revenues and operating results may vary significantly from quarter to
quarter due to a number of factors particular to EMCORE and the compound
semiconductor industry. Not all of these factors are in our control. These
factors include:
- the volume and timing of orders for our products, particularly TurboDisc
systems, which have an average selling price in excess of $1 million;
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- the timing of our announcement and introduction of new products and of
similar announcements by our competitors;
- downturns in the market for our customers' products;
- regional economic conditions, particularly in Asia where we derive a
significant portion of our revenues; and
- price volatility in the compound semiconductor industry.
These factors may cause our operating results for future periods to be
below the expectations of analysts and investors. This may cause a decline in
the price of our common stock. Please see "Management's Discussion and Analysis
of Financial Condition and Results of Operations" for detailed information on
our annual and quarterly operating results.
OUR JOINT VENTURE PARTNERS, WHO HAVE CONTROL OF THESE VENTURES, MAY MAKE
DECISIONS THAT WE DO NOT AGREE WITH AND THAT ADVERSELY AFFECT OUR NET INCOME.
Since December 1997, we have established three joint ventures (with Optek
Technology, Inc., Union Miniere, Inc. and Uniroyal Technology Corporation) and
have signed an agreement to enter into a fourth joint venture with General
Electric Lighting. Certain conditions may not be satisfied and, therefore, it is
possible that this joint venture with General Electric Lighting will not be
established. Failure to consummate this joint venture with General Electric
Lighting could have a material and adverse effect on our business prospects.
Each of our joint ventures involves the creation of a separate company, and
we do not have a majority interest in any of these entities. Each of these joint
ventures is governed by a board of managers with representatives from both the
strategic partner and us. Many fundamental decisions must be approved by both
parties to the joint venture, which means we will be unable to direct the
operation and direction of these joint ventures without the agreement of our
joint venture partners. If we are unable to agree on important issues with a
joint venture partner, the business of that joint venture may be delayed or
interrupted, which may, in turn, materially and adversely affect our business,
financial condition and results of operations.
We have devoted and we will be required to continue to devote significant
funds and technologies to our joint ventures to develop and enhance their
products. In addition, our joint ventures will require that some of our
employees devote much of their time to joint venture projects. This will place a
strain on our management, scientific, financial and sales employees. If our
joint ventures are unsuccessful in developing and marketing their products, our
business, financial condition and results of operations will be materially and
adversely affected.
General Electric Lighting and we have agreed that our joint venture will be
the sole vehicle for each party's participation in the solid state lighting
market. We and General Electric Lighting have also agreed to several limitations
during the life of the venture and thereafter relating to use that each of us
can make of the joint venture's technology. One consequence of these limitations
is that in certain circumstances, such as a material default by us, we would not
be permitted to use the joint venture's technology to compete against General
Electric Lighting in the solid state lighting market.
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SINCE A LARGE PERCENTAGE OF OUR REVENUES ARE FROM FOREIGN SALES, CERTAIN EXPORT
RISKS MAY DISPROPORTIONATELY AFFECT OUR REVENUES.
Sales to customers located outside the United States accounted for
approximately 42.5% of our revenues in fiscal 1996, 42.0% of our revenues in
fiscal 1997, 39.1% of our revenues in fiscal 1998 and 40.0% of our revenues in
the first six months of fiscal 1999. Sales to customers in Asia represent the
majority of our international sales. We believe that international sales will
continue to account for a significant percentage of our revenues. Because of
this, the following export risks may disproportionately affect our revenues:
- political and economic instability may inhibit export of our systems and
devices and limit potential customers' access to dollars;
- shipping and installation costs of our systems may increase;
- we have experienced and may continue to experience difficulties in the
timeliness of collection of foreign accounts receivable and have been
forced to write off receivables from a foreign customer;
- a strong dollar may make our systems less attractive to foreign
purchasers who may decide to postpone making the capital expenditure;
- tariffs and other barriers may make our systems and devices less cost
competitive;
- we may have difficulty in staffing and managing our international
operations;
- the laws of certain foreign countries may not adequately protect our
trade secrets and intellectual property; and
- potentially adverse tax consequences to our customers may make our
systems and devices not cost competitive.
WE WILL LOSE SALES IF WE ARE UNABLE TO OBTAIN GOVERNMENT AUTHORIZATION TO EXPORT
OUR PRODUCTS.
Exports of our products to certain destinations, such as the People's
Republic of China, Malaysia and Taiwan, may require pre-shipment authorization
from U.S. export control authorities, including the U.S. Departments of Commerce
and State. Authorization may be conditioned on end-use restrictions. On certain
occasions, we have been denied authorization, particularly with respect to the
People's Republic of China. Failure to receive these authorizations may
materially and adversely affect our revenues and in turn our business, financial
condition and results of operations from international sales. Beginning April
1999, exports of all satellites and associated components require a license from
the Department of State. This may cause delays in shipping solar cells abroad.
Delays in receiving export licenses for solar cells may materially and adversely
affect our revenues and in turn our business, financial condition and results of
operations.
THE LOSS OF SALES TO GENERAL MOTORS OR OUR OTHER LARGE CUSTOMERS WOULD BE
DIFFICULT TO REPLACE.
We derive a substantial portion of our revenues from a limited number of
customers. Sales to Hughes-Spectrolab, primarily of TurboDisc systems and solar
cells,
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accounted for approximately 23.6% of our revenues in fiscal 1996, 10.2% of our
revenues in fiscal 1997, 17.3% of our revenues in fiscal 1998, but only 3.8% of
our revenues for the first six months of fiscal 1999. We believe that, at least
in the short-term, Hughes-Spectrolab will produce most of its material
requirements in-house using TurboDisc systems purchased from us. Consequently,
we do not expect sales to Hughes-Spectrolab to continue to be significant in the
short term. General Motors, our main customer for MR sensors, accounted for
approximately 15.1% of our revenues in fiscal 1997, 12.8% of our revenues in
fiscal 1998 and 10.8% of our revenues for the first six months of fiscal 1999.
General Motors' three month strike in 1998 adversely affected our operating
performance because during that time shipments of sensors to General Motors were
halted. In addition to the lost revenues, we incurred the expense of paying
salaries to the part of our workforce dedicated to producing sensors. If General
Motors, or any of our other significant customers, stops ordering our products,
significantly reduces the volume of these orders, or cancels, delays or
reschedules any orders, and we are unable to replace these orders, our business,
financial condition and results of operations could be materially and adversely
affected. Please see "Business -- Customers" for more information on our
significant customers.
OUR PRODUCTS ARE DIFFICULT TO MANUFACTURE AND SMALL MANUFACTURING DEFECTS CAN
ADVERSELY AFFECT OUR PRODUCTION YIELDS AND OUR OPERATING RESULTS.
The manufacture of our TurboDisc systems is a highly complex and precise
process. We increasingly outsource the fabrication of certain components and
sub-assemblies of our systems, often to sole source suppliers or a limited
number of suppliers. We have experienced occasional delays in obtaining
components and subassemblies because the manufacturing process for these items
is very complex and requires long lead times. The revenues derived from sales of
our TurboDisc systems will be materially and adversely affected if we are unable
to obtain a high quality, reliable and timely supply of these components and
subassemblies. In addition, any reduction in the precision of these components
will result in sub-standard end products and will cause delays and interruptions
in our production cycle.
We manufacture all of our wafers and devices in our manufacturing
facilities and our joint venture with Uniroyal Technology Corporation plans to
manufacture HB LED wafers and package-ready devices at its facility. Minute
impurities, difficulties in the production process, defects in the layering of
the devices' constituent compounds, wafer breakage or other factors can cause a
substantial percentage of wafers and devices to be rejected or numerous devices
on each wafer to be non-functional. These factors can result in lower than
expected production yields, which would delay product shipments and may
materially and adversely affect our operating results. Because the majority of
our costs of manufacture are relatively fixed, the number of shippable devices
per wafer for a given product is critical to our financial results.
Additionally, because we manufacture all of our products at our facilities in
Somerset, New Jersey and Albuquerque, New Mexico, and our joint venture with
Uniroyal Technology Corporation will manufacture HB LED wafers and package-ready
devices at its sole facility in Tampa, Florida, any interruption in
manufacturing resulting from fire, natural disaster, equipment failures or
otherwise would materially and adversely affect our business, financial
condition and results of operations. Please see "Business -- Manufacturing" for
a more detailed description of our manufacturing processes.
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WE FACE LENGTHY SALES AND QUALIFICATIONS CYCLES FOR OUR PRODUCTS AND, IN MANY
CASES, MUST INVEST A SUBSTANTIAL AMOUNT OF TIME AND FUNDS BEFORE WE RECEIVE
ORDERS.
Sales of our TurboDisc systems primarily depend upon the decision of a
prospective customer to increase its manufacturing capacity, which typically
involves a significant capital commitment by the customer. Customers usually
place orders with us on average two to nine months after our initial contact
with them. We often experience delays in obtaining system sales orders while
customers evaluate and receive internal approvals for the purchase of these
systems. These delays may include the time necessary to plan, design or complete
a new or expanded compound semiconductor fabrication facility. Due to these
factors, we expend substantial funds and sales, marketing and management efforts
to sell our compound semiconductor production systems. These expenditures and
efforts may not result in sales.
In order to expand our materials production capabilities, we have dedicated
a number of our TurboDisc systems to the manufacture of wafers and devices.
Several of our products are currently being tested to determine whether they
meet customer or industry specifications. During this qualification period, we
invest significant resources and dedicate substantial production capacity to the
manufacture of these new products, prior to any commitment to purchase by the
prospective customer and without generating significant revenues from the
qualification process. If we are unable to meet these specifications or do not
receive sufficient orders to profitably use the dedicated production capacity,
our business, financial condition and results of operations would be materially
and adversely affected. Please see "Business -- Products," "Business --
Marketing and Sales" and "Business -- Competition" for more information on our
products and our marketing and sales efforts.
INDUSTRY DEMAND FOR SKILLED EMPLOYEES, PARTICULARLY SCIENTIFIC AND TECHNICAL
PERSONNEL WITH COMPOUND SEMICONDUCTOR EXPERIENCE, EXCEEDS THE NUMBER OF SKILLED
PERSONNEL AVAILABLE.
Our future success depends, in part, on our ability to attract and retain
certain key personnel, including scientific, operational and management
personnel. We anticipate that we will need to hire additional skilled personnel
to continue to expand all areas of our business. The competition for attracting
and retaining these employees, especially scientists, is intense. Because of
this intense competition for these skilled employees, we may be unable to retain
our existing personnel or attract additional qualified employees in the future.
If we are unable to retain our skilled employees and attract additional
qualified employees to keep up with our expansion, our business, financial
condition and results of operations will be materially and adversely affected.
PROTECTING OUR TRADE SECRETS IS CRITICAL TO OUR ABILITY TO EFFECTIVELY COMPETE
FOR BUSINESS.
Our success and competitive position depend on protecting our trade secrets
and other intellectual property. Our strategy is to rely more on trade secrets
than patents to protect our manufacturing and sales processes and products, but
reliance on trade secrets is only an effective business practice insofar as
trade secrets remain undisclosed and a proprietary product or process is not
reverse engineered or independently developed. We take certain measures to
protect our trade secrets, including executing non-disclosure agreements with
our employees, joint venture partners, customers and suppliers. If parties
breach these agreements or the measures we take are not properly
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implemented, we may not have an adequate remedy. Disclosure of our trade secrets
or reverse engineering of our proprietary products, processes or devices would
materially and adversely affect our business, financial condition and results of
operations.
Although we currently hold 11 U.S. patents, these patents do not protect
any material aspects of the current or planned commercial versions of our
systems, wafers or devices. We are actively pursuing patents on some of our
recent inventions, but these patents may not be issued. Even if these patents
are issued, they may be challenged, invalidated or circumvented. In addition,
the laws of certain other countries may not protect our intellectual property to
the same extent as U.S. laws. Please see "Business -- Intellectual Property and
Licensing" for more information regarding our trade secrets, patents and other
intellectual property.
WE MAY REQUIRE LICENSES TO CONTINUE TO MANUFACTURE AND SELL CERTAIN OF OUR
COMPOUND SEMICONDUCTOR WAFERS AND DEVICES, THE EXPENSE OF WHICH MAY ADVERSELY
AFFECT OUR RESULTS OF OPERATIONS.
We may require licenses from Rockwell International Corporation to continue
to sell our compound semiconductor wafers and devices to current customers who
do not hold licenses from Rockwell International Corporation. In addition, we
may be required to pay royalties for certain of our past sales of wafers and
devices to these customers. If we are required to pay significant royalties in
connection with these sales, our business, financial condition and results of
operations may be materially and adversely affected. The failure to obtain or
maintain these licenses on commercially reasonable terms may materially and
adversely affect our business, financial condition and results of operations.
Please see "Business -- Intellectual Property and Licensing" for more details
regarding our patents and licenses.
INTERRUPTIONS IN OUR BUSINESS AND A SIGNIFICANT LOSS OF SALES TO ASIA MAY RESULT
IF OUR PRIMARY ASIAN DISTRIBUTOR FAILS TO EFFECTIVELY MARKET AND SERVICE OUR
PRODUCTS.
We rely on a single marketing, distribution and service provider, Hakuto
Co. Ltd. to market and service many of our products in Japan, China and
Singapore. Hakuto is one of our shareholders and Hakuto's president is a member
of our Board of Directors. We have distributorship agreements with Hakuto which
expire in March 2008 and give Hakuto exclusive distribution rights for certain
of our products in Japan. Hakuto's failure to effectively market and service our
products or termination of our relationship with Hakuto would result in
significant delays or interruption in our marketing and service programs in
Asia. This would materially and adversely affect our business, financial
condition and results of operations.
YEAR 2000 PROBLEMS MAY DISRUPT OUR BUSINESS AND THE COSTS TO CORRECT THESE
PROBLEMS MAY BE MATERIAL.
Many currently installed computer systems and software products are coded
to accept or recognize only two digit entries in the date code field. These
systems and software products will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and/or software used by many companies and governmental agencies may
need to be upgraded to comply with such Year 2000 requirements or risk system
failure or miscalculations causing disruptions of normal business activities.
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We have made a preliminary assessment of our Year 2000 readiness. We plan
to perform a Year 2000 simulation on our software during the second and third
calendar quarter of 1999. We are also in the process of contacting certain
third-party vendors, licensors and providers of software, hardware and services
regarding their Year 2000 readiness. Following this testing and after contacting
these vendors and licensors, we will be better able to make a complete
evaluation of Year 2000 readiness, to determine what costs will be necessary to
be Year 2000 compliant and to determine whether contingency plans need to be
developed. We may discover Year 2000 compliance problems in our TurboDisc
systems that will require substantial modifications. In addition, we may
discover that third-party software or hardware incorporated into EMCORE's
TurboDisc systems will need to be revised or replaced, all of which could be
time-consuming and expensive.
Any failure on our part to fix or replace our internally developed
proprietary software or third-party software or hardware or services on a timely
basis could result in lost revenues, increased operating costs, the loss of
customers and other business interruptions. Moreover, we could be subject to
lawsuits which could be costly and time-consuming to defend. The failure of
governmental agencies, utility companies, third party service providers and
others outside of our control to be Year 2000 compliant could result in systemic
failure such as telecommunications or electrical failure, which could have a
material adverse effect on our business, results of operations and financial
condition. Please see "Management's Discussion and Analysis of Financial
Condition" for detailed information on our state of readiness, potential risks
and contingency plans regarding the Year 2000 issue.
OUR MANAGEMENT'S STOCK OWNERSHIP GIVES THEM THE POWER TO CONTROL BUSINESS
AFFAIRS AND PREVENT A TAKEOVER THAT COULD BE BENEFICIAL TO UNAFFILIATED
SHAREHOLDERS.
Certain members of our management, specifically Thomas J. Russell, Chairman
of our Board, Reuben F. Richards, President, Chief Executive Officer and a
director, and Robert Louis-Dreyfus, a director, are former members of Jesup &
Lamont Merchant Partners, L.L.C. They collectively beneficially own
approximately 45.9% of our common stock immediately prior to this offering and
will own approximately 34.1% of our common stock after the offering.
Accordingly, such persons will continue to hold sufficient voting power to
control our business and affairs for the foreseeable future. This concentration
of ownership may also have the effect of delaying, deferring or preventing a
change in control of our company, which could have a material adverse effect on
our stock price.
UNSUCCESSFUL CONTROL OF THE HAZARDOUS RAW MATERIALS USED IN OUR MANUFACTURING
PROCESS COULD RESULT IN COSTLY REMEDIATION FEES, PENALTIES OR DAMAGES UNDER
ENVIRONMENTAL AND SAFETY REGULATIONS.
The production of wafers and devices involves the use of certain hazardous
raw materials, including, but not limited to, ammonia, phosphine and arsene. If
our control systems are unsuccessful in preventing a release of these materials
into the environment or other adverse environmental conditions occur, we could
experience interruptions in our operations and incur substantial remediation and
other costs. Failure to comply with environmental and health and safety laws and
regulations may materially and adversely affect our business, financial
condition and results of operations.
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OUR BUSINESS OR OUR STOCK PRICE COULD BE ADVERSELY AFFECTED BY REDEMPTION OF
OUTSTANDING CONVERTIBLE PREFERRED STOCK OR ISSUANCE OF ADDITIONAL PREFERRED
STOCK.
We have 1,550,000 shares of convertible preferred stock issued and
outstanding, all of which are subject to mandatory redemption by us on November
17, 2003. If we do not have the funds available to redeem the convertible
preferred stock at that time, we will need to raise additional funds to finance
this redemption or we will be in default under the terms of the convertible
preferred stock. We may be unable to obtain adequate financing on acceptable
terms, which may adversely affect our business and financial condition.
Our board of directors is authorized to issue up to an additional 4,332,353
shares of preferred stock with such dividend rates, liquidation preferences,
voting rights, redemption and conversion terms and privileges as our board of
directors, in its sole discretion, may determine. The issuance of additional
shares of preferred stock may result in a decrease in the value or market price
of our common stock, or our board of directors could use the preferred stock to
delay or discourage hostile bids for control of us in which shareholders may
receive premiums for their common stock or to make the possible sale of the
company or the removal of our management more difficult. The issuance of
additional shares of preferred stock could adversely affect the voting and other
rights of the holders of common stock.
CERTAIN PROVISIONS OF NEW JERSEY LAW AND OUR CHARTER MAY MAKE A TAKEOVER OF OUR
COMPANY DIFFICULT EVEN IF SUCH TAKEOVER COULD BE BENEFICIAL TO SOME OF OUR
SHAREHOLDERS.
New Jersey law contains and our certificate of incorporation, as amended,
contains certain provisions that could delay or prevent a takeover attempt that
our shareholders may consider in their best interests. Our board of directors is
divided into three classes. Directors are elected to serve staggered three-year
terms and are not subject to removal except for cause by the vote of the holders
of at least 80% of our capital stock. In addition, if these amendments are
adopted, approval by the holders of 80% of our voting stock is required for
certain business combinations unless these transactions meet certain fair price
criteria and procedural requirements or are approved by two-thirds of our
continuing directors. We may in the future adopt other measures that may have
the effect of delaying or discouraging an unsolicited takeover, even if the
takeover were at a premium price or favored by a majority of unaffiliated
shareholders. Certain of these measures may be adopted without any further vote
or action by our shareholders.
FUTURE SALES BY EXISTING SHAREHOLDERS COULD DEPRESS THE MARKET PRICE OF OUR
COMMON STOCK AND MAKE IT MORE DIFFICULT FOR US TO SELL STOCK IN THE FUTURE.
If our shareholders sell substantial amounts of our common stock in the
public market following this offering, the market price of our common stock
could fall. These sales also might make it more difficult for us to sell equity
or equity-related securities in the future at a time and price that we deem
appropriate. Upon completion of this offering, we will have 13,014,204 shares of
common stock outstanding (based on the number of shares outstanding as of May 1,
1999 and assuming no exercise of outstanding options or warrants). Of these
shares, 5,600,226 shares are freely tradeable. This leaves 5,887,883 shares
eligible for sale in the public market at various times after the date of this
prospectus pursuant to Rule 144.
In addition, as of May 1, 1999, stock options to purchase 1,143,293 shares
of our common stock, warrants to purchase 1,371,262 shares of our common stock
and 1,550,000 shares of our convertible preferred stock, which are convertible
into shares of common stock on a one-for-one basis, were outstanding. In
connection with our joint
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venture with General Electric Lighting, we will issue to General Electric common
stock purchase warrants at an exercise price of $22.875 to acquire 282,010
shares of common stock, and a $7.8 million subordinated convertible debenture
with an interest rate of 4.75% per annum due in seven years. The debenture will
be convertible into 340,984 shares of common stock at a conversion price equal
to $22 7/8.
Certain shareholders, representing approximately 6,240,585 shares of our
common stock (including shares of common stock issuable upon conversion of our
convertible preferred stock and warrants) have the right to require us to
register their shares. We agreed to file a shelf registration, for the benefit
of the holders of our convertible preferred stock and those holders of up to
5,210,585 shares of common stock who choose to participate, 90 days after
completion of this offering. This shelf registration will remain effective until
November 17, 2003 or such earlier time as all of the shares of our convertible
preferred stock and the common stock issued upon conversion thereof are no
longer restricted under Rule 144.
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USE OF PROCEEDS
The net proceeds to EMCORE from the sale of the 3,000,000 shares of common
stock being offered by EMCORE are estimated to be $54.5 million ($66.0 million
if the underwriters' over-allotment option is exercised in full), assuming a
public offering price of $19.63 per share and after deducting the underwriting
discounts and commissions and estimated offering expenses. EMCORE will not
receive any proceeds from the sale of shares of common stock by the selling
shareholders. EMCORE intends to use $27.5 million to repay outstanding bank
indebtedness to First Union National Bank under two credit facilities,
approximately $8.8 million to repay subordinated notes to an affiliate and other
investors, and the balance for general corporate purposes, including working
capital.
The two credit facilities have the following principal amounts, interest
rates, maturity dates and use of proceeds:
CREDIT FACILITIES INTEREST RATE MATURITY DATE PROCEEDS USED TO:
$10.0 million Prime plus 50 basis points October 1, 1999 Purchase and equip a new facility in
(8.25% at May 1, 1999) Albuquerque, New Mexico, and for
working capital purposes.
$19 million One month LIBOR plus 75 October 1, 1999 Purchase and equip a new facility in
($18 million basis points Albuquerque, New Mexico, repay
outstanding) (5.62% at May 1, 1999) amounts advanced by Thomas Russell,
the Chairman of the Board of EMCORE,
and for working capital purposes.
When the debt is extinguished, there will be an extraordinary charge in
1999 of approximately $700,000 related to the early extinguishment of debt.
The subordinated notes were issued in May and September of 1996, bear
interest at 6.0% and mature on May 1, 2001. Thomas Russell holds approximately
$8.4 million of the subordinated notes that are being repaid. The balance of the
subordinated notes being repaid are held by approximately ten other
non-affiliated investors.
We may also use a portion of the net proceeds to fund acquisitions of
complementary businesses, products or technologies in the semiconductor sector.
Although we periodically review potential acquisition opportunities, we have not
reached any agreements, commitments or understanding for any future
acquisitions. Pending such uses, the net proceeds of this offering will be
invested in short-term, investment-grade, income producing investments.
We believe that the remaining net proceeds from this offering will be
sufficient to fund our anticipated capital expenditures and to provide adequate
working capital at least through July 2000. However, future events may require
EMCORE to seek additional capital which may not be available on terms acceptable
to us.
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PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
EMCORE's common stock has traded on the Nasdaq National Market under the
symbol "EMKR" since March 6, 1997, the date of EMCORE's initial public offering.
The following table sets forth, for the periods indicated, the high and low sale
prices per share of common stock, as reported on the Nasdaq National Market:
PRICE RANGE OF
COMMON STOCK
----------------
HIGH LOW
FISCAL YEAR ENDED SEPTEMBER 30, 1997:
Second Quarter (from March 6, 1997)....................... $12 3/4 $ 9 1/4
Third Quarter............................................. 19 1/2 11
Fourth Quarter............................................ 25 1/4 16
FISCAL YEAR ENDED SEPTEMBER 30, 1998:
First Quarter............................................. $23 3/8 $15 1/2
Second Quarter............................................ 19 5/8 11
Third Quarter............................................. 16 3/4 9
Fourth Quarter............................................ 13 1/2 6
FISCAL YEAR ENDING SEPTEMBER 30, 1999:
First Quarter............................................. $18 3/8 $ 7 1/4
Second Quarter............................................ 28 3/4 13 7/8
Third Quarter (through May 19, 1999)...................... 20 1/4 12 7/8
The reported last sale price of the common stock on the Nasdaq National
Market on May 19, 1999 was $19 5/8 per share. As of May 1, 1999, EMCORE had
approximately 1,742 shareholders of record.
EMCORE has not declared or paid dividends on its common stock since its
formation. EMCORE currently does not intend to pay dividends on its common stock
in the foreseeable future so that it may reinvest its earnings in its business.
The shares of EMCORE's convertible preferred stock are entitled to receive
cumulative quarterly dividends at the annual rate of 2% of their liquidation
preference ($.28 per annum per share). The payment of dividends, if any, on the
common stock in the future will be at the discretion of EMCORE's board of
directors.
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CAPITALIZATION
The following table sets forth the capitalization of EMCORE as of March 31,
1999, and as adjusted to reflect the sale by EMCORE of 3,000,000 shares of
common stock being offered hereby (at an assumed offering price of $19.63 per
share), the conversion of 364,000 shares of convertible preferred stock into
364,000 shares of common stock and the exercise of 19,898 warrants at $4.08 per
share and 130,220 warrants at $10.20 per share into 150,118 shares of common
stock and the application of the estimated net proceeds therefrom.
AS OF MARCH 31, 1999
-----------------------
ACTUAL AS ADJUSTED
(IN THOUSANDS)
Long-term debt........................................... $ 31,003 $ --
Convertible preferred stock; 1,550,000 issued and
outstanding; as adjusted 1,186,000..................... 21,369 14,088
Shareholders' equity:
Preferred stock; 5,882,353 shares authorized; none
issued and outstanding.............................. -- --
Common stock, 23,529,411 shares authorized; 9,446,347
shares issued and outstanding; 13,014,204 shares
issued and outstanding as adjusted.................. 87,855 151,656
Notes receivable from warrant issuances and stock
sales............................................... (7,667) (7,667)
Accumulated deficit.................................... (71,221) (71,945)
-------- --------
Total shareholders' equity..................... 8,967 72,044
-------- --------
Total capitalization..................................... $ 61,339 $ 86,132
======== ========
- ------------------------------
The 13,014,204 shares of common stock as adjusted for this offering
exclude:
(1) 1,372,059 shares of common stock reserved for issuance under EMCORE's
stock option plan, of which 980,194 shares are subject to outstanding options at
exercise prices varying from $3.03 per share to $24.75 per share;
(2) warrants to purchase 314,556 shares of common stock at an exercise
price of $4.08 per share, exercisable until May 1, 2001;
(3) warrants to purchase 1,095,270 shares of common stock at an exercise
price of $10.20 per share, exercisable until September 1, 2001;
(4) options to purchase 163,099 shares of common stock issued in connection
with EMCORE's acquisition of MODE at exercise prices ranging from $0.43 to
$0.60;
(5) warrants to purchase 47,118 shares of common stock at exercise prices
ranging from $4.32 to $5.92 per share, exercisable until September 2000;
(6) shares reserved for issuance pursuant to warrants to purchase 284,684
shares of common stock at an exercise price of $11.375 per share, exercisable
until May 1, 2001; and
(7) upon funding of the GELcore joint venture, 282,010 common stock
purchase warrants with an exercise price of $22 7/8 and a subordinated
convertible debenture that will be convertible into 340,984 shares of stock at a
price of $22 7/8.
Please see Notes 11, 12, 17 and 18 of the Notes to Financial Statements
included elsewhere in this prospectus for more information.
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SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for the six months ended
March 31, 1998 and 1999 and the five fiscal years ended September 30, 1998 of
EMCORE is qualified by reference to and should be read in conjunction with the
Financial Statements and the Notes thereto, and Management's Discussion and
Analysis of Financial Condition and Results of Operations included elsewhere in
this prospectus. The Statement of Income Data set forth below with respect to
fiscal 1996, 1997 and 1998 and the Balance Sheet Data as of September 30, 1997
and 1998 are derived from EMCORE's audited financial statements included
elsewhere in this prospectus. The Statement of Income Data for fiscal 1994 and
1995 and the Balance Sheet Data as of September 30, 1994, 1995 and 1996 are
derived from audited financial statements not included herein. The financial
data as of March 31, 1999 and for the six months ended March 31, 1998 and 1999
are derived from unaudited consolidated financial statements that, in the
opinion of EMCORE's management, reflect all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of the financial
position and results of operations for these periods. Operating results for the
six months ended March 31, 1999 are not necessarily indicative of the results
that may be expected for the entire fiscal year ending September 30, 1999.
On December 5, 1997, the Company acquired MODE in a stock transaction
accounted for under the purchase method of accounting for a purchase price of
$32.8 million. In connection with this transaction, the Company recorded a
non-recurring, non-cash charge of $19.5 million for acquired in-process research
and development, which affects the comparability of the Company's operating
results and financial condition.
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SIX MONTHS ENDED
FISCAL YEARS ENDED SEPTEMBER 30, MARCH 31,
----------------------------------------------- -------------------
1994 1995 1996 1997 1998(*) 1998(*) 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Revenues.................... $9,038 $18,137 $27,779 $47,753 $ 43,760 $ 26,165 $ 26,197
Cost of sales............... 5,213 9,927 18,607 30,094 24,676 13,910 15,219
------ ------- ------- ------- -------- -------- --------
Gross profit................ 3,825 8,210 9,172 17,659 19,084 12,255 10,978
Operating expenses:
Selling, general, and
administrative.......... 2,645 4,452 6,524 9,347 14,082 5,753 6,368
Goodwill amortization..... -- -- -- -- 3,638 1,442 2,197
Research and development:
Recurring............... 1,064 1,852 5,401 9,001 16,495 5,876 10,272
One-time acquired in-
process.............. -- -- -- -- 19,516 19,516 --
------ ------- ------- ------- -------- -------- --------
Total operating
expenses........... 3,709 6,304 11,925 18,348 53,731 32,587 18,837
------ ------- ------- ------- -------- -------- --------
Operating income (loss)....... 116 1,906 (2,753) (689) (34,647) (20,332) (7,859)
Stated interest expense,
net....................... 286 255 297 519 973 117 693
Imputed warrant interest
expense, non-cash......... -- -- 126 3,988 601 192 633
Equity in net loss of
unconsolidated
affiliate................. -- -- -- -- 198 -- 1,671
Other expense............... -- 10 -- -- -- -- --
------ ------- ------- ------- -------- -------- --------
Total other expense........... 286 265 423 4,507 1,773 309 2,997
(Loss) income before income
taxes....................... (170) 1,641 (3,176) (5,196) (36,419) (20,641) (10,856)
Provision for income taxes.... -- 125 -- 137 -- 20 --
------ ------- ------- ------- -------- -------- --------
(Loss) income before
extraordinary item.......... (170) 1,516 (3,176) (5,333) (36,419) (20,661) (10,856)
Extraordinary loss............ -- -- -- 286 -- -- --
------ ------- ------- ------- -------- -------- --------
Net (loss) income............. $ (170) $ 1,516 $(3,176) $(5,619) $(36,419) $(20,661) $(10,856)
====== ======= ======= ======= ======== ======== ========
PER SHARE DATA:
Weighted average shares used
in calculating diluted per
share data.................. 58 1,701 2,994 4,669 8,775 8,189 9,409
Net (loss) income per basic
and diluted shares before
extraordinary item.......... $(2.93) $ 0.89 $ (1.06) $ (1.14) $ (4.15) $ (2.52) $ (1.17)
====== ======= ======= ======= ======== ======== ========
Net (loss) income per basic
and diluted shares.......... $(2.93) $ 0.89 $ (1.06) $ (1.20) $ (4.15) $ (2.52) $ (1.17)
====== ======= ======= ======= ======== ======== ========
AS OF SEPTEMBER 30, AS OF
----------------------------------------------- MARCH 31,
1994 1995 1996 1997 1998(*) 1999
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital
(deficiency).......... $ 1,041 $ 2,208 $ 1,151 $12,156 $(2,017) $ 6,663
Total assets............. 5,415 10,143 20,434 39,463 73,220 85,071
Long-term liabilities.... 3,000 3,000 8,947 7,577 26,514 32,570
Redeemable convertible
preferred stock....... 16,274 -- -- -- -- 21,369
Shareholders' (deficit)
equity................ (96) 1,509 522 21,831 19,580 8,967
- -------------------------
(*) As restated -- See Note 20 to consolidated financial statements.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Subsequent to the issuance of EMCORE's Annual Report on Form 10-K for the
year ended September 30, 1998, EMCORE's management revised the amount of the
purchase price which was allocated to in-process research and development in
accounting for the acquisition of MicroOptical Devices, Inc., MODE, in December
1997. The revised allocation is based upon methods prescribed in a letter from
the SEC sent to the American Institute of Certified Public Accountants. The
letter sets forth the SEC's views regarding the valuation methodology to be used
in allocating a portion of the purchase price to acquired in-process research
and development, IPR&D, at the date of acquisition.
The revised valuation is based on management's estimates of the net cash
flows associated with expected operations of MODE and gives explicit
consideration to the SEC's views on acquired IPR&D as set forth in its letter to
the American Institute of Certified Public Accountants.
As a result of the revised allocation, EMCORE's financial statements for
the year ended September 30, 1998 have been restated from amounts previously
reported to reduce the amount of the acquired in-process research and
development expensed by $9.8 million and to increase goodwill by $9.8 million.
The amount allocated to goodwill includes approximately $0.5 million related to
the value of MODE's workforce. The change had no impact on net cash flows used
by operations.
The information included in "Selected Financial Data," and in the
discussion following reflect the effects of this restatement. Refer to Note 20
to the consolidated financial statements for further discussion.
OVERVIEW
EMCORE designs, develops and manufactures compound semiconductor materials
and is a leading developer and manufacturer of the tools and manufacturing
processes used to fabricate compound semiconductor wafers and devices. Prior to
fiscal 1997, EMCORE's revenues consisted primarily of the sales of compound
semiconductor production systems. In fiscal 1997, EMCORE expanded its product
offerings to include the design and high-volume production of compound
semiconductor wafers and package-ready devices. EMCORE's vertically-integrated
product offering allows it to provide a complete compound semiconductor solution
to its customers. EMCORE assists its customers with device design, process
development and optimal configuration of TurboDisc production systems.
Systems-related revenues include sales of EMCORE's TurboDisc production
systems as well as spare parts and services. The book-to-ship time period on
systems is approximately four to six months, and the average selling price is in
excess of $1.0 million. Materials revenues include wafers, devices and process
development technology. The materials sales cycle is generally shorter than for
systems and average selling prices vary significantly based on the products and
services provided. Generally, EMCORE achieves a higher gross profit on its
materials related products.
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EMCORE recognizes revenue upon shipment. For systems, EMCORE incurs certain
installation and warranty costs subsequent to shipment which are estimated and
accrued at the time the sale is recognized. EMCORE reserves for estimated
returns and allowances at the time of shipment. For research contracts with the
U.S. government and commercial enterprises with durations greater than six
months, EMCORE recognizes revenue to the extent of costs incurred plus a pro
rata portion of estimated gross profit as stipulated in these contracts, based
on contract performance. EMCORE's research contracts require the development or
evaluation of new materials applications and have a duration of six to 36
months. Contracts with a duration of six months or less are accounted for on the
completed contract method. A contract is considered complete when all costs have
been incurred and the research reporting requirements to the customer have been
met.
EMCORE has recently established a number of strategic relationships through
joint ventures, long-term supply agreements and an acquisition as summarized
below.
- In May 1999, Sumitomo Electric and EMCORE entered into a long-term
agreement to jointly develop and produce certain RF materials for use in
digital wireless and cellular applications. EMCORE will manufacture these
RF materials at our Somerset, New Jersey manufacturing facility. Sumitomo
Electric will market them in Japan. Sumitomo Electric is one of the
world's leading electronics manufacturers. Shipments of these RF
materials are expected to begin in June 1999.
- In January 1999, EMCORE signed an agreement with General Electric
Lighting to form GELcore, a joint venture to develop and market white
light and colored HB LEDs lighting products. GELcore's long-term goal is
to develop HB LED products to replace traditional lighting. We anticipate
investing approximately $7.8 million in GELcore upon formation of the
joint venture and will second various personnel to the joint venture to
assist in the development and marketing of its products. These personnel
and the related costs will be charged to the joint venture. In addition,
GELcore will hire its own administrative and management personnel. As
such, the impact on EMCORE's operations will be limited to the seconded
employees who will continue to be managed by EMCORE personnel.
- In November 1998, EMCORE signed a long term purchase agreement with Space
Systems/Loral, a wholly owned subsidiary of Loral Space & Communications.
Under this agreement, which is contingent upon EMCORE's compliance with
Loral's product specification requirements, EMCORE will supply compound
semiconductor high-efficiency gallium arsenide solar cells for Loral's
satellites. EMCORE anticipates completing this qualification in June
1999. Subject to the product qualification, EMCORE received an initial
purchase order for $5.25 million of solar cells. EMCORE expects to
service this agreement through our newly completed facility in
Albuquerque, New Mexico. This facility presently employs approximately 40
people, including sales, marketing, administrative and manufacturing
personnel.
- In November 1998, EMCORE formed UMCore, a joint venture with Union
Miniere Inc., a mining and materials company, to explore and develop
alternate uses for germanium using EMCORE's materials science and
production platform expertise and Union Miniere's access to and
experience with
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germanium. EMCORE has invested $600,000 in UMCore which, together with an
equal amount funded by Union Miniere, is expected to fund the operations
of UMCore through fiscal 1999. EMCORE will second various personnel to
the joint venture to assist in the development of products. Thereafter,
any additional funding will be contributed equally.
- In October 1998, EMCORE formed Emtech, a joint venture with Optek
Technology, Inc., a packager and distributor of optoelectronic devices,
to market an expanded line of magneto resistive sensors to the automotive
and related industries. This joint venture combines EMCORE's expertise in
the manufacture of magneto resistive die and Optek's expertise in
packaging these die. This combination will allow us to offer customers
off-the-shelf products. No additional personnel are anticipated to meet
the obligations to the joint venture.
- In September 1998, EMCORE entered into an agreement with Lockheed Martin
to provide technical management and support for the commercialization of
a new high-efficiency solar cell. It is anticipated that we will provide
high efficiency solar cells to Lockheed Martin upon completion of the
research and development agreement. EMCORE's new facility in Albuquerque,
New Mexico, will provide the support necessary to meet our obligations
under this agreement.
- EMCORE also signed a four-year purchase agreement with AMP Incorporated
to provide high speed VCSELs, for use in transceivers for high speed
networks that link computers. The contract requires AMP to purchase a
minimum of 80% of their VCSEL needs from EMCORE. EMCORE's MODE facility
in Albuquerque, New Mexico, will produce the devices under this contract.
- In February 1998, EMCORE and Uniroyal Technology Corporation formed
Uniroyal Optoelectronics, a joint venture to manufacture, sell and
distribute HB LED wafers and package-ready devices. This joint venture
commenced operations in July 1998. EMCORE has invested $5.5 million in
Uniroyal Optoelectronics. Uniroyal Optoelectronics is hiring its own
administrative and management personnel. The impact on EMCORE's
operations will be limited to a few seconded employees who will continue
to be managed by EMCORE personnel.
- To expand its technology base into the data communications and
telecommunications markets, on December 5, 1997, EMCORE acquired MODE in
a stock transaction accounted for under the purchase method of accounting
for a purchase price of $32.8 million. These operations are located in
Albuquerque, New Mexico and currently employ approximately 40 people
including sales, marketing, administrative and manufacturing personnel.
Because we do not have a controlling economic and voting interest in the
Uniroyal, Union Miniere, Optek and General Electric Lighting joint ventures,
EMCORE will account for these joint ventures under the equity method of
accounting and, as such, our share of profits and losses will be included below
the operating income line in our statement of operations.
EMCORE sells its products and has generated a significant portion of its
sales to customers outside the United States. In fiscal 1996, 1997, 1998 and the
first six
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months of fiscal 1999, international sales constituted 42.5%, 42.0%, 39.1% and
40.0%, respectively, of revenues. In fiscal 1998, the majority of EMCORE's
international sales were made to customers in Asia, particularly in Japan.
EMCORE's sales revenues from Europe have f luctuated because most of our sales
of TurboDisc systems are to a limited number of customers, who do not purchase
these systems regularly. EMCORE anticipates that international sales will
continue to account for a significant portion of revenues. Historically, we have
received all payments for products and services in U.S. dollars. We do not
anticipate that Europe's Euro-currency conversion will have a material effect on
our financial condition or results of operations.
The information below summarizes EMCORE's export sales by geographic area.
EMCORE's export sales to the Far East and Europe are as follows:
YEAR ENDED SEPTEMBER 30, ASIA EUROPE TOTAL
1996........................................... $ 8,209,309 $3,588,066 $11,797,375
1997........................................... 14,583,981 5,478,186 20,062,167
1998........................................... 15,527,169 1,584,851 17,112,020
1999 (6 months)................................ 7,967,184 145,919 8,113,103
As of March 31, 1999, EMCORE had an order backlog of $38.3 million
scheduled to be shipped through March 31, 2000. This represented an increase of
69% since September 30, 1998 which primarily relates to increased systems
bookings in Asia and an initial order for solar cells from Loral, which is
subject to product qualification. EMCORE includes in backlog only customer
purchase orders that have been accepted by EMCORE and for which shipment dates
have been assigned within the 12 months to follow and research contracts that
are in process or awarded. Wafer and device agreements extending longer than one
year in duration are included in backlog only for the ensuing 12 months. EMCORE
receives partial advance payments or irrevocable letters of credit on most
production system orders.
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RESULTS OF OPERATIONS
The following table sets forth the statement of operations data of EMCORE
expressed as a percentage of total revenues for the fiscal years ended September
30, 1996, 1997 and 1998 and the six months ended March 31, 1998 and 1999.
FISCAL YEARS ENDED SIX MONTHS
SEPTEMBER 30, ENDED MARCH 31,
--------------------------- -------------------
1996 1997 1998(*) 1998(*) 1999
Revenues........................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................... 67.0 63.0 56.4 53.2 58.1
----- ----- ----- ------ -----
Gross profit.................. 33.0 37.0 43.6 46.8 41.9
Operating expenses:
Selling, general and
administrative............. 23.5 19.6 32.2 22.0 24.3
Goodwill amortization......... 8.3 5.5 8.4
Research and development......
Recurring.................. 19.4 18.8 37.7 22.4 39.2
One-time acquired
in-process............... -- -- 44.6 74.6 --
----- ----- ----- ------ -----
Operating loss.................. (9.9) (1.4) (79.2) (77.7) (30.0)
Stated interest expense, net.... 1.1 1.1 2.2 0.5 2.6
Imputed warrant interest
expense, non-cash............. 0.4 8.4 1.4 0.7 2.4
Equity in net loss of associated
companies..................... -- -- 0.4 -- 6.4
----- ----- ----- ------ -----
Loss before income taxes and
extraordinary item............ (11.4) (10.9) (83.2) (78.9) (41.4)
Provision for income taxes...... -- 0.3 -- 0.1 --
----- ----- ----- ------ -----
Net loss before
extraordinary item.... (11.4) (11.2) (83.2) (79.0) (41.4)
Extraordinary loss.............. -- (0.6) -- -- --
----- ----- ----- ------ -----
Net loss................. (11.4)% (11.8)% (83.2)% (79.0)% (41.4)%
===== ===== ===== ====== =====
(*) as restated, see Note 20 to the financial statements.
COMPARISON OF SIX MONTHS ENDED MARCH 31, 1998 AND 1999
RESULTS OF OPERATIONS:
Revenues. For both the six-month periods ended March 31, 1998 and 1999,
revenues were $26.2 million. Revenues from systems-related sales and
materials-related sales were $14.4 million and $11.7 million, respectively, for
the six months ended March 31, 1998 and $20.6 million and $5.6 million,
respectively, for the six months ended March 31, 1999. As a percentage of
revenues, production systems and wafers and devices accounted for 55.2% and
44.8%, respectively, for the six months ended March 31, 1998 and 78.8% and
21.2%, respectively, for the six months ended March 31, 1999. EMCORE expects
these percentages to approach 50% in each category as its new products such as
solar cells, VCSELS and HBT's are introduced and production ramps. International
sales accounted for 43.5% of revenues for the six months ended March 31, 1998
and 45.5% of revenues for the six months ended March 31, 1999.
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Cost Of Sales/Gross Profit. Cost of sales includes direct material and
labor costs, allocated manufacturing and service overhead, and installation and
warranty costs. EMCORE's gross profit decreased 10.4% from $12.3 million for the
six months ended March 31, 1998, to $11.0 million for the six months ended March
31, 1999. The decrease was due principally to EMCORE's sale of three compound
semiconductor production systems for approximately $5.3 million to a joint
venture in which it has a 49% minority interest. EMCORE eliminated $1.3 million
of gross profit on these sales, which deferred gross profit will be recognized
ratably over the assigned life of the production systems purchased by the joint
venture.
Selling, General and Administrative. Selling, general and administrative
expenses increased by 10.7% from $5.8 million for the six months ended March 31,
1998 to $6.4 million in the six months ended March 31, 1999. As a percentage of
revenue, selling, general and administrative expenses increased from 22.0% for
the six months ended March 31, 1998 to 24.3% for the six months ended March 31,
1999. A significant portion of the increase was due to increases in sales
personnel headcount to support both domestic and foreign markets and general
headcount additions to sustain internal administrative support.
Goodwill Amortization. EMCORE recognized approximately $2.2 million of
goodwill amortization for the six months ended March 31, 1999 in connection with
the acquisition of MODE on December 5, 1997. As of March 31, 1999, EMCORE had
approximately $7.3 million of goodwill remaining, which will be fully amortized
by December 2000.
Research and Development. Research and development expenses increased
74.8% from $5.9 million in the six months ended March 31, 1998 to $10.3 million
in the six months ended March 31, 1999. As a percentage of revenue, recurring
research and development expenses increased from 22.5% for the six months ended
March 31, 1998 to 39.2% for the six months ended March 31, 1999. The increase
was primarily attributable to EMCORE's acquisition of MODE, the startup of our
new Albuquerque, New Mexico facility and increased staffing and equipment costs
necessary to enhance current products and develop new product offerings.
Products introduced or under development include HB LEDs, high efficiency solar
cells, new generation TurboDisc production systems, VCSELs, RF materials and
other optoelectronic devices. During the six months ended March 31, 1998, EMCORE
recognized a $19.5 million one-time charge for acquired in-process research and
development relating to the purchase of MODE. To maintain growth and to continue
to pursue market leadership in materials science technology, EMCORE expects to
continue to invest a significant amount of its resources in research and
development.
Operating Loss. EMCORE reported an operating loss of $7.9 million for the
six months ended March 31, 1999, as compared to an operating loss of $20.3
million for the six months ended March 31, 1998. The change in operating loss
was principally due to the $19.5 million one-time charge for acquired in-process
research and development in 1998, offset by the elimination of $1.3 million of
gross profit in 1999 on the three compound semiconductor production systems sold
to a joint venture in which it has a 49% minority interest. In addition,
EMCORE's 1999 operating loss was impacted by increased research and development
spending, the loss generated from the
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operations of MODE and the startup expenses associated with the opening of
EMCORE's new Albuquerque, New Mexico facility.
Other Expense. During fiscal 1996, EMCORE issued detachable warrants along
with subordinated notes to certain of its existing shareholders. EMCORE
subsequently assigned a value to these detachable warrants issued using the
Black-Scholes option pricing model. EMCORE recorded the subordinated notes at a
carrying value that is subject to periodic accretions, using the interest
method. In June 1998, EMCORE issued 284,684 warrants to its Chairman and its
Chief Executive Officer for providing a guarantee in connection with an 18-month
credit facility with First Union National Bank. EMCORE also assigned a value to
these warrants using the Black-Scholes option pricing model. The consequent
expense of these warrant accretion amounts is charged to "Imputed warrant
interest, non-cash" and equals approximately $192,000 and $633,000 for the six
months ended March 31, 1998 and March 31, 1999, respectively.
For the six months ended, March 31, 1999, stated interest expense, net
increased by $577,000 to $693,000 due to additional borrowing.
Because EMCORE does not have a controlling economic and voting interest in
the Uniroyal, Union Miniere, and General Electric Lighting joint ventures,
EMCORE accounts for these joint ventures under the equity method of accounting.
For the six months ended March 31, 1999, EMCORE incurred a net loss of $1.0
million related to the Uniroyal joint venture, a $497,000 net loss related to
the GELCore joint venture and a $141,000 net loss related to the UMCore joint
venture.
Net Loss. For the six months period March 31, 1999, EMCORE reported net
loss of $10.9 million, a decrease of 47.5% from a $20.7 million net loss for the
six months ended March 31, 1998. The decrease in the year-to-date loss was
attributable to the $19.5 million write-off of acquired in-process research and
development in connection with the acquisition of MODE on December 5, 1997
offset in part by an increase in research and development expenses and the net
loss from unconsolidated affiliates.
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30, 1997 AND 1998
Revenues. EMCORE's revenues decreased 8.4% from $47.8 million for the
fiscal year ended September 30, 1997 to $43.8 million for the fiscal year ended
September 30, 1998. The revenue decrease represented a shift in product mix
during the year. Equipment related revenues decreased approximately 22.3% while
materials related revenues increased approximately 26.5%. The decrease in
equipment revenues was primarily attributable to the financial issues in the
Asian economies as well as a general slowdown in the semiconductor equipment
market overall. While materials related revenues did experience a 26.5%
increase, the General Motors three month strike adversely affected revenue, as
shipments to General Motors were halted during the strike. Revenues relating to
TurboDisc systems were $34.1 million for the fiscal year ended September 30,
1997 and $26.5 million for the fiscal year ended September 30, 1998. Revenues
relating to wafers and devices were $13.7 million for the fiscal year ended
September 30, 1997 and $17.3 million for the fiscal year ended September 30,
1998. As a percentage of revenues, TurboDisc systems accounted for 71.4% for the
fiscal year ended September 30, 1997 and 60.5% for the fiscal year
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ended September 30, 1998. As a percentage of revenues, wafers and devices
accounted for 28.6% for the fiscal year ended September 30, 1997 and 39.5% for
the fiscal year ended September 30, 1998. International sales accounted for
approximately 42.0% and 39.1% of revenues for the fiscal years ended September
30, 1997 and 1998, respectively.
Cost Of Sales/Gross Profit. Cost of sales includes direct material and
labor costs, allocated manufacturing and service overhead, and installation and
warranty costs. Gross profit increased from 37.0% of revenue to 43.6% of revenue
for the fiscal years ended September 30, 1997 and 1998, respectively. The gross
profit percentage increase was attributable to a shift in product mix towards
higher gross margin materials related revenues.
Selling, General and Administrative. Selling, general and administrative
expenses increased by 50.7% from $9.3 million for the year ended September 30,
1997, to $14.1 million for the year ended September 30, 1998. The increase was
largely due to sales personnel headcount increases to support both domestic and
foreign markets and general headcount additions to sustain the internal
administrative support necessary for EMCORE's expanded product lines and new
locations. During fiscal 1998, EMCORE wrote-off a $1.0 million receivable due
from an Asian customer which was deemed to be uncollectible. As a percentage of
revenue, selling, general and administrative expenses increased from 19.6% of
revenue during fiscal 1997 to 32.2% of revenue for fiscal 1998.
Goodwill Amortization. In connection with the purchase of MODE, EMCORE
recorded goodwill of $3.4 million which is being amortized over 36 months.
Goodwill amortization expense amounted to $3.6 million for the year ended
September 30, 1998. Net goodwill at September 30, 1998 was $9.5 million.
Research and Development. Recurring research and development expenses
increased by 83.3% from $9.0 million for the year ended September 30, 1997, to
$16.5 million for the year ended September 30, 1998. The increase was primarily
attributable to EMCORE's acquisition of MODE and increased staffing and
equipment costs necessary to enhance current products and develop new product
offerings. Products introduced or under development include HB LEDs, high
efficiency solar cells, new generation TurboDisc production systems, VCSELs and
other optoelectronic devices. For the year ended September 30, 1998, EMCORE
incurred $1.1 million of research and development costs associated with MODE's
in-process (at the date of acquisition) research and development projects. As a
percentage of revenue, research and development expenses increased from 18.8% of
revenue during fiscal 1997 to 37.7% of revenue for fiscal 1998. To maintain
growth and market leadership in epitaxial technology, EMCORE expects to continue
to invest a significant amount of its resources in research and development.
In connection with the MODE acquisition, EMCORE incurred a one-time charge
for the write-off of acquired in-process research and development amounting to
$19.5 million.
The acquisition of MODE, a development stage company, constituted a
significant and strategic investment for EMCORE. The principal investment
consideration was to acquire and gain access to MODE's micro-optical technology,
which was under development at the time. EMCORE plans to use MODE's
micro-optical laser technology in new products for data communications and
telecommunications
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applications. As of the date of acquisition, MODE was engaged in the following
six significant VCSEL research and development projects:
- Gigalase -- a high speed (modulation), near-infrared single optical
laser component for serial selica fiber optic applications.
- Visilase -- a visible, red light, single optical laser component to
be used for fiber optic links and optical storage and identification.
- Gigarray -- an array of optical lasers to be used in transmission in
parallel optical interconnects.
- Microscan -- an integrated near-infrared optical laser, visible laser
and focusing element.
- Optical Laser Source Module (OLSM) -- incorporates optical lasers and
fast detector specialized circuitry and electronics.
- Optical Laser Array Source Module (OLASM) -- incorporates optical
lasers, array detection and specialized circuitry and electronics.
The value assigned to each project and the estimated time and cost to reach
technological feasibility was as follows (in $000's):
GIGALASE VISILASE GIGARRAY MICROSCAN OLSM OLASM
Value Assigned $6,509 $2,004 $7,214 $2,691 $934 $639
Original estimated 1.5 man 3 man 1 man 3.5 man 8 man 4 man
time to years years year years years years
complete
Original estimated $124 $249 $83 $290 $663 $332
cost to complete
Revised estimated Completed Completed Completed 3.5 man 8 man 4 man
time to 2/98 5/98 12/98 years years years
complete in not in in
production production production
Revised cost to Completed Completed Completed $314 $717 $358
complete
The fair value assumptions relating to pricing, product margins and expense
levels were based upon management's experience with its own operations and the
compound semiconductor industry as a whole. In developing EMCORE's future
estimated revenues and costs, new product introductions were expected to
commence in calendar 1998 and net cash flows were expected to commence in
calendar 1999 and 2000. In determining fair value of the acquired projects, a
risk-adjusted discount rate of 20% was utilized. EMCORE has capitalized
approximately $0.5 million for MODE's workforce, which is included in goodwill.
If all of MODE's in-process projects are not successfully completed and if
management's estimated product pricing and growth rates are not achieved, EMCORE
may not realize the product, market and financial benefits expected from the
MODE acquisition.
Operating Loss. During fiscal 1998, operating loss increased from a loss
of $0.7 million for the fiscal year ended September 30, 1997 to a loss of $34.6
million for the year ended September 30, 1998. The change in operating loss was
primarily due to the $19.5 million one-time charge for in-process research and
development written off in connection with the purchase of MODE. Additionally,
recurring research and
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development expense increased by $7.5 million from the prior year, as a result
of increased research and development activities at MODE and in our core
business. In addition, the General Motors three month strike adversely affected
operating performance as shipments to General Motors were halted during the
strike. General Motors is among EMCORE's largest customers. EMCORE was unable to
furlough or reduce their workforce during the strike and thereby incurred
charges without the benefit of related revenues.
Other Expense. Other expenses decreased, particularly due to the reduced
imputed warrant interest expense associated with EMCORE's subordinated debt and
debt issuance guarantee cost. During fiscal 1996, EMCORE issued detachable
warrants along with subordinated notes to certain of its existing shareholders.
In fiscal year 1997, EMCORE also issued detachable warrants in return for a
$10.0 million demand note facility guarantee by the Chairman of the Board of
EMCORE, who provided collateral for the facility. EMCORE subsequently assigned a
value to these detachable warrants issued using the Black-Scholes option pricing
model. EMCORE recorded the subordinated notes at a carrying value that is
subject to periodic accretions, using the interest method, and reflected the
facility's detachable warrant value as debt issuance cost which was written off
in its entirety in fiscal 1997. The consequent expense of these subordinated
note accretion amounts and the now terminated facility's debt issuance cost is
charged to "imputed warrant interest, non-cash," and amounted to approximately
$4.0 million and $370,000 for the fiscal years ended September 30, 1997 and
1998, respectively. In June 1998, EMCORE issued 284,684 warrants to its Chairman
and its Chief Executive Officer for providing a guarantee in connection with the
1998 Agreement, an $8.0 million 18 month credit facility with First Union
National Bank. EMCORE assigned a value to these warrants using the Black-Scholes
option pricing model. As a result, EMCORE will record imputed warrant interest,
non-cash of approximately $1.3 million over the life of the credit facility.
Income Taxes. EMCORE's effective income tax rate was 0.0% in fiscal 1998,
2.6% in fiscal 1997 and 0.0% in fiscal 1996. The lower effective rate in fiscal
1998 and 1996, relative to fiscal 1997, was attributable to a federal income tax
benefit offset by net operating loss and expenses not utilized or deductible for
tax purposes.
As of September 30, 1998, EMCORE has net operating loss carryforwards for
regular tax purposes of approximately $22.0 million which expire in the years
2003 through 2013. EMCORE believes that the consummation of certain equity
transactions and a significant change in the ownership during fiscal year 1995
has constituted a change in control under Section 382 of the Internal Revenue
Code. Due to the change in control, EMCORE's ability to use its federal net
operating loss carryovers and federal research credit carryovers to offset
future income and income taxes, respectively, are subject to annual limitations
under Internal Revenue Code Section 382 and 383.
EMCORE believes that the acquisition of MODE and the consummation of
certain other equity transactions has constituted a change in control in fiscal
1998 under Section 382 of the Internal Revenue Code. As such, federal net
operating loss carryovers and research credit carryovers incurred subsequent to
EMCORE's fiscal 1995 change in control (as described above) will also be subject
to annual limitations under Internal Revenue Code Sections 382 and 383.
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Extraordinary Item. In the fiscal year ended September 30, 1997, EMCORE
repaid $2.0 million of its outstanding subordinated notes due May 1, 2001. In
connection with this discharge of EMCORE's subordinated notes, an extraordinary
loss of $286,000 was recognized in fiscal 1997 relating to such early
extinguishment of debt.
Net Loss. Net loss increased from $5.6 million for the fiscal year ended
September 30, 1997 to $36.4 million for the fiscal year ended September 30,
1998. This increase was primarily attributable to the acquisition of MODE and
subsequent write-off of in-process research and development of $19.5 million as
well as an increase in recurring research and development expenses of $7.5
million. In addition, the General Motors three month prolonged strike adversely
affected operating performance.
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30, 1996 AND 1997
Revenues. EMCORE's revenues for fiscal 1997 increased 71.9% from $27.8
million for the fiscal year ended September 30, 1996 to $47.8 million. The
revenue increase was primarily attributable to increased demand for compound
semiconductor production systems and package-ready devices, as well as the
introduction of compound semiconductor wafer products. Revenues relating to
TurboDisc systems were $23.8 million for the fiscal year ended September 30,
1996 and $34.1 million for the fiscal year ended September 30, 1997. Revenues
relating to wafers and devices were $4.0 million for the fiscal year ended
September 30, 1996 and $14.7 million for the fiscal year ended September 30,
1997. As a percentage of revenues, TurboDisc systems accounted for 85.6% for the
fiscal year ended September 30, 1996 and 71.4% for the fiscal year ended
September 30, 1997. As a percentage of revenues, wafers and devices accounted
for 14.4% for the fiscal year ended September 30, 1996 and 28.6% for the fiscal
year ended September 30, 1997. International sales accounted for approximately
42.5% and 42.0% of revenues for the fiscal years ended September 30, 1996 and
1997, respectively.
Cost Of Sales/Gross Profit. Cost of sales includes direct material and
labor costs, allocated manufacturing and service overhead, and installation and
warranty costs. Gross profit increased from 33.0% of revenue to 37.0% of revenue
for the fiscal years ended September 30, 1996 and 1997, respectively. The gross
profit percentage increase was attributable to higher margins on wafer, device
and licensing revenues.
Selling, General And Administrative. Selling, general and administrative
expenses increased by 43.3% from $6.5 million for the year ended September 30,
1996, to $9.3 million for the year ended September 30, 1997. The increase was
largely due to increases in sales personnel headcount to support both domestic
and foreign markets and general headcount additions to sustain the internal
administrative support necessary for EMCORE's increased business as well as
higher expenses attributable to increased revenues. As a percentage of revenue,
selling, general and administrative expenses decreased from 23.5% of revenue
during fiscal 1996 to 19.6% of revenue for fiscal 1997.
Research And Development. Research and development expenses increased by
66.6% from $5.4 million for the year ended September 30, 1996, to $9.0 million
for the year ended September 30, 1997. The increase was primarily attributable
to increased staffing and equipment costs necessary to enhance current products
and research and development activities related to wafers and package-ready
devices. As a
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percentage of revenue, research and development expenses decreased from 19.4% of
revenue during fiscal 1996 to 18.8% of revenue for fiscal 1997. To maintain
growth and market leadership in epitaxial technology, EMCORE expects to continue
to invest a significant amount of its resources in research and development.
Operating Loss. Operating loss decreased $2.1 million from a loss of $2.8
million for the fiscal year ended September 30, 1996, to a loss of $0.7 million
for the year ended September 30, 1997. The change in operating loss was
primarily due to higher revenues generating greater overall gross profit.
Other Expense. During fiscal 1996, EMCORE issued detachable warrants along
with subordinated notes to certain of its existing shareholders. In the first
quarter of fiscal year 1997, EMCORE also issued detachable warrants in return
for the $10.0 million facility guarantee by the Chairman of the Board of EMCORE,
who provided collateral for the Facility. EMCORE subsequently assigned a value
to these detachable warrants issued using the Black-Scholes option pricing
model. EMCORE recorded the subordinated notes at a carrying value that is
subject to periodic accretions, using the interest method, and reflected the
facility's detachable warrant value as debt issuance cost. The consequent
expense of these subordinated note accretion amounts and the now terminated
facility's debt issuance cost is charged to "Imputed warrant interest,
non-cash," related to the warrant issuances in connection with the $10.0 million
facility, and amounted to approximately $126,000 and $4.0 million for the fiscal
years ended September 30, 1996 and 1997.
Borrowings totaling $8.0 million under the facility were utilized to fund
capital expenditures in connection with the build-out of EMCORE's manufacturing
facility during the six months ended March 31, 1997. The resultant interest
expense was the primary reason for the increase in "Stated interest expense" for
the year ended September 30, 1997. The outstanding $8.0 million under this
demand note facility was repaid in March 1997.
Extraordinary Item. EMCORE repaid $10.0 million of its outstanding debt
with proceeds from its initial public offering. The entire $8.0 million
outstanding of its credit facility was repaid and $2.0 million was used to repay
a portion of EMCORE's outstanding subordinated notes due May l, 2001. In
connection with this discharge of EMCORE's subordinated notes, an extraordinary
loss of $286,000 was recognized in fiscal 1997 relating to such early
extinguishment of debt.
Net Loss. Net loss increased $2.4 million from $3.2 million for the fiscal
year ended September 30, 1996 to $5.6 million for the fiscal year ended
September 30, 1997. This increase was primarily attributable to the $4.0 million
of non-cash imputed warrant interest associated with certain financing
transactions.
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QUARTERLY RESULTS OF OPERATIONS
The following tables present EMCORE's unaudited results of operations
expressed in dollars and as a percentage of revenues for the ten most recently
ended fiscal quarters. EMCORE believes that all necessary adjustments,
consisting only of normal recurring adjustments, have been included in the
amounts below to present fairly the selected quarterly information when read in
conjunction with the consolidated financial statements and notes included
elsewhere in this prospectus. EMCORE's results from operations may vary
substantially from quarter to quarter. Accordingly, the operating results for a
quarter are not necessarily indicative of results for any subsequent quarter or
for the full year.
THREE MONTHS ENDED
------------------------------------------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,* MAR. 31,* JUNE 30,*
1997 1997 1997 1997 1998 1998 1998
(IN THOUSANDS)
Revenues............. $ 8,591 $12,929 $14,106 $12,127 $12,357 $13,808 $ 9,074
Cost of sales........ 6,724 8,855 8,208 6,307 6,376 7,534 5,448
------- ------- ------- ------- ------- ------- -------
Gross profit......... 1,867 4,074 5,898 5,820 5,981 6,274 3,626
Operating expenses:
Selling, general and
administrative.... 2,202 1,940 2,573 2,632 3,003 2,901 4,596
Goodwill
amortization...... -- -- -- -- 343 1,098 1,098
Research and
development:
Recurring......... 2,250 1,987 2,418 2,346 2,836 2,889 5,887
One-time acquired
in process...... -- -- -- -- 19,516 -- --
------- ------- ------- ------- ------- ------- -------
Total operating
expenses............ 4,452 3,927 4,991 4,978 25,698 6,888 11,581
------- ------- ------- ------- ------- ------- -------
Operating (loss)
income.............. (2,585) 147 907 842 (19,717) (614) (7,955)
Stated interest
expense, net........ 197 249 (8) 82 70 47 211
Imputed warrant
interest,
non-cash............ 1,016 2,792 85 94 96 96 94
Equity in net loss of
unconsolidated
affiliate........... -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Total other
expense............. 1,213 3,041 77 176 166 143 305
(Loss) income before
income taxes........ (3,798) (2,894) 830 666 (19,883) (757) (8,260)
Provision for income
taxes............... -- -- -- 137 -- 20 --
------- ------- ------- ------- ------- ------- -------
(Loss) income before
extraordinary
item................ (3,798) (2,894) 830 529 (19,883) (777) (8,260)
Extraordinary loss... -- 256 -- 30 -- -- --
Net (loss) income.... $(3,798) $(3,150) $ 830 $ 499 (19,883) $ (777) $(8,260)
======= ======= ======= ======= ======= ======= =======
THREE MONTHS ENDED
---------------------------------
SEPT. 30,* DEC. 31,* MAR. 31,
1998 1998 1999
(IN THOUSANDS)
Revenues............. $ 8,521 $10,125 $16,072
Cost of sales........ 5,317 6,016 9,203
------- ------- -------
Gross profit......... 3,204 4,109 6,869
Operating expenses:
Selling, general and
administrative.... 3,582 3,143 3,225
Goodwill
amortization...... 1,098 1,099 1,098
Research and
development:
Recurring......... 4,883 5,924 4,348
One-time acquired
in process...... -- -- --
------- ------- -------
Total operating
expenses............ 9,563 10,166 8,671
------- ------- -------
Operating (loss)
income.............. (6,359) (6,057) (1,802)
Stated interest
expense, net........ 626 230 463
Imputed warrant
interest,
non-cash............ 315 316 317
Equity in net loss of
unconsolidated
affiliate........... 198 276 1,395
------- ------- -------
Total other
expense............. 1,139 822 2,175
(Loss) income before
income taxes........ (7,498) (6,879) (3,977)
Provision for income
taxes............... -- -- --
------- ------- -------
(Loss) income before
extraordinary
item................ (7,498) (6,879) (3,977)
Extraordinary loss... -- -- --
Net (loss) income.... $(7,498) $(6,879) $(3,977)
======= ======= =======
35
37
THREE MONTHS ENDED
------------------------------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,* MAR. 31,*
1997 1997 1997 1997 1998 1998
(AS A PERCENTAGE OF REVENUES)
Revenues.............. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales......... 78.3 68.5 58.2 52.0 51.6 54.6
------- ------- ------- ------- ------- -------
Gross profit.......... 21.7 31.5 41.8 48.0 48.4 45.4
Operating expenses:
Selling, general and
administrative..... 25.6 15.0 18.2 21.7 24.3 21.0
Goodwill
amortization....... -- -- -- -- 2.8 7.9
Research and
development:
Recurring.......... 26.2 15.4 17.1 19.3 23.0 20.9
One-time acquired
in process....... -- -- -- -- 157.9 --
------- ------- ------- ------- ------- -------
Total operating
expenses............. 51.8 30.4 35.3 41.0 208.0 49.8
------- ------- ------- ------- ------- -------
Operating (loss)
income............... (30.1) 1.1 6.5 7.0 (159.6) (4.4)
Stated interest
expense, net......... 2.3 1.9 (0.1) 0.7 0.6 0.3
Imputed warrant
interest, non-cash... 11.8 21.6 0.6 0.8 0.8 0.7
Equity net loss of
unconsolidated
affiliate............ -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Other expense......... 14.1 23.5 0.5 1.5 1.4 1.0
------- ------- ------- ------- ------- -------
(Loss) income before
income taxes......... (44.2) (22.4) 6.0 5.5 (161.0) (5.4)
Provision for income
taxes................ -- -- -- 1.1 -- 0.2
------- ------- ------- ------- ------- -------
(Loss) income before
extraordinary item... (44.2) (22.4) 6.0 4.4 (161.0) (5.6)
------- ------- ------- ------- ------- -------
Extraordinary loss.... -- 2.0 -- 0.2 -- --
Net (loss) income..... (44.2)% (24.4)% 6.0% 4.2% (161.0)% (5.6)%
======= ======= ======= ======= ======= =======
THREE MONTHS ENDED
---------------------------------------------
JUNE 30,* SEPT. 30,* DEC. 31,* MAR. 31,
1998 1998 1998 1999
(AS A PERCENTAGE OF REVENUES)
Revenues.............. 100.0% 100.0% 100.0% 100.0%
Cost of sales......... 60.0 62.4 59.4 57.3
------- ------- ------- -------
Gross profit.......... 40.0 37.6 40.6 42.7
Operating expenses:
Selling, general and
administrative..... 50.7 42.0 31.0 20.1
Goodwill
amortization....... 12.1 12.9 10.9 6.8
Research and
development:
Recurring.......... 64.9 57.3 58.5 27.0
One-time acquired
in process....... -- -- -- --
------- ------- ------- -------
Total operating
expenses............. 127.7 112.2 100.4 53.9
------- ------- ------- -------
Operating (loss)
income............... (87.7) (74.6) (59.8) (11.2)
Stated interest
expense, net......... 2.3 7.3 2.3 2.9
Imputed warrant
interest, non-cash... 1.0 3.7 3.1 2.0
Equity net loss of
unconsolidated
affiliate............ -- 2.3 2.7 8.6
------- ------- ------- -------
Other expense......... 3.3 13.3 8.1 13.5
------- ------- ------- -------
(Loss) income before
income taxes......... (91.0) (87.9) (67.9) (24.7)
Provision for income
taxes................ -- -- -- --
------- ------- ------- -------
(Loss) income before
extraordinary item... (91.0) (87.9) (67.9) (24.7)
------- ------- ------- -------
Extraordinary loss.... -- -- -- --
Net (loss) income..... $ (91.0)% (87.9)% (67.9)% (24.7)%
======= ======= ======= =======
* As restated -- see Notes 15 and 20 to consolidated financial statements.
From inception through December 31, 1996, EMCORE derived the majority of
its revenues from the sale of TurboDisc production systems. Beginning in January
1997, EMCORE expanded its product line to offer wafers and devices. Throughout
fiscal 1997 and the first half of fiscal 1998, EMCORE benefited from the
expanded product offerings. Early in fiscal 1998, the capital equipment market
experienced a downturn and bookings of TurboDisc systems decreased
substantially. The result was lower revenues for the last two quarters of fiscal
1998 and the first quarter of fiscal 1999.
Cost of sales was also affected by revenue shifts. Gross profit improved
consistently from the introduction of the new product lines through the second
quarter of fiscal 1998. Thereafter, gross profit was affected primarily by
reduced revenues and the resulting under-absorbed overhead.
Operating expenses have generally increased both in absolute dollars and as
a percentage of revenues, due to increased staffing in research and development,
sales and marketing, and general and administrative functions. The increase in
research expenditures was related to the development of systems for the
processing of gallium nitride materials used in the production of blue HB LEDs,
enhancement of production systems, and the introduction of wafers and devices,
in particular, MR sensors,
36
38
VCSELs and solar cells. Selling, general and administrative expenses increased
as a result of increased marketing and sales related activities, including the
hiring of additional personnel, commissions, customer samples, expansion of
facilities, and the opening of field offices in Taiwan and California.
EMCORE has experienced and expects to continue to experience significant
fluctuations in quarterly results. Factors which have had an influence on and
may continue to influence EMCORE's operating results in a particular quarter
include, but are not limited to the timing of receipt of orders, cancellation,
rescheduling or delay in product shipment or supply deliveries, product mix,
competitive pricing pressures, EMCORE's ability to design, manufacture and ship
products on a cost effective and timely basis, including the ability of EMCORE
to achieve and maintain acceptable production yields for wafers and devices,
regional economic conditions and the announcement and introduction of new
products by EMCORE and by its competitors. The timing of sales of EMCORE's
TurboDisc production systems may cause substantial fluctuations in quarterly
operating results due to the substantially higher per unit price of these
products relative to EMCORE's other products. If the compound semiconductor
industry experiences downturns or slowdowns, EMCORE's business, financial
condition and results of operations may be materially and adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $2.8 million from $4.5 million at
September 30, 1998 to $1.6 million at March 31, 1999. For the six months ended
March 31, 1999, net cash used for operations amounted to $5.9 million, primarily
due to EMCORE's net losses and an increase in accounts receivable which was
partially offset by EMCORE's non-cash depreciation and amortization charges and
an increase in advance billings.
For the six months ended March 31, 1999, net cash used for investment
activities amounted to $16.2 million, primarily due to the purchase and
manufacture of new equipment for the facilitation of EMCORE's wafer and device
product lines, and clean room modifications and enhancements of approximately
$10.4 million, as well as investments in unconsolidated affiliates of
approximately $5.8 million.
Net cash provided by financing activities for the six months ended March
31, 1999 amounted to approximately $19.2 million, primarily due to the $21.2
million of net proceeds from the private placement of preferred stock in
November 1998 and short-term related party borrowings of $5.1 million. This was
offset by debt repayments of $7.0 million on short-term related party debt.
EMCORE's Chairman has committed to provide up to $30.0 million of long-term
financing to EMCORE through July 1, 2000. This commitment terminates upon
completion of any public offering of EMCORE's common stock, subject to a minimum
offering size requirement of $40.0 million.
On January 27, 1999 EMCORE borrowed $3.0 million from its Chairman, Thomas
J. Russell. This loan bears interest at 8% per annum. On February 1, 1999,
EMCORE repaid this loan from borrowings under a new loan from First Union
National Bank. On February 1, 1999, EMCORE entered into a $5.0 million short-
term note with First Union that matures in May 1999. This note bears interest at
a rate equal to one-month LIBOR plus three quarters of one percent per annum.
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39
On April 29, 1999, EMCORE borrowed $2.5 million from its Chairman. The loan
bears interest at prime rate plus 2% per annum. On May 7, 1999, the loan was
repaid from borrowings under EMCORE's $19.0 million short-term note, as
discussed below.
On April 29, 1999, EMCORE entered into a $19.0 million short-term loan
agreement with First Union. This loan agreement represented a consolidation of
the $8.0 million loan agreement dated June 22, 1998 and $5.0 million short-term
loan agreements dated February 1, 1999, and an additional note of $6.0 million.
This new loan agreement is due and payable on October 1, 1999 and bears interest
at a rate equal to one-month LIBOR plus three-quarters of one percent per annum
(5.75% at May 14, 1999). On May 7, 1999, EMCORE used borrowings under this new
loan agreement to repay the $2.5 million short-term note from EMCORE's Chairman.
As of May 14, 1999, EMCORE had borrowed approximately $17.5 million under this
new loan agreement. This new loan agreement is guaranteed by EMCORE's Chairman
and Chief Executive Officer.
EMCORE's planned capital expenditures are expected to total approximately
$26 million during fiscal 1999, including approximately $13.4 million in
expenditures related to investments in our joint ventures. Capital spending in
1999 also is expected to include upgrading manufacturing facilities, continued
investment in analytical and diagnostic research and development equipment,
upgrading and purchasing computer equipment, and the manufacture of TurboDisc
systems for in-house use.
EMCORE believes that its current liquidity, together with available credit,
should be sufficient to meet its cash needs for working capital through July
2000. However, if the available credit facilities, cash generated from
operations and cash on hand are not sufficient to satisfy EMCORE's liquidity
requirements, EMCORE will seek to obtain additional equity or debt financing.
Additional funding may not be available when needed or on terms acceptable to
EMCORE. If EMCORE is required to raise additional financing and if adequate
funds are not available or not available on acceptable terms, the ability to
continue to fund expansion, develop and enhance products and services, or
otherwise respond to competitive pressures will be severely limited. Such a
limitation could have a material adverse effect on EMCORE's business, financial
condition or operations.
Under the agreement signed in January 1999 by EMCORE and General Electric
Lighting, when the GELcore joint venture is funded, EMCORE will issue to General
Electric common stock purchase warrants to purchase 282,010 shares of EMCORE's
common stock at an exercise price of $22.875, which will expire in 2006. The
number of common stock purchase warrants was determined based on the market
price of EMCORE's common stock on March 31, 1999. General Electric will purchase
a $7.8 million subordinated convertible debenture bearing interest at 4.75% per
annum and maturing in 2006. The debenture's interest rate will be subject to
adjustment in the event EMCORE does not complete a public offering by June 30,
1999. The debenture will be convertible into 340,984 shares of common stock at a
conversion price equal to $22.875. Proceeds from the debenture will be used to
fund EMCORE's investment in GELcore.
In January 1999, Rockwell settled litigation which challenged the validity
of certain patents which EMCORE licensed from Rockwell prior to the commencement
of the litigation. As a result of this settlement, EMCORE will be required to
pay
38
40
Rockwell a royalty including interest under our license agreement relating to
TurboDisc tools. EMCORE believes it has adequately accrued for these royalties.
In addition, prior to the commencement of the litigation, EMCORE had initiated
discussions with Rockwell to receive additional licenses to permit EMCORE to use
the technology to manufacture and sell wafers and devices. EMCORE may be
required to pay royalties to Rockwell for certain past sales of wafers and
devices to customers who do not hold licenses directly from Rockwell. If these
royalties are significant, our business, financial condition and results of
operations may be materially affected. The Rockwell patent expires in January
2000 and we may require additional licenses from Rockwell in order to continue
to manufacture and sell wafers and devices. The failure to obtain licenses to
manufacture these wafers and devices on commercially reasonable terms may
materially and adversely affect our business, financial condition and results of
operations through January 2000.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept or recognize only two digit entries in the date code field. These
systems and software products will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and/or software used by many companies and governmental agencies may
need to be upgraded to comply with such Year 2000 requirements or risk system
failure or miscalculations causing disruptions of normal business activities.
State Of Readiness. EMCORE has made a preliminary assessment of the Year
2000 readiness of its operating financial and administrative systems, including
the hardware and software that support such systems. EMCORE's assessment plan
consists of
(1) quality assurance testing of its internally developed proprietary
software;
(2) contacting third-party vendors and licensors of material hardware,
software and services that are both directly and indirectly
related to EMCORE's business;
(3) contacting vendors of third-party systems;
(4) assessing repair or replacement requirements;
(5) implementing repair or replacement; and
(6) creating contingency plans in the event of Year 2000 failures.
Our compound semiconductor wafers and devices are date insensitive and,
therefore, do not have any Year 2000 issues associated with them. Our TurboDisc
production systems have several components that could give rise to Year 2000
compliance concerns. We have preliminarily assessed the Year 2000 issues
associated with these components and have found that they have either been
certified by the vendor to be compliant or are date insensitive.
Our principal concern has been the status of our operating, financial and
administrative systems. These systems include accounting and production control
software at our New Jersey, MODE and EmcoreWest facilities. All software has
been certified as Year 2000 compliant by the vendors, except our New Jersey
office's
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41
accounting software. However, the software's manufacturer has a new version of
the software that is Year 2000 compliant. We are planning this upgrade. The
upgrade will be installed and tested by June 1999.
There are other information technology systems and non-information
technology systems that could give rise to Year 2000 concerns. These include
scientific and engineering applications, desktop applications (such as Microsoft
Word and Excel) and facilities controls such as HVAC and security. A review of
these systems leads us to believe that the systems are Year 2000 compliant, are
not critical to business operations, are used on a limited basis or are date
insensitive.
We are continuing the evaluation of the Year 2000 compliance of all our
systems and have developed an enterprise-wide database that we will use to
document these Year 2000 issues. EMCORE plans to complete its evaluation by
September 30, 1999 including Year 2000 simulation on its systems during the
second and third quarter of calendar 1999 to test systems readiness.
Costs. To date, EMCORE has not incurred any material expenditures in
connection with identifying, evaluating or addressing Year 2000 compliance
issues. Most of EMCORE expenses have related to, and are expected to continue to
relate to, the operating costs associated with time spent by employees in the
evaluation process and Year 2000 compliance matters generally.
The exact costs related to Year 2000 compliance are difficult to determine.
Several known costs relating to our information technology systems are:
- Updating New Jersey's accounting system, 2 man-weeks or $4,000, and
- Reviewing software and completing Year 2000 database, 1 man-month or
$8,000.
We will be able to make a reasonable determination of the remediation costs
for Year 2000 compliance after we have completed our Year 2000 evaluation. At
present EMCORE believes that the costs for bringing our in-house information
technology systems into compliance should not exceed $200,000.
EMCORE does not anticipate that remediation expenses will be material. If
the remediation expenses are higher than anticipated EMCORE's business,
financial condition and results of operations could be materially and adversely
affected.
Risks. EMCORE is not currently aware of any Year 2000 compliance problems
relating to its systems that would have a material adverse effect on EMCORE's
business, results of operations and financial condition. There can be no
assurance that, upon completion of its evaluation, EMCORE will not discover Year
2000 compliance problems in its systems that will require substantial revision.
In addition, there can be no assurance that third-party software, hardware or
services incorporated into EMCORE's material systems will not need to be revised
or replaced, all of which could be time-consuming and expensive. The failure of
EMCORE to fix or replace its internally developed proprietary software or
third-party software, hardware or services on a timely basis could result in
lost revenues, increased operating costs, the loss of customers and other
business interruptions, any of which could have a material adverse effect on
EMCORE's business, result of operations and financial condition. Moreover, the
failure to adequately address Year 2000 compliance issues in its internally
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42
developed proprietary software could result in claims of mismanagement,
misrepresentation or breach of contract and related litigation, which could be
costly and time-consuming to defend. In addition, the failure of governmental
agencies, utility companies, third-party service providers and others outside of
EMCORE's control to be Year 2000 compliant could result in systemic failure
beyond EMCORE's control such as a telecommunications or electrical failure,
which could have a material adverse effect on EMCORE's business, results of
operations and financial condition.
Contingency Plan. As discussed above, EMCORE is engaged in an ongoing Year
2000 assessment and has not yet developed any contingency plans. The results of
EMCORE's Year 2000 simulation testing and the responses received from
third-party vendors and service providers will be taken into account in
determining the nature and extent of any contingency plans.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS No. 131"), which
establishes standards for reporting information about operating segments in
annual financial statements. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS No. 131 is effective for fiscal years beginning after December 15, 1997.
EMCORE will be required to adopt this standard in its fiscal year ending
September 30, 1999. The adoption of SFAS No. 131 is not expected to have an
impact on EMCORE's results of operations, financial position or cash flows.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-l, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-
1 is effective for financial statements for years beginning after December 14,
1998. SOP 98-l provides guidance over accounting for computer software developed
or obtained for internal use including the requirement to capitalize specified
costs and amortization of such costs. EMCORE does not expect the adoption of
this standard to have a material effect on results of operations, financial
position or cash flows.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on
the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5, which is effective for
fiscal years beginning after December 15, 1998, provides guidance on the
financial reporting of start-up costs and organization costs. It requires costs
of start-up activities and organization costs to be expensed as incurred. As
EMCORE has expensed these costs historically, the adoption of this standard is
not expected to have a significant impact on EMCORE's results of operations,
financial position or cash flows.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and requires recognition of all
derivatives as assets or liabilities in the statement of financial position and
measurement of these instruments at fair value. The statement is effective for
fiscal years beginning after June 15, 1999. Management believes that adopting
this statement will not have a material impact on the financial position,
results of operations, or cash flows of EMCORE.
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BUSINESS
EMCORE CORPORATION
EMCORE designs, develops, and manufactures compound semiconductor materials
and is a leading developer and manufacturer of the tools and manufacturing
processes used to fabricate compound semiconductor wafers and devices. EMCORE's
products and technology enable its customers, both in the United States and
internationally, to manufacture commercial volumes of high-performance
electronic devices using compound semiconductors. EMCORE has recently
established a number of strategic relationships through joint ventures,
long-term supply agreements and an acquisition in order to facilitate the
development and manufacture of new products in targeted growth markets. EMCORE's
products are used for a wide variety of applications in the communications
(satellite, data, telecommunications and wireless), consumer and automotive
electronics, computers and peripherals, and lighting markets. EMCORE's customers
include AMP Incorporated, Hewlett Packard, General Motors, Hughes-Spectrolab,
Lucent Technologies, Inc., Siemens AG and 12 of the largest electronics
manufacturers in Japan.
INDUSTRY OVERVIEW
Recent advances in information technologies have created a growing need for
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. In the
past, electronic systems manufacturers have relied on advances in silicon
semiconductor technology to meet many of these demands. However, the newest
generation of high-performance electronic and optoelectronic applications
require certain functions that are generally not achievable using silicon-based
components.
Compound semiconductors have emerged as an enabling technology to meet the
complex requirements of today's advanced information systems. Many compound
semiconductor materials have unique physical properties that allow electrons to
move at least four times faster than through silicon-based devices. Advantages
of compound semiconductor devices over silicon devices include:
- operation at higher speeds;
- lower power consumption;
- less noise and distortion; and
- optoelectronic properties that enable these devices to emit and detect
light.
Compound semiconductor devices can be used to perform individual functions
as discrete devices, such as solar cells, HB LEDs, VCSELs, MR sensors and RF
materials. Compound semiconductor devices can also be combined into integrated
circuits, such as transmitters, receivers and alpha-numeric displays. Although
compound semiconductors are more expensive to manufacture than silicon-based
devices, electronics manufacturers are increasingly integrating compound
semiconductor devices into their products in order to achieve higher performance
in applications targeted for a wide variety of markets. These include satellite
42
44
communications, data communications, telecommunications, wireless
communications, consumer and automotive electronics, computers and peripherals,
and lighting.
The following factors have resulted in an increased demand for compound
semiconductor products and systems that enable electronic systems manufacturers
to reach the market faster with large volumes of high-performance products and
applications:
- rapid build-out of satellite communications systems;
- widespread deployment of fiber optic networks and the increasing use of
optical systems within these networks;
- launch of new wireless services and wireless high speed data systems;
- increasing use of infrared emitters and optical detectors in computer
systems;
- emergence of advanced consumer electronics applications, such as DVDs and
flat panel displays;
- increasing use of high-performance electronic devices in automobiles; and
- the anticipated conversion to HB LEDs from incandescent, halogen and
compact fluorescent lighting.
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45
The following chart summarizes the principal markets, examples of
applications for compound semiconductor devices, products incorporating these
devices and certain benefits and characteristics of these devices.
REPRESENTATIVE
MARKET APPLICATIONS PRODUCTS BENEFITS/CHARACTERISTICS
Satellite Power modules for Solar cells Radiation tolerance
communications satellites RF materials Conversion of more light
Satellite to ground to
communication power than silicon
Reduced launch costs
Increased bandwidth
- --------------------------------------------------------------------------------------------------------
Data communications High-speed fiber optic VCSEL components Increased network capacity
networks and and arrays Increased data
optical links HB LEDs transmission
(including Lasers speeds
Gigabit Ethernet, RF materials Increased bandwidth
asynchronous
transfer mode,
or ATM, and
FibreChannel networks)
- --------------------------------------------------------------------------------------------------------
Telecommunications High capacity fiber VCSEL components Increased data
optic trunk lines and arrays transmission
Lasers speeds
RF materials Increased bandwidth
- --------------------------------------------------------------------------------------------------------
Wireless Cellular telephones HB LEDs Improved display
communications Pagers RF materials visibility
PCS handsets Improved signal to noise
Direct broadcast systems performance
Lower power consumption
Increased network capacity
Reduced network congestion
Extended battery life
- --------------------------------------------------------------------------------------------------------
Consumer electronics DVDs HB LEDs Improved display
Radios VCSEL components visibility
Telephones and arrays High-speed data
Calculators Integrated circuits transmission
CD-Roms Lasers Low power
requirements
- --------------------------------------------------------------------------------------------------------
Automotive Engine sensors MR sensors Reduced weight
electronics Dashboard displays HB LEDs Lower power consumption
Indicator lights Lower emissions
Antilock brake systems
- --------------------------------------------------------------------------------------------------------
Computers and Local area networks VCSEL components Increased data
peripherals Chip-to-chip and and arrays transmission
board-to-board Transceivers speeds
optical links Increased bandwidth
- --------------------------------------------------------------------------------------------------------
Lighting Flat panel displays HB LEDs Lower power consumption
Solid state lighting Miniature lamps Longer life
Outdoor signage and
display
Digital readout signals
COMPOUND SEMICONDUCTOR PROCESS TECHNOLOGY
Compound semiconductors are composed of two or more elements and usually
consist of a metal such as gallium, aluminum or indium and a non-metal such as
arsenic, phosphorous or nitrogen. The resulting compounds include gallium
arsenide, indium phosphide, gallium nitride, indium antimonide and indium
aluminum
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46
phosphide. The performance characteristics of compound semiconductors are
dependent on the composition of these compounds. Many of the unique properties
of compound semiconductor devices are achieved by the layering of different
compound semiconductor materials in the same device. This layered structure
creates an optimal configuration to permit the conversion of electricity into
light.
Accordingly, the composition and properties of each layer and the control
of the layering process, or epitaxy, are fundamental to the performance of
advanced electronic and optoelectronic compound semiconductor devices. The
variation of thickness and composition of layers determines the intensity and
color of the light emitted or detected and the efficiency of power conversion.
The ability to vary the intensity, color and efficiency of light generation and
detection enables compound semiconductor devices to be used in a broad range of
advanced information systems.
Compound semiconductor device manufacturers predominantly use four methods
to deposit compound materials: molecular beam epitaxy, vapor phase epitaxy,
liquid phase epitaxy and metal organic chemical vapor deposition (MOCVD). The
use of molecular beam epitaxy technology can yield wafers having high thickness
uniformity. Compound semiconductor materials fabricated using liquid phase
epitaxy or vapor phase epitaxy technologies often have high electronic and
optical properties. However, due to the nature of the underlying processes,
these methods are not easily scaled up to high volume production, which is
necessary for the commercial viability of compound semiconductor devices. All of
the methods used to manufacture compound semiconductor devices pose technical,
training and safety challenges that are not present in the manufacture of
silicon devices. These production systems typically require expensive reactant
materials, the use of certain toxic chemicals, and tight control over numerous
manufacturing parameters. The key differences between MOCVD and the three other
methods is that compound semiconductor wafers fabricated using MOCVD generally
possess a better combination of uniformity and optical and electronic properties
and are easier to produce in high volumes than wafers manufactured by the three
more traditional methods. Currently, MOCVD technology is being used to
manufacture a broad range of compound semiconductor devices.
Historically, manufacturers who use compound semiconductor devices in their
products have met research, pilot production and capacity needs with in-house
systems and technologies. However, as the need for the production of commercial
volumes of high-performance compound semiconductor devices and the variety of
these devices grows, manufacturers are often unable to meet these requirements
using in-house solutions. In response to these growing demands for higher
volumes of a broad range of higher performance devices, manufacturers are
increasingly turning to outside vendors to meet their needs for compound
semiconductor wafers and devices.
THE EMCORE SOLUTION
EMCORE provides its customers with a broad range of compound semiconductor
products and services intended to meet its customers' diverse technology
requirements. EMCORE has developed extensive materials science expertise,
process technology and MOCVD production systems to address these needs and
believes that its proprietary TurboDisc deposition technology makes possible one
of the most cost-effective production processes for the commercial volume
manufacture of high-performance compound semiconductor wafers and devices. This
platform technology provides the
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basis for the production of various types of compound semiconductor wafers and
devices and enables EMCORE to address the critical need of manufacturers to
cost-effectively get to market faster with high volumes of new and improved
high-performance products. EMCORE's compound semiconductor products and services
include:
- materials and process development;
- design and development of devices;
- MOCVD production systems; and
- manufacture of wafers and devices in high volumes.
Customers can take advantage of EMCORE's vertically integrated approach by
purchasing custom-designed wafers and devices from EMCORE or manufacturing their
own devices in-house using a TurboDisc production system configured to their
specific needs.
STRATEGY
EMCORE's objective is to capitalize on its position in MOCVD process
technology and production systems to become the leading supplier of compound
semiconductor wafers, devices and production systems. The key elements of
EMCORE's strategy include:
Apply Core Technology Across Multiple Applications. EMCORE continually
leverages its proprietary core technology to develop compound semiconductor
products for multiple applications in a variety of markets. These activities
include developing new products for targeted applications as well as expanding
existing products into new applications. For example, EMCORE's MR sensors,
currently used by General Motors as crank shaft sensors, also have other
potential product applications, including as sensors in brushless motors and
antilock brakes. Other existing products which EMCORE intends to introduce in
new applications include VCSELs for communications products and HB LEDs for
broader lighting applications.
Target High Growth Opportunities. EMCORE's strategy is to target high
growth opportunities where performance characteristics and high volume
production efficiencies can give compound semiconductors a competitive advantage
over other devices. Historically, while technologically superior, compound
semiconductors have not been widely deployed because they are more expensive to
manufacture than silicon-based semiconductors and other existing solutions.
EMCORE believes that as compound semiconductor production costs are reduced, new
customers will be compelled to use these solutions because of their higher
performance characteristics. For example, EMCORE has reduced the average cost of
compound semiconductor solar cells to the point that they are replacing
silicon-based solar cells because of the compound semiconductor solar cells'
higher overall efficiency and lower weight.
Partner with Key Industry Participants. EMCORE seeks to identify and
develop long-term relationships with leading companies in targeted industries.
EMCORE develops these relationships in a number of ways including through
long-term high-volume supply agreements, joint ventures, and distribution and
other arrangements. For example, EMCORE has agreed to enter into, subject to
certain conditions, a joint
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venture with General Electric Lighting for the development and marketing of
white light and colored HB LED products for automotive, traffic, flat panel
display and other lighting applications, and has entered into a long term supply
agreement with AMP Incorporated for VCSELs to be used in its transceivers for
Gigabit Ethernet and other applications. EMCORE intends to actively seek similar
strategic relationships with other key customers and industry participants in
order to further expand its technological and production base.
Continue Investment to Maintain Technology Leadership. Through substantial
investment in research and development, EMCORE seeks to expand its leadership
position in compound semiconductor production systems, wafers and devices.
EMCORE works with its customers to identify specific performance criteria and
uses this information to enhance the performance of its production systems and
to further expand its process and materials science expertise, including the
development of new low cost, high-volume wafers and devices for its customers.
In addition, EMCORE's development efforts are focused on continually lowering
the production costs of its solutions. EMCORE's joint venture with Union Miniere
Inc. represents an initiative to explore means to use germanium to improve
product performance, identify new product applications and lower the cost and
complexity of production of EMCORE's wafers and devices.
PRODUCTS
PRODUCTION SYSTEMS
EMCORE is a leading supplier of MOCVD compound semiconductor production
systems, with more than 230 systems shipped as of March 31, 1999. According to
VLSI Research, Inc., in 1997 EMCORE's share of the MOCVD production systems
market was over 25%. EMCORE believes that its TurboDisc systems offer
significant ownership advantages over competing systems and that the high
throughput capabilities of its TurboDisc systems make possible superior
reproducibility of thickness, composition, electronic properties and layer
accuracy required for electronic and optoelectronic devices. Each system can be
customized for the customer's throughput, wafer size and process chemistry
requirements. EMCORE's production systems also achieve a high degree of
reliability with an average time available for production, based on customer
data, of approximately 95%.
EMCORE believes its TurboDisc systems enable the lowest cost of ownership
for the manufacture of compound semiconductor materials. The major components of
the cost of ownership include yield, throughput, direct costs and capital costs.
Yield primarily relates to material uniformity, which is a function of the
precision of the physical and chemical processes by which atomic layers are
deposited. Throughput, the volume of wafers produced per unit of time, includes
both the time required for a process cycle and the handling time between process
steps. Direct costs include consumables used in manufacturing and processing and
the clean room space required for the equipment. Capital costs include the cost
of acquisition and installation of the process equipment.
EMCORE's proprietary TurboDisc technology utilizes a unique high speed
rotating disk in a stainless steel growth chamber with integrated
vacuum-compatible loading chambers. To produce a wafer, a bare substrate, such
as gallium arsenide,
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sapphire or germanium, is placed on a wafer carrier in the TurboDisc growth
chamber and subjected to high temperatures. Based on a predetermined formula,
metal organic gases are released into the growth chamber. These gases decompose
on the hot, rapidly spinning wafer. Semiconductor materials are then deposited
on the substrate in a highly uniform manner. The resulting wafer thus carries
one or more ultra-thin layers of compound semiconductor material such as gallium
arsenide, gallium nitride, or indium aluminum phosphide. The TurboDisc
technology not only produces uniformity of deposition across the wafer, but also
offers flexibility for diverse applications with improved material results and
increased production rates. The unique precision control of reactant gas flow in
the TurboDisc technology platform allows users to scale easily from research to
commercial volumes with substantially reduced time and effort. Upon removal from
the growth chamber, the wafer is transferred to a device processing facility for
various steps such as photolithography, etching, masking, metallization and
dicing. Upon completion of these steps, the devices are then sent for packaging
by the customer or other third parties and inclusion in the customer's product.
(Turbodisc Diagram)
Wafers are loaded on a multiple wafer platter into the growth chamber,
where they are subjected to high-temperature vacuum conditions and spun at high
speeds. Gases are then introduced into the vacuum growth chamber, and
semiconductor materials become deposited onto the substrate in a highly uniform
manner.
EMCORE offers the following family of TurboDisc systems:
MODEL LIST PRICE APPLICATION
Explorer $350,000 -- $450,000 Research
- ---------------------------------------------------------------------------------
Discovery $600,000 -- $1,300,000 Development/Pilot Production
- ---------------------------------------------------------------------------------
Enterprise $1,300,000 -- $2,500,000 Volume Production
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EMCORE's next generation of TurboDisc products is being designed to provide
a number of innovations including:
- new reactor design to improve efficiency;
- cassette-to-cassette wafer handling to increase automation;
- digital control system to reduce noise;
- real-time process control and data acquisition on WindowsNT platform;
- modular component design to ease outsourcing and upgrading; and
- improved temperature control.
WAFERS AND DEVICES
Since its inception, EMCORE has worked closely with its customers to design
and develop materials processes for use in production systems for its customers'
end-use applications. EMCORE has leveraged its process and materials science
knowledge base to manufacture a broad range of compound semiconductor wafers and
devices such as solar cells, HB LEDs, VCSELs, MR sensors and RF materials.
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Within most of these product lines, EMCORE has established strategic
relationships through joint ventures, long-term supply agreements and an
acquisition. A summary of these relationships is found below.
PRODUCTS AND STRATEGIC RELATIONSHIPS
NATURE OF
PRODUCT LINE COMPANY RELATIONSHIP APPLICATION
Solar Cells Space Systems/Loral Long-term supply Solar panels in
agreement communications
Lockheed Martin Strategic partner satellite power
Missiles and Space systems.
Union Miniere Inc. Long-term germanium
sourcing agreement
from Union Miniere
HB LEDs General Electric GELcore joint Traffic lights
Lighting venture (pending)
for the development, Miniature lamps
marketing and
distribution of Automotive lighting
white
light and colored HB Flat panel displays
LED products
Other lighting
applications
Uniroyal Technology Uniroyal
Corporation Optoelectronics
Joint venture for the
manufacture of HB
LED wafers and
package-ready
devices
VCSELs AMP Incorporated Strategic alliance Optical links
and long-term (including Gigabit
supply agreement Ethernet ATM, and
FibreChannel
networks)
Micro Optical Acquisition
Devices, Inc.
MR sensors Optek Technology, Emtech joint venture Antilock brake
Inc. for packaging and systems
marketing of MR
sensors Brushless motors
Engine timing
sensors
General Motors Long-term supply Cam and crank shaft
agreement sensors
Germanium research Union Miniere Inc. UMCore joint Exploring
and development venture alternative
uses for germanium
substrates
RF materials Sumitomo Electric Cooperative Digital wireless
Industries, Ltd. development and cellular
agreement applications
Long-term supply
agreement
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Solar Cells. Compound semiconductor solar cells are used to power
satellites because they are more resistant to radiation levels in space, convert
substantially more light to power and therefore weigh less per unit of power
than silicon-based solar cells. These characteristics increase satellite life,
increase payload capacity and reduce launch costs. EMCORE is currently involved
in four solar cell projects:
- In November 1998, EMCORE signed a four-year purchase agreement with Space
Systems/Loral, a wholly owned subsidiary of Loral Space & Communications.
Under this agreement, which is contingent upon our compliance with
Loral's product specification requirements, EMCORE will supply compound
semiconductor high efficiency gallium arsenide solar cells for Loral's
satellites. EMCORE anticipates completing this qualification in June
1999. Subject to satisfactorily completing these product qualification
requirements, EMCORE has received an initial purchase order from Space
Systems/Loral.
- In August 1998, EMCORE and Union Miniere Inc., a mining and materials
company, entered into a long term supply agreement for germanium, which
EMCORE uses to fabricate solar cells. In addition to their solar cell
relationship, in November 1998, EMCORE formed UMCore, a joint venture
with Union Miniere to explore and develop alternate uses for germanium
using EMCORE's material science and production platform expertise and
Union Miniere's access to and experience with germanium. UMCore commenced
research and development operations in January 1999.
- In September 1998, EMCORE entered into an agreement with Lockheed Martin
Missiles and Space, a strategic business unit of Lockheed Martin
Corporation, to provide technical management and support of a Cooperative
Research and Development Agreement between Lockheed Martin and Sandia
National Laboratory for the advancement and commercialization of a new
compound semiconductor high efficiency solar cell. Pursuant to this
strategic agreement, (1) Lockheed Martin will grant EMCORE a sub-license
for all related intellectual property developed on behalf of or in
conjunction with Lockheed Martin, and (2) EMCORE and Lockheed Martin will
jointly qualify and validate the high efficiency solar cells for
operational satellite use.
- In the summer of 1998, EMCORE received a $2.2 million contract under the
U.S. Air Force's Broad Agency Announcement Program for the development of
high-efficiency advanced solar cells.
HB LEDs. High-brightness light-emitting diodes (HB LEDs) are solid state
compound semiconductor devices that emit light. The global demand for HB LEDs is
experiencing rapid growth because LEDs have a long useful life (approximately 10
years), consume approximately 10% of the power consumed by incandescent or
halogen lighting and improve display visibility. In February 1998, EMCORE and
Uniroyal Technology Corporation formed Uniroyal Optoelectronics, a joint venture
to manufacture, sell and distribute HB LED wafers and package-ready devices.
In January 1999, EMCORE signed an agreement with General Electric Lighting
to form GELcore, a joint venture to develop and market HB LED lighting products.
General Electric Lighting and EMCORE have agreed that this joint venture will be
the exclusive vehicle for each party's participation in solid state lighting.
GELcore seeks to combine EMCORE's materials science expertise, process
technology and
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compound semiconductor production systems with General Electric Lighting's brand
name recognition and extensive marketing and distribution capabilities.
GELcore's long-term goal is to develop products to replace traditional lighting.
VCSELs. VCSELs are semiconductor lasers that emit light in a cylindrical
beam. Leading electronic systems manufacturers are integrating VCSELs into a
broad array of end-market applications including Internet access, digital
cross-connect telecommunications switches, DVD, and fiber optic switching and
routing, such as Gigabit Ethernet. VCSELs offer significant advantages over
traditional laser diodes, including:
- greater control over beam size and wavelength;
- reduced manufacturing complexity and packaging costs;
- lower power consumption; and
- higher frequency performance.
In December 1997, EMCORE acquired MODE, a development stage company,
primarily dedicated to the research and development of enabling VCSEL
technologies. In February 1998, EMCORE announced Gigalase, its first commercial
high speed VCSEL laser. In September 1998, EMCORE signed a four-year purchase
agreement with AMP Incorporated to provide VCSELs for a family of optical
transceivers for the Gigabit Ethernet, FibreChannel and ATM markets. In December
1998, EMCORE announced its second VCSEL product, Gigarray, a micro-optical laser
array.
MR Sensors. MR sensors are compound semiconductor devices that possess
sensing capabilities. MR sensors improve vehicle performance through more
accurate control of engine and crank shaft timing, which allows for improved
spark plug efficiency and reduced emissions. In January 1997, EMCORE initiated
shipments of compound semiconductor MR sensors using technology licensed to
EMCORE from General Motors. This license allows EMCORE to manufacture and sell
products using this technology to anyone. As of March 31, 1999 EMCORE has
delivered over five million devices to General Motors Powertrain for crank and
cam speed and position sensing applications for three engine builds.
In October 1998, EMCORE formed Emtech, a joint venture with Optek
Technology, Inc., a packager and distributor of optoelectronic devices, to
market an expanded line of MR sensors to the automotive and related industries.
This joint venture seeks to combine EMCORE's strength in producing devices with
Optek's strength in packaging and distributing devices to offer off-the-shelf
products and expand market penetration.
RF materials. Radio frequency materials are compound semiconductor
materials which transmit and receive communications. Compound semiconductor RF
materials have a broader bandwidth and superior performance at high frequencies
than silicon-based materials. EMCORE currently produces RF materials for use as
power amplifiers in cellular phone handsets. In addition, EMCORE is exploring
opportunities to market these materials for additional uses in fiber optics and
satellite communications. EMCORE believes that its ability to produce high
volumes of RF materials at a low cost will facilitate their adoption in new
applications and new products.
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In May 1999, Sumitomo Electric and EMCORE announced a long-term agreement
to jointly develop and produce certain RF materials for use in digital wireless
and cellular applications. EMCORE will manufacture these RF materials at our
Somerset, New Jersey manufacturing facility and Sumitomo Electric will market
them in Japan. Sumitomo Electric is one of the world's leading electronics
manufacturers. Shipments of these devices are expected to begin in June 1999.
CUSTOMERS
EMCORE's customers include many of the largest semiconductor,
telecommunications, consumer goods and computer manufacturing companies in the
world. Sales to Hughes-Spectrolab accounted for 17.3% of EMCORE's revenues in
fiscal 1998 and 3.8% of EMCORE's revenues in the first six months of 1999. Sales
to General Motors accounted for 12.8% of EMCORE's revenues in fiscal 1998 and
10.8% of EMCORE's revenues in the first six months of 1999. A number of EMCORE's
customers are listed below. In addition, EMCORE has sold its products to 12 of
the largest electronics manufacturers in Japan.
AMP Incorporated
The Boeing Company
General Motors
Hewlett Packard
Honeywell
Hughes-Spectrolab
Hyundai Electronics
IBM
LG Semiconductor
L.M. Ericsson AB
Lucent Technologies
Motorola
Northrop Grumman
Philips AG
Polaroid
Rockwell International
Samsung
Sharp U.S.A.
Siemens AG
Texas Instruments
Thomson CSF
Westinghouse Electric
EMCORE has a comprehensive total quality management program with special
emphasis on total customer satisfaction. EMCORE seeks to encourage active
customer involvement with the design and operation of its production systems. To
accomplish this, EMCORE conducts user group meetings among its customers in
Asia, Europe and North America. At annual meetings, EMCORE's customers provide
valuable feedback on key operations, process oriented services, problems and
recommendations to improve EMCORE products. This direct customer feedback has
enabled EMCORE to constantly update and improve the design of its systems and
processes. Changes that affect the reliability and capabilities of EMCORE's
systems are embodied in new designs to enable current and future customers to
utilize systems which EMCORE believes are high quality and cost-efficient. As of
March 31, 1999, EMCORE employed 27 field service engineers who install EMCORE
systems and provide on-site support.
MARKETING AND SALES
EMCORE markets and sells its wafers, devices and systems through its direct
sales force in Europe, North America and Taiwan and through representatives and
distributors elsewhere in Asia. To market and service its products in China,
Japan and Singapore, EMCORE relies on a single marketing, distribution and
service provider, Hakuto. EMCORE's agreements with Hakuto have a term of 10
years, expiring March 2008. Hakuto has exclusive distribution rights for certain
of EMCORE's products in Japan. Hakuto has marketed and serviced EMCORE's
products since 1988, is a minority shareholder in EMCORE, and the President of
Hakuto is a member of EMCORE's board of directors. EMCORE recently opened sales
offices in
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Taiwan and California in order to be closer to its customers. As of March 31,
1999, EMCORE employed 26 persons in sales and marketing.
EMCORE's sales and marketing staff, senior management and technical staff
work closely with existing and potential customers to provide compound
semiconductor solutions for its customers' needs. The sales process begins by
understanding the customer's requirements and then attempting to match these
requirements with the optimal solution. EMCORE seeks to match the customer's
requirements to an existing design or a modification of a standard design, such
as a change in platform or process design. When necessary, EMCORE will work with
the customer to develop the appropriate design process and to configure and
manufacture the production system to meet the customer's needs. Also, EMCORE
will produce samples to demonstrate conformance to the customer's
specifications. For production systems, the amount of time from the initial
contact with the customer to the customer's placement of an order is typically
two to nine months or longer. EMCORE's sales cycle for wafers and devices
usually runs three to nine months, during which time EMCORE develops the formula
of materials necessary to meet the customer's specifications and qualifies the
materials, which may also require the delivery of samples. EMCORE believes that
the high level of marketing, management and engineering support involved in this
process is beneficial in developing competitive differentiation and long-term
relationships with its customers.
The following chart contains a breakdown of EMCORE's worldwide revenues and
percentages by geographic region. Historically, EMCORE has received all payments
for products and services in U.S. dollars.
SIX MONTHS
FISCAL YEARS ENDED SEPTEMBER 30, ENDED
----------------------------------------------- MARCH 31,
1996 1997 1998 1999
------------- ------------- ------------- -------------
REGION ($ IN MILLIONS)
United States........ $16.0 57.6% $27.7 57.9% $26.7 61.0% $18.1 69.1%
Asia................. 8.2 29.5 14.6 30.6 15.5 35.4 8.0 30.5
Europe............... 3.6 12.9 5.5 11.5 1.6 3.6 0.1 0.4
----- ----- ----- ----- ----- ----- ----- -----
Total.............. $27.8 100.0% $47.8 100.0% $43.8 100.0% $26.2 100.0%
===== ===== ===== ===== ===== ===== ===== =====
SERVICE AND SUPPORT
EMCORE maintains a worldwide service and support network responsible for
on-site maintenance and process monitoring on either a contractual or
time-and-materials basis. Customers may purchase annual service contracts under
which EMCORE is required to maintain an inventory of replacement parts and to
service the equipment upon the request of the customer. EMCORE also sells
replacement parts from inventory for customer needs. EMCORE pursues a program of
system upgrades for customers to increase the performance of older systems.
EMCORE generally does not offer extended payment terms to its customers and
generally adheres to a warranty policy of one year. Consistent with industry
practice, EMCORE maintains an inventory of components for servicing systems in
the field and it believes that its inventory is sufficient to satisfy
foreseeable short-term customer requirements. EMCORE recently opened a warehouse
depot in Taiwan to provide improved service to its Asian customers.
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RESEARCH AND DEVELOPMENT
To maintain and improve its competitive position, EMCORE's research and
development efforts are focused on designing new proprietary processes and
products, improving the performance of existing systems, wafers and devices and
reducing costs in the product manufacturing process. EMCORE has dedicated 16
TurboDisc systems for both research and production which are capable of
processing virtually all compound semiconductor materials. The research and
development staff utilizes x-ray, optical and electrical characterization
equipment which provide instant data allowing for shortened development cycles
and rapid customer response. EMCORE's recurring research and development
expenses were approximately $10.3 million in the first six months of fiscal
1999, $16.5 million in fiscal 1998, $9.0 million in fiscal 1997 and $5.4 million
in fiscal 1996. EMCORE also incurred a one-time, non-cash research and
development expense in fiscal 1998 in the amount of $19.5 million in connection
with the acquisition of MODE. EMCORE expects that it will continue to expend
substantial resources on research and development. As of March 31, 1999, EMCORE
employed 50 persons in research and development, 14 of whom held Ph.D.s in
materials science or related fields.
EMCORE also competes for research and development funds. In view of the
high cost of development, EMCORE solicits research contracts that provide
opportunities to enhance its core technology base or promote the
commercialization of targeted products. EMCORE presently has three contracts
under the Small Business Innovative Research programs or similar government
sponsored programs. From inception until March 31, 1999, government and other
external research contracts have provided approximately $13.3 million to support
EMCORE's research and development efforts. EMCORE is also positioned to market
technology and process development expertise directly to customers who require
it for their own product development efforts.
INTELLECTUAL PROPERTY AND LICENSING
EMCORE's success and competitive position both for production systems and
wafers and devices depend significantly on its ability to maintain trade secrets
and other intellectual property protections. Our strategy is to rely more on
trade secrets than patents. A "trade secret" is information that has value to
the extent it is not generally known, not readily ascertainable by others
through legitimate means, and protected in a way that maintains its secrecy.
Reliance on trade secrets is only an effective business practice insofar as
trade secrets remain undisclosed and a proprietary product or process is not
reverse engineered or independently developed. In order to protect its trade
secrets, EMCORE takes certain measures to ensure their secrecy, such as
executing non-disclosure agreements with its employees, joint venture partners,
customers and suppliers.
To date, EMCORE has been issued 11 U.S. patents and others are either
pending or under review. These U.S. patents will expire between 2005 and 2013.
None of these U.S. patents claim any material aspect of the current or planned
commercial versions of EMCORE's systems, wafers or devices. EMCORE relies on
trade secrets rather than patents to protect its intellectual property because
it believes publishing patents would make it easier for others to reverse
engineer EMCORE's proprietary processes.
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EMCORE is a licensee of certain VCSEL technology and associated patent
rights owned by Sandia Corporation. The Sandia license grants EMCORE:
- exclusive rights (subject to certain rights granted to Department of
Energy and AT&T Corporation) to develop, manufacture and sell products
containing Sandia VCSEL technologies for barcode scanning and plastic
optical fiber communications applications under five U.S. patents that
expire between 2007 and 2015;
- nonexclusive rights with respect to all other applications of these
patents; and
- nonexclusive rights to employ a proprietary oxidation fabrication method
in the manufacture of VCSEL products under a sixth U.S. patent that
expires in 2014. Our exclusivity with respect to the barcode scanning and
plastic optical fiber communications applications expires in 2003 or such
earlier time as we fail to meet certain development and marketing
criteria. EMCORE's success and competitive position as a producer of
VCSEL products depends on the continuation of its rights under the Sandia
license, the scope and duration of those rights and the ability of Sandia
to protect its proprietary interests in the underlying technology and
patents.
In 1992, we received a royalty-bearing, non-exclusive license under a
patent held by Rockwell International Corporation which relates to an aspect of
the manufacturing process used by our TurboDisc systems. In October 1996, we
initiated discussions with Rockwell to receive additional licenses to permit us
to use this technology to manufacture and sell compound semiconductor wafers and
devices. In November 1996, we suspended these negotiations because of litigation
surrounding the validity of the Rockwell patent. We also ceased making royalty
payments to Rockwell under the license during the pendency of the litigation. In
January 1999, the case was settled and a judgment was entered in favor of
Rockwell. As a result, we may be required to pay royalties to Rockwell for
certain of our past sales of wafers and devices to our customers who did not
hold licenses directly from Rockwell. If we are required to pay significant
royalties in connection with these sales our business, financial condition and
results of operations may be materially and adversely affected. In addition,
until the patent expires in January 2000, we may require additional licenses
from Rockwell under the Rockwell patent in order to continue to manufacture and
sell wafers and devices. The failure to obtain or maintain licenses to
manufacture these wafers and devices on commercially reasonable terms may
materially and adversely affect our business, financial condition and results of
operations.
ENVIRONMENTAL REGULATIONS
EMCORE is subject to federal, state and local laws and regulations
concerning the use, storage, handling, generation, treatment, emission, release,
discharge and disposal of certain materials used in its research and development
and production operations, as well as laws and regulations concerning
environmental remediation and employee health and safety. The production of
wafers and devices involves the use of certain hazardous raw materials,
including, but not limited to, ammonia, phosphine and arsene. If EMCORE's
control systems are unsuccessful in preventing release of these or other
hazardous materials, EMCORE could experience a substantial interruption of
operations. EMCORE has retained an environmental consultant to advise it in
complying with applicable environmental and health and safety laws and
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regulations, and believes that it is currently, and in the past has been, in
substantial compliance with all such laws and regulations.
BACKLOG
As of March 31, 1999, EMCORE had an order backlog of $38.3 million,
scheduled to be shipped through March 31, 2000. This represented an increase of
69% since September 30, 1998. This increase primarily relates to increased
production systems bookings in Asia and an initial order for solar cells from
Loral, which is subject to product qualification. EMCORE includes in backlog
only customer purchase orders that have been accepted by EMCORE and for which
shipment dates have been assigned within the 12 months to follow and research
contracts that are in process or awarded. Wafer and device agreements extending
longer than one year in duration are included in backlog only for the ensuing 12
months. EMCORE receives partial advance payments or irrevocable letters of
credit on most production system orders. EMCORE recognizes revenue from the sale
of its systems and materials upon shipment. For research contracts with the U.S.
government and commercial enterprises with durations greater than six months,
EMCORE recognizes revenue to the extent of costs incurred plus a portion of
estimated gross profit, as stipulated in such contracts, based on contract
performance.
MANUFACTURING
EMCORE's manufacturing operations are located at EMCORE's headquarters in
Somerset, New Jersey and in Albuquerque, New Mexico and include systems
engineering and production, wafer fabrication, and design and production of
devices. Many of EMCORE's manufacturing operations are computer monitored or
controlled to enhance reliability and yield. EMCORE manufactures its own systems
and outsources some components and sub-assemblies, but performs all final system
integration, assembly and testing. As of March 31, 1998, EMCORE had 158
employees involved in manufacturing. EMCORE fabricates wafers and devices at its
facilities in Somerset, New Jersey and Albuquerque, New Mexico and has a
combined clean room area totaling approximately 12,000 square feet. EMCORE's
joint venture with Uniroyal Technology Corporation expects to begin
manufacturing HB LED wafers and package-ready devices at its Tampa, Florida
manufacturing facility by summer of 1999. In May 1998, EMCORE received ISO 9001
and QS 9002 quality certification for its Somerset, New Jersey facility. EMCORE
is pursuing ISO 9001 quality certification for its Albuquerque, New Mexico
facilities.
Outside contractors and suppliers are used to supply raw materials and
standard components and to assemble portions of end systems from EMCORE
specifications. EMCORE depends on sole, or a limited number of, suppliers of
components and raw materials. EMCORE generally purchases these single or limited
source products through standard purchase orders. EMCORE also seeks to maintain
ongoing communications with its suppliers to guard against interruptions in
supply and has, to date, generally been able to obtain sufficient supplies in a
timely manner and maintains inventories it believes are sufficient to meet its
near term needs. EMCORE implemented a vendor program through which it inspects
quality and reviews suppliers and prices in order to standardize purchasing
efficiencies and design requirements to maintain as low a cost of sales as
possible. However, operating results could be materially and adversely affected
by a stoppage or delay of supply, receipt of defective
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parts or contaminated materials, and increase in the pricing of such parts or
EMCORE's inability to obtain reduced pricing from its suppliers in response to
competitive pressures.
COMPETITION
The markets in which EMCORE competes are highly competitive. EMCORE
competes with several companies for sales of MOCVD systems including Aixtron
GmbH, Nippon-Sanso K.K. and Thomas Swann Ltd. The primary competitors for
EMCORE's wafer foundry include Epitaxial Products Inc., Kopin Corporation and
Quantum Epitaxial Designs, Inc. EMCORE's principal competitors for sales of
VCSEL-related products include Honeywell, Inc. and Mitel Corporation. The
principal competitors for MR sensors are Honeywell, Inc., Matshushita Electric
Industrial Co. Ltd., Siemens AG and Asahi. The principal competitors for HB LEDs
and EMCORE's joint venture with Uniroyal Technology Corporation and the pending
joint venture with General Electric Lighting include the Phillips Electronics
and Hewlett Packard Company joint venture, Siemens AG's Osram GmbH subsidiary,
Nichia Chemical Industries and Toshiba Corporation. EMCORE also faces
competition from manufacturers that implement in-house systems for their own
use. In addition, EMCORE competes with many research institutions and
universities for research contract funding. EMCORE also sells its products to
current competitors and companies with the capability of becoming competitors.
As the markets for EMCORE's products grow, new competitors are likely to emerge,
and present competitors may increase their market share.
EMCORE believes that the primary competitive factors in the markets in
which EMCORE's products compete are yield, throughput, performance, breadth of
product line, customer satisfaction, customer commitment to competing
technologies and, in the case of production systems, capital and directs costs
and size of installed base. Competitors may develop enhancements to or future
generations of competitive products that offer superior price and performance
factors. EMCORE believes that in order to remain competitive, it must invest
significant financial resources in developing new product features and
enhancements and in maintaining customer satisfaction worldwide.
EMPLOYEES
At March 31, 1999, EMCORE had 326 full-time employees. None of EMCORE's
employees is covered by a collective bargaining agreement. EMCORE considers its
relationship with its employees to be good.
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PROPERTIES
The following chart contains certain information regarding each of EMCORE's
principal facilities. Each of these facilities contains office space, marketing
and sales, and research and development space. EMCORE also leases office space
in Hsinchu, Taiwan and Santa Clara, California. In addition to EMCORE's
facilities, Uniroyal Optoelectronics, a joint venture between EMCORE and
Uniroyal Technology Corporation, leases a 75,000 square foot office and
manufacturing facility in Tampa, Florida.
LOCATION FUNCTION SQUARE FEET TERMS
Somerset, New Headquarters, 75,900 Lease expires in 2000(1)
Jersey manufacturing of
systems, wafers and
MR sensors
- ---------------------------------------------------------------------------------------
Albuquerque, New Manufacturing of 50,000(2) Owned
Mexico solar cells
- ---------------------------------------------------------------------------------------
Albuquerque, New Manufacturing of 27,500 Leases expire in 1999(1)
Mexico VCSELs and 2001(1)
- -------------------------
(1) These leases all have options to renew by EMCORE, subject to cost of living
adjustments.
(2) EMCORE plans a three-phase construction project to expand the facility from
an initial 50,000 square feet in October 1998 to 70,000 square feet by 2002.
LEGAL PROCEEDINGS
EMCORE is not aware of any pending or threatened litigation against it that
could have a material adverse effect on its business, financial condition and
results of operations.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
EMCORE's executive officers and directors and their ages and positions are
as follows:
NAME AGE POSITION
Thomas J. Russell, Ph.D(1)(2)....... 67 Chairman of the Board
Reuben F. Richards, Jr.(2).......... 43 President, Chief Executive Officer
and Director
Thomas G. Werthan................... 42 Vice President--Finance, Chief
Financial Officer, Secretary, and
Director
Richard A. Stall(2)................. 42 Vice President--Technology, Chief
Technical Officer and Director
William J. Kroll.................... 54 Executive Vice President--Strategic
Planning
Paul Rotella........................ 44 Vice President
Louis A. Koszi...................... 54 Vice President
Thomas M. Brennan................... 45 Vice President
Robert P. Bryan..................... 33 Vice President
Craig W. Farley..................... 39 Vice President
David D. Hess....................... 37 Corporate Controller
Robert Louis-Dreyfus................ 52 Director
Hugh H. Fenwick(1)(3)............... 62 Director
Shigeo Takayama(3).................. 82 Director
Charles T. Scott(1)(3).............. 49 Director
John J. Hogan, Jr................... 54 Director
- ------------------------------
(1) Member of Compensation Committee
(2) Member of Nominating Committee
(3) Member of Audit Committee
Thomas J. Russell, Ph.D. has been a director of EMCORE since May 1995 and
was elected Chairman of the Board in December 1996. Dr. Russell founded
Bio/Dynamics, Inc. in 1961 and managed the company until its acquisition by IMS
International in 1973, following which he served as President of that company's
Life Sciences Division. From 1984 until 1988, he served as Director, then as
Chairman of IMS International until its acquisition by Dun & Bradstreet in 1988.
From 1988 to 1992, he served as Chairman of Applied Biosciences, Inc. Since
1992, he has been an investor and director of several companies. Dr. Russell
currently serves as a director of Cordiant plc and Adidas AG. Dr. Russell is one
of three trustees of the AER 1997 Trust, and he was Chairman and a member of
Jesup & Lamont Merchant Partners, L.L.C. (JLMP).
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Reuben F. Richards, Jr. joined EMCORE in October 1995 as its President and
Chief Operating Officer and became Chief Executive Officer in December 1996. Mr.
Richards has been a director of EMCORE since May 1995. From September 1994 to
December 1996, Mr. Richards was a Senior Managing Director of Jesup & Lamont
Capital Markets Inc. (JLCM), an affiliate of a registered broker-dealer. From
December 1994 to 1997, he was a member of and President of JLMP. From 1992 until
1994, Mr. Richards was a principal with Hauser, Richards & Co., a firm engaged
in corporate restructuring and management turnarounds. From 1986 until 1992, Mr.
Richards was a Director at Prudential-Bache Capital Funding in its Investment
Banking Division. Mr. Richards is on the management boards of Emtech, Uniroyal
Optoelectronics and GELcore.
Thomas G. Werthan joined EMCORE in 1992 as its Chief Financial Officer,
Vice President--Finance, Secretary and a director. Mr. Werthan is a Certified
Public Accountant and has over sixteen years experience in assisting high
technology, venture capital financed growth companies. Prior to joining EMCORE
in 1992, he was associated with The Russell Group, a venture capital
partnership, as Chief Financial Officer for several portfolio companies. The
Russell Group is affiliated with Thomas J. Russell, who was a member of and
Chairman of JLMP and is Chairman of the board of directors of EMCORE. From 1985
to 1989, Mr. Werthan served as Chief Operating Officer and Chief Financial
Officer for Audio Visual Labs, Inc., a manufacturer of multimedia and computer
graphics equipment.
Richard A. Stall, Ph.D became a director of EMCORE in December 1996. Dr.
Stall helped found EMCORE in 1984 and has been Vice President--Technology at
EMCORE since October 1984, except for a sabbatical year in 1993 during which Dr.
Stall acted as a consultant to EMCORE and his position was left unfilled. Prior
to 1984, Dr. Stall was a member of the technical staff of AT&T Bell Laboratories
and was responsible for the development of molecular beam expitaxy technologies.
He has co-authored more than 75 papers and holds four patents on MBE and MOCVD
technology and the characterization of compound semiconductor materials.
William J. Kroll joined EMCORE in 1994 as Vice President--Business
Development and in 1998 became Executive Vice President -- Strategic Planning.
Prior to 1994, Mr. Kroll served for seven years as Senior Vice President of
Sales and Marketing for Matheson Gas Products, Inc., a manufacturer and
distributor of specialty gases and gas control and handling equipment. In that
position, Mr. Kroll was responsible for $100 million in sales and 700 employees
worldwide. Prior to working at Matheson Gas Products, Mr. Kroll was Vice
President of Marketing for Machine Technology, Inc., a manufacturer of
semiconductor equipment for photoresistor applications, plasma strip, and
related equipment.
Paul Rotella joined EMCORE in 1996 as Director of Manufacturing and has
served as Vice President of TurboDisc Manufacturing since October 1997. Prior to
1996, Mr. Rotella served for three years as worldwide Manufacturing Operations
Manager for Datacolor International, a manufacturer of color measurement and
control instrumentation. Prior to working at Datacolor International, Mr.
Rotella spent 18 years with AlliedSignal Inc., where he held various positions
including Manufacturing Engineer, Manufacturing Engineering Manager and Program
Manager of Quality Improvement Systems.
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Louis A. Koszi joined EMCORE in 1995 as Vice President--Device
Manufacturing and is presently on a 2 year assignment as Chief Operating Officer
of Uniroyal Optoelectronics, LLC the Company's joint venture with Uniroyal
Technology, Inc. Prior to 1995, Mr. Koszi was a member of AT&T Bell Laboratories
for 25 years. Mr. Koszi has experience in all phases of semiconductor device
design and manufacturing processes and associated quality programs. Mr. Koszi
holds 17 U.S. patents, five foreign patents, and is a co-author of 35
publications. He was named a Distinguished Member of Technical Staff in 1989. In
1992, he was presented with the Excellence in Engineering from the Optical
Society of America.
Thomas M. Brennan joined EMCORE as a result of EMCORE's acquisition of MODE
in December 1997 and now serves as a Vice President of EMCORE. Prior to
co-founding MODE, Mr. Brennan was a senior member of the technical staff at
Sandia National Laboratories from 1986 to 1996. At Sandia, he focused his
efforts on the material growth of III-V compound semiconductors, reactor design,
in-situ reactor diagnostics, and material characterization. His responsibilities
and activities included growth of some of the first VCSEL material at Sandia and
in the U.S., and development of new and unique manufacturing techniques for
VCSEL material growth. Prior to joining Sandia, Mr. Brennan was a member of the
technical staff at AT&T Bell Laboratories from 1980 to 1984. At both facilities,
he focused his efforts on expitaxial materials growth and characterization and
expitaxial reactor design.
Robert P. Bryan joined EMCORE as a Vice President as a result of EMCORE's
acquisition of MODE in December 1997. Prior to co-founding MODE in 1995, he was
a co-founder of Vixel Corporation in 1992, a company that develops and
manufactures VCSEL devices for data links. At Vixel, he was the executive in
charge of optoelectronic product development, including all engineering
management. From 1990 to 1992, he was a senior member of the technical staff at
Sandia National Laboratories where his research focused on the areas of VCSEL
design, fabrication and characterization.
Craig W. Farley joined EMCORE in June 1998 as Vice President--Wafer
Manufacturing and is presently Vice President of Electronic Materials which
includes responsibility for antimonide sensors, RF materials, optoelectronic
devices, and EMCORE's Research and Applications laboratory. Dr. Farley has
experience in all phases of compound semiconductor device design and
manufacturing. Prior to joining EMCORE, he spent 11 years at Rockwell
International Corporation where he served as a member of the technical staff at
Rockwell's Science Center from 1987 to 1994 and as Manager of Advanced Device
Technology for Rockwell's Gallium Arsenide Manufacturing facility from 1994 to
1998.
David D. Hess joined EMCORE in 1989 as General Accounting Manager. He was
named Corporate Controller in 1990. Mr. Hess is a Certified Public Accountant
and has more than ten years experience in monitoring and controlling all phases
of product and process cost and general accounting systems. Prior to his
employment at EMCORE, he held several positions as cost accounting manager,
divisional accountant and inventory control supervisor in manufacturing firms
such as Emerson Quiet Kool (air conditioner manufacturers), Huls North America
(paint/solvent processors), and Brintec Corporation (screw machine
manufacturers).
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Robert Louis-Dreyfus has been a director of EMCORE since March 1997. Mr.
Louis-Dreyfus has been the Chairman of the Board and Chief Executive Officer of
Adidas AG since April 1993. Prior to that time, he had been from 1990 until 1993
the Chief Executive Officer of Saatchi & Saatchi plc (now Cordiant plc) and a
Director of Saatchi & Saatchi plc from January 1990 until December 1994. Since
1992, he has been an investor and a Director of several other companies. From
1982 until 1988, he served as Chief Operating Officer (1982 to 1983) and then as
Chief Executive Officer (from 1984 to 1988) of IMS International until its
acquisition by Dun & Bradstreet in 1988. Mr. Louis-Dreyfus controls Gallium
Enterprises Inc., and he was a member of JLMP.
Hugh H. Fenwick served as a director of EMCORE from 1990 until 1995, and
was again elected to serve on EMCORE's board of directors in June 1997. Since
1992, Mr. Fenwick has been a private investor and he currently holds the office
of Mayor of Bernardsville, New Jersey, to which he was elected in 1994. From
1990 until 1992, Mr. Fenwick was the Executive Director of the Alliance for
Technology Management at the Stevens Institute in Hoboken, New Jersey. Prior to
that time, Mr. Fenwick worked as a marketing executive with Lockheed Electronics
and with Alenia (formerly Selenia), an Italian subsidiary of Raytheon.
Shigeo Takayama became a director of EMCORE in July 1997. Mr. Takayama is
the Chairman, President and founder of Hakuto, EMCORE's distributor of EMCORE's
products in Japan, China and Singapore. Mr. Takayama is a Director Emeritus of
Semiconductor Equipment & Material International (SEMI), Chairman of the Japan
Electronics Products Importers Association (JEPIA), and Director of the Japan
Machinery Importers' Association (JMIA). Mr. Takayama is also a director of
Temptronic Corp., a semiconductor test equipment manufacturer in Newton,
Massachusetts, and of Anatel Corp., a TOC high-purity water monitor manufacturer
in Boulder, Colorado.
Charles T. Scott became a director of EMCORE in February 1998. Mr. Scott is
presently Chairman of Cordiant Communications Group plc, the successor
corporation of the Saatchi & Saatchi Advertising Group. He joined Saatchi &
Saatchi Company in 1990 and served as Chief Financial Officer until 1992 when he
was appointed Chief Operating Officer. In 1993, he became Chief Executive
Officer and held that position until 1996 when he assumed the title of Chairman.
John J. Hogan, Jr. became a director of EMCORE in February 1999. Mr. Hogan
has been President of a private investment management company since October
1997. Prior to that time, he had been with the law firm of Dewey Ballentine
since 1969. He also serves as a director of several other corporations and is a
former executive officer and/or director of various subsidiaries of S.A. Louis
Dreyfus en Cie.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On April 29, 1999, EMCORE borrowed $2.5 million from its Chairman at an
interest rate of prime plus two percent. On May 7, 1999, EMCORE repaid the loan
from borrowings from First Union.
In January 1999, EMCORE's Chairman advanced $3.0 million to EMCORE. These
funds were repaid with borrowings under a new $5.0 million credit facility with
First Union National Bank. The Chairman has also committed to provide up to
$30.0 million of long-term financing to EMCORE through July 1, 2000. This
commitment terminates upon completion of this offering, subject to a minimum
offering size requirement of $40.0 million.
In January 1999, EMCORE and General Electric Lighting agreed, subject to
certain conditions, to form a joint venture to develop and market HB LED
lighting products. In connection with consummation of this joint venture, EMCORE
will issue to General Electric warrants to purchase 282,010 shares of EMCORE
common stock, which will expire in 2006, have an exercise price of $22.875. In
addition, General Electric will purchase a $7.8 million subordinated convertible
debenture bearing interest at 4.75% per annum and maturing in 2006. The
debenture will be convertible into 340,984 shares of common stock at General
Electric's option.
On November 30, 1998, EMCORE completed a private placement of an aggregate
of 1,550,000 shares of Series I Preferred Stock to Hakuto, Union Miniere Inc.
and Uniroyal Technology Corporation. The net proceeds to EMCORE from the private
placement were approximately $21.2 million which has been used (1) to repay $8.5
million of debt, plus interest, to EMCORE's Chairman of the Board, Dr. Thomas
Russell, (2) to fund EMCORE's $5.0 million portion of a joint venture between
EMCORE and Uniroyal Technology Corporation to develop and manufacture HB LEDs
and (3) to fund EMCORE's $600,000 portion of its joint venture with Union
Miniere Inc. The remaining net proceeds from the private placement of
convertible preferred stock were used to acquire capital equipment for EMCORE's
new Albuquerque, New Mexico manufacturing facility and for working capital
purposes.
In September and October 1998, EMCORE borrowed an aggregate of $8.5 million
from its Chairman, Thomas J. Russell. The loan bears interest at 9.75% per
annum. The entire $8.5 million borrowed from Mr. Russell was repaid from the
proceeds of the private placement of preferred stock.
On June 22, 1998, EMCORE entered into the 1998 Agreement with First Union
National Bank. The 1998 Agreement was guaranteed by the Chairman and the Chief
Executive Officer of EMCORE. In return for guaranteeing the facility, EMCORE
granted the Chairman and the Chief Executive Officer an aggregate of 284,684
common stock purchase warrants at an exercise price of $11.375 per share which
expire May 1, 2001. These warrants are callable at EMCORE's option at $0.85 per
warrant if EMCORE's common stock has traded at or above 150% of the exercise
price for a period of 30 days. The warrant exercise price was equal to the
market price of the Company's common stock on the date of grant. An accounting
value of $1.3 million was assigned to these warrants based upon the EMCORE's
application of the Black-Scholes option pricing model.
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The President of Hakuto Co., Ltd., EMCORE's Asian distributor, is a member
of EMCORE's board of directors and Hakuto Co., Ltd. is a minority shareholder of
EMCORE. During the year ended September 30, 1998, sales made through Hakuto Co.,
Ltd. approximated $9.2 million.
In February 1998, EMCORE and Uniroyal Technology Corporation formed
Uniroyal Optoelectronics, a joint venture to produce and market compound
semiconductor products. EMCORE has a non-controlling minority interest in the
joint venture. During the first six months of fiscal 1999, EMCORE sold three
TurboDisc systems to the joint venture for a total of $5.3 million. As of March
31, 1999, EMCORE's investment in this venture amounted to $4.3 million.
In fiscal 1997, EMCORE signed a non-exclusive and non-refundable technology
licensing and royalty agreement with Uniroyal Technology Corporation for the
process technology to develop and manufacture HB LEDs. During fiscal 1998 and
1997, revenue associated with the Uniroyal Technology Corporation licensing
agreement amounted to $2.5 million and $2.5 million, respectively. At the time
the transaction was originally entered into, Uniroyal Technology Corporation's
Chairman and Chief Executive Officer was a member of EMCORE's board of directors
and EMCORE's Chairman was on the Board of Directors of Uniroyal Technology
Corporation.
All related party transactions were approved by a majority of the
disinterested members of EMCORE's board of directors.
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PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information known to EMCORE with
respect to beneficial ownership of its common stock as of May 1, 1999 and as
adjusted to reflect the sale of the shares offered pursuant to this prospectus
by: (1) each person who is known by EMCORE to be the beneficial owner of five
percent or more of the its common stock; (2) each of EMCORE's directors; (3)
each of EMCORE's executive officers; (4) all officers and directors of EMCORE as
a group (16 persons); and (5) each other selling shareholder. Except as
otherwise indicated, EMCORE believes, based on information furnished by such
persons, that each person listed below has the sole voting and investment power
over the shares of common stock shown as beneficially owned, subject to common
property laws, where applicable. Unless otherwise noted, the address for the
individuals listed below is c/o EMCORE Corporation, 394 Elizabeth Avenue,
Somerset, NJ 08873.
SHARES SHARES
SHARES BENEFICIALLY ISSUABLE UPON ISSUABLE UPON SHARES BENEFICIALLY
OWNED PRIOR TO EXERCISE OF EXERCISE OF SHARES OWNED AFTER
THE OFFERING OPTIONS WARRANTS OFFERED THE OFFERING
------------------------- ---------------------
NAME OF BENEFICIAL OWNER: NUMBER PERCENT NUMBER PERCENT
Thomas J. Russell........ 2,459,991 24.0% -- 741,657(1) -- 2,459,991 17.9%
Reuben F. Richards,
Jr..................... 518,957 5.3 79,412 149,952 -- 518,957 3.9
Thomas G. Werthan........ 131,536 1.4 64,421 23,586 15,000 116,536 *
Richard A. Stall......... 170,823 1.8 96,248 30,012 10,000 160,823 1.2
Robert Louis-Dreyfus..... 1,650,582 16.6 -- 432,535(2) -- 1,650,582 12.3
Hugh H. Fenwick.......... 6,879 * -- -- -- 6,879 *
Shigeo Takayama(3)....... 706,653 7.4 -- -- -- 706,653 5.4
Charles Scott............ 3,857 * -- -- -- 3,857 *
John J. Hogan, Jr........ -- * -- -- -- -- *
Thomas Brennan........... 265,128 2.8 39,141 -- 40,000 225,128 1.7
Robert Bryan............. 265,128 2.8 39,141 -- 50,000 215,128 1.6
Craig Farley............. -- * -- -- -- -- *
David D. Hess............ 8,665 * 4,412 -- -- 8,665 *
Louis A. Koszi........... 10,098 * 10,098 -- -- 10,098 *
William J. Kroll......... 79,990 * 21,085 16,134 6,000 73,900 *
Paul Rotella............. 3,578 * 3,578 -- -- 3,578 *
All directors and
executive officers as a
group (16 persons)..... 6,281,865 57.3 353,957 1,110,357 -- 6,281,865 44.5
The AER 1997 Trust(4).... 1,588,063 16.5 -- 141,504 -- 1,588,063 12.1
Gallium Enterprises,
Inc.(5)................ 1,218,047 12.3 -- 432,535 -- 1,218,047 9.1
Union Miniere Inc.(6).... 642,857 6.8 -- -- 250,000 392,857 3.0
Uniroyal Technology
Corporation(7)......... 642,857 6.8 -- -- 270,000 372,857 2.8
Hakuto Co., Ltd.......... 706,653 7.4 -- -- -- 706,653 5.4
General Electric(8)...... -- -- -- -- -- -- *
Alfred T. Copeland,
Jr..................... 8,000 * -- 8,000 8,000 -- *
Howard F. Curd........... 495,078 5.2 -- -- 93,015 402,063 3.1
Howard R. Curd........... 513,578 5.4 -- -- 93,015 420,063 3.2
Charles Maxwell.......... 42,511 * 42,511 10,511 32,000 *
Harold J. O'Keefe........ 6,869 * -- 3,069 3,069 3,800 *
Norman E. Schumaker...... 148,611 1.6 -- 138,831 48,831 99,780 *
- ------------------------------
* Less than 1.0%
(1) With 141,504 held by the AER 1997 Trust -- see note 4.
(2) Held by Gallium Enterprises Inc. -- see note 5.
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(3) Includes 442,368 shares of Common Stock and 264,286 shares of convertible
preferred stock owned by Hakuto Co., Ltd., which is controlled by Shigeo
Takayama.
(4) Dr. Thomas J. Russell, one of the three trustees for The AER 1997 Trust, is
the Chairman of EMCORE. After January 13, 2002, Avery E. Russell, the
daughter of Thomas J. Russell will be the primary beneficiary of the trust.
The address of The AER 1997 Trust is c/o Thomas J. Russell, Two North
Tamiami Trail, Sarasota, Florida 34236.
(5) Gallium Enterprises Inc. is controlled by Robert Louis-Dreyfus, a member of
the board of directors of EMCORE. The address of Gallium Enterprises, Inc.
is c/o Harborstone Capital Management., 152 West 57th Street, 21st Floor,
New York, New York 10019.
(6) Includes 642,857 shares of convertible preferred stock. The address of Union
Miniere Inc. is 13847 West Virginia Drive, Lakewood, Colorado 80228.
(7) Includes 642,857 shares of convertible preferred stock. The address of
Uniroyal Technology Corporation is Two North Tamiami Trail, Suite 900,
Sarasota, Florida 34236.
(8) Upon consummation of the GELcore joint venture, EMCORE will issue to General
Electric common stock purchase warrants for between 282,010 and 564,019
shares of EMCORE common stock based on the stock price as of this offering
or the closing price on March 31, 1999, whichever is earlier. Those warrants
will have an exercise price of $22.875 and will expire in 2006. General
Electric will also purchase a $7.8 million subordinated convertible
debenture that will be convertible into 340,984 shares of common stock at
General Electric's option.
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UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement,
the underwriters named below, who are represented by Donaldson, Lufkin &
Jenrette Securities Corporation, Prudential Securities Incorporated, Needham &
Company, Inc. and SoundView Technology, Inc. have severally agreed to purchase
from EMCORE and the selling shareholders the respective number of shares of
common stock set forth opposite their names below.
NUMBER OF
UNDERWRITERS: SHARES
Donaldson, Lufkin & Jenrette Securities Corporation.........
Prudential Securities Incorporated..........................
Needham & Company, Inc......................................
SoundView Technology, Inc................................... --
-------
Total.....................................................
=======
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares of common stock
offered hereby are subject to approval by their counsel of certain legal matters
and certain other conditions. The underwriters are obligated to purchase and
accept delivery of all the shares of common stock offered hereby (other than
those shares covered by the over-allotment option described below) if any are
purchased.
The underwriters initially propose to offer the shares of common stock in
part directly to the public at the public offering price set forth on the cover
page of this prospectus and in part to certain dealers (including the
underwriters) at such price less a concession not in excess of $ per
share. The underwriters may allow, and such dealers may re-allow, to certain
other dealers a concession not in excess of $ per share. After the
initial offering of the common stock, the public offering price and other
selling terms may be changed by the representatives at any time without notice.
DLJdirect, Inc., an affiliate of Donaldson, Lufkin & Jenrette Securities
Corporation and a member of the selling group, is facilitating the distribution
of the shares sold in the offering over the Internet. The underwriters have
agreed to allocate a limited number of shares to DLJdirect, Inc. for sale to its
brokerage account holders.
EMCORE has granted to the underwriters an option, exercisable within 30
days after the date of this prospectus, to purchase, from time to time, in whole
or in part, up to an aggregate of 555,000 additional shares of common stock at
the public offering price less underwriting discounts and commissions. The
underwriters may exercise such option solely to cover over-allotments, if any,
made in connection with this offering. To the extent that the underwriters
exercise such option, each underwriter will become obligated, subject to certain
conditions, to purchase its pro rata portion of such additional shares based on
such underwriter's percentage underwriting commitment as indicated in the
preceding table.
EMCORE and the selling shareholders have agreed to indemnify the
underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, or to contribute to payments that the underwriters may
be required to make in respect thereof.
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Each of EMCORE, its executive officers and directors and certain
shareholders of EMCORE (including the selling shareholders) has agreed, subject
to certain exceptions, not to (i) offer, pledge, sell, contract to sell, sell
any option or contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase or otherwise transfer or dispose
of, directly or indirectly, any shares of common stock or (ii) enter into any
swap or other arrangement that transfers all or a portion of the economic
consequences associated with the ownership of any common stock (regardless of
whether any of the transactions described in clause (i) or (ii) is to be settled
by the delivery of common stock, or such other securities, in cash or otherwise)
for a period of 90 days after the date of the prospectus without the prior
written consent of Donaldson, Lufkin & Jenrette. In addition, during such
period, EMCORE has also agreed not to file any registration statement with
respect to, and each of its executive officers, directors and certain
shareholders of EMCORE (including the selling shareholders) has agreed not to
make any demand for, or exercise any right with respect to, the registration of
any shares of common stock or any securities convertible into or exercisable or
exchangeable for common stock without the prior written consent of Donaldson,
Lufkin & Jenrette.
Other than in the United States, no action has been taken by EMCORE, the
selling shareholders or the underwriters that would permit a public offering of
the shares of common stock offered hereby in any jurisdiction where action for
that purpose is required. The shares of common stock offered hereby may not be
offered or sold, directly or indirectly, nor may this prospectus or any other
offering material or advertisements in connection with the offer and sale of any
such shares of common stock be distributed or published in any jurisdiction,
except under circumstances that will result in compliance with the applicable
rules and regulations of such jurisdiction. Persons into whose possession this
prospectus comes are advised to inform themselves about and to observe any
restrictions relating to this offering of the common stock and the distribution
of this prospectus. This prospectus does not constitute an offer to sell or
solicitation of an offer to buy any shares of common stock offered hereby in any
jurisdiction in which such an offer or a solicitation is unlawful.
The underwriters and dealers may engage in passive market making
transactions in the common stock in accordance with Rule 103 of Regulation M
promulgated by the Commission. In general, a passive market maker may not bid
for or purchase shares of common stock at a price that exceeds the highest
independent bid. In addition, the net daily purchases made by any passive market
maker generally may not exceed 30% of its average daily trading volume in the
common stock during a specified two-month period, or 200 shares, whichever is
greater. A passive maker must identify passive market making bids as such on the
Nasdaq electronic inter-dealer reporting system. Passive market making may
stabilize or maintain the market price of the common stock above independent
market levels. Underwriters and dealers are not required to engage in passive
market making and may end passive market making activities at any time.
In connection with the offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
common stock. Specifically, the underwriters may overallot this offering,
creating a syndicate short position. In addition, the underwriters may bid for
and purchase shares of common stock in the open market to cover syndicate short
positions or to stabilize the price of the common stock. Finally, the
underwriting syndicate may reclaim selling concessions from
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syndicate members in the offering, if the syndicate repurchases previously
distributed common stock in syndicate covering transactions, in stabilization
transactions or otherwise. Any of these activities may stabilize or maintain the
market price of the common stock above independent market levels. The
underwriters are not required to engage in these activities, and may end any of
these activities at any time.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
EMCORE by White & Case LLP, Miami, Florida, who may rely upon Dillon, Bitar &
Luther, New Jersey counsel for EMCORE as to matters of New Jersey law. Certain
legal matters in connection with this offering will be passed upon for the
underwriters by Brobeck, Phleger & Harrison LLP, New York, New York.
EXPERTS
The consolidated financial statements of EMCORE as of September 30, 1998
and for the year then ended included and incorporated by reference in this
prospectus, have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report (which expresses an unqualified opinion and includes an
explanatory paragraph relating to a restatement described in Note 20), which is
included and incorporated by reference herein, and has been so included and
incorporated in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
The balance sheet as of September 30, 1997, and the statements of
operations, shareholders' equity and cash flow for the two year period ended
September 30, 1997, included in this prospectus, have been included herein in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of that firm as experts in accounting and auditing.
The financial statements of MicroOptical Devices, Inc. included in this
prospectus and elsewhere in the registration statement, to the extent and for
the periods indicated in their reports, have been audited by Arthur Andersen
LLP, independent public accountants, and are included herein in reliance upon
the authority of said firm as experts in giving said reports. EMCORE has agreed
to indemnify and hold harmless Arthur Andersen LLP and its personnel for any
costs and expenses including attorneys' fees incurred by Arthur Andersen in
successful defense of a legal action or proceeding that arises as a result of
Arthur Andersen's consent to the inclusion of its audit reports on MODE's past
financial statements in a registration statement filed by EMCORE with the SEC. A
successful defense in this context would be one in which Arthur Andersen is
neither decreed to have been culpable nor pays any part of MODE's or EMCORE's
damages as a result of judgment or settlement.
The statements in this Prospectus set forth under the captions "Risk
Factors -- Our ability to protect our trade secrets is crucial to our business."
"-- We may require licenses to continue to manufacture and sell certain of our
compound semiconductor wafers and devices." and discussions of trade secrets and
the Rockwell Patent litigation in "Business -- Intellectual Property and
Licensing" have been reviewed and approved by Lerner David Littenberg Krumholz &
Mentlik, Westfield, New Jersey, patent counsel for EMCORE, as experts on such
matters, and are included herein in reliance upon such review and approval.
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PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
On December 5, 1997, EMCORE acquired all of the outstanding capital stock
of MODE in exchange for 1,461,866 shares of EMCORE's common stock, 200,966
common stock purchase options and 47,118 common stock purchase warrants. The
purchase price was approximately $32.8 million, including direct acquisition
costs of approximately $500,000. MODE was a development stage company
(incorporated in August 1995) and had 18 employees at the date of acquisition.
MODE's activities were substantially directed towards the research and
development of optical laser devices. The following unaudited pro forma
consolidated statement of operations is based on the historical financial
statements of EMCORE and MODE, adjusted to give the effect to the acquisition of
MODE by EMCORE. The unaudited pro forma consolidated statements of operations
assume that the acquisition of MODE by EMCORE occurred as of October 1, 1997.
The pro forma financial information reflects the purchase method of accounting
for the acquisition of MODE. The accompanying unaudited pro forma information
does not give effect to any cost savings that may be realized as a result of the
integration of EMCORE and MODE, or to any changes in the revenues of the
combined entity, resulting from such integration. The accompanying unaudited pro
forma financial information should be read in conjunction with EMCORE's
historical financial statements and the notes thereto and the MODE historical
financial statements and the notes thereto included herein. Such unaudited pro
forma financial information does not purport to be indicative of the results of
operations of EMCORE in the future or what its financial position and results of
operations would have been had the acquisition occurred at the dates indicated
above.
EMCORE's acquisition of MODE, a development stage company, constituted a
significant and strategic investment for EMCORE to acquire and gain access to
MODE's in-process research and development of micro-optical technology. EMCORE's
over-riding investment consideration was that if MODE's research and development
efforts, with continued research and development funding contemplated and
required after acquisition, yielded commercial products for targeted
applications, EMCORE would possess a broader array of enabling advanced
technologies and would be better positioned for entry into certain existing
large and/or high growth technology-dependent markets. The primary value
enhancing asset acquired in the MODE acquisition was the technology under
development by MODE as part of its planned micro-laser and optical subassembly
products. EMCORE plans to use MODE's micro-optical laser technology in new
products for data communications and telecommunications applications. As of the
date of acquisition, MODE had six primary micro-optical laser research and
development projects in process. EMCORE expects MODE's microlasers and optical
subassemblies to provide design, performance and significant cost advantages
over their technical predecessors such as edge-emitting solid state lasers.
Through the integration of vertical cavity surface emitting lasers (VCSELs) with
leading original equipment manufacturer systems design, VCSELs are expected to
provide enhanced performance benefits to market applications such as Internet
access, onboard photonics, Gigabit Ethernet, local area networks, microarea
network, digital video discs (DVDs) and fiberoptic switching. In developing
EMCORE's financial projections for future revenues and costs, new micro-optical
laser product introductions were expected to commence in fiscal 1998 and
reflected the
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impact of entering new markets such as the data communications and
telecommunications industries. Should EMCORE be unable to complete the
development of any of the six projects, EMCORE may not realize the product,
market and financial benefits expected from this acquisition. In February 1998,
MODE announced the introduction of its first commercial product, a Gigalase
VCSEL. Subsequent to such announcement, MODE's Gigalase product efforts were
primarily directed toward engineering, testing and quality control activities to
facilitate commercial production which commenced in May 1998. On December 14,
1998, MODE announced its second commercial product, a Gigarray VCSEL.
As part of the acquisition, EMCORE incurred a one-time in-process research
and development write-off of $19.5 million which is reflected in the
accompanying financial statements. EMCORE also recorded goodwill of
approximately $13.2 million. This is being charged against operations over a
three year period, and will therefore impact financial results through December
2000.
YEAR ENDED SEPTEMBER 30, 1998
-----------------------------------------
HISTORICAL PRO FORMA
---------------- ----------------------
EMCORE MODE ADJUSTMENTS COMBINED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues................................ $43,760 $100 $ -- $ 43,860
Cost of sales........................... 24,675 161 -- 24,836
-------- ----- -------- --------
Gross profit.......................... 19,085 (61) -- 19,024
-------- ----- -------- --------
Operating expenses
Selling, general and administrative... 14,082 346 -- 14,428
Goodwill amortization(2).............. 3,655 -- 738 4,393
Research and development:(3)
One-time acquired in-process....... 19,516 -- (19,516) --
Recurring.......................... 16,495 283 -- 16,778
-------- ----- -------- --------
Total operating expenses........... 53,748 629 (18,778) 35,599
-------- ----- -------- --------
Operating loss..................... (34,663) (690) 18,778 (16,575)
-------- ----- -------- --------
Other expenses
Stated interest expense (income),
net................................ 974 (4) -- 970
Imputed warrant interest, non-cash.... 601 -- -- 601
Equity in net loss of unconsolidated
affiliate.......................... 198 -- -- 198
-------- ----- -------- --------
Total other expense................ 1,773 (4) -- 1,769
-------- ----- -------- --------
Loss before income taxes and
extraordinary item............... (36,436) (686) 18,778 (18,344)
Provision for income taxes.............. -- -- -- --
-------- ----- -------- --------
Net loss.............................. (36,436) (686) 18,778 (18,344)
======== ===== ======== ========
Shares used in computation of net
loss.................................. 8,775 8,775
======== ========
Net loss per share before extraordinary
item.................................. $ (4.15) $ (2.09)
======== ========
Net loss per share...................... $ (4.15) $ (2.09)
======== ========
- ------------------------------
Notes to Pro Forma Statement of Operations
(1) EMCORE acquired MODE on December 5, 1997 in exchange for (i) the issuance of
1,461,866 shares of common stock, and (ii) the assumption of (x) up to
200,966 common stock purchase options at exercise prices ranging from $0.43
to $0.59 and (y) 47,118 common stock purchase warrants at exercise prices
ranging from $4.32 to $5.92. The transaction purchase price amounted to
approximately $32,800,000, including approximately $500,000 of direct
acquisition costs. EMCORE's
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common stock was valued based upon the average closing price of EMCORE's
common stock for the five days before and after the announcement of the
acquisition. The purchase price was allocated to the assets acquired
(approximately $2,801,000) and liabilities assumed (approximately
$2,645,000), based upon the fair value at the date of acquisition. In
addition, EMCORE recorded a one-time write-off of approximately $19,516,000
(as restated) relating to purchased in-process research and development.
Goodwill of approximately $13,157,000 (as restated) was recorded as a result
of the acquisition.
(2) To reflect the amortization of goodwill over a period of three years.
(3) To reverse the non-recurring, one-time write-off of $19,516,000 (as
restated) relating to purchased in-process research and development.
(4) The operating results of MODE are from the period of October 1, 1997 through
the date of acquisition. Subsequent to the date of acquisition, MODE's
operations are included with those of EMCORE.
The pro forma statement of operations for the year ended September 30, 1998,
does not reflect the non-recurring write-off of the acquired in-process research
and development.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents have been filed by EMCORE with the Commission under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and are
incorporated herein by reference:
1. EMCORE's Annual Report on Form 10-K and 10-K/A for the fiscal year
ended September 30, 1998;
2. EMCORE's Quarterly Reports on Form 10-Q and 10-Q/A for the period
ended December 31, 1998 and on Form 10-Q for the period ended March 31,
1999;
3. EMCORE's Current Report on Form 8-K dated May 13, 1999; and
4. The description of the common stock, contained in EMCORE's
Registration Statement on Form 8-A filed pursuant to Section 12 of the
Exchange Act and all amendments thereto and reports filed for the purpose
of updating such description.
All documents filed by us pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Exchange Act: (1) subsequent to the initial filing of this prospectus and
prior to the date it is declared effective; and (2) subsequent to the date of
this prospectus and prior to the termination of this offering are incorporated
by reference and become a part of this prospectus and to be a part hereof from
their date of filing. Any statement contained in this prospectus to the extent
that a statement contained in any such document modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this prospectus.
On request, we will provide anyone who receives a copy of this prospectus
with a copy of any or all of the documents incorporated in this prospectus by
reference. We will provide this information at no cost to you. Written or
telephone requests for such copies should be directed to our principal office:
EMCORE Corporation, 394 Elizabeth Avenue, Somerset, New Jersey 08872, Attn:
Thomas G. Werthan, Secretary, Telephone (732) 271-9090.
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AVAILABLE INFORMATION
We file reports, proxy statement and other information with the Commission.
Those reports, proxy statements and other information may be obtained:
- At the Public Reference Room of the Commission, Room 1024 -- Judiciary
Plaza, 450 Fifth Street, N.W., Washington, DC 20549 (for information,
please call 1-800-SEC-0330);
- At the public reference facilities at the Commission's regional offices
located at Seven World Trade Center, 13th Floor, New York, New York 10048
or Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661;
- By writing to the Commission, Public Reference Section, Judiciary Plaza,
450 Fifth Street, N.W., Washington, DC 20549;
- At the offices of the National Association of Securities Dealers, Inc.,
Reports Section, 1735 K Street, N.W., Washington, DC 20006; or
- From the Internet site maintained by the Commission at
http://www.sec.gov. which contains reports, proxy and information
statements and other information regarding issuers that file
electronically with the Commission.
Some locations may charge prescribed or modest fees for copies.
EMCORE has filed with the Commission a Registration Statement on Form S-3
(together with any amendments or supplements thereto, the "Registration
Statement") under the Securities Act covering the shares of common stock offered
hereby. As permitted by the Commission, this prospectus, which constitutes a
part of the Registration Statement, does not contain all the information
included in the Registration Statement. Such additional information may be
obtained from the locations described above. Statements contained in this
prospectus as to the contents of any contract or other document are not
necessarily complete. You should refer to the contract or other document for all
the details.
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EMCORE CORPORATION
INDEX OF FINANCIAL STATEMENTS
Report of Deloitte & Touche LLP, Independent Accountants.... F-2
Report of Coopers & Lybrand L.L.P., Independent
Accountants............................................... F-3
FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of September 30, 1997 and
1998...................................................... F-4
Consolidated Statements of Operations for the Years Ended
September 30, 1996, 1997 and 1998......................... F-5
Consolidated Statements of Shareholders' Equity as of
September 30, 1996, 1997 and 1998......................... F-6
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1996, 1997 and 1998......................... F-7
Notes to Financial Statements............................... F-9
F-1
77
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Shareholders of EMCORE Corporation
Somerset, New Jersey
We have audited the accompanying consolidated balance sheet of EMCORE
Corporation, (the "Company") as of September 30, 1998, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1998 consolidated financial statements present fairly,
in all material respects, the financial position of the Company as of September
30, 1998, and the results of their operations and their cash flows for the year
then ended in conformity with generally accepted accounting principles.
As discussed in Note 20 the accompanying 1998 consolidated financial
statements have been restated.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
May 14, 1999
F-2
78
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of EMCORE Corporation
We have audited the accompanying balance sheet of EMCORE Corporation (the
"Company") as of September 30, 1997, the related statements of operations,
shareholders' (deficit) equity and cash flows for each of the two years in the
period ended September 30, 1997. These financial statements schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements schedule 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 EMCORE Corporation as of
September 30, 1997, and the results of its operations and its cash flows for
each of the two years in the period ended September 30, 1997, in conformity with
generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Parsippany, New Jersey
November 3, 1997, except for
note 15, as to which the date
is December 5, 1997
F-3
79
EMCORE CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF
AS OF SEPTEMBER 30, MARCH 31,
--------------------------- 1999
1997 1998 (UNAUDITED)
(AS RESTATED (AS RESTATED
SEE NOTE 20) SEE NOTE 20)
Current assets:
Cash and cash equivalents......................... $ 3,653,145 $ 4,455,836 $ 1,640,437
Restricted cash................................... 312,500 62,500 --
Accounts receivable, net of allowance for doubtful
accounts of approximately $697,000, $611,000 and
$577,000 at September 30, 1997, September 30,
1998 and March 31, 1999, respectively........... 8,439,704 7,437,822 11,462,660
Accounts receivable -- related parties............ 2,500,000 500,000 2,746,731
Inventories, net.................................. 7,185,626 12,445,326 12,684,046
Costs in excess of billings on uncompleted
contracts....................................... -- 77,531 93,962
Prepaid expenses and other current assets......... 120,393 130,075 199,919
------------ ------------ ------------
Total current assets............................ 22,211,368 25,109,090 28,827,755
Property, plant and equipment, net.................. 16,797,833 36,209,831 43,259,928
Goodwill, net....................................... -- 9,519,000 7,322,000
Investments in unconsolidated affiliates............ -- 291,504 4,391,762
Other assets, net................................... 453,608 2,090,219 1,269,705
------------ ------------ ------------
Total assets.................................... $ 39,462,809 $ 73,219,644 $ 85,071,150
============ ============ ============
Current liabilities:
Note payable -- related party..................... $ -- $ 7,000,000 $ --
Accounts payable.................................. 4,050,216 12,022,628 9,131,425
Accrued expenses.................................. 3,867,589 4,197,405 5,457,262
Advanced billings................................. 1,998,183 3,180,370 6,682,305
Capitalized lease obligation -- current........... 15,030 673,036 731,908
Other current liabilities......................... 124,279 52,778 161,815
------------ ------------ ------------
Total current liabilities....................... 10,055,297 27,126,217 22,164,715
Long-term debt:
Bank loans........................................ -- 17,950,000 23,000,000
Subordinated notes, net........................... 7,499,070 7,808,772 8,002,588
Capitalized lease obligation, net of current
portion......................................... 77,870 754,517 470,242
Other liabilities................................. -- -- 1,097,389
------------ ------------ ------------
Total liabilities............................... 17,632,237 53,639,506 54,734,934
------------ ------------ ------------
Mandatorily redeemable convertible preferred stock,
1,550,000 shares issued and outstanding at March
31, 1999 (redeemable at maturity for
$21,700,000)...................................... -- -- 21,368,476
Shareholders' equity:
Preferred stock, $.0001 par value, 5,882,353 shares
authorized, no shares outstanding in all
periods........................................... -- -- --
Common stock, no par value, 23,529,411 shares
authorized, 6,000,391, 9,375,952, and 9,446,347
issued and outstanding September 30, 1997,
September 30, 1998 and March 31, 1999,
respectively...................................... 45,816,774 87,443,237 87,855,450
Accumulated deficit................................. (23,777,658) (60,196,454) (71,221,065)
Notes receivable from warrant issuances and stock
sales............................................. (208,544) (7,666,645) (7,666,645)
------------ ------------ ------------
Total shareholders' equity...................... 21,830,572 19,580,138 8,967,740
------------ ------------ ------------
Total shareholders' equity and mandatorily
redeemable convertible preferred stock........ 21,830,572 19,580,138 30,336,216
------------ ------------ ------------
Total liabilities, shareholders' equity, and
mandatorily redeemable convertible preferred
stock......................................... $ 39,462,809 $ 73,219,644 $ 85,071,150
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
80
EMCORE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED
YEARS ENDED SEPTEMBER 30, MARCH 31,
---------------------------------------- ---------------------------
1996 1997 1998 1998 1999
(AS RESTATED (UNAUDITED)
SEE NOTE 20)
(AS RESTATED (AS RESTATED
SEE NOTE 20) SEE NOTE 20)
Revenues:
Systems and materials............ $24,066,506 $46,591,662 $ 42,820,791 $25,881,555 $ 26,048,272
Services......................... 3,712,379 1,160,910 939,192 283,020 148,402
----------- ----------- ------------ ------------ ------------
Total revenues................. 27,778,885 47,752,572 43,759,983 26,164,575 26,196,674
Cost of sales:
Systems and materials............ 16,121,938 29,309,898 24,148,783 13,808,098 15,165,847
Services......................... 2,484,482 784,117 526,706 101,071 52,998
----------- ----------- ------------ ------------ ------------
Total cost of sales............ 18,606,420 30,094,015 24,675,489 13,909,169 15,218,845
----------- ----------- ------------ ------------ ------------
Gross profit................... 9,172,465 17,658,557 19,084,494 12,255,406 10,977,829
----------- ----------- ------------ ------------ ------------
Operating expenses:
Selling, general and
administrative................. 6,524,482 9,346,329 14,082,438 5,753,766 6,367,485
Goodwill amortization............ -- -- 3,637,941 1,441,941 2,197,000
Research and development --
recurring...................... 5,401,413 9,001,188 16,494,888 5,876,593 10,272,376
Research and development --
one-time acquired in-process,
non-cash....................... -- -- 19,516,000 19,516,000 --
----------- ----------- ------------ ------------ ------------
Total operating expenses... 11,925,895 18,347,517 53,731,267 32,588,300 18,836,861
----------- ----------- ------------ ------------ ------------
Operating loss................. (2,753,430) (688,960) (34,646,773) (20,332,894) (7,859,032)
----------- ----------- ------------ ------------ ------------
Other expenses:
Stated interest, net of interest
income of $71,000, $237,000,
and $448,000 for the years
ended September 30, 1996, 1997
and 1998, respectively, and
$192,000 and $285,000 for the
six months ended March 31, 1998
and 1999, respectively......... 297,093 519,422 972,992 115,922 693,112
Imputed warrant interest expense,
non-cash....................... 125,791 3,988,390 600,536 192,121 632,973
Equity in net loss of
unconsolidated affiliate....... -- -- 198,495 -- 1,671,021
----------- ----------- ------------ ------------ ------------
Loss before income taxes and
extraordinary item........... (3,176,314) (5,196,772) (36,418,796) (20,640,937) (10,856,138)
Provision for income taxes......... -- 137,000 -- 20,000 --
----------- ----------- ------------ ------------ ------------
Net loss before extraordinary
item......................... (3,176,314) (5,333,772) (36,418,796) (20,660,937) (10,856,138)
Extraordinary item -- loss on early
extinguishment of debt........... -- 285,595 -- -- --
----------- ----------- ------------ ------------ ------------
Net loss....................... $(3,176,314) $(5,619,367) $(36,418,796) $(20,660,937) $(10,856,138)
=========== =========== ============ ============ ============
Per share data:
Weighted average basic and
diluted shares used in per
share data calculations........ 2,994,466 4,668,822 8,775,270 8,189,112 9,408,570
Net loss per basic and diluted
share before extraordinary
item............................. $ (1.06) $ (1.14) $ (4.15) $ (2.52) $ (1.17)
=========== =========== ============ ============ ============
Net loss per basic and diluted
share............................ $ (1.06) $ (1.20) $ (4.15) $ (2.52) $ (1.17)
=========== =========== ============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
81
EMCORE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997, 1998
AND THE SIX-MONTH PERIOD ENDED MARCH 31, 1999
COMMON STOCK SHAREHOLDERS' TOTAL
------------------------ ACCUMULATED NOTES SHAREHOLDERS'
SHARES AMOUNT DEFICIT RECEIVABLE EQUITY
BALANCE AT SEPTEMBER 30, 1995........... 2,994,461 $16,637,566 $(14,981,977) $ (146,107) $ 1,509,482
Issuance of common stock purchase
warrants.............................. -- 2,340,000 2,340,000
Notes receivable due from shareholders
in connection with issuance of
detachable warrants................... (151,579) (151,579)
Net loss................................ (3,176,314) (3,176,314)
---------- ----------- ------------ ----------- ------------
BALANCE AT SEPTEMBER 30, 1996........... 2,994,461 18,977,566 (18,158,291) (297,686) 521,589
Issuance of common stock purchase
warrants.............................. 3,601,455 3,601,455
Issuance of common stock in initial
public offering, net of issuance cost
of $3,110,345......................... 2,875,000 22,764,655 22,764,655
Issuance of common stock on exercise of
warrants.............................. 94,124 384,027 384,027
Issuance of common stock on exercise of
stock options......................... 34,965 53,640 53,640
Redemptions of notes receivable from
shareholders.......................... 31,842 31,842
Forgiveness of notes receivable from
shareholder........................... 57,300 57,300
Compensatory stock issuances............ 1,841 35,431 35,431
Net loss................................ (5,619,367) (5,619,367)
---------- ----------- ------------ ----------- ------------
BALANCE AT SEPTEMBER 30, 1997........... 6,000,391 45,816,774 (23,777,658) (208,544) 21,830,572
Issuance of common stock purchase
warrants.............................. 1,309,546 1,309,546
Issuance of common stock on exercise of
warrants in exchange for notes
receivable............................ 1,827,966 7,458,101 (7,458,101) --
Issuance of common stock and common
stock purchase options and warrants in
connection with the acquisition of
MODE.................................. 1,461,866 32,329,000 32,329,000
Stock option exercise................... 35,809 83,486 83,486
Stock purchase warrant exercise......... 5,660 23,092 23,092
Issuance of common stock on exercise of
warrants in exchange for subordinated
notes................................. 17,605 71,841 71,841
Compensatory stock issuances............ 26,655 351,397 351,397
Net loss (as restated, see Note 20)..... (36,418,796) (36,418,796)
---------- ----------- ------------ ----------- ------------
BALANCE AT SEPTEMBER 30, 1998 (AS
RESTATED, SEE NOTE 20)................ 9,375,952 87,443,237 (60,196,454) (7,666,645) 19,580,138
Preferred stock dividends............... (144,663) (144,663)
Periodic accretion of redeemable
preferred stock to mandatory
redemption value...................... (23,810) (23,810)
Stock purchase warrant exercise......... 359 1,157 1,157
Stock option exercise................... 55,564 200,069 200,069
Compensatory stock issuances............ 14,472 210,987 210,987
Net loss................................ (10,856,138) (10,856,138)
---------- ----------- ------------ ----------- ------------
BALANCE AT MARCH 31, 1999 (UNAUDITED)... 9,446,347 $87,855,450 $(71,221,065) $(7,666,645) $ 8,967,740
========== =========== ============ =========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
82
EMCORE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
YEARS ENDED SEPTEMBER 30, MARCH 31,
------------------------------------------ ---------------------------
1996 1997 1998 1998 1999
(AS RESTATED (UNAUDITED)
SEE NOTE 20)
(AS RESTATED (AS RESTATED
SEE NOTE 20) SEE NOTE 20)
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss......................... $ (3,176,314) $ (5,619,367) $(36,418,796) $(20,660,937) $(10,856,138)
Adjustments to reconcile net loss
to net cash provided by (used
for) operating activities:
Acquired in-process research
and development, non-cash.... -- -- 19,516,000 19,516,000 --
Depreciation and
amortization................. 1,871,016 3,187,755 8,767,105 4,087,116 5,661,977
Provision for doubtful
accounts..................... 146,418 515,000 1,118,000 (80,200) 120,000
Provision for inventory
valuation.................... 105,000 120,000 120,000 60,000 --
Deferred gain on sale to
associated company........... -- -- -- -- 1,259,204
Detachable warrant accretion
and debt issuance cost
amortization................. 125,792 3,988,390 600,536 192,121 632,973
Extraordinary loss on early
extinguishment of debt....... -- 285,595 -- -- --
Equity in net loss of an
unconsolidated affiliate..... -- -- 198,495 -- 1,671,021
Compensatory stock issuances... -- 35,431 351,397 169,833 210,987
Write-off note receivable due
from shareholder............. -- 57,300 -- -- --
Change in assets and liabilities:
Accounts receivable -- trade... (1,041,956) (5,929,533) 1,882 (2,559,591) (4,144,838)
Accounts receivable -- related
party........................ -- (2,500,000) 2,000,000 -- (2,246,731)
Inventories.................... (4,410,566) 339,414 (5,243,187) (2,636,638) (238,719)
Costs in excess of billings on
uncompleted contracts........ (2,882) 19,322 (77,531) (19,281) (16,431)
Prepaid expenses and other
current assets............... (26,784) (60,458) 12,632 (258,792) (69,844)
Other assets................... (468,565) 27,568 (623,775) (168,226) 315,876
Accounts payable............... 3,398,078 (2,029,154) 7,949,760 1,413,423 (2,891,203)
Accrued expenses............... 777,899 1,880,943 (970,148) (1,255,438) 1,259,857
Advanced billings.............. 1,122,667 (1,308,279) 1,182,187 (1,912,317) 3,501,935
Billings in excess of costs on
uncompleted contracts........ (306,359) -- -- -- --
Unearned service revenue....... 12,315 111,964 (71,501) (94,279) (52,778)
------------ ------------ ------------ ------------ ------------
Total adjustments................ 1,302,073 (1,258,742) 34,831,852 16,453,731 4,973,286
------------ ------------ ------------ ------------ ------------
Net cash and cash equivalents
used for operating
activities..................... (1,874,241) (6,878,109) (1,586,944) (4,207,206) (5,882,852)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property, plant,
and equipment................ (7,090,869) (11,631,642) (22,132,071) (4,995,579) (10,448,436)
Acquisition, cash acquired..... -- -- 192,799 192,799 --
Investments in unconsolidated
affiliates................... -- -- (490,000) (5,771,279)
(Funding) payments of
restricted cash.............. -- (312,500) 250,000 124,999 62,501
------------ ------------ ------------ ------------ ------------
Net cash and cash equivalents
used for investing
activities..................... (7,090,869) (11,944,142) (22,179,272) (4,677,781) (16,157,214)
------------ ------------ ------------ ------------ ------------
F-7
83
EMCORE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
SIX MONTHS ENDED
YEARS ENDED SEPTEMBER 30, MARCH 31,
------------------------------------------ ---------------------------
1996 1997 1998 1998 1999
(AS RESTATED (UNAUDITED)
SEE NOTE 20)
(AS RESTATED (AS RESTATED
SEE NOTE 20) SEE NOTE 20)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from preferred stock
offering -- net of issuance
costs of $500,000............ -- -- -- -- 21,200,000
Proceeds from initial public
offering, net of issuance
cost of $3,110,345........... -- 22,764,655 -- --
Proceeds (payments) under bank
loans........................ -- 8,000,000 17,950,000 7,950,000 5,050,000
Proceeds (payments) from notes
payable, related party,
net.......................... -- -- 7,000,000 -- (7,000,000)
Proceeds from subordinated note
issuance..................... 11,009,600 -- -- -- --
Payments on demand note
facility and subordinated
debt......................... -- (10,000,000) -- -- --
Proceeds from exercise of stock
purchase warrants............ -- 85,121 23,092 19,131 308
Proceeds from exercise of stock
options...................... -- 53,640 83,486 41,926 199,763
Payments on capital lease
obligations.................. (3,000,000) (5,723) (487,671) (187,105) (225,403)
Reduction in notes receivable
from shareholders............ -- 210,317 -- -- --
------------ ------------ ------------ ------------ ------------
Net cash and cash equivalents
provided by financing
activities..................... 8,009,600 21,108,010 24,568,907 7,823,952 19,224,668
------------ ------------ ------------ ------------ ------------
Net (decrease) increase in cash
and cash equivalents........... (955,510) 2,285,759 802,691 (1,061,035) (2,815,398)
Cash and cash equivalents at
beginning of period............ 2,322,896 1,367,386 3,653,145 3,653,145 4,455,835
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at end
of period...................... $ 1,367,386 $ 3,653,145 $ 4,455,836 $ 2,592,110 $ 1,640,437
============ ============ ============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid for interest........... $ 276,000 $ 600,000 $ 1,347,000 314,521 865,087
Cash paid for income taxes....... 55,000 -- -- -- --
NONCASH INVESTING AND FINANCING
ACTIVITIES:
Common stock issued on the
exercise of warrants in
exchange for subordinated
notes.......................... -- -- $ 71,841 -- --
Issuance of common stock on the
exercise of warrants in
exchange for notes
receivable..................... -- -- $ 7,458,101 $ 7,458,101 --
Issuance of common stock, and
common stock purchase options
and warrants in connection with
the acquisition of MicroOptical
Devices, Inc................... -- -- $ 32,329,003 $32,329,003 --
Reference is made to Note 8 -- Debt Facilities -- for disclosure relating to
certain non-cash warrant issuance.
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
84
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS
EMCORE is a designer and developer of compound semiconductor materials and
process technology and a manufacturer of production systems used to fabricate
compound semiconductor wafers. Compound semiconductors are used in a broad range
of applications in wireless communications, telecommunications, computers, and
consumer and automotive electronics. The Company has recently capitalized on its
technology base by expanding into the design and production of compound
semiconductor wafers and package-ready devices and under specific arrangements
has licensed certain process technologies. During fiscal 1998, the Company
completed the acquisition of a development stage company focused on the research
and development of optical laser technologies (see Note 3). The Company offers
its customers a complete, vertically-integrated solution for the design,
development and production of compound semiconductor wafers and devices.
Basis of Presentation and Liquidity. The accompanying financial statements
have been prepared on a going concern basis. For the year ended September 30,
1998, the Company experienced an 8% decline in revenue of approximately $4.0
million and a substantial operating loss amounting to approximately $34.6
million (approximately $15.1 million excluding the effect of acquired in-process
research and development) and had a working capital deficiency of $2.0 million.
The Company's operations are subject to a number of risks, including but
not limited to a history of net losses from operations, future capital needs,
dependence on key personnel, competition and risk of technological obsolescence,
governmental regulations and approvals, technology research and development
results, continued development of its compound semiconductor manufacturing and
marketing capabilities and a concentration of international sales in Asia. The
Company's operations for the year ended September 30, 1998 were primarily funded
through borrowings under existing credit facilities and short-term advances from
the Company's Chairman -- aggregating $7.0 million as of September 30, 1998. The
Company's Chairman has from time to time provided credit enhancements in the
form of debt guarantees and has loaned the Company funds to support its
expansion and capital equipment requirements. The Company's Chief Executive
Officer has also provided credit enhancement in the form of debt guarantees for
the Company. On November 30, 1998, the Company completed a preferred stock
private placement (the "Private Placement" see Note 17), resulting in net
proceeds of $21.2 million. The Company repaid its Chairman $8.5 million
(including $1.5 million advanced to the Company subsequent to September 30,
1998), invested approximately $5.6 million in two unconsolidated ventures, used
$2 million to repay debt and the balance is being used for general working
capital purposes. In addition, the Company's $10.0 million credit facility was
extended to October 1, 1999. The Company's Chairman has committed to provide the
Company with $30 million of long-term financing through July 1, 2000. The
Chairman's financing commitment terminates if the Company completes a secondary
offering of approximately $40.0 million. The Company's operating plans include,
among other things attempting to improve (i) operating cash flow through
increased sales of compound semiconductor systems, wafers and package-ready
devices
F-9
85
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
and (ii) managing its cost structure in relation to its anticipated level of
revenues. The Company believes that its current liquidity, together with
available credit facilities and the proceeds from the Private Placement, should
be sufficient to meet its cash needs for working capital through fiscal 1999. If
the working capital generated from the Private Placement and cash generated from
operations is not sufficient to satisfy the Company's liquidity requirements,
the Company will seek to obtain additional equity or debt financing. Additional
funding may not be available when needed or on terms acceptable to the Company.
If the Company is required to raise additional financing and if adequate funds
are not available or are not available on acceptable terms, the ability to
continue to fund expansion, develop and enhance products and services, or
otherwise respond to competitive pressures would be severely limited. Such a
limitation could have a material adverse effect on the Company's business,
financial condition or operations and the financial statements do not include
any adjustment that could result therefrom.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information. The financial information as of March 31,
1999 and for the six-month periods ended March 31, 1998 and 1999 is unaudited,
but includes all adjustments (consisting only of normal recurring accruals) that
the Company considers necessary for a fair presentation of the financial
position at such date and the operating results and cash flows for those
periods. Operating results for the six months ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the entire year.
Principles of Consolidation. The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiary. The equity method
of accounting is used for unconsolidated affiliates in which the Company's
equity is at least 20% and not more than 50%. All significant intercompany
transactions are eliminated upon consolidation.
Cash and Cash Equivalents. The Company considers all highly liquid
short-term investments purchased with an original maturity of three months or
less to be cash equivalents. The Company had approximately $2.3 million and $3.0
million in cash equivalents at September 30, 1997 and 1998, respectively. As of
September 30, 1998, the Company had restricted cash in the amount of $62,500 due
to a contractual obligation.
Inventories. Inventories are stated at the lower of FIFO (first-in,
first-out) cost or market. Reserves are established for slow moving or obsolete
inventory based upon historical and anticipated usage.
Property and Equipment. Property and equipment are stated at cost.
Significant renewals and betterments are capitalized. Maintenance and repairs
which do not extend the useful lives of the respective assets are expensed.
Depreciation is recorded using the straight-line method over the estimated
useful lives of the applicable assets, which range from three to five years.
Leasehold improvements are amortized using the straight-line method over the
term of the related leases or the estimated useful lives of
F-10
86
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the improvements, whichever is less. Depreciation expense includes the
amortization of capital lease assets. When assets are retired or otherwise
disposed of, the assets and related accumulated depreciation accounts are
adjusted accordingly, and any resulting gain or loss is recorded in current
operations.
Long-Lived Assets. The carrying amount of assets is reviewed on a regular
basis for the existence of facts or circumstances, both internally and
externally, that suggest impairment. To date no such impairment has been
indicated. The Company determines if the carrying amount of a long-lived asset
is impaired based on anticipated undiscounted cash flows before interest. In the
event of an impairment, a loss is recognized based on the amount by which the
carrying amount exceeds fair value of the asset. Fair value is determined
primarily using the anticipated cash flows before interest, discounted at a rate
commensurate with the risk involved.
Deferred Costs. Included in other assets are deferred costs related to
obtaining product patents and debt issuance costs and an investment in an
unconsolidated affiliate. Total amortization expense amounted to approximately
$128,000, $40,000 and $79,000 for the years ended September 30, 1996, 1997 and
1998, respectively. During the year ended September 30, 1998, the Company issued
284,684 common stock purchase warrants in exchange for the guaranteeing of a
credit facility by the Company's Chairman and Chief Executive Officer. The
warrants were assigned a value of $1,310,000 which is being amortized over the
eighteen month term of the facility. The warrants were valued by the Company
based upon its application of the Black Scholes Option Pricing Model ("Black
Scholes"). Amortization expense related to such warrant issuance amounted to
approximately $219,000 for fiscal 1998.
Goodwill. Goodwill is amortized using the straight-line method over three
years. The Company, as applicable, evaluates whether there has been a permanent
impairment in the value of goodwill. Any impairment would be recognized when the
sum of expected undiscounted cash flows derived from the acquired business is
less than its carrying value.
Income Taxes. The Company recognizes deferred taxes by the asset and
liability method of accounting for income taxes. Under the asset and liability
method, deferred income taxes are recognized for differences between the
financial statement and tax bases of assets and liabilities at enacted statutory
tax rates in effect for the years in which the differences are expected to
reverse. The effect on deferred taxes of a change in tax rates is recognized in
income in the period that includes the enactment date. In addition, valuation
allowances are established when necessary to reduce deferred tax assets to the
amounts expected to be realized. The primary sources of temporary differences
are depreciation and amortization of intangible assets.
Revenue and Cost Recognition -- Systems, Components and Service Revenues.
Revenue from systems sales is recognized upon shipment, when title passes to the
customer. Subsequent to product shipment, the Company incurs certain
installation costs at the customer's facility and warranty costs which are
estimated and accrued at the time the sale is recognized. Component sales and
service revenues are recognized when goods are shipped or services are rendered
to the customer. Service revenue
F-11
87
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
under contracts with specified service terms is recognized as earned over the
service period in accordance with the terms of the applicable contract. Costs in
connection with the procurement of the contracts are charged to expense as
incurred.
Revenue and Cost Recognition -- Contract Revenue. The Company's research
contracts require the development or evaluation of new materials applications
and have a duration of six to thirty-six months. For research contracts with the
U.S. Government and commercial enterprises with durations greater than six
months, the Company recognizes revenue to the extent of costs incurred plus the
estimated gross profit as stipulated in such contracts, based upon contract
performance. Contracts with a duration of six months or less are accounted for
on the completed contract method. A contract is considered complete when all
costs, except insignificant items, have been incurred, and the research
reporting requirements to the customer have been met. Contract costs include all
direct material and labor costs and those indirect costs related to contract
performance, such as indirect labor, supplies, tools, repairs and depreciation
costs, as well as coverage of certain general and administrative costs.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined. Revenues from contracts amounted to
approximately $3,295,000, $614,000 and $438,000 for the years ended September
30, 1996, 1997 and 1998, respectively.
Research and Development. Research and development costs related to the
development of both present and future products and Company-sponsored materials
application research are charged to expense as incurred. In connection with the
acquisition of MicroOptical Devices, Inc. ("MODE"), the Company recorded a
charge of $19,516,000 for acquired in-process research and development.
Fair Value of Financial Instruments. The Company estimates the fair value
of its financial instruments based upon discounted cash flow analyses using the
Company's incremental borrowing rate on similar instruments as the discount
rate. As of September 30, 1998, the fair value of the Company's subordinated
notes exceeded the carrying value of such instruments by approximately $830,000.
As of September 30, 1998, the carrying values of the Company's cash and cash
equivalents, receivables, accounts payable and variable rate based debt as
reflected on the Company's accompanying balance sheet approximates fair value.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements. Estimates also affect the reported amounts of revenues
and expenses during the reporting period. Actual results may differ from those
estimates. The Company's most significant estimates relate to acquired
in-process research and development, accounts receivable and inventory valuation
reserves, warranty and installation accruals, estimates of cost and related
gross profits on certain research contracts and the valuation of long-lived
assets.
F-12
88
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Net Loss Per Share. The Company accounts for earnings per share under the
provisions of Statement of Financial Accounting Standards No. 128 "Earnings per
Share" ("SFAS No. 128"). Basic and diluted earnings per share calculated
pursuant to SFAS No. 128 have been restated for all periods presented to give
effect to the Securities and Exchange Commission's Staff Accounting Bulletin No.
98 which eliminated certain computational requirements of Staff Accounting
Bulletin No. 64.
Basic earnings per common share was calculated by dividing net loss by the
weighted average number of common stock shares outstanding during the period.
Diluted earnings per share was calculated by dividing net loss by the sum of the
weighted average number of common shares outstanding plus all additional common
shares that would have been outstanding if potentially dilutive common shares
had been issued. The following table reconciles the number of shares utilized in
the Company's earnings per share calculations.
SIX MONTHS ENDED
YEARS ENDED SEPTEMBER 30, MARCH 31,
---------------------------------------- ---------------------------
1996 1997 1998 1998 1999
(UNAUDITED)
Net loss............... $(3,176,314) $(5,619,367) $(36,418,796) $(20,660,937) $(10,856,138)
Preferred stock
dividends.......... -- -- -- -- (144,663)
Periodic accretion of
preferred stock to
redemption value... -- -- -- -- (23,810)
----------- ----------- ------------ ------------ ------------
Net loss available to
common
shareholders......... $(3,176,314) $(5,619,367) $(36,418,796) $(20,660,937) $(11,024,611)
=========== =========== ============ ============ ============
Loss per common share--
basic................ $ (1.06) $ (1.20) $ (4.15) $ (2.52) $ (1.17)
=========== =========== ============ ============ ============
Loss per common share--
diluted.............. $ (1.06) $ (1.20) $ (4.15) $ (2.52) $ (1.17)
=========== =========== ============ ============ ============
Common
shares -- basic...... 2,994,466 4,668,822 8,775,270 8,189,112 9,408,570
Effect of dilutive
securities:
Stock options and
warrants............. -- -- -- -- --
Preferred Stock........ -- -- -- -- --
Common
shares -- diluted.... 2,994,466 4,668,822 8,775,270 8,189,112 9,408,570
- -------------------------
The effect of outstanding common stock purchase options and warrants and the
number of shares to be issued upon the conversion of the Company's Series I
Preferred Stock have been excluded from the Company's earnings per share
calculation since the effect of such securities is anti-dilutive.
Reclassifications. Prior period balances have been reclassified to conform
with the current period financial statement presentation.
F-13
89
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131 "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS No. 131"), which
establishes standards for reporting information about operating segments in
annual financial statements. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The Company is required to adopt this standard in its fiscal year ended
September 30, 1999. The adoption of SFAS No. 131 will not have an impact on the
Company's results of operations, financial position or cash flows.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-
1 is effective for financial statements for years beginning after December 15,
1998. SOP 98-1 provides guidance over accounting for computer software developed
or obtained for internal use, including the requirement to capitalize specified
costs and amortization of such costs. The Company does not expect the adoption
of this standard to have a material effect on its results of operations,
financial position or cash flows.
In April 1998, AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities" ("SOP 98-5"). SOP 98-5, which is effective for fiscal years
beginning after December 15, 1998, provides guidance on the financial reporting
of start-up costs and organization costs. It requires costs of start up
activities and organization costs to be expenses as incurred. The adoption of
this standard is not expected to have a significant impact on its results of
operations, financial position or cash flows.
In June of 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and requires recognition of all
derivatives as assets or liabilities in the statement of financial position and
measurement of these instruments at fair value. The statement is effective for
fiscal years beginning after June 15, 1999. Management believes that adopting
this statement will not have a material impact on the financial position,
results of operations, or cash flows of the Company.
F-14
90
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. ACQUISITION
On December 5, 1997, the Company acquired all of the outstanding capital
stock of MODE in exchange for 1,461,866 shares of EMCORE common stock, 200,966
common stock purchase options (exercise prices ranging from $0.43 to $0.59), and
47,118 common stock purchase warrants (exercise prices ranging from $4.32 to
$5.92). The purchase price was approximately $32,829,000 including direct
acquisition costs of approximately $500,000. The acquisition of MODE was
recorded using the purchase method of accounting. Accordingly, the results of
operations of the acquired business and the fair values of the acquired tangible
and intangible assets and assumed liabilities have been included in the
Company's financial statements as of December 5, 1997. The allocation of the
fair value of the net assets acquired is as follows:
Net tangible assets......................................... $ 156,000
Goodwill.................................................... 13,157,000
Acquired in process research and development................ 19,516,000
-----------
Total purchase price...................................... $32,829,000
===========
The common stock issued in connection with the MODE acquisition was valued
based upon the average closing price of the Company's common stock for the five
days before and after the announcement date of the acquisition. The assumed MODE
options and warrants were valued using Black-Scholes and such values amounted to
approximately $3,761,000 and $793,000, respectively.
The MODE options have a term of 10 years from the date of grant, with such
options expiring at various dates through July 2007. The options vest, with
continued service, over a four-year period; 25% in year one and 75% equally over
the remaining 36 months. The warrants have a term of 10 years from the date of
grant, were exercisable upon grant, and expire at various dates through May
2007.
MODE was a development stage company (incorporated in August 1995) and had
18 employees at the date of acquisition. MODE's activities were substantially
dedicated towards the research and development of optical laser devices at the
date of acquisition.
Management is responsible for estimating the fair value of the acquired
in-process research and development. As of the date of acquisition, MODE had six
primary micro-optical laser research and development projects in-process, which
had not reached technological feasibility. MODE's in-process research and
development related to new technologies, the fair value assumptions relating to
pricing, product margins and expense levels were based upon management's
experience with its own operations and the compound semiconductor industry as a
whole.
The Company allocated $475,000 of the purchase price to the acquired
workforce of MODE which is included in the approximately $13.2 million of
goodwill discussed above. The amount allocated to goodwill is being amortized
over a period of three years.
F-15
91
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following unaudited pro forma basis financial information reflects the
combined results of operations of the Company and MODE, as if MODE had been
acquired as of October 1, 1996 and October 1, 1997, respectively, but does not
reflect the non-recurring write-off of the acquired in-process research and
development. The summary includes the impact of certain adjustments, such as
goodwill amortization and the number of shares outstanding.
YEAR ENDED SEPTEMBER 30,
---------------------------
1997 1998
(UNAUDITED)
Revenue............................................. $ 48,313,000 $ 43,860,000
Net loss before extraordinary item.................. (12,219,000) (18,344,000)
Net loss............................................ (12,505,000) (18,344,000)
Net loss per basic and diluted share................ $(2.04) $(2.09)
The unaudited pro forma results of operations are not necessarily
indicative of what actually would have occurred if the acquisition had occurred
on October 1, 1996. In addition, the unaudited pro forma results of operations
are not intended to be a projection of future results that might be achieved
from the combined entity. The foregoing pro forma results of operations does not
reflect the non-recurring write-off of acquired in-process research and
development.
NOTE 4. CONCENTRATION OF CREDIT RISK
The Company sells its compound semiconductor products domestically and
internationally. The Company's international sales are generally made under
letter of credit arrangements.
For the years ended September 30, 1996, 1997 and 1998, the Company sold
42.5%, 42.0% and 39.1% of its products to foreign customers, respectively.
The Company's world-wide sales to major customers were as follows:
AS OF SEPTEMBER 30,
---------------------------------------
1996 1997 1998
Customer A................................ $ 6,558,930 $ 4,872,540 $ 7,563,137
Customer B................................ 1,773,864 7,158,619 5,602,120
Customer C................................ -- 2,500,000 2,501,500
Customer D................................ 1,530,000 3,085,000 178,856
Customer E................................ 2,075,722 -- --
----------- ----------- -----------
Total................................... $11,938,516 $17,616,159 $15,845,613
=========== =========== ===========
The Company performs material application research under contract with the
U.S. Government or as a subcontractor of U.S. Government funded projects.
The Company performs ongoing credit evaluations of its customers' financial
condition and collateral is not requested. The Company maintains reserves for
potential credit losses based upon the credit risk of specified customers,
historical trends and other information. To reduce credit risk and to fund
manufacturing costs, the
F-16
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EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Company requires periodic prepayments or irrevocable letters of credit on most
production system orders. During the quarter ended June 30, 1998, the Company
wrote off outstanding receivables of approximately $1.0 million which was due
from an Asian customer. Prior to this event, the Company's credit losses
generally had not exceeded its expectations.
The Company has maintained cash balances with certain financial
institutions in excess of the $100,000 insured limit of the Federal Deposit
Insurance Corporation.
NOTE 5. INVENTORIES
The components of inventories consisted of the following:
AS OF SEPTEMBER 30, AS OF
------------------------ MARCH 31,
1997 1998 1999
(UNAUDITED)
Raw materials.............................. $6,513,379 $11,346,487 $ 9,926,968
Work-in-process............................ 672,247 1,091,971 2,743,897
Finished goods............................. -- 6,868 13,181
---------- ----------- -----------
Total.................................... $7,185,626 $12,445,326 $12,684,046
========== =========== ===========
NOTE 6. PROPERTY, PLANT AND EQUIPMENT
Major classes of property and equipment are summarized below:
AS OF SEPTEMBER 30, AS OF
--------------------------- MARCH 31,
1997 1998 1999
(UNAUDITED)
Land................................... $ -- $ 1,028,902 $ 1,028,902
Building............................... -- 7,493,385 8,915,945
Equipment.............................. 19,190,770 28,367,324 34,379,727
Furniture and fixtures................. 2,300,146 3,255,680 3,999,342
Leasehold improvements................. 6,085,256 9,948,121 10,283,521
Fixed assets under capital leases...... 98,623 2,042,728 3,956,157
------------ ------------ ------------
27,674,795 52,136,140 62,563,594
Less: accumulated depreciation and
amortization......................... (10,876,962) (15,926,309) (19,303,666)
------------ ------------ ------------
Total................................ $ 16,797,833 $ 36,209,831 $ 43,259,928
============ ============ ============
F-17
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EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
At September 30, 1998, minimum future lease payments due under the capital
leases are as follows:
PERIOD ENDING SEPTEMBER 30,
1999...................................................... $ 796,648
2000...................................................... 741,345
2001...................................................... 62,478
2002...................................................... 25,336
2003 and thereafter....................................... --
----------
Total minimum lease payments................................ 1,625,807
Less: amount representing interest (average rate of 9.8%)... (198,254)
----------
Net minimum lease payments.................................. 1,427,553
Less: current portion....................................... (673,036)
----------
Long-term portion........................................... $ 754,517
==========
The provisions for depreciation and amortization expense on owned property
and equipment amounted to approximately $1,743,000, $3,148,000 and $4,683,000
for the years ended September 30, 1996, 1997 and 1998, respectively. Accumulated
amortization on assets accounted for as capital lease amounted to approximately
$366,000 as of September 30, 1998.
Included in equipment above are ten systems and twenty systems with a
combined net book value of approximately $5.1 million and $9.8 million at
September 30, 1997 and 1998, respectively. Such systems are utilized for the
production of compound semiconductor wafers and package-ready devices for sale
to third parties, systems demonstration purposes, system sales support, in-house
materials applications, internal research and contract research funded by third
parties.
NOTE 7. ACCRUED EXPENSES
Accrued expenses consisted of the following:
AS OF SEPTEMBER 30, AS OF
----------------------- MARCH 31,
1997 1998 1999
(UNAUDITED)
Accrued payroll, vacation and other employee
expenses................................... $1,659,428 $2,113,765 $2,197,670
Installation and warranty costs.............. 1,411,120 704,114 1,255,646
Interest..................................... 272,445 346,250 402,140
Other........................................ 524,596 1,033,276 1,601,806
---------- ---------- ----------
Total...................................... $3,867,589 $4,197,405 $5,457,262
========== ========== ==========
F-18
94
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8. DEBT FACILITIES
1998 Agreement:
On June 22, 1998, the Company entered into an $8.0 million loan agreement
with First Union National Bank (the "1998 Agreement"), which expires December
31, 1999. The 1998 Agreement bears interest at a rate equal to one-month LIBOR
plus three-quarters of one percent per annum (or 6.4%) at September 30, 1998. As
of September 30, 1998, $8.0 million was outstanding under the 1998 Agreement and
is due and payable on December 31, 1999. The 1998 Agreement is guaranteed by
both the Company's Chairman and Chief Executive Officer. In exchange for
guaranteeing the facility, the Chairman and the Chief Executive Officer were
granted an aggregate of 284,684 common stock purchase warrants exercisable at
$11.375 per share until May 1, 2001. These warrants are callable at the
Company's option at $0.85 per warrant at such time as the Company's Common Stock
has traded at or above 150% of the exercise price for a period of thirty days.
The Company assigned a value of $1,310,000 to the warrants issued to the
guarantors. This valuation was based upon the Company's application of Black
Scholes. This value is accounted for as debt issuance cost and will be amortized
over the eighteen month life of the 1998 Agreement.
1997 Agreement:
On March 31, 1997, the Company entered into a $10.0 million loan agreement
(the "1997 Agreement"). The Agreement bears interest at the rate of Prime plus
50 basis points (8.75% and 9.0% at September 30, 1998 and 1997, respectively).
As of September 30, 1998 the Company had $9,950,000 outstanding under this
facility. As of September 30, 1997, there were no amounts outstanding under this
facility.
As a result of the net loss for the quarters ended June 30, 1998 and
September 30, 1998, the Company was not in compliance with the 1997 Agreement
fixed charged coverage ratio covenant. The Company received a waiver from the
bank regarding this non-compliance. The Company's 1997 Agreement was
subsequently further extended through October 1, 1999. The 1997 Agreement's
financial covenants were modified under the second amendment, and management
believes that the Company will be able to comply with such requirements
throughout fiscal 1999. In addition, the Company's Chairman has guaranteed such
debt in the event the Company does not meet certain financial covenants.
Subordinated Notes:
On May 1, 1996, the Company issued subordinated notes (the "Subordinated
Notes") in the amount of $9,500,000 to its existing shareholders, $1,000,000 of
which were exchanged for notes receivable from officers and certain employees
with identical payment and interest provisions. The Subordinated Notes are
scheduled to mature on May 1, 2001, and have a stated interest rate of 6.0%
which is payable semi-annually on May 1 and November 1. In addition, the
noteholders were issued 2,328,432 common stock purchase warrants with an
exercise price of $4.08 per share which
F-19
95
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
expire on May 1, 2001. The warrants are exercisable after November 1, 1996, and
are callable at the Company's option, after May 1, 1997, at $0.85 per warrant.
The Company has the legal right of offset with respect to the notes receivable
from officers and certain key employees, and it is their full intention to
offset the corresponding notes receivable and payable upon maturity. As such,
the Company reflected $848,000 of the officers' and employees' notes receivable
as a contra liability, reducing the Company's Subordinated Notes balance. The
remaining $152,000 note receivable has been reflected as a contra equity note
receivable balance, representing the portion of the employee note receivable
associated with common stock purchase warrants issued to such employees. The
Company received cash proceeds of $8,500,000 in connection with this
Subordinated Notes issuance.
On September 1, 1996, the Company issued a subordinated note in the amount
of $2,500,000 to the Company's then majority shareholder with terms identical to
the Subordinated Notes issued on May 1, 1996. In addition, under the terms of
this issuance, 245,098 common stock purchase warrants were issued to purchase
common stock at $10.20 per share and which expire September 1, 2001. These
warrants are exercisable after March 1, 1997, and are callable at the Company's
option after September 1, 1997, at $0.85 per warrant.
The Company assigned a value of $1,440,000 to the May 1, 1996 detachable
warrants and $900,000 to the September 1, 1996 detachable warrants. These
valuations were based upon the Company's application of Black Scholes and the
Company's assessment of the underlying valuation factors, as well as an
assessment of the terms of the Subordinated Notes. The carrying value of the
Subordinated Notes will be subject to periodic accretions, using the interest
method, in order for the carrying amount to equal the Company's obligation upon
maturity. As a result, the May 1, 1996 and September 1, 1996 Subordinated Notes
have an effective interest rate of approximately 9.3% and 15.0%, respectively.
For the years ended September 30, 1998, 1997 and 1996, imputed warrant interest
related to the Subordinated Notes amounted to $370,000, $388,000 and $126,000,
respectively.
Demand Note Facilities:
On September 17, 1998, the Company borrowed $7.0 million from its Chairman.
The loan bears interest at the rate of Prime plus 200 basis points (10.25% as of
September 30, 1998), per annum. In addition, on October 23, 1998 the Company
borrowed an additional $1.5 million from its Chairman on identical terms. The
entire sum of $8.5 million borrowed plus interest was repaid from the proceeds
of the Private Placement (see Note 17).
On October 25, 1996, the Company entered into a $10.0 million demand note
facility (the "Facility"). The Facility bore interest at the rate of LIBOR plus
75 basis points, had a term of one year and was due and payable on demand. The
Facility was guaranteed by the Chairman of the Company's Board of Directors who
provided collateral for the Facility. In December 1996, in return for
guaranteeing the facility, the Company granted the Chairman 980,392 common stock
purchase warrants at $10.20 per share which expire September 1, 2001. These
warrants are exercisable after
F-20
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EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
July 1, 1997, and are callable at the Company's option after December 1, 1997 at
$0.85 per warrant. The Facility was terminated in conjunction with the Company's
initial public offering.
The Company assigned a value of $3,600,000 to the warrants issued to the
guarantor. This valuation was based upon the Company's application of Black
Scholes. This value was accounted for as debt issuance cost and was amortized
over the expected period that the facility was to be in place (four months).
The Company utilized a portion of the proceeds from its initial public
offering to pay down or discharge certain of its debts. The Company repaid the
entire $8.0 million outstanding under its October 1996 Facility and $2.0 million
was used to repay a portion of the Company's outstanding subordinated notes, due
May 1, 2001. In connection with the discharge of the Company's subordinated
notes, an extraordinary loss of $286,000 was recognized.
NOTE 9. COMMITMENTS AND CONTINGENCIES
On November 16, 1992, the Company entered into a three-year lease agreement
with a bank for 34,000 square feet of space in the building the Company
presently occupies. On March 31, 1995, the agreement was renewed for 5 years for
49,000 square feet. In November 1996, the Company signed an agreement to occupy
the remaining 26,000 square feet that it previously had not occupied.
The Company leases certain equipment under non-cancelable operating leases.
Facility and equipment rent expense under such leases amounted to
approximately $350,000, $548,000 and $637,000 for the years ended September 30,
1996, 1997 and 1998, respectively.
Future minimum rental payments under the Company's non-cancelable operating
leases with an initial or remaining term of one year or more as of September 30,
1998 are as follows:
PERIOD ENDING SEPTEMBER 30,
1999...................................................... $ 712,000
2000...................................................... 359,000
2001...................................................... 74,000
2002...................................................... 13,000
2003...................................................... 8,000
----------
Total minimum lease payments.............................. $1,166,000
==========
The Company is from time to time involved in litigation incidental to the
conduct of its business. Management and its counsel believe that such pending
litigation will not have a material adverse effect on the Company's results of
operations, cash flows or financial condition.
F-21
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EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10. INCOME TAXES
Income tax expense consists of the following:
YEARS ENDED SEPTEMBER 30,
---------------------------
1996 1997 1998
Current:
Federal.............................................. $ -- $113,000 $ --
State................................................ -- 24,000 --
----- -------- -----
-- 137,000 --
Deferred:
Federal.............................................. -- -- --
State................................................ -- -- --
----- -------- -----
Total............................................. $ -- $137,000 $ --
===== ======== =====
The principal differences between the U.S. statutory and effective income
tax rates were as follows:
YEARS ENDED SEPTEMBER 30,
--------------------------
1996 1997 1998
US statutory income tax (benefit) expense rate...... (34.0)% (34.0)% (34.0)%
State rate, net of federal benefit.................. (5.9) (5.9) (5.9)
Acquired in-process research and development........ -- -- 18.2
Change in valuation allowance....................... 38.3 37.7 19.8
Non-deductible amortization......................... -- -- 3.4
Other............................................... 1.6 4.7 (1.5)
------ ------ ------
Effective tax rate.................................. 0.0% 2.5% 0.0%
====== ====== ======
F-22
98
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The components of the Company's net deferred taxes were as follows:
YEARS ENDED SEPTEMBER 30,
-------------------------
1997 1998
Deferred tax assets:
Federal net operating loss carryforwards.............. $3,502,348 $7,943,877
Research credit carryforwards (state and federal)..... 718,644 1,479,221
Inventory reserves.................................... 207,732 247,521
Accounts receivable reserves.......................... 243,996 239,701
Interest.............................................. 1,461,389 1,657,337
Accrued installation reserve.......................... 362,379 163,778
Accrued warranty reserve.............................. 158,202 75,621
State net operating loss carryforwards................ 461,821 1,494,064
Other................................................. 144,586 238,318
Valuation reserve -- federal.......................... (5,583,217) (9,438,122)
Valuation reserve -- state............................ (1,334,975) (3,751,314)
---------- ----------
Total deferred tax assets.......................... 342,905 350,002
Deferred tax liabilities:
Fixed assets and intangibles.......................... (342,905) (350,002)
---------- ----------
Total deferred tax liabilities..................... (342,905) (350,002)
Net deferred taxes...................................... $ -- $ --
========== ==========
The Company has established a valuation reserve as it has not determined
that it is more likely than not that the net deferred tax asset is realizable,
based upon the Company's past earnings history.
As of September 30, 1998, the Company has net operating loss carryforwards
for regular tax purposes of approximately $22.0 million which expire in the
years 2003 through 2013. The Company believes that the consummation of certain
equity transactions and a significant change in the ownership during fiscal
years 1995 and 1998 have constituted a change in control under Section 382 of
the Internal Revenue Code ("IRC"). Due to the change in control, the Company's
ability to use its federal net operating loss carryovers and federal research
credit carryovers to offset future income and income taxes, respectively, are
subject to annual limitations under IRC Section 382 and 383.
The Company believes that the acquisition of MODE and the consummation of
certain other equity transactions has constituted a change in control in fiscal
1998 under Section 382 of the IRC. As such, Federal net operating loss
carryovers and research credit carryovers incurred subsequent to the Company's
fiscal 1995 change in control (as described above) will also be subject to
annual limitations under IRC Section 382 and 383.
NOTE 11. STOCKHOLDERS' EQUITY
Reverse Stock Split. On February 3, 1997, the Board of Directors approved
a 3.4:1 reverse stock split of its common stock and approved a decrease in the
number of
F-23
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EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
shares of common stock authorized. All references in the accompanying financial
statements to the number of common stock and per-share amounts have been
restated to reflect the reverse split.
Common Stock Offering. In March 1997, the Company completed an initial
public offering of 2,500,000 shares of common stock at a price of $9.00 per
share (the "Offering"), and upon the exercise of the Underwriter's overallotment
option, 375,000 additional shares of common stock were also sold at $9.00 per
share. The proceeds, net of commissions and certain expenses, to the Company
from the offering were approximately $22.8 million. Prior to the Offering, there
was no public market for the Company's common stock.
Warrant Exercise. On December 3, 1997, the holders of 1.8 million common
stock purchase warrants (with an exercise price of $4.08) exercised such
warrants with the Company taking full recourse notes amounting to approximately
$7.5 million in exchange for the issued common stock. The notes receivable
mature and are payable in full on May 1, 2001 and bear interest at a rate of 6%,
compounding semi-annually. In addition, the holders are required to provide
collateral at a 2:1 coverage ratio. This collateral is presently held by the
Company.
Preferred Stock. The Company's certificate of incorporation authorizes the
Board of Directors to issue up to 5,882,353 shares of preferred stock of the
Company upon such terms and conditions having such rights, privileges and
preferences as the Board of Directors may determine.
NOTE 12. STOCK OPTIONS AND WARRANTS
Stock Option Plan. In November 1994, the Company's Incentive Stock Option
Plan, initiated in 1987, was eliminated. On June 5, 1995, the Company adopted
the 1995 Incentive and Non-Statutory Stock Option Plan (the "Option Plan").
Under the terms of the Option Plan, options to acquire 323,529 shares of common
stock may be granted to eligible employees, as defined, at no less than 100
percent of the fair market value on the date of grant. In March 1996, options to
acquire an additional 323,530 shares of common stock were approved. In February
1997, options to acquire an additional 725,000 shares of common stock were
approved. As of September 30, 1998, 1,372,059 stock options were available for
issuance under the Company's Option Plan.
Certain options under the Option Plan are intended to qualify as incentive
stock options pursuant to Section 422A of the Internal Revenue Code.
During fiscal 1998, options with respect to 816,284 shares were granted
pursuant to the Company's option plan or issued in connection with the MODE
acquisition at exercise prices ranging from $0.44 to $20.00 per share.
Stock options granted generally vest over three to five years and are
exercisable over a ten year period. As of September 30, 1996, 1997 and 1998,
options with respect to 162,764, 199,368 and 481,863 shares were exercisable,
respectively.
F-24
100
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the activity under the plan:
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
Outstanding as of September 30, 1995.................... 281,470 $ 3.03
Granted............................................... 57,942 6.04
Exercised............................................. -- --
Canceled.............................................. -- --
--------- ------
Outstanding as of September 30, 1996.................... 339,412 $ 3.54
Granted............................................... 182,700 11.06
Exercised............................................. (42,165) 3.17
Canceled.............................................. (4,475) 3.08
--------- ------
Outstanding as of September 30, 1997.................... 475,472 $ 6.47
Granted............................................... 615,318 13.34
Exercised............................................. (19,919) 3.78
Canceled.............................................. (35,457) 12.34
--------- ------
Outstanding as of September 30, 1998.................... 1,035,414 $10.40
Granted............................................... 9,000 25.06
Exercised............................................. (11,466) 3.29
Canceled.............................................. (23,489) 12.00
--------- ------
Outstanding as of March 31, 1999 (unaudited)............ 1,009,459 10.44
========= ======
As of September 30, 1998, stock options outstanding, excluding those
assumed in connection with the acquisition of MODE, were as follows:
WEIGHTED AVERAGE
REMAINING
OPTIONS CONTRACTUAL LIFE EXERCISABLE
EXERCISE PRICES OUTSTANDING (YEARS) OPTIONS
$0.00 more than x less than $5.00......................... 242,219 7.96 295,423
$5.00 more than x less than $10.00........................ 22,500 9.88 --
$10.00 more than x less than $15.00....................... 661,975 9.17 178,873
$15.00 more than x less than $20.00....................... 74,720 9.19 767
$20.00 more than x less than $25.00....................... 34,000 8.94 6,800
In connection with the Company's acquisition of MODE, it assumed 200,966
common stock purchase options with exercise prices ranging from $0.43 to $0.59.
The MODE options have a term of 10 years from the date of grant, with such
options expiring at various dates through July 31, 2007. The options vest, with
continued service, over a four-year period; 25% in year one and 75% equally over
the remaining 36 months. As of September 30, 1998, there are 177,312 options
outstanding at a weighted average exercise price of $0.49.
F-25
101
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the activity of options assumed in the MODE
acquisition.
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
Outstanding as of September 30, 1997.................... -- --
Options assumed at the date of acquisition.............. 200,966 $0.50
Exercised............................................... (15,890) 0.51
Cancelled............................................... (7,764) 0.56
--------- -----
Outstanding as of September 30, 1998.................... 177,312 0.50
Granted................................................. -- --
Exercised............................................... (9,634) 0.54
Cancelled............................................... (5,170) 0.58
--------- -----
Outstanding as of March 31, 1999 (unaudited)............ 162,508 $0.49
========= =====
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock Based Compensation" ("SFAS 123"). SFAS 123
establishes financial and reporting standards for stock based compensation
plans. The Company has adopted the disclosure only provisions of this standard
and has elected to continue to apply the provision of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees". Had the
Company elected to recognize compensation expense for stock options based on the
fair value at the grant dates of awards, net loss and net loss per share would
have been as follows:
YEARS ENDED SEPTEMBER 30,
--------------------------
1997 1998
Net loss before extraordinary item
As reported.......................................... $5,333,772 $36,418,796
Pro forma............................................ 5,441,274 37,037,847
Net loss per basic and diluted share before
extraordinary item
As reported.......................................... $ (1.14) $ (4.15)
Pro forma............................................ (1.17) (4.22)
Net loss
As reported.......................................... $5,619,367 $36,418,796
Pro forma............................................ 5,726,869 37,037,847
Net loss per basic and diluted share
As reported.......................................... $ (1.20) $ (4.15)
Pro forma............................................ (1.23) (4.22)
The weighted average fair value of the Company's stock options was
calculated using Black Scholes with the following weighted-average assumptions
used for grants in fiscal 1997: no dividend yield; expected volatility of 0%
prior to the Company's initial public offering and 60% thereafter; a risk-free
interest rate of 6.04% and 5.57% for fiscal years 1997 and 1998, respectively;
and expected lives of 5 years. The weighted average fair value of options
granted during the years ended September 30, 1997 and 1998 is $3.82 and $7.50
per share, respectively. Stock options granted by the
F-26
102
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Company prior to its initial public offering were valued using the minimum value
method under FASB No. 123.
Warrants. Set forth below is a summary of the Company's outstanding
warrants at September 30, 1998:
EXERCISE EXPIRATION
SECURITY PRICE WARRANTS DATE
Common Stock(1)........................... $ 4.08 385,428 May 1, 2001
Common Stock(2)........................... 4.33 36,990 August 21, 2006
Common Stock(2)........................... 5.92 10,128 May 16, 2007
Common Stock(3)........................... 10.20 1,225,490 September 1, 2001
Common Stock(4)........................... 11.38 284,684 May 1, 2001
- -------------------------
(1) Issued in connection with the Company's May 1996 subordinated note issuance.
(2) Issued in connection with the MODE acquisition.
(3) Issued in connection with the Company's September 1996 subordinated debt
issuance and October 1996 debt guarantee.
(4) Issued in connection with the 1998 Agreement guarantee.
NOTE 13. RELATED PARTIES
In May 1995, 52% of the Company's outstanding shares of Common Stock were
purchased by Jesup & Lamont Merchant Partners, L.L.C. ("JLMP"). Prior to May 12,
1997, a majority of the Company's then six directors were members of JLMP. On
May 12, 1997, JLMP distributed all of its shares of the Company to the
individual members of JLMP. In May 1995, the Company entered into a consulting
agreement (the "Agreement") with Jesup & Lamont Capital Markets, Inc. ("Jesup &
Lamont") pursuant to which Jesup & Lamont agreed to provide financial advisory
and employee services for the Company for one year. Total fees paid to Jesup &
Lamont amounted to approximately $241,697 for the fiscal year ended September
30, 1996. No fees were paid to Jesup & Lamont during the fiscal years ended
September 30, 1998 and 1997.
In December 1996, the Company's chairman and chief executive officer
retired. The Company entered into a consulting agreement with him for a term of
two years and will provide compensation of $250,000 per annum. In addition, the
Company has also forgiven $115,300 of his indebtedness to the Company and had
agreed to extend the period for the exercise of his vested stock options through
March 1997 and accordingly he exercised all 26,471 vested shares.
In fiscal 1997, the Company entered into a non-exclusive and non-refundable
technology licensing and royalty agreement with Uniroyal Technology Corporation
("UTC") for the process technology to develop and manufacture high brightness
light emitting diodes ("LEDs"). During fiscal 1998 and 1997, revenue associated
with the UTC licensing agreement amounted to $2.5 million and $2.5 million,
respectively. At the time the transaction was originally entered into, UTC's
Chairman and CEO was a member of EMCORE's Board of Directors and EMCORE's
Chairman was on the Board of Directors of UTC. All related party accounts
receivable for fiscal 1997 have
F-27
103
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
been paid in full. As of September 30, 1998, the Company had an outstanding
related party receivable of $500,000.
In July 1998, the Company and a wholly-owned subsidiary of UTC formed
Uniroyal Optoelectronics, a venture (the "UTC Venture") to produce and market
compound semiconductor products. The Company has a 49% non-controlling minority
interest. The Company's rights under the venture agreement are protective and as
such, the Company accounts for its interest in the venture under the equity
method of accounting. In July 1998, the Company invested $490,000 in the UTC
Venture which was classified as a component of other long-term assets. For the
year ended September 30, 1998, the Company recognized a loss of $198,000 related
to the UTC Venture, which has been recorded as a component of other income and
expense.
In November 1998, the Company invested an additional $5.0 million into the
UTC Venture. During the six months ended March 31, 1999, the Company sold three
compound semiconductor production systems to the UTC Venture totaling $5.3
million in revenues. The Company eliminated gross profit of approximately $1.3
million on such sales to the extent of its minority interest. Such deferred
gross profit will be recognized ratably over the assigned life of the UTC
Venture's production systems. For the six months and the year ended March 31,
1999 and September 30, 1998, respectively, the Company recognized a loss of $1.0
million and $198,000 related to this venture, which has been recorded as a
component of other income and expense. As of March 31, 1999, the Company's
investment in this venture amounted to $4.3 million.
The President of Hakuto Co. Ltd. ("Hakuto"), the Company's Asian
distributor, is a member of the Company's Board of Directors and Hakuto is a
minority shareholder of the Company. During the year ended September 30, 1998,
sales made through Hakuto approximated $9.2 million. During the six months ended
March 31, 1999, sales made through Hakuto amounted to approximately $5.1
million.
On June 22, 1998, the Company entered into the 1998 Agreement. The 1998
Agreement was guaranteed by the Chairman and the Chief Executive Officer of the
Company (see Note 8). In return for guaranteeing the facility, the Company
granted the Chairman and the Chief Executive Officer an aggregate of 284,684
common stock purchase warrants at $11.375 per share which expire May 1, 2001.
These warrants are callable at the Company's option at $0.85 per warrant at such
time as the Company's common stock has traded at or above 150% of the exercise
price for a period of 30 days.
On September 17, 1998, the Company borrowed $7.0 million from its Chairman,
Thomas J. Russell. The loan bears interest at 9.75% per annum. In addition, on
October 23, 1998 the Company borrowed an additional $1.5 million from its
Chairman on identical terms. The entire $8.5 million, borrowed from Mr. Russell
was repaid from the proceeds of a private placement (See Note 8).
F-28
104
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14. EXPORT SALES
The information below summarizes the Company's export sales by geographic
area. The Company's export sales to the Far East and Europe are as follows:
ASIA EUROPE TOTAL
Year ended September 30, 1996.............. $ 8,209,309 $3,588,066 $11,797,375
Year ended September 30, 1997.............. 14,583,981 5,478,186 20,062,167
Year ended September 30, 1998.............. 15,527,169 1,584,851 17,112,020
NOTE 15. QUARTERLY FINANCIAL DATA (UNAUDITED)
NET
INCOME (LOSS)
PER
BASIC AND
OPERATING NET DILUTED
REVENUES INCOME (LOSS) INCOME (LOSS) SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Fiscal Year Ended September 30,
1997:
December 31, 1996................. $ 8,591 $ (2,585) $ (3,798) $(0.86)
March 31, 1997.................... 12,929 147 (3,150) (0.82)
June 30, 1997..................... 14,106 907 830 0.10
September 30, 1997................ 12,126 841 498 0.06
Fiscal Year Ended September 30,
1998:
December 31, 1997 (as previously
reported)...................... $12,357 $(29,223)* $(29,389)* $(4.15)*
December 31, 1997 (as restated)... 12,357 (19,717) (19,883) (2.81)
March 31, 1998 (as previously
reported)...................... 13,808 200 37 0.00
March 31, 1998 (as restated)...... 13,808 (615) (778) (0.08)
June 30, 1998 (as previously
reported)...................... 9,074 (7,141) (7,446) (0.80)
June 30, 1998 (as restated)....... 9,074 (7,956) (8,260) (0.88)
September 30, 1998 (as previously
reported)...................... 8,521 (5,544) (6,683) (0.71)
September 30, 1998 (as
restated)...................... 8,521 (6,359) (7,498) (0.80)
- -------------------------
See Note 20, "Restatement".
* includes a $19.5 million one-time charge to acquired in-process research and
development, non-cash.
NOTE 16. EMPLOYEE SAVINGS PLAN
The Company has a savings plan (the "Savings Plan") that qualifies as a
deferred salary arrangement under Section 401(k) of the Internal Revenue Code.
Under the Savings Plan, participating employees may defer a portion of their
pretax earnings, up to the Internal Revenue Service annual contribution limit.
Effective August 1, 1997, the Company began contributing to the Savings Plan.
All employer contributions are made in the Company's common stock. For the year
ended September 30, 1998, the Company contributed approximately $252,000 to the
Savings Plan.
F-29
105
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 17. SUBSEQUENT EVENT -- REDEEMABLE PREFERRED STOCK PRIVATE PLACEMENT
On November 30, 1998, the Company sold an aggregate of 1,550,000 shares of
Series I Redeemable Convertible Preferred Stock (the "Series I Preferred Stock")
to related parties (Hakuto Company, Ltd., Uniroyal Technology Corporation, and
Union Miniere, Inc.) for aggregate consideration of $21.7 million before
deducting costs and expenses which amounted to approximately $500,000. The
Series I Preferred Stock was recorded net of issuance costs. The excess of the
preference amount over the carrying value of the Series I Preferred Stock is
being accreted by periodic charges to accumulated deficit in the absence of
additional paid in capital. The shares of Series I Preferred Stock are
convertible, at any time, at the option of the holders thereof, unless
previously redeemed, into shares of common stock at an initial conversion price
of $14.00 per share of common stock, subject to adjustment in certain cases. The
market price of the Company's common stock was $12.875 on the date the Series I
Preferred Stock was issued. The Series I Preferred Stock is redeemable, in whole
or in part, at the option of the Company at any time the Company's stock has
traded at or above $28.00 per share for 30 consecutive trading days, at a price
of $14.00 per share, plus accrued and unpaid dividends, if any, to the
redemption date. The Series I Preferred stock carries a dividend of 2% per
annum. Dividends are being charged to accumulated deficit in the absence of
additional paid in capital. In addition, the Series I Preferred Stock is subject
to mandatory redemption by the Company at $14.00 per share plus accrued and
unpaid dividends, if any, on November 17, 2003.
NOTE 18. SUBSEQUENT EVENTS -- JOINT VENTURES
In November 1998, the Company entered into a joint venture with Union
Miniere Inc. to undertake research and development aimed at new material
application of germanium substrates. The Company has a 50% non-controlling
interest in the venture. The Company will account for its interest in the
venture under the equity method of accounting. In November 1998, the Company
invested $600,000 in the venture. The Company is obligated to fund the venture's
capital requirements in proportion to its equity interest.
In November 1998, the Company also formed a venture with Optek Technology,
Inc. to produce, market and distribute packaged electronic semiconductor
components. The Company has a 50% non-controlling interest in the venture. The
Company will account for its interest in the venture under the equity method of
accounting. The Company is obligated to fund the venture's capital requirements
in proportion to its equity interest.
On January 21, 1999, GE Lighting and the Company agreed, subject to certain
conditions, to form a new joint venture to develop and market "white light"
light-emitting diodes. The new company, GELcore, LLC (the "GELcore Venture"),
will develop and market LEDs as replacements for miniature automotive, compact
fluorescent, halogen and traditional incandescent lighting. Under terms of the
joint venture agreement, the Company will have a 49% non-controlling interest in
the GELcore Venture.
F-30
106
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the GELcore venture, General Electric will fund the
Company's initial capital contribution of $7.8 million into GELcore. The funding
will be in the form of a subordinated debenture (the "Debenture") with an
interest rate of 4.75% that will mature seven years from the date of issuance
and is convertible into common stock of the Company at a conversion price of
$22.875 or 340,984 shares. The Debenture is convertible at any time at the
option of GE Lighting and may be called by the Company after three years, if the
price of the Company's common stock has traded at or above $34 for at least
thirty days. The Debenture's interest rate will be subject to adjustment in the
event the Company does not complete a public offering by June 30, 1999.
In addition, General Electric will also receive 282,010 warrants to
purchase common stock at $22.875 per share. The warrants are exercisable at any
time and will expire in 2006. For the three months ended March 31, 1999, the
Company recognized a loss of $497,000 related to this venture which has been
recorded as a component of other income and expense. On a fully diluted basis,
General Electric will own approximately 5% of the common stock of the Company.
On April 27, 1999, the Company contributed an additional $500,000 as a
capital investment in their joint venture with Uniroyal Technologies
Corporation.
NOTE 19. SUBSEQUENT EVENTS -- OTHER
Short Term Borrowings. On February 1, 1999, the Company entered into a $5
million short-term note (the "Note") with First Union. The Note is due and
payable in May 1999. The Note bears interest at a rate equal to one-month LIBOR
plus three-quarters of one percent per annum.
On April 29, 1999, the Company entered into a $19.0 million short-term note
(the "Amended Note") with First Union. The Amended Note consolidated the $8.0
million loan agreement dated June 22, 1998 and the $5 million Note plus an
additional $6.0 million. The Amended Note is due and payable October 1, 1999 and
bears interest at a rate equal to one-month LIBOR plus three-quarters of one
percent per annum. The Amended Note is guaranteed by the Company's Chairman and
Chief Executive Officer.
1997 Agreement. In January 1999, the Company borrowed the remaining
balance of $2,050,000 available under the 1997 Agreement.
Related Party Transactions. On January 27, 1999, the Company borrowed $3.0
million from its Chairman. The loan bears interest at 8% per annum. This loan
was repaid from borrowings under the Note.
On January 29, 1999, the Company's Chairman committed to provide $30
million of long-term financing of the Company through July 1, 2000. The
Chairman's financing commitment terminates if the Company completes a secondary
offering of approximately $40.0 million.
F-31
107
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
On April 29, 1999, the Company borrowed $2.5 million from its Chairman at
an interest rate of Prime plus two percent. On May 7, 1999, this loan was repaid
from borrowing under the Amended Note with First Union.
20. RESTATEMENT
Subsequent to the issuance of the Company's Annual Report on Form 10-K for
the year ended September 30, 1998, the Company's management revised the amount
of the purchase price which was allocated to in-process research and development
in accounting for the acquisition of MicroOptical Devices, Inc. ("MODE") in
December 1997. The revised allocation is based upon methods prescribed in a
letter from the Securities and Exchange Commission ("SEC") sent to the American
Institute of Certified Public Accountants. The letter sets forth the SEC's views
regarding the valuation methodology to be used in allocating a portion of the
purchase price to acquired in-process research and development ("IPR&D") at the
date of acquisition.
The revised valuation is based on management's estimates of the net cash
flows associated with expected operations of MODE and gives explicit
consideration to the SEC's views on acquired IPR&D as set forth in its letter to
the American Institute of Certified Public Accountants.
As a result of the revised allocation, the Company's financial statements
for the year ended September 30, 1998, have been restated from amounts
previously reported to reduce the amount of the acquired in-process research and
development expensed by $9.8 million and to increase goodwill by $9.8 million.
The amount allocated to goodwill includes approximately $0.5 million related to
the value of MODE's workforce. The change had no impact on net cash flows used
by operations.
A summary of the significant effects of the restatement is as follows:
AS OF
SEPTEMBER 30, 1998
-----------------------------
AS PREVIOUSLY
REPORTED AS RESTATED
BALANCE SHEET DATA:
Goodwill, net................................... $ 2,457,000 $ 9,519,000
Accumulated deficit............................. (67,258,454) (60,196,454)
FOR THE YEAR ENDED FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 1998 MARCH 31, 1998
----------------------------- ----------------------------
AS PREVIOUSLY AS PREVIOUSLY
REPORTED AS RESTATED REPORTED AS RESTATED
STATEMENT OF OPERATIONS DATA:
Goodwill amortization........................... $ 921,941 $ 3,637,941 $ 355,000 $ 1,442,000
Research and development -- one time acquired
in-process, non-cash.......................... 29,294,000 19,516,000 -- --
Net loss........................................ (43,480,796) (36,418,796) (29,351,937) (20,660,937)
Net loss per basic and diluted share............ $(4.95) $(4.15) $(3.58) $(2.52)
F-32
108
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
MicroOptical Devices, Inc.:
We have audited the accompanying balance sheets of MICROOPTICAL DEVICES,
INC. (a Delaware corporation in the development stage) (the "Company") as of
December 31, 1996 and 1995, and the related statements of operations,
stockholders' equity and cash flows for the year ended December 31, 1996 and for
the period from inception (August 3, 1995) through December 31, 1995 and 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of MicroOptical Devices, Inc.
as of December 31, 1996 and 1995, and the results of its operations and its cash
flows for the year ended December 31, 1996 and for the period from inception
(August 3, 1995) through December 31, 1995 and 1996, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Albuquerque, New Mexico
March 21, 1997
F-33
109
MICROOPTICAL DEVICES, INC.
(A DEVELOPMENT STAGE CORPORATION)
BALANCE SHEETS
AS OF SEPTEMBER 30, 1997 (UNAUDITED), DECEMBER 31, 1996 AND 1995
DECEMBER 31,
SEPTEMBER 30, ---------------------
1997 1996 1995
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents...................... $ 643,542 $ 991,066 $125,837
Trade accounts receivable...................... 173,710 3,850 150
Inventory...................................... 131,931 83,926 --
Other current assets........................... 22,314 26,544 9,029
---------- ---------- --------
Total current assets........................ 971,497 1,105,386 135,016
Property and equipment, net...................... 2,405,541 2,388,953 5,220
Organization costs, net.......................... 2,247 2,814 3,571
---------- ---------- --------
Total assets................................ $3,379,285 $3,497,153 $143,807
========== ========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................... 70,589 $ 29,580 $ 18,148
Accrued liabilities............................ 755,568 74,600 746
Current portion of obligations under capital
leases...................................... 91,664 38,676 --
Deferred revenue............................... -- 125,000 --
---------- ---------- --------
Total current liabilities................... 917,821 267,856 18,894
---------- ---------- --------
Long-term liabilities:
Obligations under capital leases, net of
current portion............................. 1,753,994 107,648 --
---------- ---------- --------
Commitments and contingencies (Notes 8 and 9)
Stockholders' equity:
Series A Convertible Preferred Stock, $.001 par
value; 1,200,000 shares authorized; 666,666
shares issued and outstanding............... 666 666 222
Series B Convertible Preferred Stock, $.001 par
value; 5,333,334 shares authorized,
4,076,088 shares issued and outstanding..... 4,076 4,076 --
Common Stock, $.001 par value; 6,000,000 shares
authorized:
3,000,000 shares issued and outstanding..... 3,015 3,000 1,000
Additional paid-in capital....................... 3,275,592 3,251,532 181,596
Deficit accumulated during development stage..... (2,575,879) (137,625) (57,905)
---------- ---------- --------
Total stockholders' equity.................. 707,470 3,121,649 124,913
========== ========== ========
Total liabilities and stockholders'
equity.................................... $3,379,285 $3,497,153 $143,807
========== ========== ========
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-34
110
MICROOPTICAL DEVICES, INC.
(A DEVELOPMENT STAGE CORPORATION)
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (AUGUST 3, 1995)
THROUGH DECEMBER 31, 1996,
THE YEAR ENDED DECEMBER 31, 1996,
THE PERIOD FROM INCEPTION THROUGH DECEMBER 31, 1995
AND FOR THE NINE MONTH PERIOD
ENDED SEPTEMBER 30, 1997 (UNAUDITED)
INCEPTION
NINE MONTH PERIOD (AUGUST, 1995)
ENDED THROUGH YEAR ENDED PERIOD FROM
SEPTEMBER 30, 1997 DECEMBER 31, 1996 DECEMBER 31, 1996 INCEPTION TO
(UNAUDITED) DECEMBER 31, 1995
Revenues............. $ 342,610 $ 661,350 $ 661,350 $ --
Cost of goods sold... 365,084 222,967 222,967 --
----------- ---------- ---------- ----------
Gross margin......... (22,474) 438,383 438,383 --
----------- ---------- ---------- ----------
Expenses:
Research and
development...... 1,683,176 339,696 292,592 47,104
General and
administrative... 659,654 192,105 178,540 13,565
Sales and
marketing........ 112,198 85,169 85,169 --
----------- ---------- ---------- ----------
Total expenses... 2,455,028 616,970 556,301 60,669
----------- ---------- ---------- ----------
Operating
(loss)....... (2,477,502) (178,587) (117,918) (60,669)
Interest income...... 39,248 40,962 38,198 2,764
----------- ---------- ---------- ----------
Net Loss....... $(2,438,254) $ (137,625) $ (79,720) $ (57,905)
=========== ========== ========== ==========
Net loss per share... $ (0.81) $ (.05) $ (.03) $ (.02)
=========== ========== ========== ==========
Weighted Average
Number of Post-
Split Common Shares
Outstanding........ 3,000,000 3,000,000 3,000,000 3,000,000
=========== ========== ========== ==========
The accompanying notes to financial statements are an integral part of these
statements.
F-35
111
MICROOPTICAL DEVICES, INC.
(A DEVELOPMENT STAGE CORPORATION)
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (AUGUST 3, 1995)
THROUGH SEPTEMBER 30, 1997 (UNAUDITED)
SERIES A SERIES B DEFICIT
CONVERTIBLE CONVERTIBLE ACCUMULATED
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL DURING
---------------- ------------------ ------------------ PAID-IN DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL STAGE TOTAL
Balance, at inception........ -- $ -- -- $ -- -- $ -- $ -- $ -- $ --
Issuance of Common Stock..... -- -- -- -- 1,000,000 1,000 -- -- 1,000
Issuance of Series A
Convertible Preferred
Stock:
Net of $18,182 in issuance
costs.................... 222,222 222 -- -- -- -- 181,596 -- 181,818
Net loss..................... -- -- -- (57,905) (57,905)
------- ---- --------- ------ --------- ------ ---------- ----------- ----------
Balance, December 31, 1995... 222,222 222 -- -- 1,000,000 1,000 181,596 (57,905) 124,913
Issuance of Series B
Convertible Preferred
Stock:
Net of $48,545 in issuance
costs.................... -- -- 1,293,479 1,294 -- -- 2,925,162 -- 2,926,456
Conversion of Note Payable... -- -- 65,217 65 -- -- 149,935 -- 150,000
Three for one stock split.... 444,444 444 2,717,392 2,717 2,000,000 2,000 (5,161) -- --
Net loss..................... -- -- -- (79,720) (79,720)
------- ---- --------- ------ --------- ------ ---------- ----------- ----------
Balance, December 31, 1996... 666,666 $666 4,076,088 $4,076 3,000,000 $3,000 $3,251,532 $ (137,625) $3,121,649
------- ---- --------- ------ --------- ------ ---------- ----------- ----------
Issuance of Common Stock upon
exercise of options........ 15,000 15 1,560 1,575
TVC finders fee forgiven..... 22,500 22,500
Net loss..................... (2,438,254) (2,438,254)
------- ---- --------- ------ --------- ------ ---------- ----------- ----------
Balance, September 30, 1997
(unaudited)................ 666,666 $666 4,076,088 $4,076 3,015,000 $3,015 $3,275,592 $(2,575,879) $ 707,470
======= ==== ========= ====== ========= ====== ========== =========== ==========
The accompanying notes to financial statements are an integral part of these
statements.
F-36
112
MICROOPTICAL DEVICES, INC.
(A DEVELOPMENT STAGE CORPORATION)
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (AUGUST 3, 1995)
THROUGH DECEMBER 31, 1996
AND FOR THE YEAR ENDED DECEMBER 31, 1996
AND FOR THE PERIOD FROM INCEPTION THROUGH DECEMBER 31, 1995
AND FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997 (UNAUDITED)
PERIOD FROM
INCEPTION INCEPTION
NINE MONTH (AUGUST, 1995) (AUGUST, 1995)
PERIOD ENDED THROUGH YEAR ENDED THROUGH
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss......................................... $(2,438,254) $ (137,625) $ (79,720) $(57,905)
Adjustments to reconcile net loss to net cash
provided by operating activities --
Depreciation and amortization.................. 302,540 32,430 31,894 536
----------- ----------- ----------- --------
(2,135,714) (105,195) (47,826) (57,369)
----------- ----------- ----------- --------
Changes in certain operating accounts --
Trade accounts receivable.................... (169,860) (3,850) (3,700) (150)
Inventory.................................... (48,005) (83,926) (83,926) --
Other current assets......................... 4,229 (26,544) (17,515) (9,029)
Accounts payable............................. 41,009 29,580 11,432 18,148
Accrued liabilities.......................... 703,467 74,600 73,854 746
Deferred revenue............................. (125,000) 125,000 125,000 --
----------- ----------- ----------- --------
405,840 114,860 105,145 9,715
----------- ----------- ----------- --------
Net cash provided by (used in) operating
activities............................... (1,729,874) 9,665 57,319 (47,654)
----------- ----------- ----------- --------
CASH FLOWS USED BY INVESTING ACTIVITIES:
Additions to equipment........................... (318,559) (2,420,513) (2,414,970) (5,543)
Proceeds from sale and leaseback of equipment.... -- 150,234 150,234 --
Additions to organization costs.................. -- (3,784) -- (3,784)
----------- ----------- ----------- --------
Net cash used in investing activities...... (318,559) (2,274,063) (2,264,736) (9,327)
----------- ----------- ----------- --------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Proceeds from issuance of notes payable.......... 1,699,334 150,000 150,000 --
Repayments of obligations under capital leases... -- (3,810) (3,810) --
Net proceeds from issuance of preferred stock.... -- 3,108,274 2,926,456 181,818
Net proceeds from issuance of common stock....... 1,575 1,000 -- 1,000
----------- ----------- ----------- --------
Net cash provided by financing
activities............................... 1,700,909 3,255,464 3,072,646 182,818
----------- ----------- ----------- --------
Net increase in cash and cash equivalents........ (347,524) 991,066 865,229 125,837
Cash and cash equivalents, beginning of period... 991,066 -- 125,837 --
----------- ----------- ----------- --------
Cash and cash equivalents, end of period......... 643,542 $ 991,066 $ 991,066 $125,837
=========== =========== =========== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest........................... $ 1,776 $ 1,776 $ --
=========== =========== ========
NON CASH STOCK ACTIVITY:
Conversion of note payable to preferred stock.... $ 150,000 $ 150,000 $ --
=========== =========== ========
NON-CASH FINANCING ACTIVITY:
Equipment capital leases......................... $ 146,000 $ 146,000 $ --
=========== =========== ========
The accompanying notes to financial statements are an integral part of these
statements.
F-37
113
MICROOPTICAL DEVICES, INC.
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM INCEPTION (AUGUST 3, 1995)
THROUGH DECEMBER 31, 1996
AND FOR THE YEAR ENDED DECEMBER 31, 1996
AND FOR THE PERIOD FROM INCEPTION THROUGH DECEMBER 31, 1995
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT RISK FACTORS
MicroOptical Devices, Inc. (the "Company" or "MODE"), was incorporated
under the laws of the State of Delaware on August 3, 1995 for the purpose of
developing technology and manufacturing of advanced optoelectronic components
and systems for specific use in commercial identification and communications
markets.
The Company funded its marketing, development and operational activities to
date from the proceeds of two equity offerings. Since inception, the Company has
devoted substantially all of its efforts and resources to marketing and
development of its technology and remains in the development stage. Ultimately,
the Company's ability to achieve profitable operations is dependent, in large
part, upon making the transition to a manufacturing company.
On July 16, 1996, an amendment to the Certificate of Incorporation of MODE
(the "Amendment") was filed, which (a) increased the total number of its common
shares, which the Company is authorized to issue from two million to four
million, and (b) increased the total number of authorized shares of its
Convertible Preferred Stock, from four thousand to two million (222,222 shares
of Series A Convertible Preferred Stock and 1,777,778 shares of Series B
Convertible Preferred Stock).
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Basis. The financial books and records of the Company are
maintained on the accrual basis of accounting. As a development stage company,
cumulative results of operations from inception are presented.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Cash Equivalents. For the purposes of presenting cash flows, cash and cash
equivalents represent cash balances and highly liquid investments with original
maturities of less than 90 days.
Inventory. Inventories are stated at the lower of standard cost (which
approximates actual cost using the first-in, first-out method) or market and
consist of raw materials.
Property and Equipment. Equipment is stated at cost, net of accumulated
depreciation. Depreciation is computed on the straight-line method based on
estimated useful lives ranging from three to five years. Leasehold improvements
are amortized
F-38
114
MICROOPTICAL DEVICES, INC.
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
using the straight-line method over the shorter of the estimated useful life of
the asset or the remaining term of the lease.
Organization Costs. Costs to organize the Company are capitalized and
amortized on a straight-line basis over five years.
Research and Development. The costs of research and development activities
are charged to expense as incurred.
Fair Value of Financial Instruments. The carrying value of all financial
instruments approximates fair market value at December 31, 1996 and 1995.
Stock-Based Compensation. The Company accounts for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25 ("APB Opinion No. 25"), "Accounting for Stock
Issued to Employees," and related Interpretations. Accordingly, compensation
cost for stock options is measured as the excess, if any, of the quoted market
price of the Company's stock at the date of the grant over the amount an
employee must pay to acquire the stock. Financial Accounting Standards Board
Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), was
issued in 1995 and the Company has adopted the disclosure requirements of SFAS
123 (see Note 6).
Income Taxes. MODE accounts for income taxes using the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under Financial Accounting Standards Board Statement No.
109, "Accounting for Income Taxes" ("SFAS No. 109"), the effect on deferred tax
assets and liabilities of a change in tax rates is recognized in operations in
the period that includes the enactment date.
Net Loss Per Share. Net loss per share for each period was calculated
based upon the weighted average number of Common Stock outstanding during each
period, using post split shares resulting from the three- for-one stock split
effective August 1996. Common Stock equivalents were excluded in the calculation
of weighted average shares outstanding since their inclusion would have had an
anti-dilutive effect.
Accounting Pronouncement Not Yet Adopted. The Financial Accounting
Standards Board issued SFAS No. 128, "Earnings Per Share," which is effective
for calendar years beginning after December 15, 1997 at which time it will
require restatement of prior years earnings per share calculations. Management
has not yet determined the effect, if any, of SFAS No. 128 on the financial
statements.
F-39
115
MICROOPTICAL DEVICES, INC.
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment at December 31 by major classification are as
follows:
1996 1995
Manufacturing equipment..................................... $1,781,487 $ --
Leasehold improvements...................................... 570,397 --
Furniture and fixtures...................................... 68,529 5,543
---------- ------
2,420,413 5,543
Less accumulated depreciation and amortization.............. 31,460 323
---------- ------
$2,388,953 $5,220
========== ======
NOTE 4. CAPITAL LEASES
In 1996, the Company financed certain manufacturing equipment, leasehold
improvements, and furniture and fixtures under a Master Equipment Lease
Agreement ("the Lease") expiring June 30, 1997, which provides for financing of
up to $2,000,000. The Company had only nominal borrowings under the Lease at
December 31, 1996. The capital leases have terms of 42 months and are
collateralized by manufacturing equipment. The transactions under the Lease are
accounted for as a financing, whereby the property remains on the books and
continues to be depreciated and amortized. Obligations under capital leases
representing the proceeds was recorded, and is reduced based on payments under
capital lease obligations. All items are sold and leasedback at original
purchase price, therefore no gain or loss was recorded on such transactions
during 1996.
At December 31, 1996, approximately $146,000 of manufacturing equipment was
under capital lease. The future minimum lease payments for assets under capital
lease and the present value of the net minimum lease payments at December 31,
1996, are as follows:
FISCAL YEAR MINIMUM PAYMENT
1997...................................................... $ 49,964
1998...................................................... 49,964
1999...................................................... 49,964
2000...................................................... 20,575
--------
Total minimum lease payments................................ 170,467
Less amount representing interest........................... 24,143
--------
Present value of net minimum lease payments................. 146,324
Less current portion........................................ 38,676
--------
$107,648
========
In connection with the Lease, the Company issued a warrant to purchase
208,695 shares of MODE's Series B convertible preferred stock, on a post stock
split basis (see Note 5), exercisable at any time for a period of up to ten
years ending on August 21,
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MICROOPTICAL DEVICES, INC.
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2006 at a price of $.77 per share. The warrant may terminate sooner in
connection with certain significant corporate events.
NOTE 5. STOCKHOLDERS' EQUITY
Effective August, 1996, the Company declared a stock split on all existing
preferred and common shares at a ratio of three to one. The accompanying
financial statements for the year ended December 31, 1996, have been adjusted to
reflect the stock split.
On July 17, 1996, the Company issued 4,076,088 shares, on a post stock
split basis, of its Series B Convertible Preferred Stock ("Series B"). Each
share of Series B, which has a liquidation preference of $.77, is convertible to
one share of the Company's Common Stock and earns dividends at the rate declared
for each share of Common Stock. No such dividends have been declared as of
December 31, 1996. Terms of the agreements with Preferred Shareholders require
the Company to comply with terms similar to those specified in the Series A
issuance.
As specified in the Series A Convertible Preferred Stock ("Series A")
issuance, the Series A Preferred Stockholder purchased $150,000 of Convertible
Promissory Notes (the "Notes"), during 1996. The Notes, which bore interest at
the prime rate compounded monthly, were convertible at a price equal to the per
share purchase price of the Series B stock issuance. On July 17, 1996, the Notes
and the related interest of $1,169 were converted to Series B convertible
preferred stock in conjunction with the Series B stock issuance.
On August 29, 1995, the Company issued 666,666 shares, on a post stock
split basis, of its Series A. Each share of Series A, which has a liquidation
preference of $.3, is convertible to one share of the Company's Common Stock and
earns dividends at the rate declared for each share of Common Stock. No such
dividends have been declared as of December 31, 1996. An agreement with the
Series A Preferred Stockholder requires the Company to, among other items,
maintain keyman life insurance on certain key employees, and obtain the
Preferred Stockholders' approval to make key changes in the operations of the
Company.
On August 3, 1995, the Company issued 3,000,000 shares, on a post stock
split basis, of its Common Stock at a par value of $.001 per share.
NOTE 6. DEFERRED COMPENSATION PLAN
In July 1996, the Company adopted the 1996 Stock Option Plan (the "Plan"),
where options granted to an employee are qualified "incentive stock options"
under the Internal Revenue Code and options granted to a non-employee are
"non-statutory stock options", for which 1,800,000 shares were reserved, on a
post stock split basis. The Company accounts for options granted to employee's
under this Plan in accordance with APB Opinion No. 25, under which no
compensation cost has been recognized. The compensation costs for the Plan
determined consistent with SFAS 123
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MICROOPTICAL DEVICES, INC.
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
is immaterial. Options granted to non-employee's under this Plan are accounted
for in accordance with the provisions of SFAS 123.
The Company has granted options on 645,500 shares through December 31,
1996. Under the Plan, the option exercise price equals the common stocks market
price on date of grant. All options are immediately exercisable and expire ten
years from date of grant. The options granted to MODE's founders are subject to
repurchase by the Company, at the original exercise price, upon the cessation of
service prior to vesting in such shares. Such shares vest in a series of 72
successive equal monthly installments over a six year period, however, such
vesting shall accelerate to 48 successive equal monthly installments upon the
Company meeting performance milestones as provided for by the Board. At December
31, 1996, the Company has achieved two out of five of its performance measures.
All other shares vest at the rate of 25 percent of the shares upon the
optionee's continued service to the Company through the initial vesting date,
with the remaining shares vesting in a series of 36 successive equal monthly
installments. The vesting period accelerates in connection with certain
significant corporate events.
A summary of the status of the Company's option Plan at December 31, 1996,
and changes during the year then ended is presented in the table and narrative
below:
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
Outstanding at beginning of year......................... -- $ --
Granted.................................................. 645,500 .077
Exercised................................................ -- --
Forfeited................................................ -- --
Expired.................................................. -- --
======= =====
Outstanding at end of year............................... 645,500 $.077
======= =====
Exerciseable at end of year.............................. 645,500 $.077
Weighted average fair value of options granted during the
year................................................... $ .02
The options outstanding at December 31, 1996, have a weighted average
remaining contractual life of 9.5 years.
The fair value of each option grant is estimated on the date of grant using
Black-Scholes option pricing model with the following average assumptions used:
risk-free interest rate of 6.65%; expected lives of ten years; a divided yield
of 0%; and expected volatility of .01%.
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MICROOPTICAL DEVICES, INC.
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7. INCOME TAXES
MODE had no income tax expense and there were no income taxes currently
payable for the year ended December 31, 1996 and period ended December 31, 1995.
Deferred income taxes at December 31, 1996 and 1995, are offset by a valuation
allowance as follows:
1996 1995
Deferred tax asset:
Net operating loss........................................ $16,197 $14,000
Deferred revenue.......................................... 48,750 --
------- -------
64,947 14,000
Valuation allowance....................................... (40,926) (14,000)
------- -------
24,021 --
------- -------
Deferred tax liability:
Depreciation and amortization............................. (22,535) --
Other..................................................... (1,486) --
------- -------
(24,021) --
------- -------
Net deferred taxes........................................ $ -- $ --
======= =======
The Company has established a valuation allowance for the entire deferred
tax asset due to the uncertainty of future earnings (see Note 1). A net
operating loss carry forward of $46,214 is available to offset future taxable
income for the next fifteen years.
NOTE 8. COMMITMENTS AND CONTINGENCIES
Technology Assistance and Royalty Agreement. On February 22, 1996, the
Company entered into a technical assistance and royalty agreement (as
subsequently amended) in which the Company agreed to further develop laser
technology in return for eight years of co-exclusive rights to five existing
patents covering this technology. The Company is required to pay $7,500 in 1997,
plus royalty payments beginning in 1998 of 1.5% to 2.5%, subject to minimum
annual payments ranging from up to $50,000 over the life of the patents provided
that the technology is developed and the related products are manufactured in
Albuquerque, New Mexico. In the event that the Company fails to develop or
abandons development of this technology, all rights to the technology become
nonexclusive. The Company paid $7,500 under this Agreement in 1996.
In October, 1996, the Company signed an agreement for research and
development, which expires March 31, 1998. Under the Agreement, the Buyer paid
the Company $95,000 for non-recurring engineering expense, plus all applicable
fees and taxes, which payment is non-refundable. Buyer will pay MODE the balance
of the payment upon demonstration of feasibility.
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119
MICROOPTICAL DEVICES, INC.
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Keyman Life Insurance. The Company is beneficiary to $500,000 of term life
insurance for each of its two founders.
Licensing Agreement. On March 21, 1996, the Company signed a license
agreement (the "Agreement") with a major manufacturer in the identification
market (the "Manufacturer"). Under the Agreement, the Manufacturer paid the
Company a $500,000 license fee (the "Payment") plus all applicable gross
receipts tax that the Company is required to pay thereon.
The Manufacturer retains exclusive rights to use and sell any products or
components which the Company develops for the Manufacturer's portion of the
identification market (the "Product") for a limited period of time. After the
exclusive rights period expires, the Company is required to first offer these
Products, if achieved to the Manufacturer under similar sales terms as the
Products are offered to any other party for a limited period of time.
Within approximately one year of the receipt of the Payment, the Company
and the Manufacturer will negotiate in good faith to enter into a supply
agreement for the Product, if achieved. If no agreement is reached, then the
Company can elect to sell the Product, if achieved to the Manufacturer for an
additional license fee and, for each Product sold, the cost of the Product plus
a specified factor for overhead and profit.
Should the Company fail to pursue development or sell the Product to the
Manufacturer, the Manufacturer will be granted certain nonexclusive
sub-licensing rights.
At December 31, 1996, $325,000 has been earned under the terms of this
agreement.
Leased Property. The Company leases its facility under an operating lease
with a term of three years. Rental expense under operating leases was $18,214
for the year end December 31, 1996. There was no rental expense incurred for the
period from inception through December 31, 1995. The minimum future lease
commitments for all operating leases are $34,332 for each of the years ending
December 31, 1997 and 1998 and $17,166 for year end December 31, 1999.
NOTE 9. SUBSEQUENT EVENT
Purchase and Supply Agreement. On February 14, 1997, the Company signed a
purchase and supply contract (the "Contract"). Under the Contract, MODE
established the terms and conditions controlling potential sales of
vertical-cavity surface-emitting laser ("VCSEL") chips, devices and arrays in
the event they occur. The initial term of the Contract is five years, and can be
canceled by either party upon written notice 360 days prior to the end of the
initial term or any subsequent term. The Contract also may terminate prior to
the five year period under certain circumstances. Products sold under the
agreement are subject to a warranty period not to exceed the earlier of 18
months from the date the product is delivered to customer,
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120
MICROOPTICAL DEVICES, INC.
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
or one year from the date of delivery by customer to its end-users, or one year
from the date the products are placed in service.
Sale/Leaseback of Assets. Subsequent to year end, the Company financed an
additional $1,850,000 of its property via a sale-leaseback transaction with a
leasing company under the terms of the Master Equipment Lease Agreement (see
Note 4).
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- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
, 1999
(EMCORE LOGO) EMCORE CORPORATION
3,897,441 SHARES OF COMMON STOCK
------------------------
PROSPECTUS
------------------------
DONALDSON, LUFKIN & JENRETTE
PRUDENTIAL SECURITIES
NEEDHAM & COMPANY, INC.
SOUNDVIEW TECHNOLOGY GROUP
------------------------
DLJDIRECT INC.
- --------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor any
sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of the company
have not changed since the date hereof.
- --------------------------------------------------------------------------------
122
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than
underwriting discounts and commissions. All amounts shown are estimates except
the Securities and Exchange Commission registration fee and the NASD filing fee.
TO BE PAID
BY THE
REGISTRANT
Securities and Exchange Commission registration fee......... $ 22,890.00
NASD filing fee............................................. 8,000.00
Accounting fees and expenses................................ 150,000.00
Printing expenses........................................... 300,000.00
Transfer agent and registrar fees........................... 15,000.00
Legal fees and expenses..................................... 300,000.00
Other expenses.............................................. 75,000.00
-----------
Total..................................................... $870,890.00
===========
* to be provided
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
EMCORE's Restated Certificate of Incorporation provides that the Company
shall indemnify its directors and officers to the full extent permitted by New
Jersey law, including in circumstances in which indemnification is otherwise
discretionary under New Jersey law.
Section 14A:2-7 of the New Jersey Business Corporation Act provides that a
New Jersey corporation's:
"certificate of incorporation may provide that a director or officer shall
not be personally liable, or shall be liable only to the extent therein
provided, to the corporation or its shareholders for damages for breach of any
duty owed to the corporation or its shareholders, except that such provision
shall not relieve a director or officer from liability for any breach of duty
based upon an act or omission (a) in breach of such person's duty of loyalty to
the corporation or its shareholders, (b) not in good faith or involving a
knowing violation of law or (c) resulting in receipt by such person of an
improper personal benefit. As used in this subsection, an act or omission in
breach of a person's duty of loyalty means an act or omission which that person
knows or believes to be contrary to the best interests of the corporation or its
shareholders in connection with a matter in which he has a material conflict of
interest."
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In addition, Section 14A:3-5 (1995) of the New Jersey Business Corporation
Act (1995) provides as follows:
INDEMNIFICATION OF DIRECTORS, OFFICERS AND EMPLOYEES
(1) As used in this section,
(a) "Corporate agent" means any person who is or was a director,
officer, employee or agent of the indemnifying corporation or of any
constituent corporation absorbed by the indemnifying corporation in a
consolidation or merger and any person who is or was a director, officer,
trustee, employee or agent of any other enterprise, serving as such at the
request of the indemnifying corporation, or of any such constituent
corporation, or the legal representative of any such director, officer,
trustee, employee or agent;
(b) "Other enterprise" means any domestic or foreign corporation,
other than the indemnifying corporation, and any partnership, joint
venture, sole proprietorship, trust or other enterprise, whether or not for
profit, served by a corporate agent;
(c) "Expenses" means reasonable costs, disbursements and counsel fees;
(d) "Liabilities" means amounts paid or incurred in satisfaction of
settlements, judgments, fines and penalties;
(e) "Proceeding" means any pending, threatened or completed civil,
criminal, administrative or arbitrative action, suit or proceeding, and any
appeal therein and any inquiry or investigation which could lead to such
action, suit or proceeding; and
(f) References to "other enterprises" include employee benefit plans;
references to "fines" include any excise taxes assessed on a person with
respect to an employee benefit plan; and references to "serving at the
request of the indemnifying corporation" include any service as a corporate
agent which imposes duties on, or involves services by, the corporate agent
with respect to an employee benefit plan, its participants, or
beneficiaries; and a person who acted in good faith and in a manner the
person reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in
a manner "not opposed to the best interests of the corporation" as referred
to in this section.
(2) Any corporation organized for any purpose under any general or special
law of this State shall have the power to indemnify a corporate agent against
his expenses and liabilities in connection with any proceeding involving the
corporate agent by reason of his being or having been such a corporate agent,
other than a proceeding by or in the right of the corporation, if
(a) such corporate agent 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
(b) with respect to any criminal proceeding, such corporate agent had
no reasonable cause to believe his conduct was unlawful. The termination of
any proceeding by judgment, order, settlement, conviction or upon a plea of
nolo contendere or its equivalent, shall not of itself create a presumption
that such
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124
corporate agent did not meet the applicable standards of conduct set forth
in paragraphs 14A:3-5(2)(a) and 14A:3-5(2)(b).
(3) Any corporation organized for any purpose under any general or special
law of this State shall have the power to indemnify a corporate agent against
his expenses in connection with any proceeding by or in the right of the
corporation to procure a judgment in its favor which involves the corporate
agent by reason of his being or having been such corporate agent, 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. However, in such proceeding no
indemnification shall be provided in respect of any claim, issue or matter as to
which such corporate agent shall have been adjudged to be liable to the
corporation, unless and only to the extent that the Superior Court or the court
in which such proceeding was brought shall determine upon application that
despite the adjudication of liability, but in view of all circumstances of the
case, such corporate agent is fairly and reasonably entitled to indemnity for
such expenses as the Superior Court or such other court shall deem proper.
(4) Any corporation organized for any purpose under any general or special
law of this State shall indemnify a corporate agent against expenses to the
extent that such corporate agent has been successful on the merits or otherwise
in any proceeding referred to in subsections 14A:3-5(2) and 14A:3-5(3) or in
defense of any claim, issue or matter therein.
(5) Any indemnification under subsection 14A:3-5(2) and, unless ordered by
a court, under subsection 14A:3-5(3) may be made by the corporation only as
authorized in a specific case upon a determination that indemnification is
proper in the circumstances because the corporate agent met the applicable
standard of conduct set forth in subsection 14A:3-5(2) or subsection 14A:3-5(3).
Unless otherwise provided in the certificate of incorporation or bylaws, such
determination shall be made
(a) by the board of directors or a committee thereof, acting by a
majority vote of a quorum consisting of directors who were not parties to
or otherwise involved in the proceeding; or
(b) if such a quorum is not obtainable, or, even if obtainable and
such quorum of the board of directors or committee by a majority vote of
the disinterested directors so directs, by independent legal counsel, in a
written opinion, such counsel to be designated by the board of directors;
or
(c) by the shareholders if the certificate of incorporation or bylaws
or a resolution of the board of directors or of the shareholders so
directs.
(6) Expenses incurred by a corporate agent in connection with a proceeding
may be paid by the corporation in advance of the final disposition of the
proceeding as authorized by the board of directors upon receipt of an
undertaking by or on behalf of the corporate agent to repay such amount if it
shall ultimately be determined that he is not entitled to be indemnified as
provided in this section.
(7) (a) If a corporation upon application of a corporate agent has failed
or refused to provide indemnification as required under subsection 14A:3-5(4) or
permitted under subsections 14A:3-5(2), 14A:3-5(3) and 14A:3-5(6), a corporate
agent may apply to a court for an award of indemnification by the corporation,
and such court
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(i) may award indemnification to the extent authorized under
subsections 14A:3-5(2) and 14A:3-5(3) and shall award indemnification
to the extent required under subsection 14A:3-5(4), notwithstanding any
contrary determination which may have been made under subsection
14A:3-5(5); and
(ii) may allow reasonable expenses to the extent authorized by,
and subject to the provisions of, subsection 14A:3-5(6), if the court
shall find that the corporate agent has by his pleadings or during the
course of the proceeding raised genuine issues of fact or law.
(b) Application for such indemnification may be made:
(i) in the civil action in which the expenses were or are to be
incurred or other amounts were or are to be paid; or
(ii) to the Superior Court in a separate proceeding. If the
application is for indemnification arising out of a civil action, it
shall set forth reasonable cause for the failure to make application
for such relief in the action or proceeding in which the expenses were
or are to be incurred or other amounts were or are to be paid.
The application shall set forth the disposition of any previous application
for indemnification and shall be made in such manner and form as may be required
by the applicable rules of court or, in the absence thereof, by direction of the
court to which it is made. Such application shall be upon notice to the
corporation. The court may also direct that notice shall be given at the expense
of the corporation to the shareholders and such other persons as it may
designate in such manner as it may require.
(8) The indemnification and advancement of expenses provided by or granted
pursuant to the other subsections of this section shall not exclude any other
rights, including the right to be indemnified against liabilities and expenses
incurred in proceedings by or in the right of the corporation, to which a
corporate agent may be entitled under a certificate of incorporation, bylaw,
agreement, vote of shareholders, or otherwise; provided that no indemnification
shall be made to or on behalf of a corporate agent if a judgment or other final
adjudication adverse to the corporate agent establishes that his acts or
omissions (a) were in breach of his duty of loyalty to the corporation or its
shareholders, as defined in subsection (3) of N.J.S.14A:2-7, (b) were not in
good faith or involved a knowing violation of law or (c) resulted in receipt by
the corporate agent of an improper personal benefit.
(9) Any corporation organized for any purpose under any general or special
law of this State shall have the power to purchase and maintain insurance on
behalf of any corporate agent against any expenses incurred in any proceeding
and any liabilities asserted against him by reason of his being or having been a
corporate agent, whether or not the corporation would have the power to
indemnify him against such expenses and liabilities under the provisions of this
section. The corporation may purchase such insurance from, or such insurance may
be reinsured in whole or in part by, an insurer owned by or otherwise affiliated
with the corporation, whether or not such insurer does business with other
insureds.
II-4
126
(10) The powers granted by this section may be exercised by the
corporation, notwithstanding the absence of any provision in its certificate of
incorporation or bylaws authorizing the exercise of such powers.
(11) Except as required by subsection 14A:3-5(4), no indemnification shall
be made or expenses advanced by a corporation under this section, and none shall
be ordered by a court, if such action would be inconsistent with a provision of
the certificate of incorporation, a bylaw, a resolution of the board of
directors or of the shareholders, an agreement or other proper corporate action,
in effect at the time of the accrual of the alleged cause of action asserted in
the proceeding, which prohibits, limits or otherwise conditions the exercise of
indemnification powers by the corporation or the rights of indemnification to
which a corporate agent may be entitled.
(12) This section does not limit a corporation's power to pay or reimburse
expenses incurred by a corporate agent in connection with the corporate agent's
appearance as a witness in a proceeding at a time when the corporate agent has
not been made a party to the proceeding.
The Underwriting Agreement provides for indemnification by the Underwriters
of the Registrant and its officers and directors for certain liabilities,
including liabilities under the Securities Act.
ITEM 16. EXHIBITS
The following exhibits are filed with this Registration Statement:
EXHIBIT NO. DESCRIPTION
1.1 -- Form of Underwriting Agreement.*
3.1 -- Restated Certificate of Incorporation, amended February 3,
1997 (incorporated by reference to Exhibit 3.1 to Amendment
No. 1 to the Registration Statement on Form S-1 (File No.
333-18565) filed with the Commission on February 6, 1997).
3.2 -- Amended By-Laws, as amended January 11, 1989 (incorporated
by reference to Exhibit 3.2 to Amendment No. 1 to the
Registration Statement on Form S-1 (File No. 333-18565)
filed with the Commission on February 6, 1997).
3.3 -- Certificate of Amendment to the Certificate of
Incorporation, dated November 19, 1998 (incorporated by
reference to Exhibit 3.3 to the registrant's annual report
on Form 10-K for the fiscal year ended September 30, 1998
(the "1998 10-K"))
4.1 -- Specimen certificate for shares of common stock
(incorporated by reference to Exhibit 4.1 to Amendment No. 3
to the Registration Statement on Form S-1 (File No.
333-18565) filed with the Commission on February 24, 1997).
4.2 -- Form of $4.08 Warrant (incorporated by reference to Exhibit
10.10 to Amendment No. 1 to the Registration Statement on
Form S-1 (File No. 333-18565) filed with the Commission on
February 6, 1997).
4.3 -- Form of $10.20 Warrant (incorporated by reference to Exhibit
10.12 to Amendment No. 1 to the Registration Statement on
Form S-1 (File No. 333-18565) filed with the Commission on
February 6, 1997).
II-5
127
EXHIBIT NO. DESCRIPTION
4.4 -- Form of $11.375 Warrant (incorporated by reference to
Exhibit 4.2 to the 1998 10-K).
5.1 -- Form of White & Case LLP Opinion.*
10.1 -- 1995 Incentive and Non-Statutory Stock Option Plan
(incorporated by reference to Exhibit 10.1 to Amendment No.
1 to the Registration Statement on Form S-1 (File No.
333-18565) filed with the Commission on February 6, 1997).
10.2 -- 1996 Amendment to Option Plan (incorporated by reference to
Exhibit 10.2 to Amendment No. 1 to the Registration
Statement on Form S-1 (File No. 333-18565) filed with the
Commission on February 6, 1997).
10.3 -- Specimen Incentive Stock Option Agreement (incorporated by
reference to Exhibit 10.3 to Amendment No. 1 to the
Registration Statement on Form S-1 (File No. 333-18565)
filed with the Commission on February 6, 1997).
10.4 -- Second Amended and Restated Distributorship Agreement dated
as of March 31, 1998 between the Company and Hakuto.
Confidential treatment has been requested by the Company for
portions of this document. Such portions are indicated by
"[*]" (incorporated by reference to Exhibit 10.4 to the 1998
10-K).
10.5 -- Amendment to Lease for premises at 394 Elizabeth Avenue,
Somerset, New Jersey 08873 (incorporated by reference to
Exhibit 10.5 to Amendment No. 1 to the Registration
Statement on Form S-1 (File No. 333-18565) filed with the
Commission on February 6, 1997).
10.6 -- Registration Rights Agreement relating to September 1996
warrant issuance (incorporated by reference to Exhibit 10.6
to Amendment No. 1 to the Registration Statement on Form S-1
(File No. 333-18565) filed with the Commission on February
6, 1997).
10.7 -- Registration Rights Agreement relating to December 1996
warrant issuance (incorporated by reference to Exhibit 10.7
to Amendment No. 1 to the Registration Statement on Form S-1
(File No. 333-18565) filed with the Commission on February
6, 1997).
10.8 -- Form of 6% Subordinated Note Due May 1, 2001 (incorporated
by reference to Exhibit 10.8 to Amendment No. 1 to the
Registration Statement on Form S-1 (File No. 333-18565)
filed with the Commission on February 6, 1997).
10.9 -- Form of 6% Subordinated Note Due September 1, 2001
(incorporated by reference to Exhibit 10.9 to Amendment No.
1 to the Registration Statement on Form S-1 (File No.
333-18565) filed with the Commission on February 6, 1997).
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128
EXHIBIT NO. DESCRIPTION
10.10 -- Purchase Order issued to the Company by General Motors
Corporation on November 17, 1996. (incorporated by reference
to Exhibit 10.15 to Amendment No. 1 to the Registration
Statement on Form S-1 (File No. 333-18565) filed with the
Commission on February 6, 1997). Confidential treatment has
been requested by the Company with respect to portions of
this document. Such portions are indicated by "[*]".
10.11 -- Purchase Agreement, dated November 30, 1998, by and between
the Company, Hakuto UMI and UTC (incorporated by reference
to Exhibit 10.15 to the 1998 10-K).
10.12 -- Registration Rights Agreement, dated November 30, 1998 by
and between the Company, Hakuto, UMI and UTC (incorporated
by reference to Exhibit 10.16 to the 1998 10-K).
10.13 -- Long Term Purchase Agreement dated November 24, 1998 by and
between the Company and Space Systems/Loral, Inc.
(incorporated by reference to Exhibit 10.17 to the 1998
10-K). Confidential treatment has been requested by the
Company with respect to portions of this document. Such
portions are indicated by "[*]."
10.14 -- Promissory Note, dated April 29, 1999 by EMCORE in favor of
First Union National Bank.*
10.15 -- Second Amendment to Revolving Loan and Security Agreement,
dated as of November 30, 1998 between the Company and First
Union National Bank (incorporated by reference to Exhibit
10.19 to the 1998 10-K).
10.16 -- Agreement and Plan of Merger, dated as of December 5, 1997,
among the Company, the Merger Subsidiary, MODE and the
Principal Shareholders named therein (incorporated by
reference to Exhibit 2 to the Company's report on Form 8-K
filed with the Commission on December 22, 1997).
10.17 -- Transaction Agreement, dated January 26, 1999, by and
between EMCORE and General Electric Company (incorporated by
reference to Exhibit 10.1 to EMCORE's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1999).
Confidential treatment has been requested by EMCORE with
respect to portions of this document. Such portions are
indicated by "[*]."
21 -- Subsidiaries of the registrant.
23.1 -- Consent of Deloitte & Touche LLP*
23.2 -- Consent of PricewaterhouseCoopers LLP*
23.3 -- Consent of Arthur Andersen LLP*
23.4 -- Consent of White & Case (included in Exhibit 5.1).*
23.5 -- Consent of Lerner David Littenberg Krumholz & Mentlik.*
99.1 -- Form of Power of Attorney and Custody Agreement for selling
shareholders.*
- -------------------------
* Filed herewith
II-7
129
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a)or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the 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 Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of a registration statement in reliance upon Rule 430A and contained in the
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 the purpose of determining any liability under the Securities
Act of 1933, 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.
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130
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 1 Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the Township of Somerset, State
of New Jersey, on May 21, 1999.
EMCORE CORPORATION
By *
------------------------------------
Reuben F. Richards, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act, this Amendment No. 1 on
Form S-3 has been signed by the following persons in the capacities indicated,
on May 21, 1999.
SIGNATURE TITLE
* Chairman of the Board and Director
- ------------------------------------------------
Thomas J. Russell
* President, Chief Executive Officer and
- ------------------------------------------------ Director (Principal Executive Officer)
Reuben F. Richards, Jr.
/s/ THOMAS G. WERTHAN Vice President, Chief Financial
- ------------------------------------------------ Officer, Secretary and Director
Thomas G. Werthan (Principal Accounting and Financial
Officer)
* Director
- ------------------------------------------------
Richard A. Stall
* Director
- ------------------------------------------------
Charles Scott
* Director
- ------------------------------------------------
Robert Louis-Dreyfus
* Director
- ------------------------------------------------
Hugh H. Fenwick
* Director
- ------------------------------------------------
Shigeo Takayama
/s/ JOHN J. HOGAN, JR. Director
- ------------------------------------------------
John J. Hogan, Jr.
*By: /s/ THOMAS G. WERTHAN
------------------------------------------
Thomas G. Werthan
Attorney-in-Fact
II-9
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EXHIBIT 1.1
_______________Shares
EMCORE CORPORATION
Common Stock
UNDERWRITING AGREEMENT
March __, 1999
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
PRUDENTIAL SECURITIES
NEEDHAM & COMPANY, INC
VOLPE BROWN WHELAN & COMPANY
As representatives of the several Underwriters
named in Schedule I hereto
c/o Donaldson, Lufkin & Jenrette Securities Corporation
277 Park Avenue
New York, New York 10172
Dear Sirs:
EMCORE Corporation, a New Jersey corporation (the "COMPANY"), proposes
to issue and sell to the several underwriters named in Schedule I hereto (the
"UNDERWRITERS"), and certain stockholders of the Company named in Schedule II
hereto (the "SELLING STOCKHOLDERS") severally propose to sell to the several
Underwriters, an aggregate of _______________ shares of the common stock, no
par value per share, of the Company (the "FIRM Shares"), of which _____________
shares are to be issued and sold by the Company and _____________ shares are to
be sold by the Selling Stockholders, each Selling Stockholder selling the
amount set forth opposite such Selling Stockholder's name in Schedule II
hereto. The Company also proposes to issue and sell to the several Underwriters
not more than an additional _______ shares of its common stock, no par value
per share (the "ADDITIONAL SHARES"), if requested by the Underwriters as
provided in Section 2 hereof. The Firm Shares and the Additional Shares are
hereinafter referred to collectively as the "SHARES". The shares of common
stock of the Company to be outstanding after giving effect to the sales
contemplated hereby are hereinafter referred to as the "COMMON STOCK". The
Company and the Selling Stockholders are hereinafter sometimes referred to
collectively as the "SELLERS."
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SECTION 1. REGISTRATION STATEMENT AND PROSPECTUS. The Company has
prepared and filed with the Securities and Exchange Commission (the
"COMMISSION") in accordance with the provisions of the Securities Act of 1933,
as amended, and the rules and regulations of the Commission thereunder
(collectively, the "ACT"), a registration statement on Form S-3, including a
prospectus, relating to the Shares. The registration statement, as amended at
the time it became effective, including the information (if any) deemed to be
part of the registration statement at the time of effectiveness pursuant to
Rule 430A under the Act and including all documents incorporated by reference
in such registration statement, is hereinafter referred to as the "REGISTRATION
STATEMENT"; and the prospectus in the form first used to confirm sales of
Shares, including all documents incorporated by reference therein, is
hereinafter referred to as the "PROSPECTUS". If the Company has filed or is
required pursuant to the terms hereof to file a registration statement pursuant
to Rule 462(b) under the Act registering additional shares of Common Stock (a
"RULE 462(B) REGISTRATION STATEMENT"), then, unless otherwise specified, any
reference herein to the term "Registration Statement" shall be deemed to
include such Rule 462(b) Registration Statement. The terms "SUPPLEMENT" and
"AMENDMENT" or "AMEND" as used in this Agreement with respect to the
Registration Statement or the Prospectus shall include all documents
subsequently filed by the Company with the Commission pursuant to the
Securities Exchange Act of 1934, as amended, and the rules and regulations of
the Commission thereunder (collectively, the "EXCHANGE ACT") that are deemed to
be incorporated by reference in the Prospectus.
SECTION 2. AGREEMENTS TO SELL AND PURCHASE AND LOCK-UP AGREEMENTS . On
the basis of the representations and warranties contained in this Agreement,
and subject to its terms and conditions, (i) the Company agrees to issue and
sell ______________ Firm Shares, (ii) each Selling Stockholder agrees,
severally and not jointly, to sell the number of Firm Shares set forth opposite
such Selling Stockholder's name in Schedule II hereto and (iii) each
Underwriter agrees, severally and not jointly, to purchase from each Seller at
a price per Share of $______ (the "PURCHASE PRICE") the number of Firm Shares
(subject to such adjustments to eliminate fractional shares as you may
determine) that bears the same proportion to the total number of Firm Shares to
be sold by such Seller as the number of Firm Shares set forth opposite the name
of such Underwriter in Schedule I hereto bears to the total number of Firm
Shares.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to issue
and sell the Additional Shares and the Underwriters shall have the right to
purchase, severally and not jointly, up to _______ Additional Shares from the
Company at the Purchase Price. Additional Shares may be purchased solely for
the purpose of covering over-allotments made in connection with the offering of
the Firm Shares. The Underwriters may exercise their right to purchase
Additional Shares in whole or in part from time to time by giving written
notice thereof to the Company within 30 days after the date of this Agreement.
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You shall give any such notice on behalf of the Underwriters and such notice
shall specify the aggregate number of Additional Shares to be purchased
pursuant to such exercise and the date for payment and delivery thereof, which
date shall be a business day (i) no earlier than two business days after such
notice has been given (and, in any event, no earlier than the Closing Date (as
hereinafter defined)) and (ii) no later than ten business days after such
notice has been given. If any Additional Shares are to be purchased, each
Underwriter, severally and not jointly, agrees to purchase from the Company the
number of Additional Shares (subject to such adjustments to eliminate
fractional shares as you may determine) which bears the same proportion to the
total number of Additional Shares to be purchased from the Company as the
number of Firm Shares set forth opposite the name of such Underwriter in
Schedule I bears to the total number of Firm Shares.
Each Seller hereby agrees not to (i) offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant to purchase, or otherwise transfer
or dispose of, directly or indirectly, any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock
(including, without limitation, shares of Common Stock or securities
convertible into or exercisable or exchangeable for Common Stock which may be
deemed to be beneficially owned by the undersigned in accordance with the rules
and regulations of the Securities and Exchange Commission) or (ii) enter into
any swap or other arrangement that transfers all or a portion of the economic
consequences associated with the ownership of any Common Stock (regardless of
whether any of the transactions described in clause (i) or (ii) is to be
settled by the delivery of Common Stock, or such other securities, in cash or
otherwise), except to the Underwriters pursuant to this Agreement, for a period
of 90 days after the date of the Prospectus without the prior written consent
of Donaldson, Lufkin & Jenrette Securities Corporation. Notwithstanding the
foregoing, during such period (i) the Company may grant stock options pursuant
to the Company's existing stock option plan and (ii) the Company may issue
shares of Common Stock upon the exercise of an option or warrant or the
conversion of a security outstanding on the date hereof. The Company also
agrees not to file any registration statement with respect to any shares of
Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock for a period of 90 days after the date of the Prospectus
without the prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation. In addition, each Selling Stockholder agrees that, for a period of
90 days after the date of the Prospectus without the prior written consent of
Donaldson, Lufkin & Jenrette Securities Corporation, it will not make any
demand for, or exercise any right with respect to, the registration of any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock. The Company shall, prior to or concurrently with
the execution of this Agreement, deliver an agreement executed by (i) each
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Selling Stockholder, (ii) each of the directors and officers of the Company who
is not a Selling Stockholder and (iii) each stockholder listed on Annex I
hereto to the effect that such person will not, during the period commencing on
the date such person signs such agreement and ending 90 days after the date of
the Prospectus, without the prior written consent of Donaldson, Lufkin &
Jenrette Corporation, (A) engage in any of the transactions described in the
first sentence of this paragraph or (B) make any demand for, or exercise any
right with respect to, the registration of any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock.
SECTION 3. TERMS OF PUBLIC OFFERING. The Sellers are advised by you
that the Underwriters propose (i) to make a public offering of their respective
portions of the Shares as soon after the execution and delivery of this
Agreement as in your judgment is advisable and (ii) initially to offer the
Shares upon the terms set forth in the Prospectus.
SECTION 4. DELIVERY AND PAYMENT. The Shares shall be represented by
definitive certificates and shall be issued in such authorized denominations
and registered in such names as Donaldson, Lufkin & Jenrette Securities
Corporation shall request no later than two business days prior to the Closing
Date or the applicable Option Closing Date (as defined below), as the case may
be. The Shares shall be delivered by or on behalf of the Sellers, with any
transfer taxes thereon duly paid by the respective Sellers, to Donaldson,
Lufkin & Jenrette Securities Corporation through the facilities of The
Depository Trust Company ("DTC"), for the respective accounts of the several
Underwriters, against payment to the Sellers of the Purchase Price therefore by
wire transfer of Federal or other funds immediately available in New York City.
The certificates representing the Shares shall be made available for inspection
not later than 9:30 A.M., New York City time, on the business day prior to the
Closing Date or the applicable Option Closing Date, as the case may be, at the
office of DTC or its designated custodian (the "DESIGNATED OFFICE"). The time
and date of delivery and payment for the Firm Shares shall be 9:00 A.M., New
York City time, on ________, 199_ or such other time on the same or such other
date as Donaldson, Lufkin & Jenrette Securities Corporation and the Company
shall agree in writing. The time and date of delivery and payment for the Firm
Shares are hereinafter referred to as the "CLOSING DATE". The time and date of
delivery and payment for any Additional Shares to be purchased by the
Underwriters shall be 9:00 A.M., New York City time, on the date specified in
the applicable exercise notice given by you pursuant to Section 2 or such other
time on the same or such other date as Donaldson, Lufkin & Jenrette Securities
Corporation and the Company shall agree in writing. The time and date of
delivery and payment for any Additional Shares are hereinafter referred to as
the "OPTION CLOSING DATE".
The documents to be delivered on the Closing Date or any Option
Closing Date on behalf of the parties hereto pursuant to Section 9 of this
Agreement shall be delivered at the offices of Brobeck, Phleger & Harrison LLP,
1633 Broadway, 47th Floor, New York, New York, 10019, and the Shares shall be
delivered at the Designated Office, all on the Closing Date or such Option
Closing Date, as the case may be.
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SECTION 5. AGREEMENTS OF THE COMPANY. The Company agrees with you:
(a) To advise you promptly and, if requested by you, to confirm such
advice in writing, (i) of any request by the Commission for amendments to the
Registration Statement or amendments or supplements to the Prospectus or for
additional information, (ii) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or of the
suspension of qualification of the Shares for offering or sale in any
jurisdiction, or the initiation of any proceeding for such purposes, (iii) when
any amendment to the Registration Statement becomes effective, (iv) if the
Company is required to file a Rule 462(b) Registration Statement after the
effectiveness of this Agreement, when the Rule 462(b) Registration Statement
has become effective and (v) of the happening of any event during the period
referred to in Section 5(d) below which makes any statement of a material fact
made in the Registration Statement or the Prospectus untrue or which requires
any additions to or changes in the Registration Statement or the Prospectus in
order to make the statements therein not misleading. If at any time the
Commission shall issue any stop order suspending the effectiveness of the
Registration Statement, the Company will use its best efforts to obtain the
withdrawal or lifting of such order at the earliest possible time.
(b) To furnish you five (5) signed copies of the Registration
Statement as first filed with the Commission and of each amendment to it,
including all exhibits and documents incorporated therein by reference, and to
furnish to you and each Underwriter designated by you such number of conformed
copies of the Registration Statement as so filed and of each amendment to it,
without exhibits but including documents incorporated therein by reference, as
you may reasonably request.
(c) To prepare the Prospectus, the form and substance of which shall
be satisfactory to you, and to file the Prospectus in such form with the
Commission within the applicable period specified in Rule 424(b) under the Act;
during the period specified in Section 5(d) below, not to file any further
amendment to the Registration Statement and not to make any amendment or
supplement to the Prospectus of which you shall not previously have been
advised or to which you shall reasonably object after being so advised; and,
during such period, to prepare and file with the Commission, promptly upon your
reasonable request, any amendment to the Registration Statement or amendment or
supplement to the Prospectus which may be necessary or advisable in connection
with the distribution of the Shares by you, and to use its best efforts to
cause any such amendment to the Registration Statement to become promptly
effective.
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(d) Prior to 10:00 A.M., New York City time, on the first business
day after the date of this Agreement and from time to time thereafter for such
period as in the opinion of counsel for the Underwriters a prospectus is
required by law to be delivered in connection with sales by an Underwriter or a
dealer, to furnish in New York City to each Underwriter and any dealer as many
copies of the Prospectus (and of any amendment or supplement to the Prospectus)
and any documents incorporated therein by reference as such Underwriter or
dealer may reasonably request.
(e) If during the period specified in Section 5(d), any event shall
occur or condition shall exist as a result of which, in the opinion of counsel
for the Underwriters, it becomes necessary to amend or supplement the
Prospectus in order to make the statements therein, in the light of the
circumstances when the Prospectus is delivered to a purchaser, not misleading,
or if, in the opinion of counsel for the Underwriters, it is necessary to amend
or supplement the Prospectus to comply with applicable law, forthwith to
prepare and file with the Commission an appropriate amendment or supplement to
the Prospectus so that the statements in the Prospectus, as so amended or
supplemented, will not in the light of the circumstances when it is so
delivered, be misleading, or so that the Prospectus will comply with applicable
law, and to furnish to each Underwriter and to any dealer as many copies
thereof as such Underwriter or dealer may reasonably request.
(f) Prior to any public offering of the Shares, to cooperate with you
and counsel for the Underwriters in connection with the registration or
qualification of the Shares for offer and sale by the several Underwriters and
by dealers under the state securities or Blue Sky laws of such jurisdictions as
you may request, to continue such registration or qualification in effect so
long as required for distribution of the Shares and to file such consents to
service of process or other documents as may be necessary in order to effect
such registration or qualification; PROVIDED, HOWEVER, that the Company shall
not be required in connection therewith to qualify as a foreign corporation in
any jurisdiction in which it is not now so qualified or to take any action that
would subject it to general consent to service of process or taxation other
than as to matters and transactions relating to the Prospectus, the
Registration Statement, any preliminary prospectus or the offering or sale of
the Shares, in any jurisdiction in which it is not now so subject.
(g) To mail and make generally available to its stockholders as soon
as practicable an earnings statement covering the twelve-month period ending
March 31, 2000 that shall satisfy the provisions of Section 11(a) of the Act,
and to advise you in writing when such statement has been so made available.
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(h) During the period of three years after the date of this
Agreement, to furnish to you as soon as available copies of all reports or
other communications furnished to the record holders of Common Stock or
furnished to or filed with the Commission or any national securities exchange
on which any class of securities of the Company is listed and such other
publicly available information concerning the Company and its subsidiaries as
you may reasonably request.
(i) Whether or not the transactions contemplated in this Agreement
are consummated or this Agreement is terminated, to pay or cause to be paid all
expenses incident to the performance of the Sellers' obligations under this
Agreement, including: (i) the fees, disbursements and expenses of the Company's
counsel, the Company's accountants and any Selling Stockholder's counsel (in
addition to the Company's counsel) in connection with the registration and
delivery of the Shares under the Act and all other fees and expenses in
connection with the preparation, printing, filing and distribution of the
Registration Statement (including financial statements and exhibits), any
preliminary prospectus, the Prospectus and all amendments and supplements to
any of the foregoing, including the mailing and delivering of copies thereof to
the Underwriters and dealers in the quantities specified herein, (ii) all costs
and expenses related to the transfer and delivery of the Shares to the
Underwriters, including any transfer or other taxes payable thereon, (iii) all
costs of printing or producing this Agreement and any other agreements or
documents in connection with the offering, purchase, sale or delivery of the
Shares, (iv) all expenses in connection with the registration or qualification
of the Shares for offer and sale under the securities or Blue Sky laws of the
several states and all costs of printing or producing any Preliminary and
Supplemental Blue Sky Memoranda in connection therewith (including the filing
fees and fees and disbursements of counsel for the Underwriters in connection
with such registration or qualification and memoranda relating thereto), (v)
the filing fees and disbursements of counsel for the Underwriters in connection
with the review and clearance of the offering of the Shares by the National
Association of Securities Dealers, Inc., (vi) all fees and expenses in
connection with the preparation and filing of the registration statement on
Form 8-A relating to the Common Stock and all costs and expenses incident to
the listing of the Shares on the Nasdaq National Market, (vii) the cost of
printing certificates representing the Shares, (viii) the costs and charges of
any transfer agent, registrar and/or depositary, and (ix) all other costs and
expenses incident to the performance of the obligations of the Company and the
Selling Stockholders hereunder for which provision is not otherwise made in
this Section. The provisions of this Section shall not supersede or otherwise
affect any agreement that the Company and the Selling Stockholders may
otherwise have for allocation of such expenses among themselves.
(j) To use its best efforts to list for quotation the Shares on the
Nasdaq National Market and to maintain the listing of the Shares on the Nasdaq
National Market for a period of three years after the date of this Agreement.
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(k) To use its best efforts to do and perform all things required or
necessary to be done and performed under this Agreement by the Company prior to
the Closing Date or any Option Closing Date, as the case may be, and to satisfy
all conditions precedent to the delivery of the Shares.
(l) If the Registration Statement at the time of the effectiveness of
this Agreement does not cover all of the Shares, to file a Rule 462(b)
Registration Statement with the Commission registering the Shares not so
covered in compliance with Rule 462(b) by 10:00 P.M., New York City time, on
the date of this Agreement and to pay to the Commission the filing fee for such
Rule 462(b) Registration Statement at the time of the filing thereof or to give
irrevocable instructions for the payment of such fee pursuant to Rule 111(b)
under the Act.
SECTION 6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to each Underwriter that:
(a) The Registration Statement has become effective (other than any
Rule 462(b) Registration Statement to be filed by the Company after the
effectiveness of this Agreement); any Rule 462(b) Registration Statement filed
after the effectiveness of this Agreement will become effective no later than
10:00 P.M., New York City time, on the date of this Agreement; and no stop
order suspending the effectiveness of the Registration Statement is in effect,
and no proceedings for such purpose are pending before or threatened by the
Commission.
(b) (i) Each document, if any, filed or to be filed pursuant to the
Exchange Act and incorporated by reference in the Prospectus complied or will
comply when so filed in all material respects with the Exchange Act, (ii) the
Registration Statement (other than any Rule 462(b) Registration Statement to be
filed by the Company after the effectiveness of this Agreement), when it became
effective, did not contain and, as amended, if applicable, will not contain any
untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading, (iii) the Registration Statement (other than any Rule 462(b)
Registration Statement to be filed by the Company after the effectiveness of
this Agreement) and the Prospectus comply and, as amended or supplemented, if
applicable, will comply in all material respects with the Act, (iv) if the
Company is required to file a Rule 462(b) Registration Statement after the
effectiveness of this Agreement, such Rule 462(b) Registration Statement and
any amendments thereto, when they become effective (A) will not contain any
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untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not misleading
and (B) will comply in all material respects with the Act and (v) the
Prospectus does not contain and, as amended or supplemented, if applicable,
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, except that the
representations and warranties set forth in this paragraph do not apply to
statements or omissions in the Registration Statement or the Prospectus based
upon information relating to any Underwriter furnished to the Company in
writing by such Underwriter through you expressly for use therein.
(c) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Act, complied when so filed in all material
respects with the Act, and did not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, except that the representations and
warranties set forth in this paragraph do not apply to statements or omissions
in any preliminary prospectus based upon information relating to any
Underwriter furnished to the Company in writing by such Underwriter through you
expressly for use therein.
(d) Each of the Company and its subsidiaries has been duly
incorporated, is validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation and has the corporate power and
authority to carry on its business as described in the Prospectus and to own,
lease and operate its properties, and each is duly qualified and is in good
standing as a foreign corporation authorized to do business in each
jurisdiction in which the nature of its business or its ownership or leasing of
property requires such qualification, except where the failure to be so
qualified would not have a material adverse effect on the business, prospects,
financial condition or results of operations of the Company and its
subsidiaries, taken as a whole.
(e) There are no outstanding subscriptions, rights, warrants,
options, calls, convertible securities, commitments of sale or liens granted or
issued by the Company or any of its subsidiaries relating to or entitling any
person to purchase or otherwise to acquire any shares of the capital stock of
the Company or any of its subsidiaries, except as otherwise disclosed in the
Registration Statement.
(f) All the outstanding shares of capital stock of the Company
(including the Shares to be sold by the Selling Stockholders) have been duly
authorized and validly issued and are fully paid, non-assessable and not
subject to any preemptive or similar rights; and the Shares to be issued and
sold by the Company have been duly authorized and, when issued and delivered to
the Underwriters against payment therefor as provided by this Agreement, will
be validly issued, fully paid and non-assessable, and the issuance of such
Shares will not be subject to any preemptive or similar rights.
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(g) All of the outstanding shares of capital stock of each of the
Company's subsidiaries have been duly authorized and validly issued and are
fully paid and non-assessable, and are owned by the Company, directly or
indirectly through one or more subsidiaries, free and clear of any security
interest, claim, lien, encumbrance or adverse interest of any nature.
(h) The authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus.
(i) Neither the Company nor any of its subsidiaries is in violation
of its respective charter or by-laws or in default in the performance of any
obligation, agreement, covenant or condition contained in any indenture, loan
agreement, mortgage, lease or other agreement or instrument that is material to
the Company and its subsidiaries, taken as a whole, to which the Company or any
of its subsidiaries is a party or by which the Company or any of its
subsidiaries or their respective property is bound.
(j) The execution, delivery and performance of this Agreement by the
Company, the compliance by the Company with all the provisions hereof and the
consummation of the transactions contemplated hereby will not (i) require any
consent, approval, authorization or other order of, or qualification with, any
court or governmental body or agency (except such as may be required under the
securities or Blue Sky laws of the various states), (ii) conflict with or
constitute a breach of any of the terms or provisions of, or a default under,
the charter or by-laws of the Company or any of its subsidiaries or any
indenture, loan agreement, mortgage, lease or other agreement or instrument
that is material to the Company and its subsidiaries, taken as a whole, to
which the Company or any of its subsidiaries is a party or by which the Company
or any of its subsidiaries or their respective property is bound, (iii) violate
or conflict with any applicable law or any rule, regulation, judgment, order or
decree of any court or any governmental body or agency having jurisdiction over
the Company, any of its subsidiaries or their respective property or (iv)
result in the suspension, termination or revocation of any Authorization (as
defined below) of the Company or any of its subsidiaries or any other
impairment of the rights of the holder of any such Authorization.
(k) There are no legal or governmental proceedings pending or
threatened to which the Company or any of its subsidiaries is or could be a
party or to which any of their respective property is or could be subject that
are required to be described in the Registration Statement or the Prospectus
and are not so described; nor are there any statutes, regulations, contracts or
other documents that are required to be described in the Registration Statement
or the Prospectus or to be filed as exhibits to the Registration Statement that
are not so described or filed as required.
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(l) Neither the Company nor any of its subsidiaries has violated any
foreign, federal, state or local law or regulation relating to the protection
of human health and safety, the environment or hazardous or toxic substances or
wastes, pollutants or contaminants ("ENVIRONMENTAL LAWS"), any federal or state
law relating to discrimination in the hiring, promotion or pay of employees,
any applicable federal or state wages and hours laws, any provisions of the
Employee Retirement Income Security Act of 1974, as amended, or any provisions
of the Foreign Corrupt Practices Act or the rules and regulations promulgated
thereunder, except for such violations which, singly or in the aggregate, would
not have a material adverse effect on the business, prospects, financial
condition or results of operation of the Company and its subsidiaries, taken as
a whole.
(m) Each of the Company and its subsidiaries has such permits,
licenses, consents, exemptions, franchises, authorizations and other approvals
(each, an "AUTHORIZATION") of, and has made all filings with and notices to,
all governmental or regulatory authorities and self-regulatory organizations
and all courts and other tribunals, including, without limitation, under any
applicable Environmental Laws, as are necessary to own, lease, license and
operate its respective properties and to conduct its business, except where the
failure to have any such Authorization or to make any such filing or notice
would not, singly or in the aggregate, have a material adverse effect on the
business, prospects, financial condition or results of operations of the
Company and its subsidiaries, taken as a whole. Each such Authorization is
valid and in full force and effect and each of the Company and its subsidiaries
is in compliance with all the terms and conditions thereof and with the rules
and regulations of the authorities and governing bodies having jurisdiction
with respect thereto; and no event has occurred (including, without limitation,
the receipt of any notice from any authority or governing body) which allows
or, after notice or lapse of time or both, would allow, revocation, suspension
or termination of any such Authorization or results or, after notice or lapse
of time or both, would result in any other impairment of the rights of the
holder of any such Authorization; and such Authorizations contain no
restrictions that are burdensome to the Company or any of its subsidiaries;
except where such failure to be valid and in full force and effect or to be in
compliance, the occurrence of any such event or the presence of any such
restriction would not, singly or in the aggregate, have a material adverse
effect on the business, prospects, financial condition or results of operations
of the Company and its subsidiaries, taken as a whole.
(n) In the ordinary course of its business, the Company conducts a
periodic review of the effect of Environmental Laws on the business, operations
and properties of the Company, in the course of which it identifies and
evaluates associated costs and liabilities (including, without limitation, any
capital or operating expenditures required for clean-up, closure of properties
or compliance with Environmental Laws or any permit, license or approval, any
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related constraints on operating activities and any potential liabilities to
third parties). On the basis of such review, the Company has reasonably
concluded that such associated costs and liabilities would not, singly or in
the aggregate, have a material adverse effect on the business, prospects,
financial condition or results of operations of the Company and its
subsidiaries, taken as a whole.
(o) This Agreement has been duly authorized, executed and delivered
by the Company.
(p) PricewaterhouseCoopers LLP and Arthur Andersen LLP are each
independent public accountants with respect to the Company and its subsidiaries
as required by the Act.
(q) The consolidated financial statements included in the
Registration Statement and the Prospectus (and any amendment or supplement
thereto), together with related schedules and notes, present fairly the
consolidated financial position, results of operations and changes in financial
position of the Company and its subsidiaries on the basis stated therein at the
respective dates or for the respective periods to which they apply; such
statements and related schedules and notes have been prepared in accordance
with generally accepted accounting principles consistently applied throughout
the periods involved, except as disclosed therein; the supporting schedules, if
any, included in the Registration Statement present fairly in accordance with
generally accepted accounting principles the information required to be stated
therein; and the other financial and statistical information and data set forth
in the Registration Statement and the Prospectus (and any amendment or
supplement thereto) are, in all material respects, accurately presented and
prepared on a basis consistent with such financial statements and the books and
records of the Company.
(r) The Company is not and, after giving effect to the offering and
sale of the Shares and the application of the proceeds thereof as described in
the Prospectus, will not be, an "investment company" or a company "controlled"
by an "investment company", as such terms are defined in the Investment Company
Act of 1940, as amended.
(s) Except as otherwise disclosed in the Registration Statement,
there are no contracts, agreements or understandings between the Company and
any person granting such person the right to require the Company to file a
registration statement under the Act with respect to any securities of the
Company or to require the Company to include such securities with the Shares
registered pursuant to the Registration Statement.
(t) Since the respective dates as of which information is given in
the Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement),
(i) there has not occurred any material adverse change or any development
involving a prospective material adverse change in the condition, financial or
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otherwise, or the earnings, business, management or operations of the Company
and its subsidiaries, taken as a whole, (ii) there has not been any material
adverse change or any development involving a prospective material adverse
change in the capital stock or in the long-term debt of the Company or any of
its subsidiaries and (iii) neither the Company nor any of its subsidiaries has
incurred any material liability or obligation, direct or contingent.
(u) Each certificate signed by any officer of the Company and
delivered to the Underwriters or counsel for the Underwriters shall be deemed
to be a representation and warranty by the Company to the Underwriters as to
the matters covered thereby.
(w) The Company and its subsidiaries have good and marketable
title in fee simple to all real property and good and marketable title to all
personal property owned by them which is material to the business of the
Company and its subsidiaries, taken as a whole, in each case free and clear of
all liens, encumbrances and defects except such as are described in the
Prospectus or such as do not materially affect the value of such property and
do not interfere with the use made and proposed to be made of such property by
the Company and its subsidiaries; and any real property and buildings held
under lease by the Company and its subsidiaries are held by them under valid,
subsisting and enforceable leases with such exceptions as are not material and
do not interfere with the use made and proposed to be made of such property and
buildings by the Company and its subsidiaries, taken as a whole, in each case
except as described in the Prospectus.
(x) The Company and its subsidiaries own, or possess valid
and enforceable licenses to all patents, patent rights, inventions, copyrights,
know-how (including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures), trademarks,
service marks and trade names ("INTELLECTUAL PROPERTY") currently employed by
the Company and its subsidiaries in connection with the business now operated
by them , except where the failure to own or possess such Intellectual Property
would not, singly or in the aggregate, have a material adverse effect on the
business, prospects, financial condition or results of operation of the Company
and its subsidiaries, taken as a whole. Neither the Company, nor its
subsidiaries, has received any notice, nor are they aware of facts which would
form a reasonable basis for any such claim, that: (i) challenges the Company's
or its subsidiaries' rights in or to any Intellectual Property; (ii) challenges
the validity or scope of any Intellectual Property; (iii) any third party has
or will be able to establish any rights in the Intellectual Property, except
for the ownership rights of the owners of the Intellectual Property which is
licensed to the Company or the rights of parties to whom the Company has
granted licenses of such Intellectual Property; (iv) the Intellectual Property
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infringes or otherwise violates any patent, copyright, trade secret, trademark
or other proprietary right of any third party; or (v) there is infringement of
the Intellectual Property by any third party, which, in the case of any such
claim specified in clauses (i), (ii), (iii), (iv) or (v) above, singly or in
the aggregate, if the subject of an unfavorable decision, ruling or finding,
would have a material adverse effect on the business, prospects, financial
condition or results of operations of the Company and its subsidiaries, taken
as a whole.
(y) The Company and each of its subsidiaries are insured by
insurers of recognized financial responsibility against such losses and risks
and in such amounts as are prudent and customary in the businesses in which
they are engaged; and neither the Company nor any of its subsidiaries (i) has
received notice from any insurer or agent of such insurer that substantial
capital improvements or other material expenditures will have to be made in
order to continue such insurance or (ii) has any reason to believe that it will
not be able to renew its existing insurance coverage as and when such coverage
expires or to obtain similar coverage from similar insurers at a cost that
would not have a material adverse effect on the business, prospects, financial
conditions or results of operations of the Company and its subsidiaries, taken
as a whole.
(z) No relationship, direct or indirect, exists between or
among the Company or any of its subsidiaries on the one hand, and the
directors, officers, shareholders, customers or suppliers of the Company or any
of its subsidiaries on the other hand, which is required by the Act to be
described in the Registration Statement or the Prospectus which is not so
described.
(aa) There is no (i) significant unfair labor practice
complaint, grievance or arbitration proceeding pending or, to the Company's
best knowledge, threatened against the Company or any of its subsidiaries
before the National Labor Relations Board or any state or local labor relations
board, (ii) strike, labor dispute, slowdown or stoppage pending or, to the
Company's best knowledge, threatened against the Company or any of its
subsidiaries or (iii) union representation question existing with respect to
the employees of the Company and its subsidiaries, except for such actions
specified in clause (i), (ii) or (iii) above, which, singly or in the
aggregate, would not have a material adverse effect on the business, prospects,
financial condition or results of operations of the Company and its
subsidiaries, taken as a whole. To the best of the Company's knowledge, no
collective bargaining organizing activities are taking place with respect to
the Company or any of its subsidiaries.
(bb) The Company and each of its subsidiaries maintains a
system of internal accounting controls sufficient to provide reasonable
assurance that (i) transactions are executed in accordance with management's
general or specific authorizations; (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability; (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 the existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
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(cc) All material tax returns required to be filed by the
Company and each of its subsidiaries in any jurisdiction have been filed, other
than those filings being contested in good faith, and all material taxes,
including withholding taxes, penalties and interest, assessments, fees and
other charges due pursuant to such returns or pursuant to any assessment
received by the Company or any of its subsidiaries have been paid, other than
those being contested in good faith and for which adequate reserves have been
provided.
(dd) Any documents which at the date hereof are incorporated by
reference in the Registration Statement, the Prospectus or any amendment or
supplement thereto, or any preliminary prospectus (the "Incorporated
Documents") were filed in a timely manner and, when they were filed (or, if any
amendment with respect to any such document was filed, when such amendment was
filed), conformed with the requirements of the Securities Exchange Act of 1934
(the "Exchange Act") and did not contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading.
(ee) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might reasonably be expected to
cause or result in stabilization or manipulation of the price of the Common
Stock to facilitate the sale or resale of the Shares.
(ff) The Common Stock is registered pursuant to Section 12(g)
of the Exchange Act and is listed on The Nasdaq National Market, and the
Company has taken no action designed to, or likely to have the effect of,
terminating the registration of the Common Stock under the Exchange Act or
delisting the Common Stock from The Nasdaq National Market, nor has the Company
received any notification that the Commission or the National Association of
Securities Dealers, Inc. ("NASD") is contemplating terminating such
registration or listing.
SECTION 7. REPRESENTATIONS AND WARRANTIES OF THE SELLING STOCKHOLDERS.
. Each Selling Stockholder represents and warrants to each Underwriter that:
(a) Such Selling Stockholder is the lawful owner of the Shares to be
sold by such Selling Stockholder pursuant to this Agreement and has, and on the
Closing Date will have, good and clear title to such Shares, free of all
restrictions on transfer, liens, encumbrances, security interests, equities and
claims whatsoever.
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(b) The Shares to be sold by such Selling Stockholder have been duly
authorized and are validly issued, fully paid and non-assessable.
(c) Such Selling Stockholder has, and on the Closing Date will have,
full legal right, power and authority, and all authorization and approval
required by law, to enter into this Agreement, the Custody Agreement signed by
such Selling Stockholder and [American Stock Transfer & Trust Company], as
Custodian, relating to the deposit of the Shares to be sold by such Selling
Stockholder (the "CUSTODY AGREEMENT") and the Power of Attorney of such Selling
Stockholder appointing certain individuals as such Selling Stockholder's
attorneys-in-fact (the "ATTORNEYS") to the extent set forth therein, relating
to the transactions contemplated hereby and by the Registration Statement and
the Custody Agreement (the "POWER OF ATTORNEY") and to sell, assign, transfer
and deliver the Shares to be sold by such Selling Stockholder in the manner
provided herein and therein.
(d) This Agreement has been duly authorized, executed and delivered
by or on behalf of such Selling Stockholder.
(e) The Custody Agreement of such Selling Stockholder has been duly
authorized, executed and delivered by such Selling Stockholder and is a valid
and binding agreement of such Selling Stockholder, enforceable in accordance
with its terms.
(f) The Power of Attorney of such Selling Stockholder has been duly
authorized, executed and delivered by such Selling Stockholder and is a valid
and binding instrument of such Selling Stockholder, enforceable in accordance
with its terms, and, pursuant to such Power of Attorney, such Selling
Stockholder has, among other things, authorized the Attorneys, or any one of
them, to execute and deliver on such Selling Stockholder's behalf this
Agreement and any other document that they, or any one of them, may deem
necessary or desirable in connection with the transactions contemplated hereby
and thereby and to deliver the Shares to be sold by such Selling Stockholder
pursuant to this Agreement.
(g) Upon delivery of and payment for the Shares to be sold by such
Selling Stockholder pursuant to this Agreement, good and clear title to such
Shares will pass to the Underwriters, free of all restrictions on transfer,
liens, encumbrances, security interests, equities and claims whatsoever.
(h) The execution, delivery and performance of this Agreement and the
Custody Agreement and Power of Attorney of such Selling Stockholder by or on
behalf of such Selling Stockholder, the compliance by such Selling Stockholder
with all the provisions hereof and thereof and the consummation of the
transactions contemplated hereby and thereby will not (i) require any consent,
approval, authorization or other order of, or qualification with, any court or
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governmental body or agency (except such as may be required under the
securities or Blue Sky laws of the various states), (ii) conflict with or
constitute a breach of any of the terms or provisions of, or a default under,
the organizational documents of such Selling Stockholder, if such Selling
Stockholder is not an individual, or any indenture, loan agreement, mortgage,
lease or other agreement or instrument to which such Selling Stockholder is a
party or by which such Selling Stockholder or any property of such Selling
Stockholder is bound or (iii) violate or conflict with any applicable law or
any rule, regulation, judgment, order or decree of any court or any
governmental body or agency having jurisdiction over such Selling Stockholder
or any property of such Selling Stockholder.
(i) The information in the Registration Statement under the caption
"Principal and Selling Stockholders" which specifically relates to such Selling
Stockholder does not, and will not on the Closing Date, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(j) At any time during the period described in Section 5(d), if there
is any change in the information referred to in Section 7(i), such Selling
Stockholder will immediately notify you of such change.
(k) Each certificate signed by or on behalf of such Selling
Stockholder and delivered to the Underwriters or counsel for the Underwriters
shall be deemed to be a representation and warranty by such Selling Stockholder
to the Underwriters as to the matters covered thereby.
SECTION 8. INDEMNIFICATION. (a) The Sellers, severally and not
jointly, agree to indemnify and hold harmless each Underwriter, its directors,
its officers and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Securities Exchange Act
of 1934, as amended (the "EXCHANGE ACT"), from and against any and all losses,
claims, damages, liabilities and judgments (including, without limitation, any
legal or other expenses incurred in connection with investigating or defending
any matter, including any action, that could give rise to any such losses,
claims, damages, liabilities or judgments) caused by any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement (or any amendment thereto), the Prospectus (or any amendment or
supplement thereto) or any preliminary prospectus, or caused by 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, except insofar as
such losses, claims, damages, liabilities or judgments are caused by any such
untrue statement or omission or alleged untrue statement or omission based upon
information relating to any Underwriter furnished in writing to the Company by
such Underwriter through you expressly for use therein PROVIDED, HOWEVER, that
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the foregoing indemnity agreement with respect to any preliminary prospectus
shall not inure to the benefit of any Underwriter who failed to deliver a
Prospectus, as then amended or supplemented, (so long as the Prospectus and any
amendment or supplement thereto was provided by the Company to the several
Underwriters in the requisite quantity and on a timely basis to permit proper
delivery on or prior to the Closing Date) to the person asserting any losses,
claims, damages, liabilities or judgments caused by any untrue statement or
alleged untrue statement of a material fact contained in such preliminary
prospectus, or caused by 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, if such material misstatement or omission or alleged
material misstatement or omission was cured in the Prospectus, as so amended or
supplemented, and such Prospectus was required by law to be delivered at or
prior to the written confirmation of sale to such person. Notwithstanding the
foregoing, the aggregate liability of any Selling Stockholder pursuant to this
Section 8(a) shall be limited to an amount equal to the total proceeds (before
deducting underwriting discounts and commissions and expenses) received by such
Selling Stockholder from the Underwriters for the sale of the Shares sold by
such Selling Stockholder hereunder.
(b) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, its directors, its officers who sign 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, each
Selling Stockholder and each person, if any, who controls such Selling
Stockholder within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act to the same extent as the foregoing indemnity from the Sellers to
such Underwriter but only with reference to information relating to such
Underwriter furnished in writing to the Company by such Underwriter through you
expressly for use in the Registration Statement (or any amendment thereto), the
Prospectus (or any amendment or supplement thereto) or any preliminary
prospectus.
(c) In case any action shall be commenced involving any person in
respect of which indemnity may be sought pursuant to Section 8(a) or 8(b) (the
"INDEMNIFIED PARTY"), the indemnified party shall promptly notify the person
against whom such indemnity may be sought (the "INDEMNIFYING PARTY") in writing
and the indemnifying party shall assume the defense of such action, including
the employment of counsel reasonably satisfactory to the indemnified party and
the payment of all fees and expenses of such counsel, as incurred (except that
in the case of any action in respect of which indemnity may be sought pursuant
to both Sections 8(a) and 8(b), the Underwriter shall not be required to assume
the defense of such action pursuant to this Section 8(c), but may employ
separate counsel and participate in the defense thereof, but the fees and
expenses of such counsel, except as provided below, shall be at the expense of
such Underwriter). Any indemnified party shall have the right to employ
separate counsel in any such action and participate in the defense thereof, but
the fees and expenses of such counsel shall be at the expense of the
indemnified party unless (i) the employment of such counsel shall have been
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specifically authorized in writing by the indemnifying party, (ii) the
indemnifying party shall have failed to assume the defense of such action or
employ counsel reasonably satisfactory to the indemnified party or (iii) the
named parties to any such action (including any impleaded parties) include both
the indemnified party and the indemnifying party, and the indemnified party
shall have been advised by such counsel that there may be one or more legal
defenses available to it which are different from or additional to those
available to the indemnifying party (in which case the indemnifying party shall
not have the right to assume the defense of such action on behalf of the
indemnified party). In any such case, the indemnifying party shall not, in
connection with any one action or separate but substantially similar or related
actions in the same jurisdiction arising out of the same general allegations or
circumstances, be liable for (i) the fees and expenses of more than one
separate firm of attorneys (in addition to any local counsel) for all
Underwriters, their officers and directors and all persons, if any, who control
any Underwriter within the meaning of either Section 15 of the Act or Section
20 of the Exchange Act, (ii) the fees and expenses of more than one separate
firm of attorneys (in addition to any local counsel) for the Company, its
directors, its officers who sign the Registration Statement and all persons, if
any, who control the Company within the meaning of either such Section and
(iii) the fees and expenses of more than one separate firm of attorneys (in
addition to any local counsel) for all Selling Stockholders and all persons, if
any, who control any Selling Stockholder within the meaning of either such
Section, and all such fees and expenses shall be reimbursed as they are
incurred. In the case of any such separate firm for the Underwriters, their
officers and directors and such control persons of any Underwriters, such firm
shall be designated in writing by Donaldson, Lufkin & Jenrette Securities
Corporation. In the case of any such separate firm for the Company and such
directors, officers and control persons of the Company, such firm shall be
designated in writing by the Company. In the case of any such separate firm for
the Selling Stockholders and such control persons of any Selling Stockholders,
such firm shall be designated in writing by the Attorneys. The indemnifying
party shall indemnify and hold harmless the indemnified party from and against
any and all losses, claims, damages, liabilities and judgments by reason of any
settlement of any action (i) effected with its written consent or (ii) effected
without its written consent if the settlement is entered into more than twenty
business days after the indemnifying party shall have received a request from
the indemnified party for reimbursement for the fees and expenses of counsel
(in any case where such fees and expenses are at the expense of the
indemnifying party) and, prior to the date of such settlement, the indemnifying
party shall have failed to comply with such reimbursement request. No
indemnifying party shall, without the prior written consent of the indemnified
party, effect any settlement or compromise of, or consent to the entry of
judgment with respect to, any pending or threatened action in respect of which
the indemnified party is or could have been a party and indemnity or
contribution may be or could have been sought hereunder by the indemnified
party, unless such settlement, compromise or judgment (i) includes an
unconditional release of the indemnified party from all liability on claims
that are or could have been the subject matter of such action and (ii) does not
include a statement as to or an admission of fault, culpability or a failure to
act, by or on behalf of the indemnified party.
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(d) To the extent the indemnification provided for in this Section 8
is unavailable to an indemnified party or insufficient in respect of any
losses, claims, damages, liabilities or judgments referred to therein, then
each indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities and judgments (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Sellers on the one hand and the Underwriters on the other hand from the
offering of the Shares or (ii) if the allocation provided by clause 8(d)(i)
above is not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause 8(d)(i) above
but also the relative fault of the Sellers on the one hand and the Underwriters
on the other hand in connection with the statements or omissions which resulted
in such losses, claims, damages, liabilities or judgments, as well as any other
relevant equitable considerations. The relative benefits received by the
Sellers 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 (after
deducting underwriting discounts and commissions, but before deducting
expenses) received by the Sellers, and the total underwriting discounts and
commissions received by the Underwriters, bear to the total price to the public
of the Shares, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault of the Sellers on the one hand and the
Underwriters on the other hand shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or
the omission or alleged omission to state a material fact relates to
information supplied by the Company or the Selling Stockholders on the one hand
or the Underwriters on the other hand and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
The Sellers and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 8(d) were 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 account of
the equitable considerations referred to in the immediately preceding
paragraph. The amount paid or payable by an indemnified party as a result of
the losses, claims, damages, liabilities or judgments referred to in the
immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses incurred by such
indemnified party in connection with investigating or defending any matter,
including any action, that could have given rise to such losses, claims,
damages, liabilities or judgments. Notwithstanding the provisions of this
Section 8, no Underwriter shall be required to contribute any amount in excess
of the amount by which the total price at which the Shares underwritten by it
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and distributed to the public were offered to the public exceeds the amount of
any damages which such Underwriter has otherwise been required to pay by reason
of such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations to
contribute pursuant to this Section 8(d) are several in proportion to the
respective number of Shares purchased by each of the Underwriters hereunder and
not joint.
(e) The remedies provided for in this Section 8 are not exclusive and
shall not limit any rights or remedies which may otherwise be available to any
indemnified party at law or in equity.
(f) Each Selling Stockholder hereby designates EMCORE Corporation,
394 Elizabeth Avenue, Somerset, New Jersey, 08873, as its authorized agent,
upon which process may be served in any action which may be instituted in any
state or federal court in the State of New York by any Underwriter, any
director or officer of any Underwriter or any person controlling any
Underwriter asserting a claim for indemnification or contribution under or
pursuant to this Section 8, and each Selling Stockholder will accept the
jurisdiction of such court in such action, and waives, to the fullest extent
permitted by applicable law, any defense based upon lack of personal
jurisdiction or venue. A copy of any such process shall be sent or given to
such Selling Stockholder, at the address for notices specified in Section 12
hereof.
SECTION 9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The several
obligations of the Underwriters to purchase the Firm Shares under this
Agreement are subject to the satisfaction of each of the following conditions:
(a) All the representations and warranties of the Company contained
in this Agreement shall be true and correct on the Closing Date with the same
force and effect as if made on and as of the Closing Date.
(b) If the Company is required to file a Rule 462(b) Registration
Statement after the effectiveness of this Agreement, such Rule 462(b)
Registration Statement shall have become effective by 10:00 P.M., New York City
time, on the date of this Agreement; and no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been commenced or shall be pending
before or contemplated by the Commission.
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(c) You shall have received on the Closing Date a certificate dated
the Closing Date, signed by Reuben F. Richards and Thomas G. Werthan, in their
capacities as the President and Chief Executive Officer and Vice President -
Finance, Chief Financial Officer and Secretary of the Company, confirming the
matters set forth in Sections 6(t), 9(a) and 9(b) and that the Company has
complied with all of the agreements and satisfied all of the conditions herein
contained and required to be complied with or satisfied by the Company on or
prior to the Closing Date.
(d) Since the respective dates as of which information is given in
the Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement),
(i) there shall not have occurred any change or any development involving a
prospective change in the condition, financial or otherwise, or the earnings,
business, management or operations of the Company and its subsidiaries, taken
as a whole, (ii) there shall not have been any change or any development
involving a prospective change in the capital stock or in the long-term debt of
the Company or any of its subsidiaries and (iii) neither the Company nor any of
its subsidiaries shall have incurred any liability or obligation, direct or
contingent, the effect of which, in any such case described in clause 9(d)(i),
9(d)(ii) or 9(d)(iii), in your judgment, is material and adverse and, in your
judgment, makes it impracticable to market the Shares on the terms and in the
manner contemplated in the Prospectus.
(e) All the representations and warranties of each Selling
Stockholder contained in this Agreement shall be true and correct on the
Closing Date with the same force and effect as if made on and as of the Closing
Date and you shall have received on the Closing Date a certificate dated the
Closing Date from each Selling Stockholder to such effect and to the effect
that such Selling Stockholder has complied with all of the agreements and
satisfied all of the conditions herein contained and required to be complied
with or satisfied by such Selling Stockholder on or prior to the Closing Date.
(f) You shall have received on the Closing Date an opinion
(satisfactory to you and counsel for the Underwriters), dated the Closing Date,
of White & Case LLP, counsel for the Company and the Selling Stockholders, to
the effect that:
(i) each of the Company and its subsidiaries has been duly
incorporated, is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation and has the
corporate power and authority to carry on its business as described in
the Prospectus and to own, lease and operate its properties;
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(ii) each of the Company and its subsidiaries is duly
qualified and is in good standing as a foreign corporation authorized
to do business in each jurisdiction in which the nature of its
business or its ownership or leasing of property requires such
qualification, except where the failure to be so qualified would not
have a material adverse effect on the business, prospects, financial
condition or results of operations of the Company and its
subsidiaries, taken as a whole;
(iii) all the outstanding shares of capital stock of the
Company (including the Shares to be sold by the Selling Stockholders)
have been duly authorized and validly issued and are fully paid,
non-assessable and not subject to any preemptive or similar rights;
(iv) the Shares to be issued and sold by the Company hereunder
have been duly authorized and, when issued and delivered to the
Underwriters against payment therefor as provided by this Agreement,
will be validly issued, fully paid and non-assessable, and the
issuance of such Shares will not be subject to any preemptive or
similar rights;
(v) all of the outstanding shares of capital stock of each of
the Company's subsidiaries have been duly authorized and validly
issued and are fully paid and non-assessable, and are owned by the
Company, directly or indirectly through one or more subsidiaries, free
and clear of any security interest, claim, lien, encumbrance or
adverse interest of any nature;
(vi) this Agreement has been duly authorized, executed and
delivered by the Company and by or on behalf of each Selling
Stockholder;
(vii) the authorized capital stock of the Company conforms as
to legal matters to the description thereof contained in the
Prospectus;
(viii) the Registration Statement has become effective under the
Act, no stop order suspending its effectiveness has been issued and no
proceedings for that purpose are, to the best of such counsel's
knowledge after due inquiry, pending before or contemplated by the
Commission;
(ix) the statements under the captions "Risk Factors - Risks
Related to New Joint Ventures", "--Risks Related to Environmental
Regulation", "--Possible Adverse Effects of Issuances of Preferred
Stock", "--Effect of Certain Anti-Takeover Provisions", and "--Shares
Eligible for Future Sale", "Certain Relationships and Related
Transactions" and "Underwriting" in the Prospectus and Item 15 of Part
II of the Registration Statement, insofar as such statements
constitute a summary of the legal matters, documents or proceedings
referred to therein, fairly present the information called for with
respect to such legal matters, documents and proceedings;
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(x) neither the Company nor any of its subsidiaries is in
violation of its respective charter or by-laws and, to the best of
such counsel's knowledge after due inquiry, neither the Company nor
any of its subsidiaries is in default in the performance of any
obligation, agreement, covenant or condition contained in any
indenture, loan agreement, mortgage, lease or other agreement or
instrument that is material to the Company and its subsidiaries, taken
as a whole, to which the Company or any of its subsidiaries is a party
or by which the Company or any of its subsidiaries or their respective
property is bound;
(xi) the execution, delivery and performance of this Agreement
by the Company, the compliance by the Company with all the provisions
hereof and the consummation of the transactions contemplated hereby
will not (A) require any consent, approval, authorization or other
order of, or qualification with, any court or governmental body or
agency (except such as may be required under the securities or Blue
Sky laws of the various states), (B) conflict with or constitute a
breach of any of the terms or provisions of, or a default under, the
charter or by-laws of the Company or any of its subsidiaries or any
indenture, loan agreement, mortgage, lease or other agreement or
instrument that is material to the Company and its subsidiaries, taken
as a whole, to which the Company or any of its subsidiaries is a party
or by which the Company or any of its subsidiaries or their respective
property is bound, (C) violate or conflict with any applicable law or
any rule, regulation, judgment, order or decree of any court or any
governmental body or agency having jurisdiction over the Company, any
of its subsidiaries or their respective property or (D) result in the
suspension, termination or revocation of any Authorization of the
Company or any of its subsidiaries or any other impairment of the
rights of the holder of any such Authorization;
(xii) after due inquiry, such counsel does not know of any
legal or governmental proceedings pending or threatened to which the
Company or any of its subsidiaries is or could be a party or to which
any of their respective property is or could be subject that are
required to be described in the Registration Statement or the
Prospectus and are not so described, or of any statutes, regulations,
contracts or other documents that are required to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to
the Registration Statement that are not so described or filed as
required;
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(xiii) neither the Company nor any of its subsidiaries has
violated any Environmental Law, any provisions of the Employee
Retirement Income Security Act of 1974, as amended, or any provisions
of the Foreign Corrupt Practices Act or the rules and regulations
promulgated thereunder, except for such violations which, singly or in
the aggregate, would not have a material adverse effect on the
business, prospects, financial condition or results of operation of
the Company and its subsidiaries, taken as a whole;
(xiv) each of the Company and its subsidiaries has such
Authorizations of, and has made all filings with and notices to, all
governmental or regulatory authorities and self-regulatory
organizations and all courts and other tribunals, including, without
limitation, under any applicable Environmental Laws, as are necessary
to own, lease, license and operate its respective properties and to
conduct its business, except where the failure to have any such
Authorization or to make any such filing or notice would not, singly
or in the aggregate, have a material adverse effect on the business,
prospects, financial condition or results of operations of the Company
and its subsidiaries, taken as a whole; each such Authorization is
valid and in full force and effect and each of the Company and its
subsidiaries is in compliance with all the terms and conditions
thereof and with the rules and regulations of the authorities and
governing bodies having jurisdiction with respect thereto; and no
event has occurred (including, without limitation, the receipt of any
notice from any authority or governing body) which allows or, after
notice or lapse of time or both, would allow, revocation, suspension
or termination of any such Authorization or results or, after notice
or lapse of time or both, would result in any other impairment of the
rights of the holder of any such Authorization; and such
Authorizations contain no restrictions that are burdensome to the
Company or any of its subsidiaries; except where such failure to be
valid and in full force and effect or to be in compliance, the
occurrence of any such event or the presence of any such restriction
would not, singly or in the aggregate, have a material adverse effect
on the business, prospects, financial condition or results of
operations of the Company and its subsidiaries, taken as a whole;
(xv) the Company is not and, after giving effect to the
offering and sale of the Shares and the application of the proceeds
thereof as described in the Prospectus, will not be, an "investment
company" or a company "controlled" by an "investment company" as such
terms are defined in the Investment Company Act of 1940, as amended;
(xvi) to the best of such counsel's knowledge after due
inquiry, except as otherwise set forth in the Prospectus there are no
contracts, agreements or understandings between the Company and any
person granting such person the right to require the Company to file a
registration statement under the Act with respect to any securities of
the Company or to require the Company to include such securities with
the Shares registered pursuant to the Registration Statement;
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(xvii) (A) each document, if any, filed pursuant to the Exchange
Act and incorporated by reference in the Prospectus (except for
financial statements and other financial data included therein as to
which no opinion need be expressed) complied when so filed as to form
with the Exchange Act, (B) such counsel has no reason to believe that
at the time the Registration Statement became effective or on the date
of this Agreement, the Registration Statement and the prospectus
included therein (except for the financial statements and other
financial data as to which such counsel need not express any belief)
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 and (C) such counsel has no reason
to believe that the Prospectus, as amended or supplemented, if
applicable (except for the financial statements and other financial
data, as aforesaid) contains any untrue statement of a material fact
or omits to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading;
(xviii) each Selling Stockholder is the lawful owner of the
Shares to be sold by such Selling Stockholder pursuant to this
Agreement and has good and clear title to such Shares, free of all
restrictions on transfer, liens, encumbrances, security interests,
equities and claims whatsoever;
(xix) each Selling Stockholder has full legal right, power and
authority, and all authorization and approval required by law, to
enter into this Agreement and the Custody Agreement and the Power of
Attorney of such Selling Stockholder and to sell, assign, transfer and
deliver the Shares to be sold by such Selling Stockholder in the
manner provided herein and therein;
(xx) the Custody Agreement of each Selling Stockholder has
been duly authorized, executed and delivered by such Selling
Stockholder and is a valid and binding agreement of such Selling
Stockholder, enforceable in accordance with its terms;
(xxi) the Power of Attorney of each Selling Stockholder has
been duly authorized, executed and delivered by such Selling
Stockholder and is a valid and binding instrument of such Selling
Stockholder, enforceable in accordance with its terms, and, pursuant
to such Power of Attorney, such Selling Stockholder has, among other
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things, authorized the Attorneys, or any one of them, to execute and
deliver on such Selling Stockholder's behalf this Agreement and any
other document they, or any one of them, may deem necessary or
desirable in connection with the transactions contemplated hereby and
thereby and to deliver the Shares to be sold by such Selling
Stockholder pursuant to this Agreement;
(xxii) upon delivery of and payment for the Shares to be sold by
each Selling Stockholder pursuant to this Agreement, good and clear
title to such Shares will pass to the Underwriters, free of all
restrictions on transfer, liens, encumbrances, security interests,
equities and claims whatsoever; and
(xxiii) the execution, delivery and performance of this Agreement
and the Custody Agreement and Power of Attorney of each Selling
Stockholder by such Selling Stockholder, the compliance by such
Selling Stockholder with all the provisions hereof and thereof and the
consummation of the transactions contemplated hereby and thereby will
not (A) require any consent, approval, authorization or other order
of, or qualification with, any court or governmental body or agency
(except such as may be required under the securities or Blue Sky laws
of the various states), (B) conflict with or constitute a breach of
any of the terms or provisions of, or a default under, the
organizational documents of such Selling Stockholder, if such Selling
Stockholder is not an individual, or any indenture, loan agreement,
mortgage, lease or other agreement or instrument to which such Selling
Stockholder is a party or by which any property of such Selling
Stockholder is bound or (C) violate or conflict with any applicable
law or any rule, regulation, judgment, order or decree of any court or
any governmental body or agency having jurisdiction over such Selling
Stockholder or any property of such Selling Stockholder.
The opinion of White & Case LLP described in Section 9(f) above shall
be rendered to you at the request of the Company and the Selling Stockholders
and shall so state therein.
(g) You shall have received on the Closing Date an opinion, dated the
Closing Date, of Brobeck, Phleger & Harrison LLP, counsel for the Underwriters,
as to the matters referred to in Sections 9(f)(iv), and 9(f)(vi) (but only with
respect to the Company), 9(f)(ix) (but only with respect to the statements
under the caption "Underwriting") and clauses 9(f)(xvii)(B), 9(f)(xvii)(C) and
9(f)(xvii)(D).
In giving such opinions with respect to the matters covered by Section
9(f)(xvii), [counsel for the Company] may state that their opinion and belief
are based upon their participation in the preparation of the Registration
Statement and Prospectus and any amendment or supplements thereto and documents
incorporated therein by reference and review and discussion of the contents
thereof, but is without independent check or verification except as specified.
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In giving such opinions with respect to the matters covered by clauses
9(f)(xvii)(B), 9(f)(xvii)(C) and 9(f)(xvii)(D) above, Brobeck, Phleger &
Harrison LLP may state that their opinion and belief are based upon their
participation in the preparation of the Registration Statement and Prospectus
and any amendments or supplements thereto (other than the documents
incorporated therein by reference) and review and discussion of the contents
thereof (including the documents incorporated therein by reference), but are
without independent check or verification except as specified.
(h) You shall have received on the Closing Date an opinion
(satisfactory to you and counsel for the Underwriters), dated the Closing Date,
of Lerner, David, Littenberg, Krumholz & Mentlik, patent counsel for the
Company, to the effect that:
(i) The statements in the Registration Statement and Prospectus (x)
under the caption "Risk Factors-No Assurance of Intellectual Property
Protections", "--Licensed Technology Risks" and "--Rockwell Patent Litigation"
and (y) under the caption "Business--Intellectual Property and Licensing",
insofar as such statements constitute summaries of matters of law are accurate
statements or summaries of the matters set forth therein.
(ii) The Company has clear record title to its United States patents
and patent applications identified in SCHEDULE A to the opinion.
(iii) Such counsel is not aware of any facts which, in its opinion,
would render any of the United States patents owned by the Company
unenforceable or invalid.
(iv) Except as is set forth in SCHEDULE B, such counsel is not aware
of any patents, trademarks, service marks, trade names, mask work rights,
copyrights, trade secrets or other rights of others which are being infringed
by specific, current or proposed products or processes referred to in the
Prospectus; such counsel has no knowledge of any pending or threatened action,
suit, proceeding or claim by others that the Company is infringing any patent,
trademark, service mark, trade name, mask work right, copyright, trade secret
or other right of any third party.
(v) To such counsel's knowledge there are no legal or governmental
proceedings pending relating to the United States patent rights, other than
review by the United States Patent and Trademark Office of pending applications
for patents, including appeal proceedings, and, to such counsel's knowledge, no
such proceedings are threatened by United States governmental authorities or
others.
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(vi) Except as set forth in SCHEDULE C, such counsel is not aware of
any infringement by third parties of the Company's Intellectual Property nor
any pending or threatened actions, proceedings or claims by the Company that
any third party is infringing the Company's Intellectual Property.
(vii) Such counsel does not know of any contracts or other documents
relating to the Intellectual Property of the Company or United States patents
or patent applications other than those described in the Registration Statement
and the Prospectus or identified on SCHEDULE A.
In addition, such counsel shall state that no facts have come to
the attention of such counsel which would form a basis for the belief that (a)
the Registration Statement or any amendment thereto, or (b) the Prospectus, as
amended or supplemented, contain any untrue statement of a material fact with
respect to the patent position of the Company, or omit to state any material
fact relating to the patent position of the Company, which is necessary to make
the statements contained therein not misleading.
(i) You shall have received, on each of the date hereof and the
Closing Date, a letter dated the date hereof or the Closing Date, as the case
may be, in form and substance satisfactory to you, from PricewaterhouseCoopers
LLP, independent public accountants, containing the information and statements
of the type ordinarily included in accountants' "comfort letters" to
Underwriters with respect to the financial statements and certain financial
information contained in or incorporated by reference into the Registration
Statement and the Prospectus.
(j) The Company shall have delivered to you the agreements specified
in Section 2 hereof which agreements shall be in full force and effect on the
Closing Date.
(k) The Shares shall have been duly listed for quotation on the
Nasdaq National Market.
(l) The Company and the Selling Stockholders shall not have failed on
or prior to the Closing Date to perform or comply with any of the agreements
herein contained and required to be performed or complied with by the Company
or the Selling Stockholders, as the case may be, on or prior to the Closing
Date.
(m) You shall have received on the Closing Date, a certificate of
each Selling Stockholder who is not a U.S. Person (as defined under applicable
U.S. federal tax legislation) to the effect that such Selling Stockholder is
not a U.S. Person, which certificate may be in the form of a properly completed
and executed United States Treasury Department Form W-8 (or other applicable
form or statement specified by Treasury Department regulations in lieu
thereof).
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The several obligations of the Underwriters to purchase any Additional
Shares hereunder are subject to the delivery to you on the applicable Option
Closing Date of such documents as you may reasonably request with respect to
the good standing of the Company, the due authorization and issuance of such
Additional Shares and other matters related to the issuance of such Additional
Shares.
SECTION 10. EFFECTIVENESS OF AGREEMENT AND TERMINATION. This Agreement
shall become effective upon the execution and delivery of this Agreement by the
parties hereto.
This Agreement may be terminated at any time on or prior to the
Closing Date by you by written notice to the Sellers if any of the following
has occurred: (i) any outbreak or escalation of hostilities or other national
or international calamity or crisis or change in economic conditions or in the
financial markets of the United States or elsewhere that, in your judgment, is
material and adverse and, in your judgment, makes it impracticable to market
the Shares on the terms and in the manner contemplated in the Prospectus, (ii)
the suspension or material limitation of trading in securities or other
instruments on the New York Stock Exchange, the American Stock Exchange, the
Chicago Board of Options Exchange, the Chicago Mercantile Exchange, the Chicago
Board of Trade or the Nasdaq National Market or limitation on prices for
securities or other instruments on any such exchange or the Nasdaq National
Market, (iii) the suspension of trading of any securities of the Company on any
exchange or in the over-the-counter market, (iv) the enactment, publication,
decree or other promulgation of any federal or state statute, regulation, rule
or order of any court or other governmental authority which in your opinion
materially and adversely affects, or will materially and adversely affect, the
business, prospects, financial condition or results of operations of the
Company and its subsidiaries, taken as a whole, (v) the declaration of a
banking moratorium by either federal or New York State authorities or (vi) the
taking of any action by any federal, state or local government or agency in
respect of its monetary or fiscal affairs which in your opinion has a material
adverse effect on the financial markets in the United States.
If on the Closing Date or on an Option Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase the
Firm Shares or Additional Shares, as the case may be, which it has or they have
agreed to purchase hereunder on such date and the aggregate number of Firm
Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase is not
more than one-tenth of the total number of Firm Shares or Additional Shares, as
the case may be, to be purchased on such date by all Underwriters, each
non-defaulting Underwriter shall be obligated severally, in the proportion
which the number of Firm Shares set forth opposite its name in Schedule I bears
to the total number of Firm Shares which all the non-defaulting Underwriters
have agreed to purchase, or in such other proportion as you may specify, to
purchase the Firm Shares or Additional Shares, as the case may be, which such
defaulting Underwriter or Underwriters agreed but failed or refused to purchase
on such date; PROVIDED that in no event shall the number of Firm Shares or
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Additional Shares, as the case may be, which any Underwriter has agreed to
purchase pursuant to Section 2 hereof be increased pursuant to this Section 10
by an amount in excess of one-ninth of such number of Firm Shares or Additional
Shares, as the case may be, without the written consent of such Underwriter. If
on the Closing Date any Underwriter or Underwriters shall fail or refuse to
purchase Firm Shares and the aggregate number of Firm Shares with respect to
which such default occurs is more than one-tenth of the aggregate number of
Firm Shares to be purchased by all Underwriters and arrangements satisfactory
to you, the Company and the Selling Stockholders for 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 non-defaulting Underwriter, the
Company or the Selling Stockholders. In any such case which does not result in
termination of this Agreement, either you or the Sellers 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 any other documents or arrangements may be effected. If, on an
Option Closing Date, any Underwriter or Underwriters shall fail or refuse to
purchase Additional Shares and the aggregate number of Additional Shares with
respect to which such default occurs is more than one-tenth of the aggregate
number of Additional Shares to be purchased on such date, the non-defaulting
Underwriters shall have the option to (i) terminate their obligation hereunder
to purchase such Additional Shares or (ii) purchase not less than the number of
Additional Shares that such non-defaulting Underwriters would have been
obligated to purchase on such date in the absence of such default. Any action
taken under this paragraph shall not relieve any defaulting Underwriter from
liability in respect of any default of any such Underwriter under this
Agreement.
SECTION 11. AGREEMENTS OF THE SELLING STOCKHOLDERS. Each Selling
Stockholder agrees with you and the Company:
(a) To pay or to cause to be paid all transfer taxes payable in
connection with the transfer of the Shares to be sold by such Selling
Stockholder to the Underwriters.
(b) To do and perform all things to be done and performed by such
Selling Stockholder under this Agreement prior to the Closing Date and to
satisfy all conditions precedent to the delivery of the Shares to be sold by
such Selling Stockholder pursuant to this Agreement.
SECTION 12. MISCELLANEOUS. Notices given pursuant to any provision of
this Agreement shall be addressed as follows: (i) if to the Company, to EMCORE
Corporation, 394 Elizabeth Avenue, Somerset, New Jersey, 08873, (ii) if to the
Selling Stockholders, to [American Stock Transfer & Trust Co.] c/o [ADDRESS OF
ATTORNEY-IN-FACT] and (iii) if to any Underwriter or to you, to you c/o
Donaldson, Lufkin & Jenrette Securities Corporation, 277 Park Avenue, New York,
New York 10172, Attention: Syndicate Department, or in any case to such other
address as the person to be notified may have requested in writing.
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The respective indemnities, contribution agreements, representations,
warranties and other statements of the Company, the Selling Stockholders and
the several Underwriters set forth in or made pursuant to this Agreement shall
remain operative and in full force and effect, and will survive delivery of and
payment for the Shares, regardless of (i) any investigation, or statement as to
the results thereof, made by or on behalf of any Underwriter, the officers or
directors of any Underwriter, any person controlling any Underwriter, the
Company, the officers or directors of the Company, any person controlling the
Company, any Selling Stockholder or any person controlling such Selling
Stockholder, (ii) acceptance of the Shares and payment for them hereunder and
(iii) termination of this Agreement.
If for any reason the Shares are not delivered by or on behalf of any
Seller as provided herein (other than as a result of any termination of this
Agreement pursuant to Section 10), the Sellers agree, jointly and severally, to
reimburse the several Underwriters for all out-of-pocket expenses (including
the fees and disbursements of counsel) incurred by them. Notwithstanding any
termination of this Agreement, the Company shall be liable for all expenses
which it has agreed to pay pursuant to Section 5(i) hereof. The Sellers also
agree, jointly and severally, to reimburse the several Underwriters, their
directors and officers and any persons controlling any of the Underwriters for
any and all fees and expenses (including, without limitation, the fees
disbursements of counsel) incurred by them in connection with enforcing their
rights hereunder (including, without limitation, pursuant to Section 8 hereof).
Except as otherwise provided, this Agreement has been and is made
solely for the benefit of and shall be binding upon the Company, the Selling
Stockholders, the Underwriters, the Underwriters' directors and officers, any
controlling persons referred to herein, the Company's directors and the
Company's officers who sign the Registration Statement and their respective
successors and assigns, all as and to the extent provided in this Agreement,
and no other person shall acquire or have any right under or by virtue of this
Agreement. The term "successors and assigns" shall not include a purchaser of
any of the Shares from any of the several Underwriters merely because of such
purchase.
This Agreement shall be governed and construed in accordance with the
laws of the State of New York.
This Agreement may be signed in various counterparts which together
shall constitute one and the same instrument.
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Please confirm that the foregoing correctly sets forth the agreement
among the Company, the Selling Stockholders and the several Underwriters.
Very truly yours,
EMCORE CORPORATION
By:
---------------------------------------
Title:
THE SELLING STOCKHOLDERS
NAMED IN SCHEDULE II
HERETO, ACTING
SEVERALLY
By:
---------------------------------------
Attorney-in-fact
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
PRUDENTIAL SECURITIES
NEEDHAM & COMPANY, INC.
VOLPE BROWN WHELAN & COMPANY
Acting severally on behalf of
themselves and the several
Underwriters named in
Schedule I hereto
By DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
----------------------------
By
----------------------------
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SCHEDULE I
Number of Firm Shares
Underwriters to be Purchased
Donaldson, Lufkin & Jenrette Securities
Corporation
Prudential Securities
Needham & Company, Inc.
Volpe Brown Whelan & Company
Total
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SCHEDULE II
SELLING STOCKHOLDERS
Number of Firm
Name Shares Being Sold
Total
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ANNEX I
[Insert names of stockholders of the Company who will
be required to sign lock ups]
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1
EXHIBIT 5.1
WHITE & CASE LLP OPINION
May 21, 1999
Emcore Corporation Company
394 Elizabeth Avenue
Somerset, New Jersey, 08873
Re: EMCORE Corporation
Public offering of shares of Common Stock
Ladies and Gentlemen:
On the date hereof EMCORE Corporation, a New Jersey corporation (the
"Company"), filed with the Securities and Exchange Commission under the
Securities Act of 1933, as amended (No. 333-71791) a Registration Statement on
Form S-3 (the "Registration Statement"). Such Registration Statement relates to
the sale by the Company of up to 3,584,616 shares of the Company's Common Stock,
no par value per share (the "Common Stock") and 897,441 shares of Common Stock
by selling shareholders.
We have acted as counsel to the Company in connection with the
preparation of the Registration Statement. We are familiar with the proceedings
of the Board of Directors of the Company in connection with the authorization,
issuance and sale of the Shares. We have examined such certificates of public
officials and certificates of officers of the Company and the selling
shareholders, and the originals (or copies thereof, certified to our
satisfaction) of such corporate documents and records of the Company, and such
other documents, records and papers as we have deemed relevant in order to give
the opinions hereinafter set forth. In this connection, we have assumed the
genuineness of signatures, the authenticity of all documents submitted to us as
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originals and the conformity to authentic original documents of all documents
submitted to us as certified, conformed, facsimile or photostatic copies. In
addition, we have relied, to the extent that we deem such reliance proper, upon
such certificates of public officials and of officers of the Company with
respect to the accuracy of material factual matters contained therein which
were not independently established.
We do not express or purport to express any opinions with respect to
laws other than the Federal laws of the United States. As to all matters
governed by the laws of the State of New Jersey involved in our opinions set
forth below, we have relied, with your consent, upon an opinion of Dillon Bitar
& Luther dated today and addressed to us.
Based upon the foregoing, we are of the opinion that the Shares have
been duly authorized and, when issued and delivered by the Company against
payment therefor as provided by the Underwriting Agreement will be validly
issued, fully paid and non-assessable, and may be issued free of restrictive
legends.
We hereby consent to the filing of this opinon as an exhibit to the
Registration Statement and to the use of our name under the caption "Legal
Matters" in the Prospectus forming a part of the Registration Statement.
Very truly yours,
White & Case LLP
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Exhibit 10.14
AMENDED AND RESTATED
PROMISSORY NOTE
(REVOLVING LINE OF CREDIT)
$19,000,000.00
April 29, 1999
EMCORE CORPORATION
394 Elizabeth Avenue
Somerset, New Jersey 08873
(Hereinafter referred to as the "Borrower")
FIRST UNION NATIONAL BANK
190 River Road
Summit, New Jersey 07901
(Hereinafter referred to as the "Bank")
Borrower promises to pay to the order of Bank, in lawful money of the United
States of America, at its office indicated above or wherever else Bank may
specify, the sum of NINETEEN MILLION AND NO/100 DOLLARS ($19,000,000.00) or such
sum as may be advanced and outstanding from time to time with interest on the
unpaid principal balance at the rate and on the terms provided in this
Promissory Note (including all renewals, extensions or modifications hereof,
this "Note").
AMENDED AND RESTATED NOTE. This Note shall be deemed to replace and supercede
the $8,000,000 Promissory Note (Revolving Line of Credit) dated June 22, 1998
and the $5,000,000 Promissory Note (Revolving Line of Credit dated January 29,
1999, in each case made by Borrower and payable to the Bank (the "Prior Notes").
Accordingly, as of the date hereof, all of Borrower's obligations evidenced by
the Prior Notes shall be deemed to be evidenced by this Note and all of the
terms and conditions of the Prior Notes are amended and restated in their
entirety by the terms and conditions of this Note. It is hereby acknowledge that
the terms and conditions of this Note that pertain to Borrower's obligations
under the Prior Notes are a modification of said obligations under the Prior
Notes, and not an extinguishment, satisfaction or novation of such obligations.
SECURITY. This Note is secured by, INTER ALIA, the Unconditional Guaranty dated
the date hereof, made by Thomas J. Russell, Jr., individually and the TJR
Holding Trust (collectively, the "Note Guarantors") and by the Collateral
described in the Pledge and Assignment Agreement of even date herewith made by
the Note Guarantors in favor of the Bank (collectively, the "TJR Documents").
INTEREST RATE. Interest shall accrue on the unpaid principal balance of each
Revolving Loan (defined herein) under this Note from the date such Revolving
Loan is made available to the Borrower at the at a rate equal to one month LIBOR
plus three-quarters of one percent (3/4%) per annum ("LIBOR-BASED RATE"), as
determined by the Bank prior to the commencement of each Interest Period. The
LIBOR-Based Rate shall remain in effect, subject to the provisions hereof, for
the entire Interest Period for which it is determined. Borrower acknowledges
that the LIBOR-Based Rate is not represented or intended to be the lowest or
most favorable rate of interest offered by Bank. "LIBOR" is the rate for U.S.
dollar deposits of that many months maturity as reported on Telerate page 3750
as of 11:00 a.m., London time, on the second London business day before the
relevant Interest Period begins (or if not so reported, then as determined by
Bank from another recognized source of interbank quotation). The term "Interest
Period" means, initially, the period commencing on the date hereof and ending
April 30, 1999, and thereafter, each period commencing on the last day of the
immediately preceding Interest Period
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and ending one month thereafter, but in no event after the Maturity Date;
subject, however, to the following provisions: (i) if any Interest Period would
otherwise end on a day which is not a New York business day, that Interest
Period shall be extended to the next succeeding New York business day unless the
result of such extension would be to carry such Interest Period into another
calendar month, in which event such Interest Period shall end on the immediately
preceding New York business day; and (ii) any Interest Period that begins on the
last New York business day of a calendar month (or on a day for which there is
no numerically corresponding day in the calendar month at the end of such
Interest Period) shall end on the last New York business day of a calendar
month.
DEFAULT RATE. In addition to all other rights contained in this Note, if a
Default (defined herein) occurs and as long as a Default continues, (a) Borrower
shall no longer have the option to request a LIBOR-Based Rate and (b) all
outstanding Obligations shall bear interest at the Lending Rate (as such term is
defined in the Credit Agreement) plus 3% ("Default Rate"). The Default Rate
shall also apply from acceleration until the Obligations or any judgment thereon
is paid in full.
INDEMNIFICATION. The Borrower shall indemnify the Bank against the Bank's loss
or expense in employing deposits as a consequence of (i) the Borrower's failure
to make any payment when due under this Note, or (ii) any prepayment of the Loan
on a date other than the last day of an Interest Period ("INDEMNIFIED LOSS OR
EXPENSE").
ADDITIONAL COSTS. If, at any time, a new, or a revision in any existing law or
interpretation or administration (including reversals) thereof by any government
authority, central bank or comparable agency imposes, increases or modifies any
reserve or similar requirement against assets, deposits or credit extended by
the Bank, or subjects the Bank to any tax, duty or other charge (except tax on
the Bank's net income), and any of the foregoing increase the cost to the Bank
of maintaining its commitment or reduce the amount of any sum received or
receivable by the Bank under this Note, within 15 days after demand by the Bank,
the Borrower agrees to pay the Bank such additional amounts as will compensate
the Bank for such increased costs or reductions ("ADDITIONAL COSTS").
MATCH FUNDING. The amount of such (i) Indemnified Loss or Expense, or (ii)
Additional Costs outlined above shall be determined, in the Bank's sole
discretion, based upon the assumption that the Bank funded 100% of that portion
of the Loan to which the LIBOR-Based Rate applies in the applicable London
interbank market.
UNAVAILABILITY OF INTEREST RATE. If, at any time, (i) the Bank shall determine
that, by reason of circumstances affecting foreign exchange and interbank
markets generally, LIBOR deposits in the applicable amounts are not being
offered to the Bank; or (ii) a new, or a revision in any existing law or
interpretation or administration (including reversals) thereof by any government
authority, central bank or comparable agency shall make it unlawful or
impossible for the Bank to honor its obligations under this Note, then (A) the
Bank's obligation, if any, to make or maintain a Revolving Loan at the
LIBOR-Based Rate shall be suspended, and (B) the applicable LIBOR-Based Rate
shall, for the remainder of the term of the Loan, immediately be converted to
(x) the Lending Rate (as such term is defined in the Credit Agreement) or (y) if
the undersigned has hedged the LIBOR-Based Rate by entering into an interest
rate swap agreement with the Bank, the rate of interest payable to the
undersigned by the Bank as a Floating Rate Payer under the terms of said swap
agreement (plus the percentage added to LIBOR above if not included in said rate
of interest payable by the Bank).
INTEREST AND FEE(S) COMPUTATION. (ACTUAL/360). Interest and fees, if any, shall
be computed on the basis of a 360-day year for the actual number of days in the
applicable period ("Actual/360 Computation"). The Actual/360 Computation
determines the annual effective yield by taking the stated (nominal) rate for a
year's period and then dividing said rate by 360 to determine the daily periodic
rate to be applied for each day in the applicable period. Application of the
Actual/360 Computation produces an annualized effective rate exceeding that of
the nominal rate.
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REPAYMENT TERMS. This Note shall be due and payable in consecutive monthly
payments of accrued interest only commencing on April 30, 1999, and on the last
day of each one month Interest Period occurring thereafter until fully paid. In
any event, all principal and accrued interest hereunder shall be due and payable
on the earlier to occur of (i) the day the Revolving Loans are accelerated due
to the occurrence of a Default, or (ii) October 1, 1999 (the "Maturity Date").
MANDATORY PREPAYMENTS. Upon the receipt of Net Cash Proceeds (as defined below)
from any sale or issuance of any shares of Borrower's common stock or any class
of its preferred stock, any securities convertible into or exchangeable for
shares of any such stock, or any warrants, rights or options to acquire shares
of such stock, be applied Borrower will prepay the Obligations in an amount
equal to 100% of such Net Cash Proceeds (or that portion of such proceeds
required to so prepay said Obligations), and (notwithstanding any provision of
this Note or any other Loan Document) such prepayment shall be applied in the
following manner:
FIRST: to prepay the principal balance of any outstanding
Revolving Loans (defined herein), together with any accrued
and unpaid interest thereon, and
SECOND: to prepay the principal balance of any outstanding
Revolving Loans incurred under the Credit Agreement (defined
herein), together with any accrued and unpaid interest
thereon.
The maximum amount available to be advanced under this Note shall be
permanently reduced by an amount equal to the amount applied to reduce the
principal balance of such Revolving Loans pursuant to clause FIRST above. As
used herein "Net Cash Proceeds" means the aggregate amount of cash received from
time to time (whether as initial consideration or through payment or disposition
of deferred compensation) by or on behalf of Borrower in connection with any
sale or issuance of equity securities contemplated above, after deduction
therefrom only (i) reasonable and customary brokerage commissions, underwriting
fees and discounts, legal fees and other similar fees and expenses, and (ii) the
amount of taxes payable in connection with, or as a result of, such transaction;
but in each case only to the extent that such amounts are deducted upon receipt
of such cash proceeds and actually paid to persons or entities, other than
Borrower, Note Guarantors or any Affiliate of Borrower or Note Guarantors. For
the avoidance of doubt, Borrower acknowledges that (i) the foregoing shall not
be deemed or construed as a consent by Bank to any such equity sale or issuance
which would otherwise be prohibited by the terms of the Loan Documents and (i)
this Section, as it relates to the reduction of Borrower's Obligations under the
Credit Agreement, shall survive the payment in full and/or termination of
Borrower's Obligations hereunder. In connection with any prepayment required
hereunder, Bank shall cooperate with Borrower to mitigate any Indemnified Loss
of Expense otherwise payable hereunder, and under similar charges payable under
the Credit Agreement.
APPLICATION OF PAYMENTS. Monies received by Bank from any source for application
toward payment of the Obligations shall be applied first to fees, penalties,
accrued interest and then to principal. If a Default occurs, monies may be
applied to the Obligations in any manner or order deemed appropriate by Bank. If
any payment received by Bank under this Note or other Loan Documents is
rescinded, avoided or for any reason returned by Bank because of any adverse
claim or threatened action, the returned payment shall remain payable as an
obligation of all persons liable under this Note or other Loan Documents as
though such payment had not been made.
LOAN DOCUMENTS AND OBLIGATIONS. The term "Loan Documents" used in this Note and
other Loan Documents refers to all documents executed in connection with the
loan evidenced by this Note and any prior notes which evidence all or any
portion of the loan evidenced by this Note, and may include, without limitation,
this Note, the TJR Documents, the Credit Agreement (as such term is defined
below), guaranty agreements, security agreements, security instruments,
financing statements, mortgage instruments, letters of credit and any renewals
or modifications, whenever any of the foregoing are executed, but does not
include swap
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agreements (as defined in 11 U.S.C. Section 101).
The term "Obligations" used in this Note refers to any and all indebtedness and
other obligations under this Note, all other obligations under any other Loan
Document(s), and all obligations under any swap agreements as defined in 11
U.S.C. Section 101 between Borrower and Bank whenever executed.
LATE CHARGE. If any payments are not timely made, Borrower shall also pay to
Bank a late charge equal to 3% of each payment past due for 10 or more days.
Acceptance by Bank of any late payment without an accompanying late charge shall
not be deemed a waiver of Bank's right to collect such late charge or to collect
a late charge for any subsequent late payment received.
ATTORNEYS' FEES AND OTHER COLLECTION COSTS. Borrower shall pay all of Bank's
reasonable expenses incurred to enforce or collect any of the Obligations,
including, without limitation, reasonable arbitration, paralegals', attorneys'
and experts' fees and expenses, whether incurred without the commencement of a
suit, in any trial, arbitration, or administrative proceeding, or in any
appellate or bankruptcy proceeding.
USURY. Regardless of any other provision of this Note or other Loan Documents,
if for any reason the effective interest should exceed the maximum lawful
interest, the effective interest shall be deemed reduced to, and shall be, such
maximum lawful interest, and (i) the amount which would be excessive interest
shall be deemed applied to the reduction of the principal balance of this Note
and not to the payment of interest, and (ii) if the loan evidenced by this Note
has been or is thereby paid in full, the excess shall be returned to the party
paying same, such application to the principal balance of this Note or the
refunding of excess to be a complete settlement and acquittance thereof.
DEFAULT. If any of the following occurs, a default ("Default") under this Note
shall exist: NONPAYMENT; NONPERFORMANCE. The failure of timely payment or
performance of the Obligations or Default under this Note or any other Loan
Documents or failure of any party to comply with any other term, condition or
agreement set forth in this Note or any other Loan Document, beyond any
applicable grace period, if any. FALSE WARRANTY. A warranty or representation
made or deemed made in the Loan Documents or furnished Bank in connection with
the loan evidenced by this Note proves materially false, or if of a continuing
nature, becomes materially false. CROSS DEFAULT. At Bank's option, any default
in payment or performance of any obligation under any other loans, contracts or
agreements of Borrower, any Subsidiary or Affiliate of Borrower, any general
partner of or the holder(s) of the majority ownership interests of Borrower with
Bank or its affiliates ("Affiliate" shall have the meaning as defined in 11
U.S.C. Section 101, except that the term "debtor" therein shall be substituted
by the term "Borrower" herein; "Subsidiary" shall mean any corporation of which
more than 50% of the issued and outstanding voting stock is owned directly or
indirectly by Borrower). CESSATION; BANKRUPTCY. The dissolution of, termination
of existence of, loss of good standing status by, appointment of a receiver for,
assignment for the benefit of creditors of, or commencement of any bankruptcy or
insolvency proceeding by or against the Borrower, its Subsidiaries or
Affiliates, if any, or any general partner of or the holder(s) of the majority
ownership interests of Borrower, or any party to the Loan Documents. NOTE
GUARANTORS. If (i) any Note Guarantor fails to comply with any payment
obligation set forth in the Guaranty or if any Note Guarantor fails to comply
with any of the covenants or other agreements set forth in the Guaranty or any
other Loan Document to which it is a party beyond any applicable grace period
provided for therein, or (ii) any representation or warranty made or deemed made
by Note Guarantor in the Guaranty or any other Loan Document to which it is a
party or which is contained in any exhibit, schedule or any other document or
other statement furnished at any time under or in connection with the Guaranty
or any of the other Loan Documents shall prove to have been incorrect in any
material respect on or as of the date made or deemed made, or (iii) if Note
Guarantor shall terminate, purport to terminate or take any steps which have the
effect of decreasing its liability under the Guaranty.
REMEDIES UPON DEFAULT. If a Default occurs under this Note or any Loan
Documents, Bank may at any time thereafter, take the following actions: BANK
LIEN. Foreclose its security
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interest or lien against Borrower's accounts without notice. ACCELERATION UPON
DEFAULT. Accelerate the maturity of this Note and all other Obligations, and all
of the Obligations shall be immediately due and payable. CUMULATIVE. Exercise
any rights and remedies as provided under the Note and other Loan Documents, or
as provided by law or equity.
FINANCIAL AND OTHER INFORMATION. Borrower shall deliver to Bank such information
as required under the Credit Agreement and other Loan Documents.
AUTOMATIC DEBIT OF CHECKING ACCOUNT FOR LOAN PAYMENT. Borrower authorizes Bank
to debit its demand deposit account number 002030000135558 or any other account
with Bank for any payments due under this Note. Borrower further certifies that
Borrower holds legitimate ownership of this account and preauthorizes this
periodic debit as part of its right under said ownership.
REVOLVING LOANS. Borrower may borrow, repay and reborrow, and Bank may advance
and readvance under this Note respectively from time to time (each a "Revolving
Loan" and together the "Revolving Loans"), so long as the total indebtedness
outstanding at any one time does not exceed the principal amount stated on the
face of this Note (as such availability may be reduced pursuant to the Section
captioned Mandatory Prepayments hereunder). Bank's obligation to make Revolving
Loans under this Note shall terminate if there is a Default.
ADDITIONAL COVENANTS, REPRESENTATIONS AND WARRANTIES. All of the agreements,
covenants, representations and warranties made by the Borrower in the Revolving
Loan and Security Agreement dated March 31, 1997 between the Borrower and the
Bank as amended by (i) the Consent and Amendment thereto dated December 5, 1997,
(ii) the Second Amendment thereto dated as of November 30, 1998, and (iii) the
letter waiver and amendment dated March 8, 1999 (such agreement, as so amended
and as the same may be further amended from time to time in the future, the
"Credit Agreement") and the other Loan Documents (as such term is defined in the
Credit Agreement) are deemed incorporated herein in their entirety as if fully
and completely set forth herein. All capitalized terms used herein and not
otherwise defined herein shall have the meanings ascribed to such terms in the
Credit Agreement. For the avoidance of doubt, Borrower acknowledges (i) all
terms and provisions of the Credit Agreement incorporated by reference into this
Note shall be so incorporated as such terms exist as of the date hereof and
shall remain so incorporated herein irrespective of the termination or
expiration of the Credit Agreement and (ii) the Obligations hereunder shall be
secured, guaranteed and otherwise supported by the Loan Documents and Collateral
referred to therein.
WAIVERS AND AMENDMENTS. No waivers, amendments or modifications of this Note and
other Loan Documents shall be valid unless in writing and signed by an officer
of Bank. No waiver by Bank of any Default shall operate as a waiver of any other
Default or the same Default on a future occasion. Neither the failure nor any
delay on the part of Bank in exercising any right, power, or remedy under this
Note and other Loan Documents shall operate as a waiver thereof, nor shall a
single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right, power or remedy.
Each Borrower or any person liable under this Note waives presentment, protest,
notice of dishonor, demand for payment, notice of intention to accelerate
maturity, notice of acceleration of maturity, notice of sale and all other
notices of any kind. Further, each agrees that Bank may extend, modify or renew
this Note or make a novation of the loan evidenced by this Note for any period
and grant any releases, compromises or indulgences with respect to any
collateral securing this Note, or with respect to any other Borrower or any
other person liable under this Note or other Loan Documents, all without notice
to or consent of each Borrower or each person who may be liable under this Note
or other Loan Documents and without affecting the liability of Borrower or any
person who may be liable under this Note or other Loan Documents.
MISCELLANEOUS PROVISIONS. ASSIGNMENT. This Note and other Loan Documents shall
inure to the benefit of and be binding upon the parties and their respective
heirs, legal representatives, successors and assigns. Bank's interests in and
rights under this Note and other
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Loan Documents are freely assignable, in whole or in part, by Bank. In addition,
nothing in this Note or any of the Loan Documents shall prohibit Bank from
pledging or assigning this Note or any of the Loan Documents or any interest
therein to any Federal Reserve Bank. Borrower shall not assign its rights and
interest hereunder without the prior written consent of Bank, and any attempt by
Borrower to assign without Bank's prior written consent is null and void. Any
assignment shall not release Borrower from the Obligations. APPLICABLE LAW;
CONFLICT BETWEEN DOCUMENTS. This Note and other Loan Documents shall be governed
by and construed under the laws of the state where Bank first shown above is
located without regard to that state's conflict of laws principles. If the terms
of this Note should conflict with the terms of the loan agreement or any
commitment letter that survives closing, the terms of this Note shall control.
BORROWER'S ACCOUNTS. Except as prohibited by law, Borrower grants Bank a
security interest in all of Borrower's accounts with Bank and any of its
affiliates. JURISDICTION. Borrower irrevocably agrees to non-exclusive personal
jurisdiction in the state in which the office of Bank first shown above is
located. SEVERABILITY. If any provision of this Note or of the other Loan
Documents shall be prohibited or invalid under applicable law, such provision
shall be ineffective but only to the extent of such prohibition or invalidity,
without invalidating the remainder of such provision or the remaining provisions
of this Note or other such document. NOTICES. Any notices to Borrower shall be
sufficiently given, if in writing and mailed or delivered to the Borrower's
address shown above or such other address as provided hereunder, and to Bank, if
in writing and mailed or delivered to Bank's office address shown above or such
other address as Bank may specify in writing from time to time. In the event
that Borrower changes Borrower's address at any time prior to the date the
Obligations are paid in full, Borrower agrees to promptly give written notice of
said change of address by registered or certified mail, return receipt
requested, all charges prepaid. PLURAL; CAPTIONS. All references in the Loan
Documents to Borrower, guarantor, person, document or other nouns of reference
mean both the singular and plural form, as the case may be, and the term
"person" shall mean any individual, person or entity. The captions contained in
the Loan Documents are inserted for convenience only and shall not affect the
meaning or interpretation of the Loan Documents. BINDING CONTRACT. Borrower by
execution of and Bank by acceptance of this Note agree that each party is bound
to all terms and provisions of this Note. REVOLVING LOANS. Bank in its sole
discretion may make other Revolving Loans under this Note pursuant hereto.
POSTING OF PAYMENTS. All payments received during normal banking hours after
2:00 p.m. local time at the office of Bank first shown above shall be deemed
received at the opening of the next banking day. FEES AND TAXES. Borrower shall
promptly pay all documentary, intangible recordation and/or similar taxes on
this transaction whether assessed at closing or arising from time to time.
ARBITRATION. Upon demand of any party hereto, whether made before or after
institution of any judicial proceeding, any dispute, claim or controversy
arising out of, connected with or relating to this Note and other Loan Documents
("Disputes") between or among parties to this Note shall be resolved by binding
arbitration as provided herein. Institution of a judicial proceeding by a party
does not waive the right of that party to demand arbitration hereunder. Disputes
may include, without limitation, tort claims, counterclaims, disputes as to
whether a matter is subject to arbitration, claims brought as class actions,
claims arising from Loan Documents executed in the future, or claims arising out
of or connected with the transaction reflected by this Note.
Arbitration shall be conducted under and governed by the Commercial Financial
Disputes Arbitration Rules (the "Arbitration Rules") of the American Arbitration
Association (the "AAA") and Title 9 of the U.S. Code. All arbitration hearings
shall be conducted in the city in which the office of Bank first stated above is
located. The expedited procedures set forth in Rule 51 ET SEQ. of the
Arbitration Rules shall be applicable to claims of less than $1,000,000.00. All
applicable statutes of limitation shall apply to any Dispute. A judgment upon
the award may be entered in any court having jurisdiction. The panel from which
all arbitrators are selected shall be comprised of licensed attorneys. The
single arbitrator selected for expedited procedure shall be a retired judge from
the highest court of general jurisdiction, state or federal, of the state where
the hearing will be conducted or if such person is not available to serve, the
single arbitrator may be a licensed attorney. Notwithstanding the foregoing,
this arbitration provision does not apply to disputes under or related to swap
agreements.
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PRESERVATION AND LIMITATION OF REMEDIES. Notwithstanding the preceding binding
arbitration provisions, Bank and Borrower agree to preserve, without diminution,
certain remedies that any party hereto may employ or exercise freely,
independently or in connection with an arbitration proceeding or after an
arbitration action is brought. Bank and Borrower shall have the right to proceed
in any court of proper jurisdiction or by self-help to exercise or prosecute the
following remedies, as applicable: (i) all rights to foreclose against any real
or personal property or other security by exercising a power of sale granted
under Loan Documents or under applicable law or by judicial foreclosure and
sale, including a proceeding to confirm the sale; (ii) all rights of self-help
including peaceful occupation of real property and collection of rents, set-off,
and peaceful possession of personal property; (iii) obtaining provisional or
ancillary remedies including injunctive relief, sequestration, garnishment,
attachment, appointment of receiver and filing an involuntary bankruptcy
proceeding; and (iv) when applicable, a judgment by confession of judgment.
Preservation of these remedies does not limit the power of an arbitrator to
grant similar remedies that may be requested by a party in a Dispute.
Borrower and Bank agree that they shall not have a remedy of punitive or
exemplary damages against the other in any Dispute and hereby waive any right or
claim to punitive or exemplary damages they have now or which may arise in the
future in connection with any Dispute whether the Dispute is resolved by
arbitration or judicially.
CONDITIONS PRECEDENT. This Note shall not be deemed in full force and effect and
no Revolving Loans shall be made hereunder until the Bank has received the
following:
(1) This Note, duly executed and delivered by the Borrower;
(2) All of the TJR Documents fully executed by the parties thereto; and
(3) Each of the other documents and materials itemized on the Closing
Document Checklist attached hereto as SCHEDULE A, each in form and
substance satisfactory to the Bank.
IN WITNESS WHEREOF, Borrower, on the day and year first above written, has
caused this Note to be executed under seal.
EMCORE CORPORATION
CORPORATE By:______________________________
SEAL Name:
Title:
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STATE OF )
) ss.:
COUNTY OF )
On the ___ day of April, 1999, before me personally came
_____________________, to me known, who, being by me duly sworn, did depose and
say that _he resides at No. ___________________________________________________;
that _he is the ______________ of EMCORE CORPORATION, the corporation described
in and which executed the foregoing instrument; that _he knows the seal of said
corporation; that the seal affixed to said instrument is such corporate seal;
that it was so affixed by authority of the board of directors of said
corporation and that _he signed h__ name thereto by like authority.
---------------------------------
Notary Public
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EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement of
EMCORE Corporation on Form S-3 of our report dated May 14, 1999 (which expresses
an unqualified opinion and includes an explanatory paragraph relating to a
restatement described in Note 20), included in the Annual Report on Form 10-K/A
of EMCORE Corporation for the year ended September 30, 1998, and to the use of
our report dated May 14, 1999, appearing in the Prospectus, which is part of
this Registration Statement. We also consent to the reference to us under the
heading "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
May 21, 1999
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Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-3
of our report dated November 3, 1997, except for Note 15, as to which the date
is December 5, 1997, on our audits of the financial statements and financial
statement schedule of EMCORE Corporation as of September 30, 1997, and for the
two years ended September 30, 1997. We also consent to the references to our
firm under the caption "Experts".
PricewaterhouseCoopers LLP
Florham Park, New Jersey
May 20, 1999
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Exhibit 23.3
Consent of Arthur Andersen LLP
As independent public accountants, we hereby consent to the
use of our report dated March 21, 1997 on the financial statements of
MicroOptical Devices, Inc. for the year ended December 31, 1996 and for the
period from inception (August 3, 1995) through December 31, 1995 and 1996,
included in or made a part of this registration statement under Amendment No. 1
to Form S-3 for EMCORE Corporation.
ARTHUR ANDERSEN LLP
Albuquerque, New Mexico
May 21, 1999
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Exhibit 23.5
Consent of Lerner David Littenberg Krumholz & Mentlik
We hereby consent to the reference to our firm under the caption
"Experts" in the Registration Statement on Form S-3 of EMCORE Corporation for
the offering of shares of common stock by EMCORE Corporation and certain selling
shareholders.
Lerner David Littenberg Krumholz & Mentlik
May 21, 1999
Westfield, New Jersey
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EXHIBIT 99.1
POWER OF ATTORNEY AND CUSTODY AGREEMENT
Reuben F. Richards, Jr.
Thomas G. Werthan
As Attorneys-in-Fact
c/o Emcore Corporation
394 Elizabeth Avenue
Somerset, New Jersey 08873
Attention: Thomas G. Werthan
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
Ladies and Gentlemen:
The undersigned proposes to sell ________ issued and outstanding
shares (the "Shares") of common stock, no par value (the "Common Stock"), of
EMCORE Corporation, a New Jersey corporation (the "Company"), to a group of
underwriters (the "Underwriters") represented by Donaldson, Lufkin & Jenrette
Securities Corporation and certain other Underwriters (the "Representatives"),
who propose to offer such Shares to the public (the "Offering"), all
substantially on the terms and subject to the conditions set forth in the
Underwriting Agreement (the "Underwriting Agreement") among the
Representatives, the Company and the Selling Shareholders (as defined in the
Underwriting Agreement). The Shares include the shares of Common Stock to be
sold by the undersigned on the Closing Date (as defined in the Underwriting
Agreement), and are represented by the certificate(s) deposited by the
undersigned with American Stock Transfer & Trust Company (the "Custodian")
hereunder. The undersigned understands that, in connection with the Offering,
the Company has filed a Registration Statement on Form S-3 (the "Registration
Statement") with the Securities and Exchange Commission (the "SEC") to register
the offer and sale of the Shares under the Securities Act of 1933.
The undersigned hereby acknowledges receipt of a copy of the
Registration Statement and of a copy of a preliminary form of the Underwriting
Agreement.
1. APPOINTMENT OF ATTORNEYS-IN-FACT. In connection with the foregoing,
the undersigned hereby appoints Reuben F. Richards, Jr. and Thomas G. Werthan,
each with full power to act in all respects hereunder in his sole discretion,
the true attorneys-in-fact (each an "Attorney-in-Fact"; all references below to
Attorney-in-Fact shall be deemed to include either Attorney-in-Fact acting
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individually as the case may be) of the undersigned, with full power and
authority in the name of and for and on behalf of the undersigned with respect
to all matters arising in connection with the sale of the Shares to the
Underwriters pursuant to the Underwriting Agreement and the Pricing Agreement,
including, but not limited to, the power and authority:
(a) to sell, assign and transfer to the Underwriters the Shares at
such purchase price per share to be paid by the Underwriters as the
Attorney-in-Fact so acting shall determine in his sole and absolute discretion,
such purchase price to be the same price per share to be paid by the
Underwriters to the Company and the other Selling Shareholders pursuant to the
Underwriting Agreement.
(b) for the purpose of effecting such sale, to execute and deliver the
Underwriting Agreement substantially in the form previously delivered to the
undersigned, with such changes therein as the Attorney-in-Fact so acting, in
his sole and absolute discretion, may determine to be necessary or appropriate,
and containing such terms as such Attorney-in-Fact shall determine, including
the purchase price per share to be paid by the Underwriters and provisions
concerning the Offering, the execution and delivery of the Underwriting
Agreement by such Attorney-in-Fact to be conclusive evidence with respect to
the undersigned's approval thereof, and to carry out and comply with each and
all of the provisions of the Underwriting Agreement;
(c) in the sole and absolute discretion of the Attorney-in-Fact so
acting, to exercise any power conferred upon and to take any action authorized
or required to be taken by the undersigned as a Selling Shareholder pursuant to
the Underwriting Agreement and, subject to authority otherwise specifically
reserved to the Custodian under this Agreement, to give such instructions to
the Custodian as the Attorney-in-Fact so acting may determine with respect to
(i) the transfer on the stock record books of the Company of the Shares in
order to effect such sale (including the names in which new certificates for
the Shares are to be issued and the denominations thereof), (ii) the delivery
to or for the account of the Underwriters of the certificates for the Shares
against receipt by the Custodian of the purchase price to be paid therefor, and
(iii) the remittance to the undersigned of the proceeds from any sale of the
Shares;
(d) to retain legal counsel in connection with any and all matters
referred to herein;
(e) to make, execute, acknowledge and deliver all such other
contracts, orders, receipts, notices, requests, consents, instructions,
certificates, letters and other writings, including communications to the SEC
and state securities commissions and amendments to the Underwriting Agreement
and to take all action that the Attorney-in-Fact so acting may consider
necessary or appropriate in connection with or to carry out the aforesaid sale
of the Shares to the Underwriters as fully as the undersigned could if then
personally present and acting; and
(f) to make payment, on behalf and for the account of the undersigned,
of all costs and expenses payable by the undersigned pursuant to the provisions
of the Underwriting Agreement or otherwise incurred and deemed appropriate by
the Attorney-in-Fact so acting, including any applicable stock transfer taxes
chargeable to the undersigned and any fees and expenses of the Custodian, out
of and to the extent of funds available from the sale of the Shares (the
Attorney-in-Fact shall have no personal liability to make such payments out of
other funds), all in the sole and absolute discretion of the Attorney-in-Fact
so acting (the undersigned hereby expressly promising to repay such
Attorney-in-Fact for any such payments made on behalf and for the account of
the undersigned by such Attorney-in-Fact).
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Without limiting the foregoing authority, the Attorney-in-Fact is
authorized to (i) request on behalf of the undersigned acceleration of the
effectiveness of the Registration Statement and (ii) advise the SEC of the
reason the undersigned is selling shares of Common Stock.
2. APPOINTMENT OF CUSTODIAN; DEPOSIT OF SHARES: INSTRUCTIONS TO THE
COMPANY.
(a) The undersigned hereby appoints American Stock Transfer & Trust
Company to act as the Custodian of the certificate(s) representing the Shares
on the terms and subject to the conditions set forth in this Agreement.
(b) The undersigned hereby delivers to the Custodian a certificate or
certificates representing the Shares, together with stock powers executed in
blank. These certificates are to be held by the Custodian for the account of
the undersigned and are to be disposed of by the Custodian in accordance with
this Agreement. Such certificates are listed in the schedule attached hereto.
(c) The undersigned hereby authorizes and directs the Custodian to
hold the certificates deposited herewith in its custody with full power in the
name of and for and on behalf of the undersigned and:
(i) to instruct the Company's transfer agent to issue a
certificate or certificates representing the Shares in accordance with
the directions of the Representatives, and to permit inspection of
such certificates by the Representatives as provided in Section 4 of
the Underwriting Agreement;
(ii) to deliver, or cause to be delivered, certificates
representing the Shares to the Underwriters on the Closing Date fixed
in accordance with the Underwriting Agreement against receipt by the
Attorney-in-Fact of the consideration provided for in the Underwriting
Agreement;
(iii) to determine, in the sole and absolute discretion of
the Custodian, whether and the time and times when, the purpose for,
and the manner in which, any power conferred herein to the Custodian
shall be exercised, and the conditions, provisions and covenants of
any instrument or document which may be executed by the Custodian
pursuant hereto; and
(iv) to do all things and perform all acts pursuant to the
terms of this Agreement as the Custodian may in its sole and absolute
discretion deem appropriate, including, without limitation, the
execution and delivery of all certificates, receipts, instruments,
letters of transmittal and other documents and papers required,
contemplated by, or deemed by the Custodian appropriate in connection
with this Agreement to the Representatives, the Company's transfer
agent or any other person, and the employment of such counsel or other
person or firms as the Custodian in its sole and absolute discretion
shall deem necessary.
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3. REPRESENTATIONS AND WARRANTIES. The undersigned hereby represents
warrants and agrees that:
(a) The undersigned has read the representations and warranties
contained in Section 6 of the form of the Underwriting Agreement previously
delivered to the undersigned and understands the same, confirms that the same
are true and correct, and hereby authorizes the Attorney-in-Fact, acting on
behalf of the undersigned, to make such representations and warranties to the
Underwriters as provided therein.
(b) The undersigned has read the form of the Underwriting Agreement
previously delivered to the undersigned and understands the same, and hereby
authorizes the Attorney-in-Fact to enter into such agreement with the
Representatives on behalf of the undersigned and to provide all necessary
performance in satisfaction of the terms and conditions of such agreement.
(c) The undersigned will not make bids for or purchases of or induce
bids for or purchases of, directly or indirectly, any shares of Common Stock of
the Company until the distribution of all shares of Common Stock being sold in
the Offering has been completed. The undersigned has been advised that the
Underwriters will notify the Company when the Offering has been completed.
(d) The undersigned has duly executed and delivered to the Company a
questionnaire in connection with the sale of the Shares by the undersigned
pursuant to the Underwriting Agreement, and the answers to said questionnaire
given by the undersigned are true and correct and do not omit to state a fact
required to be stated therein or necessary to make the statements therein not
misleading, and any changes to such answers will be supplied by the undersigned
as required by said questionnaire.
4. TERMINATION OF AGREEMENT.
(a) All power and authority granted or conferred hereby is granted and
conferred subject to the interests of the Underwriters, the Company and the
other Selling Shareholders and, in consideration of those interests and for the
purpose of assuring completion of the transactions contemplated by the
Underwriting Agreement and this Agreement, is coupled with an interest and is
irrevocable and shall not be terminated by any act of the undersigned or by
operation of law, whether by death or the occurrence of any other event, and if
after the execution hereof the undersigned shall die or any other such event
shall occur, before the completion of the transactions contemplated by the
Underwriting Agreement and this Agreement, the Attorney-in-Fact and the
Custodian are nevertheless authorized and directed to complete all of such
transactions as if such death or other event had not occurred and regardless of
notice thereof.
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(b) Notwithstanding the foregoing, if the Underwriting Agreement shall
not be entered into, or if all of the transactions contemplated by the
Underwriting Agreement and this Agreement are not completed prior to May 31,
1999, then from and after such date the undersigned shall have the power, by
giving written notice to the Attorney-in-Fact, to terminate this Agreement,
subject, however, to all lawful action done or performed by the
Attorney-in-Fact pursuant hereto prior to the actual receipt of such notice.
5. LIMITATION OF LIABILITY; INDEMNIFICATION. The undersigned agrees
that, whenever the Attorney-in-Fact or the Custodian may obtain the advice of
any such counsel as either may select in connection with any matter arising
under the Underwriting Agreement or this Agreement, the Attorney-in-Fact or the
Custodian, as the case may be, shall not be liable for any action taken or
omitted in accordance with such advice. The undersigned agrees to indemnify and
hold harmless the Attorney-in-Fact and the Custodian against any and all
losses, claims, damages or liabilities (including all costs, legal and other
expenses) incurred as a result of any action taken or omitted by the
Attorney-in-Fact or the Custodian in accordance with the Underwriting Agreement
or this Agreement (including, without limitation, the establishment of the
price under the Underwriting Agreement), whether or not under the advice of
counsel, except with respect to any losses, claims, damages or liabilities
which shall be finally adjudicated to be the result of gross negligence or
willful misconduct of the Attorney-in-Fact or the Custodian, respectively.
6. APPLICABLE LAW. The validity, enforceability, interpretation, and
construction of this Agreement shall be determined in accordance with the laws
of the State of New York, and this Agreement shall inure to the benefit of, and
shall be binding upon, the undersigned and the undersigned's heirs, executors,
administrators, successors and assigns, as the case may be.
7. RETURN OF UNDELIVERED SHARES. If the Shares are not accepted by the
Underwriters against payment therefor in accordance with the terms and
provisions of the Underwriting Agreement, or if the Underwriting Agreement
shall be otherwise terminated pursuant to the provisions thereof, the Custodian
shall return to the undersigned the certificate(s) referred to in Section 2(b)
of this Agreement and held by it for the account of the undersigned hereunder.
8. MISCELLANEOUS. This Agreement may be executed in any number of
counterparts each of which shall be deemed to be an original and all of which
together shall be deemed to be one and the same instrument.
Until delivery of the consideration provided for in the Underwriting
Agreement has been made to the Attorney-in-Fact by or for the account of the
Underwriters, the undersigned shall remain the owner of the Shares and shall
have all rights thereto which are not inconsistent with this Agreement.
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IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney
and Custody Agreement to be executed this ____ day of __________, 1999.
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Print Name:
(Signature(s) must correspond with the
name(s) in which the deposited certificate(s)
representing shares of Common Stock were
issued.)
Witnessed:
- ----------------------------------
- ----------------------------------
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The certificate(s) representing Shares of Common Stock of the Company
delivered herewith to the Custodian by the above-named Selling Shareholder
pursuant to this Power of Attorney and Custody Agreement are identified as
follows:
Number of Securities
Transferred in
Accordance Herewith
Common Stock Number
Certificate of Registered
Numbers Shares in name of
------------ ------ ----------
The undersigned, as Custodian, hereby acknowledges receipt of the
certificate(s) above identified, to be held and disposed of pursuant to the
directions in the foregoing Power of Attorney and Custody Agreement and hereby
agrees to act as Custodian in accordance with the terms of the Power of
Attorney and Custody Agreement, this ____ day of __________, 1999.
AMERICAN STOCK TRANSFER
& TRUST COMPANY
as Custodian
By:
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Authorized Signature
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The undersigned hereby agree to act as Attorneys-in-Fact for the
above-named Selling Shareholder in accordance with the terms of this Power of
Attorney and Custody Agreement this ____ day of __________, 1999.
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[Name]
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[Name]
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