S-1/A: General form of registration statement for all companies including face-amount certificate companies
Published on February 6, 1997
As filed with the Securities and Exchange Commission on February 6, 1997
Registration No. 333-18565
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________
Amendment No. 1
to
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
______________
EMCORE CORPORATION
(Exact name of Registrant as specified in its charter)
________________________
394 Elizabeth Avenue, Somerset, New Jersey 08873
(908) 271-9090
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
_____________________
Thomas G. Werthan
EMCORE Corporation
394 Elizabeth Avenue
Somerset, New Jersey 08873
(908) 271-9090
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Ellen B. Corenswet, Esq.
Kevin Keogh, Esq. Babak Yaghmaie, Esq.
White & Case Brobeck, Phleger & Harrison LLP
1155 Avenue of the Americas 1633 Broadway
New York, New York 10036 New York, New York 10019
(212) 819-8200 (212) 581-1600
Approximate date of commencement of proposed sale to the public: as soon
as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act
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.
[ART]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL
MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
This Prospectus contains certain statements of a forward-looking
nature relating to future events, such as developments of processes and
commencement of production, or the future financial performance of the
Company. Prospective investors are cautioned that such statements are only
projections and that actual events or results may differ materially. In
evaluating such statements, prospective investors should specifically
consider the various factors identified in this Prospectus, including the
matters set forth under the heading "Risk Factors" which could cause actual
results to differ materially from those indicated by such forward-looking
statements.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell
or the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any state.
Prospectus SUBJECT TO COMPLETION, DATED FEBRUARY __, 1997
________, 1997
2,500,000 SHARES
[EMCORE LOGO]
EMCORE CORPORATION
COMMON STOCK
All the 2,500,000 shares of Common Stock offered hereby (the
"Offering") are being issued and sold by EMCORE Corporation ("EMCORE" or
the "Company").
Prior to the Offering, there has been no public market for the Common
Stock of the Company. It is currently anticipated that the initial public
offering price will be between $9.00 and $11.00 per share. See "Underwrit-
ing" for a discussion of the factors considered in determining the initial
public offering price.
The Company has applied for quotation of the Common Stock on the
Nasdaq National Market under the symbol "EMKR."
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses estimated at $710,000 which will be paid by
the Company.
(3) The Company has granted the several Underwriters an option,
exercisable within 30 days of the date hereof, to purchase up to 375,000
additional shares of Common Stock solely to cover over-allotments, if any.
If such option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to the Company will be
__________, __________ and __________. See "Underwriting."
The shares of Common Stock are being offered by the several
Underwriters when, as and if delivered to and accepted by the Underwriters
and subject to various prior conditions, including their right to reject
orders in whole or in part. It is expected that delivery of the share
certificates will be made in New York, New York on or about __________,
1997.
DONALDSON, LUFKIN & JENRETTE NEEDHAM & COMPANY, INC.
SECURITIES CORPORATION
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more
detailed information, including "Risk Factors" and the Financial Statements
and Notes thereto, appearing elsewhere in this Prospectus. Except as
otherwise indicated, (a) all references to fiscal years of the Company in
this Prospectus refer to fiscal years ended on September 30 and (b) all
information in this Prospectus assumes no exercise of the Underwriters'
over-allotment option and reflects a 3.4:1 reverse stock split of the
Common Stock effective February 3, 1997.
THE COMPANY
EMCORE, founded in 1984, designs and develops compound
semiconductor materials, such as gallium arsenide, and process technology
and is a leading manufacturer of production systems used to fabricate
compound semiconductor wafers. The Company provides its customers, both in
the U.S. and internationally, with materials science expertise, process
technology and compound semiconductor production systems that enable the
manufacture of commercial volumes of high-performance electronic and
optoelectronic devices. In 1996, in response to the growing need of its
customers to cost effectively get to market faster with high volumes of new
and improved high-performance products, the Company expanded its product
offerings to include the design and production of wafers and package-ready
devices. The Company believes that it is the only company that offers such
a broad range of products and services to the compound semiconductor
industry.
Recent advances in information technologies have created a growing
need for power-efficient, high- performance electronic systems that operate
at very high frequencies, have increased storage, computational and display
capabilities, and can be produced cost-effectively in commercial volumes.
In the past, electronic systems manufacturers 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 performance and functions which 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.
Compound semiconductor devices operate at much higher speeds than silicon
devices with lower power consumption and less noise and distortion. In
addition, unlike silicon-based devices, compound semiconductor devices have
optoelectronic capabilities that enable them to emit and detect light. As
a result, electronics manufacturers are increasingly integrating compound
semiconductor devices into their products in order to achieve higher
performance in a wide variety of applications, including wireless
communica-tions, telecommunications, computers, and consumer and automotive
electronics.
Historically, developers of compound semiconductor devices have met
capacity needs with in-house systems and technologies. However, the
requirements for the production of commercial volumes of high- performance
compound semiconductor devices have often exceeded the capabilities of such
in-house solutions. The Company believes that wafers fabricated using
metal organic chemical vapor deposition ("MOCVD") possess better
uniformity, as well as better optical and electronic properties, than
wafers fabricated by traditional methods. The Company believes that its
proprietary TurboDiscTM MOCVD system provides a low cost of ownership and
is the critical enabling process step in the volume manufacture of high-
performance electronic and optoelectronic devices.
The Company's objective is to capitalize on its position as a
leading developer of MOCVD process technology and production systems to
become a leading supplier of wafers and package-ready devices. In 1995,
the Company had a 26% share of the market for sales of MOCVD systems,
according to VLSI Research Inc., which regularly publishes research on this
market. In addition, the Company seeks to form strategic alliances with
customers in order to obtain long-term development and high volume
production contracts. The Company currently has a strategic relationship
with General Motors Corporation ("General Motors") to develop and
manufacture magneto-resistive ("MR") sensor products for use in automotive
applications. In addition, the Company has been integrally involved in the
development of solar cell technologies for telecommunications satellites
and transmitter and display technologies for wireless communications
applications.
The Company works closely with its customers in designing and
developing materials processes to be used in production systems for its
customers' end-use applications. The Company has sold more than 180
systems worldwide to a broad base of leading electronics manufacturers,
including: Spectrolab Inc. (a subsidiary of Hughes Electronics Company,
"Hughes-Spectrolab"), General Motors, Hewlett Packard Co., Lucent
Technologies, Inc., Motorola, Inc., Rockwell International Corp.
("Rockwell"), Samsung Co., Siemens AG, L.M. Ericsson AB, Texas Instruments
Incorporated and thirteen of the largest electronics manufacturers in
Japan. In fiscal 1996, only one customer, Hughes-Spectrolab, accounted for
more than 10% of the Company's revenues; sales to this customer accounted
for 23.6% of the Company's revenues. The Company's systems are used by
these customers to manufacture epitaxial wafers which are then processed
into components used in a variety of end-use products, including: cellular
telephones, pagers, personal communication service ("PCS") handsets, direct
broadcast satellite ("DBS") systems, CD-ROMs, digital versatile disks
("DVDs"), flat-panel displays and electronic automotive components.
THE OFFERING
Common Stock offered
by the Company . . . . . . . . 2,500,000 Shares
Common Stock to
be outstanding after
the Offering . . . . . . . . . 5,494,461 Shares(1)
Use of Proceeds . . . . . . . . To repay outstanding debt, expand
manufacturing facilities and for other
general corporate purposes. See "Use
of Proceeds."
Proposed Nasdaq National
Market symbol . . . . . . . . . EMKR
__________________________
(1) Excludes: (i) 647,059 shares of Common Stock reserved for issuance
under the Company's 1995 Incentive and Non-Statutory Stock Option
Plan, as amended, of which 464,017 shares are subject to outstanding
options at exercise prices varying from $3.03 per share to $10.20 per
share, (ii) warrants to purchase 9,103 shares of Common Stock at an
exercise price of $17.00 per share, exercisable until July 24, 1997,
(iii) warrants to purchase 2,330,784 shares of Common Stock at an
exercise price of $4.08 per share, exercisable until May 1, 2001 and
(iv) warrants to purchase 1,225,490 shares of Common Stock at an
exercise price of $10.20 per share, exercisable until September 1,
2001. See "Management -- Stock Option Plan," "Description of Capital
Stock -- Warrants" and Note 12 of the Notes to Financial Statements.
(2) In October 1996, the Company established a $10.0 million demand note
facility with First Union National Bank. As of December 31, 1996, the
Company had drawn down $6 million from this facility. The Company
intends to use part of the net proceeds of the Offering to pay down
the balance outstanding under this facility. See "Use of Proceeds."
(3) Reflect the sale by the Company of the 2,500,000 shares of Common
Stock offered hereby, after deducting underwriting discounts and
commissions and estimated offering expenses payable by the Company and
the application of the estimated net proceeds thereof. See "Use of
Proceeds."
(4) Pro forma adjustment for net (loss) income per share and shares used
in computing net (loss) income per share assumes: (i) 2,994,461 shares
of Common Stock, which represents the actual weighted average shares
of Common Stock outstanding, (ii) 2,500,000 shares of Common Stock to
be issued by the Company in the Offering and (iii) 1,443,936
equivalent shares of Common Stock to reflect the Common Stock purchase
warrants and stock options issued during the twelve months preceding
the filing date of the registration statement relating to the
Company's initial public offering, using the treasury stock method.
RISK FACTORS
An investment in the Common Stock offered by this Prospectus involves a
high degree of risk. Risks involved in an investment in the Common Stock
include, without limitation: risks related to expansion of the Company's
business, risks related to continued growth, risks arising from the need to
increase manufacturing capacity, the Company's history of operating losses,
fluctuations in the Company's operating results, risks related to customer
concentration, risks relating to the lengthy sales and qualification cycles
for the Company's products, risks related to the Company's reliance on
trade secrets, risks related to the Company's dependence on limited product
offerings, manufacturing risks, risks from reliance on international sales,
risks arising from rapid technological change, risks regarding the
acceptance of new compound semiconductor technology by customers, risks of
increased competition, risks from continued existence of a control group,
risks related to dependence on key employees, risks related to
environmental regulation, risks arising from the absence of a public
market, risks of uncertainty of additional funding, and risks of certain
anti-takeover provisions, See "Risk Factors."
RISK FACTORS
An investment in the shares of Common Stock offered by this Prospectus
involves a high degree of risk. In addition to the other matters described
in this Prospectus, prospective investors should carefully consider the
following factors before making a decision to purchase the Common Stock
offered hereby.
Risks Related to Expansion of Business. The Company has recently
experienced a significant increase in the demand for its compound
semiconductor production systems. There can be no assurance that the
market for compound semiconductor production systems will continue to grow
or that the Company will be able to continue to develop compound semicon-
ductor systems for the market or that it will be able to meet market
demands or maintain and expand its customer base for such products. A
failure to do so would have a material adverse effect on the Company's
business, financial condition and results of operations. The Company has
also recently expanded its operations to include the production of compound
semiconductor wafers and package-ready devices. The Company's expansion
into the production of such new products involves substantial capital
expenditures and a significant risk that management will be unsuccessful.
The Company presently anticipates utilizing a significant portion of the
net proceeds of the Offering for such expenditures. The development,
production and sale of compound semiconductor wafers and package-ready
devices entail yield, process and capacity-related risks that differ from
those associated with the development, production and sale of the Company's
compound semiconductor production systems. The markets for compound
semiconductor wafers and package-ready devices are in a relatively early
stage of development. There can be no assurance that these markets will
continue to grow or that the Company will be successful in developing or
marketing such products. The Company's failure to successfully develop or
market such products could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business -- Products."
Risks Related to Continued Growth. The Company has recently
experienced a period of rapid growth, has added new personnel and intends
to continue to expand. For example, the number of the Company's employees
has increased from 95 as of September 30, 1995 to 185 as of September 30,
1996. Because of the level of scientific and management expertise
necessary to support such growth, the Company must recruit and retain
highly qualified and well-trained technical and management personnel.
There may be only a limited number of persons with the requisite skills to
serve in these positions, and it may become increasingly difficult for the
Company to hire such personnel over time. The Company's expansion may also
significantly strain management, financial, sales and marketing and other
personnel and systems. In order to effectively manage its growth, the
Company must continue to enhance its systems and controls and successfully
expand, train and manage its employee base. There can be no assurance that
the Company will be able to manage this expansion effectively or will be
able to recruit, train and retain sufficient technical and managerial
personnel. Any failure to manage the Company's growth properly could have
a material adverse effect on the Company's business, financial condition
and results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Risks Arising from the Need to Increase Manufacturing Capacity. The
Company currently anticipates increasing its manufacturing capacity to meet
the demand for its compound semiconductor production systems and wafers and
package-ready devices by expanding its existing production facility for its
new product offerings and instituting a third shift at its facility. This
increase will require substantial capital expenditures. The Company
presently anticipates utilizing a significant portion of the net proceeds
of the Offering for such expenditures. There can be no assurance that the
Company will be successful in increasing its manufacturing capacity in time
to meet the demand for its production systems or wafers and package-ready
devices. In addition, the Company's success is in large part dependent on
its ability to manufacture its products, particularly its wafers and
package-ready devices, in high volumes and on a timely basis. In addition,
commercial production of the Company's wafers and package-ready devices
requires the achievement of adequate competitive yield levels. The failure
of the Company to increase its manufacturing capacity, or to manufacture
its products in high volumes, in a timely manner, or at sufficient yield
levels, would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Use of Proceeds" and
"Business -- Manufacturing."
History of Operating Losses; Uncertainty of Profitability. The Company
has been in operation since 1984 and had an accumulated deficit of $18.1
million at September 30, 1996. In fiscal 1996, and the first quarter of
fiscal 1997, the Company incurred consolidated net losses of $3.2 million
and $3.8 million, respectively, which primarily resulted from significant
initial operating expenses related to the Company's expansion to include
the production of compound semiconductor wafers and package-ready devices
and for the quarter ending December 31, 1996, $1.0 million of imputed
warrant interest, non-cash. The Company has increased its expense levels
to support anticipated growth in demand for each of its compound semicon-
ductor production systems, wafer and package-ready device product
offerings, including the hiring of additional manufacturing, research,
engineering, sales, and administrative personnel and has also increased its
investments in inventory and capital equipment. As a result, the Company
is dependent upon increasing revenues and profit margins to achieve profit-
ability. If the Company's sales and profit margins do not increase to
support the higher levels of operating expenses, the Company's business,
financial condition and results of operations would be materially adversely
affected. There can be no assurance that the Company will ever again
achieve profitability. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Financial Statements
and the Notes thereto.
Substantial Losses Incurred in First Fiscal Quarter of 1997. The
Company has incurred a loss of $3.8 million in the quarter ending December
31, 1996. The loss was primarily attributable to continuing start-up
expenses associated with the Company's two new product lines, in addition
to $1 million of imputed warrant interest, non-cash. There can be no
assurance that the Company will reverse its losses or cease reporting
quarterly losses or that the Company's capital expenditures incurred in
connection with the initiation of new product offerings will yield net
revenues. The failure to report positive results from the two new product
offerings could have a material adverse effect on the Company's business,
financial condition and results of operation.
Fluctuations in Operating Results. Historically, the Company has
derived substantially all of its revenues from the sale of compound
semiconductor production systems which typically have list prices ranging
from approximately $350,000 to $2.5 million per system. At the Company's
current revenue level, each shipment of a compound semiconductor production
system or failure to make a shipment can have a material effect on the
Company's quarterly or annual results of operations. A cancellation,
rescheduling or delay in a system shipment near the end of a particular
quarter could cause net revenues in that quarter to fall significantly
below the Company's expectations and could materially adversely affect the
Company's operating results for such quarter. The Company's policy is to
maintain positive relationships with its customers by responding promptly
and effectively to warranty claims. Since the occurrence of warranty
claims is unpredictable, the Company's prompt action in response to such
claims could cause the Company's operating results to fluctuate
unexpectedly. The Company maintains reserves against warranty claims;
however, an unexpectedly high level of warranty claims in a particular
quarter could have a material adverse effect on the Company's business,
financial condition and results of operation for that quarter. The Company
anticipates that any revenues derived in the future from its recently-
established wafer and package-ready device products will be subject to
similar risks. Other factors which may lead to fluctuations in the
Company's quarterly and annual operating results include: market
acceptance of the Company's and its customers' products; the number of
compound semiconductor production systems, wafers or package-ready devices
being manufactured during any particular period; the mix of sales by
product and by distribution channel; the timing of announcement and
introduction of new compound semiconductor production systems, wafers or
package-ready devices by the Company and its competitors; a downturn in the
market for products incorporating compound semiconductors; variations in
the configuration of production systems; changes in the design or process
conditions for the production of wafers or package-ready devices; product
discounts and changes in pricing; delays in deliveries from suppliers;
delays in orders due to customers' financial difficulties; and volatility
in the compound semiconductor industries and the markets served by the
Company's customers. In addition, customers may face competing capital
budget considerations, thus making the timing of customer orders uneven and
difficult to predict. There can be no assurance that the Company will be
able to achieve a rate of growth or level of revenues in any future period
commensurate with its level of expenses. It is likely that, in some future
quarter or quarters, the Company's operating results may be below the
expectations of analysts and investors. In such event, the price of the
Company's Common Stock would likely be materially adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Risks Related to Customer Concentration. A small number of customers
have historically accounted for a substantial portion of the Company's
revenues, and the Company expects a significant portion of its future sales
to remain concentrated within a limited number of customers. Sales of the
Company's production systems to Hughes-Spectrolab, accounted for
approximately 28.9% and 23.6% of the Company's revenues in fiscal 1995 and
1996, respectively. Hughes-Spectrolab is currently the Company's largest
purchaser of compound semiconductor production systems. General Motors is
currently the Company's sole customer for package-ready devices.
Currently, the Company is only deriving revenues from the fabrication of
its wafers for use in connection with the package-ready devices being sold
to General Motors. There can be no assurance that the Company will succeed
in marketing its wafers and package-ready devices to any customer other
than General Motors. Failure by the Company to provide wafers and package-
ready devices for customers other than General Motors would have a material
adverse effect on the Company's business, financial condition and results
of operations. In addition, the loss of, or a significant reduction of
orders from, Hughes-Spectrolab or General Motors would have a material
adverse effect on the Company's business, financial condition and results
of operations. There can be no assurance that the Company will be able to
retain these or other major customers or that such customers will not
cancel, delay or reschedule orders. Any reduction or delay in orders from
any of the Company's significant customers, including reductions or delays
due to market, economic or competitive conditions in compound
semiconductor-related industries, or the loss of any such customers, would
have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Customers."
Risks Related to Lengthy Sales and Qualification Cycles. Sales of the
Company's compound semiconductor production systems depend, in significant
part, upon the decision of a prospective customer to increase its
manufacturing capacity, which typically involves a significant capital
commitment by the customer. 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. The Company often experiences delays in
obtaining system sales orders while customers evaluate and receive
approvals for the purchase of compound semiconductor production systems.
Such delays may include the time necessary to plan, design or complete a
new or expanded compound semiconductor fabrication facility. Due to these
factors, the Company's compound semiconductor systems typically have a
lengthy sales cycle during which the Company may expend substantial funds
and sales, marketing and management effort. There can be no assurance that
any of these expenditures or efforts on the part of the Company will result
in sales. Although the Company has a limited operating history for wafer
and package-ready device fabrication, the Company anticipates that such
products will have similarly lengthy sales cycles and will therefore be
subject to risks substantially similar to those inherent in the lengthy
sales cycles for compound semiconductor systems. In addition, the sales
cycle for wafers and package-ready devices also includes a period of two to
six months during which the Company develops the formula of materials
necessary to meet the customer's specifications and qualifies the materials
which may also require the delivery of samples. There can be no assurance
that the Company will successfully develop an appropriate product in
accordance with customer specifications. See "Business -- Products," "--
Sales and Marketing" and "-- Competition."
Risks Related to Reliance on Trade Secrets; No Assurance of Continued
Intellectual Property Protections. The Company's success and competitive
position both for sales of production systems and for wafers and package-
ready devices depend on whether it can maintain trade secrets, patents and
other intellectual property protections. Trade secrets are routinely
employed in the Company's manufacturing processes. A "trade secret"
includes 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. In order to protect its
trade secrets, the Company takes certain measures to ensure their secrecy,
such as executing non-disclosure agreements with its employees, customers
and suppliers. Reliance on trade secrets is only an effective business
practice insofar as (i) trade secrets remain undisclosed and (ii) a
proprietary product or process is not reverse engineered or independently
developed. The Company's inability to maintain its trade secrets relating
to the systems production technology and operation could have a material
adverse effect on the ability of the Company to sell its production
systems. There can be no assurance that these trade secrets will remain
undisclosed, that the Company's non-disclosure agreements will not be
breached, that there will be adequate remedies for any such breach, or that
the Company's production systems, process and operations will not be
reverse engineered or independently developed. There can be no assurance
that the steps taken by the Company will prevent misappropriation of its
technology. Sales of the Company's wafers and package-ready devices
depends heavily on the Company's trade secrets related to its MOCVD
technology and processes. Failure to maintain trade secrets in this area
would have a material adverse effect on the sales of the Company's wafer
and package-ready devices. Although the Company holds six U.S. patents,
these patents do not claim any material aspect of the current or planned
commercial versions of the Company's systems, wafers or package-ready
devices. The Company is actively pursuing patents on its recent
inventions, but there can be no assurance that patents will be issued from
any pending applications, or that the claims in any existing or future
patents issued or licensed to the Company will not be challenged, invali-
dated or circumvented, or that any of the Company's pending or future
patent applications will result in an issued patent with the scope of the
claims sought by the Company, if at all. The Company has not been notified
and is not aware of any third parties that are infringing its intellectual
property right, or that the Company is infringing intellectual property
rights of third parties, but there can be no assurance that the Company
will not face such claims or infringements in the future. There can be no
assurance that the Company will be successful in any resulting litigation
or obtaining a license on commercially reasonable terms, if at all, or will
not be prevented from engaging in certain activities. Defense and
prosecution of infringement claims can be expensive and time consuming,
regardless of outcome, and can result in the diversion of substantial
financial, management and other resources of the Company. In addition, the
laws of certain other countries may not protect the Company's intellectual
property to the same extent as the laws of the United States. See
"Business -- Intellectual Property."
Risks Arising from Reversal of Declaratory Judgment in Rockwell Patent
Litigation. To permit sales of its MOCVD production systems, the Company
was in 1992 granted a non-exclusive license (the "Rockwell License") under
U.S. patent number 4,368,098 (the "Rockwell Patent") issued on January 11,
1983 to Rockwell. The Rockwell Patent claimed, among other things,
intellectual property rights in the general use of MOCVD in unspecified
applications and expires in 2000. In October 1996, the Company initiated
discussions with Rockwell to receive additional licenses to permit the
Company to utilize MOCVD technology to manufacture and sell certain wafers
and package-ready devices. On November 15, 1996, in litigation not
involving the Company, the Rockwell Patent was declared invalid by the U.S.
Court of Federal Claims. The Company believes that Rockwell will appeal
this judgment. In the event the foregoing judgment is reversed by a court
of appeal, the Company may be liable to Rockwell for royalty payments, as
well as other amounts which the Company may ultimately be deemed to owe
Rockwell in connection with the sales of its systems, wafers and package-
ready devices. Moreover, the Company may require additional licenses from
Rockwell under the Rockwell Patent in order to manufacture and sell certain
wafers and package-ready devices. There can be no assurance that the
foregoing judgment will not be reversed, that the Rockwell License can be
maintained or that licenses for wafers and package-ready devices can be
obtained or maintained on commercially feasible terms, if at all. The
failure to maintain or obtain such licenses could have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Intellectual Property."
Risks Related to Dependence on Limited Product Offerings. To date,
substantially all of the Company's revenues have resulted from sales of its
TurboDiscTM systems. The Company anticipates that a significant portion of
its revenues in fiscal 1997 will be derived from the sale of these systems.
The Company has recently developed the capacity to produce compound
semiconductor wafers and package-ready devices. The Company's future
success depends on whether it can develop and introduce in a timely manner
new products, including improvements to its existing products, which
compete effectively on the basis of price and performance and which
adequately address customer requirements. The success of new product
introductions is dependent upon several factors, including timely
completion of new product designs, achievement of acceptable yields and
market acceptance. No assurance can be given that the Company's product
and process development efforts will be successful or that its new products
will achieve market acceptance. To the extent that such new product
introductions do not occur in a timely manner or the Company's or its
customers' products do not achieve market acceptance, the Company's
business, financial condition and results of operations would be materially
adversely affected. See "Business -- Products."
Manufacturing Risks. The manufacture of systems, wafers and package-
ready devices are each subject to significant risks. The manufacture of
systems is a highly complex and precise process. The Company increasingly
outsources the fabrication of certain components and sub-assemblies of the
systems it manufactures. Any impairment in the supply of these components
or sub-assemblies would have a material adverse effect on revenues derived
from sales of the Company's systems. In addition, any reduction in the
precision of these components will result in sub-standard end products and
would cause delays and interruptions in the production cycle. To the
extent the Company experiences shipment delays for its systems or wafers or
package-ready devices, the Company's operating results would be materially
adversely affected. The Company relies exclusively on its own production
capabilities for manufacturing wafers and package-ready devices, and such
operations are subject to additional manufacturing risks. Minute
impurities, difficulties in the production process, defects in the
epitaxial growth of the package-ready devices' constituent compounds, wafer
breakage or other factors can cause a substantial percentage of wafers and
package-ready devices to be rejected or numerous package-ready devices on
each wafer to be nonfunctional. Such factors may result in lower than
expected production yields, which would delay product shipments and
materially adversely affect the Company's operating results. There can be
no assurance that the Company will maintain acceptable production yields in
the future. Because the majority of the Company's costs of manufacture are
relatively fixed, the number of shippable package-ready devices per wafer
for a given product is critical to the Company's operating results.
Additionally, because the Company manufactures all of its products at its
facility in Somerset, New Jersey, and such components, products and systems
are not readily available from other sources, any interruption in
manufacturing resulting from fire, natural disaster, equipment failures or
otherwise would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business --
Manufacturing."
Reliance on International Sales; Reliance on Single Distributor. Sales
to customers located outside the United States accounted for approximately
58.6%, 36.0% and 42.5% of the Company's revenues in fiscal 1994, 1995 and
1996, respectively. The Company believes that such international sales
will continue to account for a significant percentage of the Company's
revenues. In particular, to market and service its systems in seven Asian
countries, the Company relies on a single marketing, distribution and
service provider, Hakuto & Co., Ltd. ("Hakuto"). A substantial portion of
the Company's sales of systems in Asia is to Hakuto. The Company's
agreement with Hakuto has an initial term of seven years but allows for
earlier termination upon 60 days notice. Furthermore, the agreement is
presently under renegotiation. There can be no assurance that Hakuto will
continue to adequately and effectively market and service the Company's
systems. Termination of the Company's relationship with Hakuto would
result in significant delays or interruption in the Company's marketing and
service programs in Asia and would have a material adverse effect on the
Company's business, financial condition and results of operations. The
Company competes with its competitors for relationships with reliable
international distributors. There can be no assurance that international
distributors, including Hakuto, will not market products in competition
with the Company's in the future or will not otherwise reduce or
discontinue their relationships with or support of the Company and its
products, or that the Company will be able to attract and retain qualified
international distributors in the future. The inability of the Company to
obtain qualified new international distributors could have a material
adverse effect on the Company's business, financial condition and results
of operations. In general, the Company's international sales are subject
to risks different from domestic U.S. sales, including U.S. and
international regulatory requirements and policy changes, U.S. and
international export controls, political and economic instability,
increased installation costs, difficulties in accounts receivable
collection, exchange rates affecting end-market purchasers, tariffs and
other barriers, extended payment terms, difficulty in staffing and managing
international operations, dependence on and difficulties in managing inter-
national distributors or representatives and potentially adverse tax
consequences. In particular, exports of the Company's 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. The Company, on certain occasions,
has been denied authorization, particularly with respect to the People's
Republic of China, and there is no assurance that export licenses will be
granted in the future. Failure to receive such authorizations could have a
material adverse effect on the Company's business, financial condition and
results of operations. Furthermore, although the Company seeks to meet
technical standards established by non-U.S. regulatory bodies, there can be
no assurance that the Company will be able to comply with such standards in
the future. In addition, the laws of certain countries may not protect the
Company's trade secrets and intellectual property to the same extent as the
laws of the United States. See "Business -- Sales and Marketing."
Dependence on Key Sole Source Suppliers. The Company does not maintain
any long-term supply agreements with any of its suppliers, and the majority
of the critical components and sub-assemblies included in the Company's
production systems, as well as certain raw materials required for the
fabrication of the Company's wafers and package-ready devices, are obtained
from sole source suppliers or a limited number of suppliers. The
manufacture of certain components and sub-assemblies and raw materials is
very complex and requires long lead times. The Company's systems cannot be
produced without certain sole-sourced, critical components. In addition,
the production of the Company's wafers and package-ready devices is
inherently dependent on an adequate source of raw materials. Alternative
suppliers for many of these components and materials may not be readily
available. In addition, the Company intends to rely to an increasing
degree on outside suppliers because of their specialized expertise. The
Company's reliance on a limited group of suppliers, and particularly on
sole source suppliers, involves several risks, including the potential
inability to obtain an adequate supply of components and materials, and
reduced control over pricing and delivery time. To date, the Company has
experienced occasional delays in obtaining components and materials. There
can be no assurance that delays or shortages caused by suppliers will not
occur in the future. The failure to obtain adequate, timely deliveries of
sub-assemblies and components and materials could prevent the Company from
meeting scheduled shipment dates, which could damage relationships with
current and prospective customers and could materially adversely affect the
Company's business, financial condition and results of operations. See
"Business -- Manufacturing."
Risks Arising from Rapid Technological Change; Reliance Upon Continued
Product Development. The markets in which the Company and its customers
compete are characterized by rapid technological change, evolving industry
standards and continuous improvements in products and services. Due to
continual changes in these markets, the Company's future success will
depend upon whether it can improve its production systems and processes,
wafers and package-ready devices and to develop new technologies that
compete effectively on the basis of price and performance and adequately
address customer requirements. There can be no assurance that the
Company's research and development staff will develop new products in time
or with sufficient performance characteristics to meet the demands of the
market. The Company's production systems must remain competitive on the
basis of cost of ownership, process performance and capital productivity.
Because it is generally not possible to predict the time required and costs
involved in reaching certain research, development and engineering
objectives, actual development costs could exceed budgeted amounts and
estimated product development schedules could require extension. Any delay
or inability to overcome such difficulties would materially adversely
affect the Company's business, financial condition and results of
operations. Additionally, if new products or enhancements experience
reliability or quality problems, the Company could encounter a number of
difficulties, including reduced orders, higher manufacturing costs, delays
in collection of accounts receivable and additional service and warranty
expenses, all of which could materially adversely affect the Company's
business, financial condition and results of operations. See "Business --
Compound Semiconductor Process Technology," "-- Products," "-- Research and
Development" and "-- Competition."
Risks Regarding the Acceptance of New Compound Semiconductor Technology
By Customers. The Company's systems utilize MOCVD technologies. These
same technologies are used in the Company's production of wafers and
package-ready devices. MOCVD technology differs significantly from the
technological approaches used by others for each of these products. The
semiconductor industry is especially resistant to the introduction of
changes in process or approach in a manufacturing cycle which is quite
long, consists of many separate process events and suffers from limited
control measurement points during the overall fabrication process.
Accordingly, the Company's customers may resist changing systems or
accepting any new technological approach. Additionally, the inclusion of
compound semiconductor wafers and package-ready devices increases the cost
of electronic end products and, therefore, limits the feasibility of
commercial applications of such products. The Company is seeking to per-
suade certain potential customers to incorporate compound semiconductor-
based package-ready devices for many of their high-performance
applications. Because a substantial investment is required by
semiconductor manufacturers to install and integrate capital equipment into
a production line, these manufacturers may tend to choose compound
semiconductor equipment suppliers based on past relationships, product
compatibility and proven operating performance. The Company's wafer and
package-ready device customers may be reluctant to re-tool their equipment
and production systems to accept these new technologies, may be reluctant
to rely upon a smaller supplier such as the Company for package-ready
devices, and may be reluctant to pay higher device costs. There can be no
assurance that the Company's MOCVD-based products will achieve broad market
acceptance. See "Business -- Compound Semiconductor Process Technology,"
"Business -- Products" and "Business -- Customers."
Risks of Increased Competition. The Company faces substantial
competition from both established competitors and potential new entrants.
The Company believes that the primary competitive factors in the markets in
which the Company's products compete are yield, throughput, capital and
direct costs, system performance, size of installed base, breadth of
product line and customer satisfaction, as well as customer commitment to
competing technologies. The Company's principal competitors in the market
for MOCVD systems include Aixtron GmbH ("Aixtron"), Nippon Sanso K.K.
("Nippon Sanso") and Thomas Swann Ltd. ("Thomas Swann"). The Company's
principal competitors for sales of wafers and package-ready devices include
Epitaxial Products International, Kopin Corp. and Q.E.D. The Company also
faces competition from manufacturers that produce wafers and package-ready
devices for their own use. The Company may experience competition from
corporations that have been in business longer than the Company and have
broader product lines, more experience with high volume manufacturing,
broader name recognition, substantially larger installed bases, alternative
technologies which may be better established than the Company's and
significantly greater financial, technical and marketing resources than the
Company. There can be no assurance that the Company will successfully
compete with these competitors in the future or that the Company's
competitors will not develop enhancements to or future generations of
competitive products that will offer price and performance features that
are superior to those of the Company. The Company believes that in order
to remain competitive, it must invest significant financial resources in
developing new product features and enhancements and in maintaining cus-
tomer satisfaction worldwide. In marketing its products, the Company may
face competition from suppliers employing new technologies in order to
extend the capabilities of competitive products beyond their current limits
or increase their productivity. In addition, increased competitive
pressure could lead to intensified price-based competition, resulting in
lower prices and margins, which would materially adversely affect the
Company's business, financial condition and results of operations. See
"Business -- Competition."
Risks from Continued Existence of Control Group. Prior to consummation
of the Offering, Jesup & Lamont Merchant Partners, L.L.C. ("JLMP"), the
Company's majority shareholder, beneficially owned approximately 72.9% of
the equivalent Common Stock outstanding, not including warrants to purchase
980,392 which become exercisable on May 6, 1997. After the Offering, JLMP,
together with the Company's directors and officers, will beneficially own
approximately 52.9% of the equivalent Common Stock outstanding, not
including warrants to purchase 980,392 which become exercisable on May 6,
1997. Accordingly, the Company's majority shareholder and management will
continue to hold sufficient voting power to control the business and
affairs of the Company for the foreseeable future. Such concentration of
ownership may also have the effect of delaying, deferring or preventing a
change in control of the Company. Reuben F. Richards, Jr., the Company's
President, Chief Executive Officer and a director, Howard R. Curd and
Howard F. Curd, each a director of the Company, are three of the five
members of JLMP. To guarantee the Company's demand note facility, Thomas
J. Russell, the Chairman of the Company's Board of Directors, has granted
the Company's lender a security interest over certain assets he controls.
The Company intends to use up to $10.0 million of the net proceeds from the
Offering to repay the borrowings under the demand note facility.
Additionally, Mr. Russell is one of three trustees of a trust which is a
member of JLMP. See "Use of Proceeds," "Principal Shareholders" and
"Certain Transactions."
Risks Related to Dependence on Key Employees. The future success of
the Company is dependent, in part, on whether the Company can attract and
retain certain key personnel, including materials scientists and operations
and finance personnel. The Company anticipates that it will need to hire
additional skilled personnel to expand all areas of its business to
continue to grow. The competition for such employees is extremely intense.
There can be no assurance that the Company will be able to retain its
existing personnel or attract additional qualified employees in the future,
failure of which would have a material adverse effect on the Company's
business, financial condition and results of operations.
Risks Related to Environmental Regulation. The Company 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 Company has retained an
environmental consultant to advise it in complying with applicable
environmental and health and safety laws and regulations. There can be no
assurance, however, that future changes in such laws and regulations will
not result in expenditures or liabilities, or in restrictions on the
Company's operation, that could have such an effect. The production of
wafers and package-ready devices involves the use of certain hazardous raw
materials, including, but not limited to, ammonia, phosphine and arsenic.
The Company's expansion to offer wafers and package-ready devices will
require the increased usage and maintenance of these materials on the
Company's premises. There can be no assurance that the Company's control
systems will be successful in preventing a release of these materials or
other adverse environmental conditions, which could cause a substantial
interruption in the Company's operations. Such an interruption could have
a material adverse effect on the Company's business, financial condition
and results of operation. See "Business -- Environmental Regulations."
Risks Arising from Absence of Public Market; Possible Volatility of
Stock Price. There has been no prior public market for the Company's
Common Stock. Consequently, the initial public offering price has been
determined by negotiations between the Company and Donaldson, Lufkin &
Jenrette Securities Corporation and Needham & Company, Inc., as
representatives of the underwriters. There can be no assurance that an
active public market for the Common Stock will develop or be sustained
after the Offering or that the market price of the Common Stock will not
decline below the initial public offering price. The Company believes that
a variety of factors could cause the price of the Company's Common Stock to
fluctuate, perhaps substantially, including: announcements of developments
related to the Company's business; quarterly fluctuations in the Company's
actual or anticipated operating results and order levels; general
conditions in the compound semiconductor and related industries or the
worldwide economy; announcements of technological innovations; new products
or product enhancements by the Company or its competitors; developments in
patents or other intellectual property rights and litigation; and develop-
ments in the Company's relationships with its customers, distributors and
suppliers. In addition, in recent years the stock market in general, and
the market for shares of small capitalization and semiconductor industry-
related stocks in particular, have experienced extreme price fluctuations
which have often been unrelated to the operating performance of affected
companies. Any such fluctuations in the future could adversely affect the
market price of the Company's Common Stock. See "Underwriting."
Risks of Uncertainty of Additional Funding. The Company may require
substantial additional capital to fund the Company's operations through
fiscal 1997 and may need to raise additional funds through public or
private financings. No assurance can be given that additional financing
will be available or that, if available, it will be available on terms
favorable to the Company or its shareholders. If additional funds are
raised through the issuance of equity securities, the percentage ownership
of then current shareholders of the Company will be reduced and such equity
securities may have rights, preferences or privileges senior to those of
the holders of the Company's Common Stock. If adequate funds are not
available to satisfy either short or long-term capital requirements, the
Company may be required to limit its operations significantly. The
Company's capital requirements will depend on many factors, including, but
not limited to, the rate at which the Company develops and introduces its
products, the market acceptance and competitive position of such products,
the levels of promotion and advertising required to launch and market such
products and attain a competitive position in the marketplace, and the
response of competitors to the products based on the Company's tech-
nologies. See "Use of Proceeds" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
Effect of Certain Anti-Takeover Provisions. The Company's Restated
Certificate of Incorporation (the "Certificate of Incorporation") and the
New Jersey Business Corporation Act contain certain provisions that could
delay or impede the removal of incumbent directors and would make more
difficult a merger, tender offer or proxy contest involving the Company,
even if such a transaction were beneficial to the interests of the
shareholders, or could discourage a third party from attempting to acquire
control of the Company. The Company has authorized 5,882,353 shares of
Preferred Stock, which the Company could issue without further shareholder
approval and upon such terms and conditions, and having such rights,
privileges and preferences, as the Board of Directors may determine. The
Company has no current plans to issue any Preferred Stock. The Company is
also subject to the New Jersey Shareholders Protection Act (the "Protection
Act"), which prohibits certain New Jersey corporations from engaging in
business combinations (including mergers, consolidations, significant asset
dispositions and certain stock issuances) with any Interested Shareholder
(defined to include, among others, any person that becomes a beneficial
owner of 10% or more off the affected corporation's voting power) for five
years after such person becomes an Interested Shareholder, unless the
business combination is approved by the Board of Directors prior to the
date the shareholder became an Interested Shareholder. In addition, the
Protection Act prohibits any business combination at any time with an
Interested Shareholder other than a transaction that (i) is approved by the
Board of Directors prior to the date the Interested Shareholder became an
Interested Shareholder, or (ii) is approved by the affirmative vote of the
holders of two-thirds of the voting stock not beneficially owned by the
Interested Shareholder, or (iii) satisfies certain "fair price" and related
criteria. These provisions could have the effect of delaying, deferring or
preventing a change in control of the Company and adversely affect the
voting and other rights of holders of Common Stock. Further, the Company's
Certificate of Incorporation and Amended and Restated By-Laws include
provisions to reduce the personal liability of the Company's directors for
monetary damages resulting from breaches of their fiduciary duty and to
permit the Company to indemnify its directors and officers to the fullest
extent permitted by New Jersey law. See "Description of Capital Stock."
Risks of Issuance of Blank Check Preferred Stock. The Company's Board
of Directors is authorized by the Company's Certificate of Incorporation
and By-laws to issue, without shareholder approval, up to 5,882,353 shares
of Preferred Stock in one or more classes or series. The Board of
Directors, without further approval of the shareholders, is authorized to
designate in any such class or series resolution, such par value and such
priorities, power, preferences and relative, participating, optional or
other special rights and qualifications, limitations and restrictions as it
shall determine. Such characteristics may be superior to those of the
Common Stock and could adversely affect the voting power or other rights of
the holders of Common Stock. The issuance of Preferred Stock or of rights
to purchase Preferred Stock could be used to discourage an unsolicited
effort to acquire control of the Company. The potential for issuance of
this "blank check preferred stock" may have an adverse impact on the market
price of the Common Stock outstanding after the Offering. See "Description
of Capital Stock."
Risks Arising from Substantial Dilutive Effect of the Offering.
Purchasers of the Common Stock will experience immediate and substantial
dilution in net tangible book value per share of Common Stock from the
initial public offering price per share of Common Stock. Assuming an
initial public offering price at the midpoint of the range of the estimated
offering prices on the front cover hereof, new investors would suffer an
immediate dilution of $6.44 calculated by taking the difference in pro
forma net tangible book value per share after the Offering ($3.56) and
deducting this amount from the initial public offering price. See
"Dilution."
Risks of Sales of Common Stock Issuable Upon Exercise of Options and
Warrants. The Company currently has outstanding stock options to purchase
464,017 shares of Common Stock and warrants to purchase 3,565,377 shares of
Common Stock. Subsequent to the exercise of such options or warrants, and
to the issuance of shares of Common Stock, such shares may be offered and
sold by the holders thereof subject to the provisions of Rule 144 under the
Securities Act, or pursuant to an effective registration statement filed by
the Company. Upon expiration of certain contractual obligations between
certain holders and the Underwriters, 777,657 shares of Common Stock will
become eligible for sale without restrictions under Rule 144(k), and an
additional 2,216,804 shares will become eligible for sale subject to the
restrictions of Rule 144. Sales of substantial amounts of such shares
could adversely affect the market price for the Company's Common Stock.
See "Shares Eligible for Future Sale."
Risk of No Dividends. The Company has never declared or paid dividends
on its Common Stock since its formation. The Company currently does not
intend to pay dividends in the foreseeable future. The payment of
dividends, if any, in the future will be at the discretion of the Board of
Directors.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,500,000 shares
of Common Stock being offered hereby are estimated to be $22,540,000
($26,027,500 if the underwriters' over-allotment option is exercised in
full), after deducting the underwriting discounts and commissions and
estimated offering expenses.
Of the net proceeds, $10,000,000 will be used to repay debt; the entire
principal amount outstanding under the Company's demand note facility with
First Union National Bank, which has been used for capital expenditures in
connection with the build-out of the Company's manufacturing facility will
be paid in full. This demand note facility bears interest at a rate equal
to the six month LIBOR plus 75 basis points, currently 6.2968%. The
remaining net proceeds allocated to debt repayment, if any, will be used to
repay a portion of the Company's outstanding long-term indebtedness
consisting of subordinated notes. These subordinated notes bear interest
at a rate of 6%. Approximately $8,000,000 of the net proceeds are expected
to be used for capital expenditures to expand the Company's manufacturing
facility and the balance of the net proceeds are expected to be used for
general corporate purposes including working capital. The Company may also
use a portion of the net proceeds to fund acquisitions of complementary
businesses, products or technologies in the semiconductor sector. Although
the Company periodically reviews potential acquisition opportunities, there
are no current agreements with respect to any such transactions. Pending
such uses, the net proceeds of the Offering will be invested in short-term,
investment-grade, income producing investments.
The Company believes that the remaining net proceeds from the Offering
and the funds available under its demand note facility, which after being
repaid will be available in its entirety, will be sufficient to fund the
Company's anticipated facility expansion, and to provide the Company with
adequate working capital at least through fiscal 1997. However, there can
be no assurance that events in the future will not require the Company to
seek additional capital sooner or, if so required, that adequate capital
will be available on terms acceptable to the Company.
DIVIDEND POLICY
The Company has never declared or paid dividends on its Common Stock
since its formation. The Company currently does not intend to pay
dividends in the foreseeable future so that it may reinvest its earnings in
the development of its business. The payment of dividends, if any, in the
future will be at the discretion of the Board of Directors.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1996, and the capitalization of the Company as adjusted to
give effect to the sale by the Company of 2,500,000 shares of Common Stock
being offered hereby (at the assumed initial public offering price of
$10.00 per share) and the application of the estimated net proceeds
therefrom. This table should be read in conjunction with the Company's
Financial Statements and Notes thereto and "Selected Financial Data"
included elsewhere in this Prospectus.
____________________________
(1) In October 1996, the Company established a $10.0 million demand note
facility with First Union National Bank. As of December 31, 1996, the
Company had drawn down $6 million from this facility. The Company
intends to use $10 million of the net proceeds of the Offering to pay
down the balance outstanding under this facility. The remaining net
proceeds allocated to debt repayment, if any, will be used to repay a
portion of the Company's outstanding long-term indebtedness consisting
of subordinated notes. See "Use of Proceeds."
(2) Excludes: (i) 647,059 shares of Common Stock reserved for issuance
under the Company's 1995 Incentive and Non-Statutory Stock Option
Plan, as amended, of which 339,412 shares were subject to outstanding
options at exercise prices varying from $3.03 per share to $10.20 per
share, (ii) warrants to purchase 9,103 shares of Common Stock at an
exercise price of $17.00 per share exercisable until July 24, 1997,
(iii) warrants to purchase 2,330,784 shares of Common Stock at an
exercise price of $4.08 per share, exercisable until May 1, 2001 and
(iv) warrants to purchase 1,225,490 shares of Common Stock at an
exercise price of $10.20 per share, exercisable until September 1,
2001.
DILUTION
The net tangible book value (deficiency) of the Company as of December
31, 1996 was $(2,973,796) or approximately $0.99 per share. Net tangible
book value (deficiency) per share represents the amount of the Company's
shareholders' equity (net capital deficiency), less intangible assets
($3,297,313 at December 31, 1996 comprised of $3,228,572 of deferred
financing and offering costs and $68,741 of deferred patent costs), divided
by 2,994,461 shares of Common Stock outstanding. Net tangible book value
dilution per share represents the difference between the amount per share
paid by purchasers of shares of Common Stock in the Offering made hereby
and the pro forma net tangible book value per share of Common Stock
immediately after completion of the Offering. After giving effect to the
sale by the Company of 2,500,000 shares of Common Stock offered hereby
(assuming an initial public offering price of $10.00 per share and after
deducting underwriting discounts and commissions and estimated offering
expenses payable by the Company) and the application of the estimated net
proceeds therefrom, the pro forma net tangible book value of the Company as
of December 31, 1996 would have been $19,566,204 or approximately $3.56 per
share. This represents an immediate increase in net tangible book value of
$4.55 per share to existing shareholders and an immediate dilution in net
tangible book value of $6.44 per share to the purchasers of Common Stock in
the Offering, as illustrated in the following table:
The foregoing table assumes no exercise of any outstanding stock
options or warrants.
The following table sets forth, on a pro forma basis as of December
31, 1996, the difference between the existing shareholders and the
purchasers of shares in the Offering with respect to the number of shares
purchased from the Company, the total consideration paid and the average
price per share paid assuming an initial public offering price of $10 per
share:
At December 31, 1996, there were outstanding: stock options to
purchase 437,546 shares of Common Stock at a weighted average exercise
price of $5.47 per share, warrants to purchase 9,103 shares of Common Stock
at $17.00 per share, warrants to purchase 2,330,784 shares of Common Stock
at $4.08 per share and warrants to purchase 1,225,490 shares of Common
Stock at $10.20 per share. To the extent that these options or warrants
are exercised, there will be further dilution in the aggregate to new
investors.
SELECTED FINANCIAL DATA
The following selected financial data of the Company is qualified by
reference to and should be read in conjunction with the Financial State-
ments and the Notes thereto, and Management's Discussion and Analysis of
Financial Condition and Results of Operations included elsewhere in this
Prospectus. The financial data included in this table have been selected
by the Company and have been derived from the Company's financial
statements. The Statement of Income Data set forth below with respect to
fiscal 1996, 1995 and 1994 and the Balance Sheet Data as of September 30,
1996 and 1995, are derived from the audited financial statements included
elsewhere in this Prospectus which financial statements have been audited
by Coopers & Lybrand L.L.P., whose report with respect thereto appears
elsewhere in this Prospectus. The Statement of Income Data for fiscal 1993
and 1992 and the Balance Sheet Data as of September 30, 1994, 1993 and 1992
are derived from audited financial statements not included herein. The
financial data as of December 31, 1996, and for the three-month periods
ended December 31, 1995 and 1996 are derived from unaudited consolidated
financial statements that, in the opinion of the management of the Company,
reflect all adjustments (consisting only of normal recurring accruals)
necessary for a fair presentation of the financial position and results of
operations for these periods. Operating results for the three months ended
December 31, 1996 are not necessarily indicative of the results that may be
expected for the entire fiscal year ending September 30, 1997.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
EMCORE designs and develops compound semiconductor materials and
process technology and is a leading 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.
EMCORE believes that its proprietary TurboDiscTM deposition technology is
the critical enabling process step in the cost effective, high volume
manufacture of high-performance electronic and optoelectronic devices. The
Company was founded in 1984 to engage in advanced materials science
research and development and to develop and manufacture a viable production
platform for the processing of compound semiconductor materials. In 1986,
the Company shipped its first TurboDiscTM system and by 1990, had sold
systems in the United States, Asia and Europe.
To date, the Company has sold over 180 systems worldwide. From fiscal
1986 through fiscal 1993, the Company's systems revenues consisted
principally of sales of research and development systems and small pilot
production systems. Beginning in fiscal 1994, due to the increased market
demand for compound semiconductor devices, the Company's systems revenues
have principally consisted of the sale of larger production platforms.
Historically, the Company's revenues have consisted primarily of the sales
of MOCVD systems and components, government-sponsored research contracts
and service contracts. The Company's systems sales contracts typically
require partial advance payments during the design and production phases of
the systems manufacturing process. Such advance payments have historically
represented a significant funding source to the Company.
Prior to fiscal 1996, the Company was profitable for six consecutive
quarters. In fiscal 1996, the Company expanded its product offerings to
include wafers and package-ready devices and incurred a consolidated net
loss of $3.2 million, which primarily resulted from significant initial
operating expenses related to the Company's expansion. The Company has
increased its expense levels to support anticipated growth in demand for
each of its compound semiconductor production systems, wafer and package-
ready device product offerings, including the hiring of additional
manufacturing, research, engineering, sales and administrative personnel
and has also increased its investments in inventory and capital equipment.
As a result, the Company is dependent upon increasing revenues and profit
margins to achieve profitability. If the Company's sales and profit
margins do not increase to support the higher levels of operating expenses,
the Company's business, financial condition and results of operations would
be materially adversely affected. The Company currently anticipates
continuing to expand its manufacturing capacity for the production of
wafers and package-ready devices, which entails substantial additional
capital expenditures. The Company currently anticipates expending a
significant portion of the net proceeds of the Offering for this purpose.
The Company incurred a substantial loss in the quarter ended December 31,
1996. The loss was primarily attributable to continuing start-up operating
expenses associated with the Company's two new product lines. In the
future, the Company expects to derive significant revenues from sales of
wafers and package-ready devices. However, the Company's ability to derive
any such revenues is subject to certain risks and uncertainties, including
yield, process and capacity related risks and risks associated with the
market acceptance of such products. There can be no assurance that the
Company will be successful in developing or marketing such wafers and
package-ready devices. The Company's failure to develop or market such
products would have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company sells its production systems worldwide and has generated a
significant portion of its sales to customers outside the United States.
In fiscal 1994, 1995 and 1996 and the first fiscal quarter of 1997,
international sales constituted 58.6%, 36.0%, 42.5% and 64.0%,
respectively, of revenues. The Company has made international sales in
Belgium, France, Germany, Italy, Japan, Korea, the People's Republic of
China, Sweden, Taiwan and the United Kingdom. In fiscal 1996,
approximately two-thirds of the Company's international sales were made to
customers in Asia, particularly in Japan. The Company anticipates that
international sales will continue to account for a significant portion of
revenues. However, the Company's international sales are subject to
certain risks and uncertainties, including international regulatory
requirements and policy changes, export controls, tariffs and other
barriers, and dependence on and difficulties in managing international
distributors. There can be no assurance that the Company will continue to
derive significant revenues from international sales.
As of December 31, 1996, the Company had an order backlog of
approximately $23.8 million, consisting of $20.7 million of production
systems, $1.0 million of research contracts and $2.1 million of package-
ready devices, compared to a backlog of $19.0 million as of December 31,
1995, consisting of $17.2 million of production systems and $1.8 million of
research contracts. This increase in backlog was a result of the increased
market acceptance of the Company's production systems and multiple unit
orders for such systems and the introduction of the Company's package-ready
device products. The Company includes in backlog only customer purchase
orders that have been accepted by the Company and for which shipment dates
have been assigned within the twelve months to follow and research
contracts that are in process or awarded. The Company receives partial
advance payments or irrevocable letters of credit on most production system
orders and has never experienced a purchase order cancellation.
The Company recognizes systems and components, wafers and package-
ready device revenue upon shipment. The Company incurs certain
installation and warranty costs subsequent to system shipment which are
estimated and accrued at the time the sale is recognized. The Company
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, the Company recognizes revenue to
the extent of costs incurred plus a pro rata portion of estimated gross
profit as stipulated in such contracts, based on contract performance. The
Company's research contracts require the development or the evaluation of
new material applications and have a duration of six to thirty-six 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.
RESULTS OF OPERATIONS
The following table sets forth the Statement of Operations data of the
Company expressed as a percentage of total revenues for the periods
indicated.
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30, 1995 AND 1996
Revenues. Revenues increased 53.6% from $18.1 million in fiscal 1995 to
$27.8 million in fiscal 1996. This increase was primarily due to greater
sales of the Company's compound semiconductor production systems resulting
from broader acceptance of these products, coupled with an increased market
demand for compound semiconductor devices, and to a lesser extent,
increased service revenues, which include parts and service contracts,
resulting from the Company's growing installed base. In addition, in fiscal
1996, the Company's research contract revenues increased as a result of an
arrangement with General Motors to develop and enhance certain magneto-
resistive package-ready devices which generated approximately $1.6 million
in revenue. Revenues derived from international sales increased 81.5% from
$6.5 million in fiscal 1995 to $11.8 million in fiscal 1996. This increase
was primarily due to an increased demand for the Company's production
systems.
Cost of Sales/Gross Profit. The Company's cost of sales includes direct
material and labor costs, manufacturing and service overhead, and
installation and warranty costs. Cost of sales increased 87.9% from $9.9
million in fiscal 1995 to $18.6 million in fiscal 1996. Gross profit
decreased from 45.3% of revenues in fiscal 1995 to 33.0% of revenues in
fiscal 1996. This decrease was principally attributable to: (i) the sale
of three systems at a loss for strategic reasons, (ii) competitive pricing
conditions prevailing generally in the market and a resulting decrease in
the average selling price of the Company's production systems, (iii) costs
associated with system enhancements and (iv) an increase in the Company's
cost of obtaining certain components. The sales for strategic reasons were
made to several leading universities in key geographic areas in order to
increase the Company's visibility and to enhance its reputation in the
technology and research community. The Company believes that the three
sales made for strategic reasons resulted in an approximately 4% decline in
gross profit in fiscal 1996.
Selling, General and Administrative. Selling, general and administrative
expenses increased 44.4% from $4.5 million in fiscal 1995 to $6.5 million
in fiscal 1996. This increase was primarily due to increased marketing
expenses associated with the Company's higher level of production systems
sales and the hiring of additional personnel to support the Company's
expanded activities. As a percentage of revenues, selling, general and
administrative expenses decreased from 24.5% in fiscal 1995 to 23.5% in
fiscal 1996.
Research and Development. Research and development expenses include the
costs of internally-funded research and development projects, as well as
materials prototype product support expenses, which primarily include
employee and material costs, depreciation of capital equipment and other
engineering-related costs. Research and development expenses increased
184.2% from $1.9 million in fiscal 1995 to $5.4 million in fiscal 1996.
This increase was primarily due to the Company's increased research and
development activities relating to the initiation of its wafer and package-
ready device product lines. As a percentage of revenues, research and
development expenses increased from 10.2% in fiscal 1995 to 19.4% in fiscal
1996.
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30, 1994 AND 1995
Revenues. Revenues increased 101.1% from $9.0 million in fiscal 1994 to
$18.1 million in fiscal 1995. This increase was primarily due to increased
sales of the Company's production systems, and to a lesser extent an
increase in service revenues. Revenues derived from international sales
increased 22.6% from $5.3 million in fiscal 1994 to $6.5 million in fiscal
1995. This increase was primarily due to broader acceptance of the
Company's production systems.
Cost of Sales/Gross Profit. Cost of sales increased 90.4% from $5.2
million in fiscal 1994 to $9.9 million in fiscal 1995. Gross profit
increased from 42.3% of revenues in fiscal 1994 to 45.3% of revenues in
fiscal 1995. This increase was due to favorable product mix consisting of
a higher proportion of larger production systems with higher gross profit.
Selling, General and Administrative. Selling, general and administrative
expenses increased 73.1% from $2.6 million in fiscal 1994 to $4.5 million
in fiscal 1995. The increase was primarily due to increased marketing
expenses, including customer samples, associated with the Company's higher
level of systems sales and the hiring of additional personnel to support
the Company's expanded activities. As a percentage of revenues, selling,
general and administrative expenses decreased from 29.2% in fiscal 1994 to
24.5% in fiscal 1995 due to the growth in the Company's revenues.
Research and Development. Research and development expenses increased
72.7% from $1.1 million in fiscal 1994 to $1.9 million in fiscal 1995.
This increase was primarily due to increased research and development
activities relating to the development of new production systems for the
processing of gallium nitride used in the manufacture of blue high
brightness light emitting diodes ("HB LEDs"). As a percentage of
revenues, research and development expenses decreased from 11.8% in fiscal
1994 to 10.2% in fiscal 1995.
COMPARISON OF QUARTERS ENDED DECEMBER 31, 1995 AND 1996.
Revenues. Revenue increased 102% from $4.3 million in the quarter ended
December 31, 1995 to $8.6 million in the quarter ended December 31, 1996.
This increase was primarily due to greater sales of the Company's compound
semiconductor production systems resulting from broader acceptance of those
products, coupled with an increased market demand for compound
semiconductor devices. Revenues from international sales increased 352%
from $1.6 million in the quarter ended December 31, 1995 to $5.5 million in
the quarter ended December 31, 1996. This increase was primarily due to
broader acceptance of the Company's production systems.
Cost of Sales/Gross Profit. Cost of sales increased 142% from $2.8 million
for the quarter ended December 31, 1995 to $6.7 million for the quarter
ending December 31, 1996. Gross profit decreased from 34.6% of revenues in
the quarter ended December 31, 1995 to 21.7% of revenues in the quarter
ended December 31, 1996. The decrease was primarily attributable to higher
than anticipated installation expenses and the continued start-up costs
associated with the Company's new product lines.
Selling, General and Administrative. Selling, general and administrative
expenses increased 45.7% from $1.5 million for the quarter ended December
31, 1995 to $2.2 million for the quarter ended December 31, 1996. The
increase was primarily due to increased marketing and administrative costs
associated with the Company's higher level of revenues, including
additional personnel to support the Company's expanded activities. As a
percentage of revenues, selling, general and administrative expenses
decreased from 35.5% for the quarter ended December 31, 1995 to 25.6% for
the quarter ended December 31, 1996 due to the growth in the Company's
revenues.
Research and Development. Research and development expenses increased 184%
from $0.8 million in the quarter ended December 31, 1995 to $2.3 million in
the quarter ended December 31, 1996. This increase was primarily due to
increased research and development activities relating to the process
development of HB LEDs and the expenses associated with the production
process controls on indium antimonide, a magneto-resistor configuration.
As a percentage of total revenues, research and development expenses
increased from 18.5% in the quarter ended December 31, 1995 to 26.2% for
the quarter ended December 31, 1996.
QUARTERLY RESULTS OF OPERATIONS
The following tables present the Company's unaudited results of
operations expressed in dollars and as a percentage of revenues for the
eight most recently ended fiscal quarters. The Company 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 Financial
Statements and Notes thereto, included herein. The Company'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.
The Company has experienced a significant increase in demand for its
products as a result of greater demand for compound semiconductor systems,
materials and devices. Accordingly, during the nine quarters ended
December 31, 1996, the Company's quarterly revenues increased on average by
61.0% when comparing the corresponding quarterly revenues for the
immediately preceding fiscal year.
Historically, the Company has experienced less demand for its products
during the spring and summer, resulting in lower revenues during the
Company's first fiscal quarter. However, the Company's backlog has
continually increased throughout the nine quarters ended December 31, 1996.
The cost of sales remained relatively constant as a percentage of
revenues during fiscal 1995. Gross profit ranged from a high of 46.7% to a
low of 43.8%. The Company experienced a decline in gross profit beginning
in fiscal 1996. Gross profit ranged from a high of 35.7% to a low of 21.7%
and in the first quarter of fiscal 1997 was 21.7%. This decline was
principally attributable to (i) the sale of three systems at a loss for
strategic reasons, (ii) competitive pricing conditions prevailing generally
in the market and a resulting decrease in the average selling price of the
Company's production systems, (iii) costs associated with system
enhancements and (iv) an increase in the Company's cost of obtaining
certain components.
Operating expenses have generally increased in absolute dollars over
the quarters shown as the Company has increased staffing in research and
development, sales and marketing and general and administrative functions.
This increase was due to activities relating to the development of new
systems for the processing of gallium nitride used in the manufacture of
blue HB LEDs, the development of the Company's volume production systems
and the initiation of the Company's wafer and package-ready device
products. Selling, general and administrative expenses have increased as a
result of increased marketing and sales related activities, including the
hiring of additional personnel, commissions and customer samples, with the
exception of the quarter ended September 30, 1996, during which selling,
general and administrative expenses decreased as a result of a reduction in
the production of sales samples. As a percentage of total revenues,
operating expenses in fiscal 1995 have generally increased ranging from a
low of 34.3% to a high of 35.2%. In fiscal 1996, operating expenses as a
percentage of total revenues fluctuated from a low of 33.4% to a high of
54.1%. This general trend has continued, and for the first quarter of
fiscal 1997, operating expenses were 51.8% of total revenues.
The Company has experienced and expects to continue to experience
significant fluctuations in its quarterly results. Factors which have had
an influence on and may continue to influence the Company's operating
results in a particular quarter include the timing of receipt of orders,
cancellation, rescheduling or delay in product shipment or supply
deliveries, product mix, competitive pricing pressures, the Company's
ability to design, manufacture and ship products on a cost effective and
timely basis, including the ability of the Company to achieve and maintain
acceptable production yields for its wafers and package-ready devices, and
the announcement and introduction of new products by the Company and by its
competitors. The timing of sales of the Company's larger, volume
production systems may cause substantial fluctuations in quarterly
operating results due to the substantially higher per unit price of these
products relative to the Company's other products. There can be no
assurance that the compound semiconductor industry will not experience
downturns or slowdowns, which may materially and adversely affect the
Company's business, financial condition and results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has funded its operations through the
private sale of equity securities, issuance of subordinated debt, capital
equipment leases, bank and other third party borrowings, as well as advance
payments by customers, and in fiscal 1994 and fiscal 1995, cash flow
generated from operations. As of December 31, 1996, the Company had $1.9
million in cash, a working capital deficit of $2.0 million and subordinated
debt with a carrying value of $9.1 million.
Net cash provided from operations was $573,000 and $3.1 million during
fiscal 1994 and fiscal 1995, respectively. The cash provided in fiscal
1994 and 1995 was the result of improved operating performance, as
evidenced by profitable operations in fiscal 1995. Net cash used in
operating activities was $1.9 million in fiscal 1996 and $4.3 million in
the first fiscal quarter of 1997 and was primarily attributable to the
loss from operations, an increase in inventories and receivables offset, in
part by increases in current liabilities particularly advance billings and
accounts payable.
Net cash used for investing activities was $1.2 million, $1.3 million,
$7.1 million and $1.1 million in fiscal 1994, 1995, 1996 and the first
fiscal quarter of 1997, respectively. These expenditures included the
manufacture or purchase of capital equipment, including TurboDiscTM
production systems, and the purchases of characterization and test
equipment, computer equipment, research and development tools, and,
particularly during fiscal 1996, tenant improvements in the Company's
facility, including construction and refurbishment of two clean rooms. The
Company anticipates making additional capital expenditures primarily for
manufacturing expansion and improvements including additional cleanroom
space, TurboDiscTM production systems, research and development tools and
office equipment, including computers, furniture and fixtures. The Company
estimates its capital needs will be approximately $13 million in fiscal
1997.
The Company's financing activities provided net cash of approximately
$967,000, $90,000, $8.0 million and $6.0 million in fiscal 1994, 1995, 1996
and the first fiscal quarter of 1997, respectively. In fiscal 1994,
financing cash proceeds were primarily derived from the issuance of $1.0
million of 7.5% Notes to Hakuto. In fiscal 1995, cash proceeds were
generated from the sale of equity securities to senior management. During
fiscal 1996, the Company raised $11.0 million from the issuance of 6%
Subordinated Notes due 2001. Of this amount, $3.0 million was used to
repay the outstanding 7.5% Notes held by Hakuto.
On October 25, 1996, the Company entered into a $10.0 million demand
note facility with First Union National Bank. The facility bears interest
at the rate of the six-month LIBOR plus 75 basis points (6.2968% at
December 31, 1996) and is due and payable on demand. The facility has been
guaranteed by JLMP, the Company's majority shareholder. Collateral for the
facility, in the form of a custodial account containing marketable equity
securities, has been provided by Thomas J. Russell, the Chairman of the
Company's Board of Directors and Chairman of JLMP. The Company anticipates
using the borrowing under the demand note facility to finance a portion of
its capital expenditure requirements in fiscal 1997. As of December 31,
1996, the Company had borrowed $6.0 million under the demand note facility.
The Company believes that its cash on hand, the receipt of customer
deposits and the net proceeds from the Offering will be sufficient to repay
the borrowings under the demand note facility and to provide the Company
with adequate working capital at least through fiscal 1997. However, there
can be no assurance that events in the future will not require the Company
to seek additional capital sooner or, if so required, that adequate capital
will be available on terms acceptable to the Company. The Company is
presently in discussions with certain lenders to put in place a revolving
credit facility in place of the demand note facility.
The Company's net operating loss tax carryforwards and research
credits are subject to annual limitations under Sections 382 and 383 of the
Internal Revenue Code due to a change in ownership. A change in control as
defined by Section 381 of the Internal Revenue Code occurred in May 1995.
As of that date, the approximate net operating loss tax carryforward of
$7,200,000 will be limited to annual usage of approximately $680,000 per
year. The net operating loss tax carryforward of approximately $2,400,000
generated after the change in ownership will have no limits on annual
usage.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of" ("SFAS 121"). This pronouncement establishes accounting
standards for when impairment losses relating to long-lived assets,
identifiable intangibles and goodwill related to those assets should be
recognized and how the losses should be measured. The Company plans to
implement SFAS 121 in fiscal 1997. The adoption of SFAS 121 is not
expected to have an impact on the Company's financial position or results
of operations, since the Company's current policy is to monitor assets for
impairment and record any necessary write-downs.
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123 "Accounting for Stock Based Compensation" ("SFAS 123").
The provisions of SFAS 123 set forth the method of accounting for stock
based compensation based on the fair value of stock options and similar
instruments, but do not require the adoption of this preferred method.
SFAS 123 also requires the disclosure of additional information about stock
compensation plans, even if the preferred method of accounting is not
adopted. The Company plans to implement SFAS 123 in fiscal 1997. The
Company does not intend to change its method of accounting for stock based
compensation to the method under SFAS 123, but instead will continue to
apply the provisions of Statement of Financial Accounting Standards No. 25
"Accounting for Stock Issued to Employees." However, the Company will
disclose the pro forma effect of SFAS 123 on its net income and earnings
per share.
BUSINESS
COMPANY OVERVIEW
EMCORE designs and develops compound semiconductor materials and
process technology and is a leading 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.
EMCORE believes that its proprietary TurboDiscTM deposition technology is
the critical enabling process step in the cost-effective, volume
manufacture of high-performance electronic and optoelectronic devices. The
Company has recently capitalized on its technology base by expanding into
the design and production of compound semiconductor wafers and package-
ready devices. The Company offers its customers a complete, vertically-
integrated solution for the design, development and production of compound
semiconductor wafers and devices. EMCORE's production systems and process
technology have been purchased by, among others: General Motors, Hewlett
Packard Co., Hughes-Spectrolab, L.M. Ericsson AB, Lucent Technologies,
Inc., Motorola, Inc., Rockwell, Samsung Co., Siemens AG, Texas Instruments
Incorporated, Thomson CSF and thirteen of the largest electronics
manufacturers in Japan. In fiscal 1996, only one customer, Hughes-
Spectrolab, accounted for more than 10% of the Company's revenues; sales to
this customer accounted for 23.6% of the Company's revenues.
INDUSTRY OVERVIEW
Recent advances in information technologies have created a growing
need for power efficient, high-performance electronic systems that operate
at very high frequencies, have increased storage capacity and computational
and display capabilities, and can be produced cost-effectively in
commercial volumes. 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 which
are generally not achievable using silicon-based components. To address
these market demands, electronic system manufacturers are increasingly
incorporating new electronic and optoelectronic devices into their products
in order to improve performance or enable new applications.
Compound semiconductors have emerged as an enabling technology to meet
the complex requirements of today's advanced information systems. Compound
semiconductor devices can be used to perform individual functions as
discrete devices, such as HB LEDs, lasers and solar cells, or can be
combined into integrated circuits, such as transmitters, receivers and
alpha-numeric displays. Many compound semiconductor materials have unique
physical properties that allow electrons to move at least four times faster
than through silicon-based devices. This higher electron mobility enables
a compound semiconductor device to operate at much higher speeds than
silicon devices with lower power consumption and less noise and distortion.
In addition, unlike silicon-based devices, compound semiconductor devices
have optoelectronic capabilities that enable them to emit and detect light.
As a result, electronics manufacturers are increasingly integrating
compound semiconductor devices into their products in order to achieve
higher performance in a wide variety of applications, including wireless
communications, telecommunications, computers, and consumer and automotive
electronics.
Wireless Communications. Compound semiconductor devices have multiple
applications in wireless communication products, including cellular
telephones, pagers, PCS handsets, DBS systems and global positioning
systems ("GPS"). Compound semiconductor devices are used in high frequency
transmitters, receivers and power amplifiers to increase capacity, improve
signal to noise performance and lower power consumption, which in turn
reduces network congestion, increases roaming range and extends battery
life. In addition, HB LEDs are used in electronic displays on these
products in order to reduce size, weight and power consumption and to
improve display visibility. In satellite communications, compound
semiconductor devices are used in ultra-high frequency satellite up-
converters and down-converters to cost-effectively deliver information to
fixed and mobile users over wide geographic areas. In addition, compound
semiconductor solar cells are used to power these satellites because they
are more tolerant to radiation levels in space and have higher power-to-
weight ratios than silicon-based solar cells, thereby increasing satellite
life and payload capacity.
Telecommunications. To accommodate the exponential growth in voice,
data and video traffic and the increased demand for higher transmission
rates, telecommunications companies and Internet service providers are
relying on fiber optic networks utilizing high speed switching
technologies. Compound semiconductor components such as lasers and LEDs,
coupled with optical detectors, are used within these networks to enable
high speed data transmission, increase overall network capacity and reduce
equipment costs.
Computers. Computer manufacturers are increasingly seeking to achieve
higher clock speeds than the architecture prevalent in today's advanced
multimedia computer systems. Higher processing speeds necessitate the use
of larger cache memory to enable higher transmission rates. Computer
manufacturers are increasingly utilizing compound semiconductor devices to
achieve these results. In addition, today's advanced multimedia
applications require increased data storage capacity, which is commonly
addressed by the use of CD ROMs. To achieve these higher storage
capabilities, computer manufacturers are increasingly utilizing compound
semiconductor lasers and optical detectors. As a result of the migration
of multimedia applications into consumer products, computer manufacturers
are also incorporating compound semiconductor infrared emitters into their
products to replace bulky wires and cables.
Consumer Electronics. Consumer electronics manufacturers are using
compound semiconductor devices to improve the performance of many existing
products and to develop new applications. For example, next generation
compact disc players are utilizing shorter wavelength compound
semiconductor lasers to read and record information on high density DVDs
which store at least four times more information than a conventional
compact disc. In addition, compound semiconductor devices are increasingly
being used in advanced display technologies. Ultra-thin LED flat panel
displays are being used in a variety of applications, including point-of-
purchase displays and outdoor advertising with live-action billboards, and
are being developed for use in laptop computers and flat panel television
screens.
Automotive Electronics. Compound semiconductor devices are
increasingly being used by automotive manufacturers to improve vehicle
performance while reducing weight and costs through lower power
consumption. These devices are utilized in a wide variety of applications,
including dashboard displays, indicator lights, engine sensors, anti-lock
braking systems and other electronic systems. In addition, the Company
believes that the use of electronic components within automobiles is likely
to increase as manufacturers design vehicles to comply with state and
federal environmental and safety regulations. Automotive production cycles
generally last three to five years, providing a relatively predictable
source of demand for compound semiconductor devices once an electronic
component is designed into a specific vehicle model.
The high-performance characteristics of compound semiconductors,
combined with the requirements of advanced information systems, have led to
the widespread deployment of compound semiconductor devices within a broad
range of electronic systems. The Company believes that the following
factors have resulted in an increased demand for compound semiconductor
production systems, wafers and devices which enable electronic systems
manufacturers to reach the market faster with high volumes of high-
performance products and applications:
- Launch of new wireless services such as PCS and wireless high
speed data systems;
- Rapid build-out of satellite communications systems;
- Widespread deployment of fiber optic networks and the increasing
use of optical systems within these networks;
- Increasing use of infrared emitters and optical detectors in
computer systems to replace bulky interconnect wires and cables;
- Emergence of advanced consumer electronics applications, such as
DVDs and flat panel displays; and
- Increasing use of high-performance electronic devices in
automobiles.
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 phosphide. The performance characteristics
of compound semiconductors are uniquely dependent on the composition of
these compounds. For example, the electrical and optical properties of
gallium arsenide are substantially changed by adding aluminum as a third
element. Many of the unique properties of compound semiconductor devices
are achieved by the layering of different compound semiconductor materials
in the same device. For example, infrared compound semiconductor lasers
and LEDs are fabricated by depositing ultrathin layers of gallium arsenide
between layers of gallium aluminum arsenide. 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 uniquely enables compound
semiconductor devices to be used in a broad range of advanced information
systems.
Compound semiconductor device manufacturers have predominantly used
three methods to deposit compound materials: molecular beam epitaxy
("MBE"), vapor phase epitaxy and liquid phase epitaxy. The Company
believes that these traditional methods are subject to a number of inherent
chemical process or volume production limitations. While these methods are
successfully used for a variety of applications, they are not easily scaled
up to high volume commercial production of complex materials, such as those
used for optoelectronic devices.
A fourth method, metal organic chemical vapor deposition overcomes
these limitations. Using MOCVD, a number of elements can be easily
combined into a broad range of compounds. Currently, MOCVD technology is
being used to manufacture a number of devices, including high efficiency
solar cells, HB LEDs, heterojunction bipolar transistors ("HBTs"), vertical
cavity surface emitting lasers ("VCSELs") and MR sensors. The Company
believes that compound semiconductor wafers fabricated using MOCVD
generally possess better uniformity, as well as better optical and
electronic properties, than wafers manufactured by more traditional
methods. The Company believes that MOCVD has gained broad acceptance as
the preferred methodology for the production of complex device structures
in commercial volumes.
Historically, developers of compound semiconductor devices have met
research, pilot production and capacity needs with in-house systems and
technologies. However, the requirements for the production of commercial
volumes of high-performance compound semiconductor devices have often
exceeded the capabilities of such in-house solutions. Simultaneously, the
growth of new applications for discrete compound semiconductor devices has
challenged manufacturers to develop processes for new applications while
simultaneously meeting demand for existing products. In response to these
growing demands for higher volumes 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 materials science expertise,
process technology and MOCVD production systems that enable the manufacture
of commercial volumes of high-performance compound semiconductor wafers and
devices. EMCORE believes that its proprietary TurboDiscTM deposition
technology provides the most cost-effective production systems for the
commercial volume manufacture of high-performance compound semiconductor
wafers and devices. EMCORE is capitalizing on its technology base to
address the critical need of electronics manufacturers to cost-effectively
get to market faster with high volumes of new and improved high-performance
products. EMCORE offers its customers a broad range of products and
services and a vertically integrated product line which includes device
design, materials and process development, MOCVD production systems,
epitaxial wafers and package-ready devices. The Company believes that its
knowledge base and materials science expertise uniquely position the
Company to become a valuable source for a broad array of solutions for the
compound semiconductor industry.
[graphic depicting flowchart of registrant's expertise and registrant's
products, indicating the ultimate end markets for those products]
STRATEGY
The Company believes that its close collaboration with its customers
over the past twelve years has contributed to its position in the MOCVD
process technology and production systems market. The Company's objective
is to capitalize on this position to become a leading supplier of compound
semiconductor wafers and package-ready devices. The key elements of the
Company's strategy include:
Provide Complete Compound Semiconductor Solutions. The Company's
vertically-integrated product offerings allow it to provide complete
compound semiconductor solutions to a broad range of electronics
manufacturers in order to meet their diverse technology requirements. The
Company plans to capitalize on the growing need of electronics
manufacturers to reach the market faster and more cost-efficiently with
high volumes of end products. The Company assists its customers with
device design, process development and optimal configuration of production
systems. Moreover, the Company can also serve its customers as a reliable
source for high volume production of wafers or package-ready devices.
Through its materials science expertise, process technology and commercial
production systems, the Company intends to become an integral part of its
customers' compound semiconductor product life cycle.
Form Strategic Relationships with Customers. By developing enabling
technologies, the Company seeks to form strategic alliances with its
customers in order to obtain long-term development and high volume
production contracts. For example, the Company currently has a strategic
relationship with General Motors under which it has developed and enhanced
the device structure and production process for, and has received a
purchase order to manufacture, MR sensor products for use in General
Motors' automotive applications. In addition, the Company has been
integrally involved with a large telecommunication concern in connection
with the development of solar cell technologies for satellites. Throughout
its association with this customer, the Company has successfully customized
its production systems to meet the customer's special high-performance
device requirements. The Company intends to actively seek similar
strategic relationships with other key customers in order to further expand
its technological and production base.
Expand Technology Leadership. The Company has developed and
optimized its compound semiconductor processes and has developed higher
performance production systems through substantial investments in research
and development. The Company works closely with its customers to identify
specific performance criteria in its production systems, wafers and
package-ready devices. The Company intends to continue to expend
substantial resources in research and development in order 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 package-ready devices for its customers. The
Company employs 15 persons holding Ph.D.s in various science applications,
nine of whom work in research and development.
PRODUCTS
Production Systems and Materials Processes. The Company is a leading
supplier of MOCVD compound semiconductor production systems, and, in 1995,
had a 26% share of this market, according to VLSI Research Inc. which
regularly publishes research on this market. The Company has shipped more
than 180 systems to date and believes that its TurboDiscTM systems offer
significant cost of ownership advantages over competing systems. The
Company believes that its MOCVD production systems produce materials with
superior uniformity of thickness, electrical properties and material
composition. Each system is designed for the customer's particular
applications and can be customized for the customer's throughput, wafer
size and process chemistry requirements.
The Company's proprietary TurboDiscTM technology utilizes a unique
high speed rotating disk in a stainless steel growth chamber with
integrated vacuum-compatible loading chambers. To produce an epitaxial
wafer, a bare substrate, such as gallium arsenide, indium phosphide or
germanium, is placed on a wafer carrier in the TurboDiscTM 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 then
become deposited on the substrate in a highly uniform manner. The
resulting epitaxial wafer thus carries one or more ultra-thin layers of
compound semiconductor material such as gallium arsenide, gallium nitride,
or indium aluminum phosphide. The TurboDiscTM technology not only ensures
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
TurboDiscTM technology platform allows users to scale easily from research
to commercial volumes with substantially reduced time and effort. Wafers
from two inches to 14 inches in diameter can be prepared using the same
platform technology.
Upon removal from the growth chamber, the epitaxial wafer is then
transferred to a device processing facility for various steps such as
photolithography, etching, masking, metallization and dicing. Upon
completion of these steps, the package-ready devices are then sent to the
customer's facility for the attachment of leads and encapsulation in resin
prior to the ultimate inclusion in the customer's product. The production
of such compound semiconductor devices is substantially less complex than
that of silicon integrated circuits.
[schematic diagram of production system fabricated and sold by the
registrant]
Wafers are loaded on a multiple wafer holder 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.
Compound semiconductor manufacturers, much like their counterparts in
the silicon semiconductor industry, place great pressure on process
equipment suppliers to decrease the cost of ownership of production
systems. Cost of ownership is determined by yield, throughput, direct
costs and capital. Yield is primarily determined by 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. The Company believes that the
high throughput capabilities of its TurboDiscTM systems make possible the
lowest cost of ownership for the manufacture of compound semiconductor
materials as well as superior reproducibility of thickness, composition,
electrical profiles and layer accuracy required for electronic and
optoelectronic devices. The Company's production systems also achieve a
high degree of reliability with an average time available for production,
based on customer data, of approximately 95%.
The Company offers the following family of systems:
Model List Price Application
Explorer $350,000-450,000 Research
Discovery $600,000-1,100,000 Development/Pilot
Production
Enterprise $1,300,000-2,500,000 Volume Production
Wafer and Device Fabrication. Since its inception, the Company has
worked closely with its customers in designing and developing materials
processes to be used in production systems for its customers' end use
applications. When a customer orders a production system, the customer
provides the Company with certain performance criteria. The Company then
determines the chemistry and process to meet these requirements and
manufactures and configures the production system to produce the materials
needed by the customer. The Company has recently begun to leverage its
process and materials science knowledge base to manufacture wafers and
package-ready devices in its own facility. The Company's expansion into
wafer and package-ready device production has been spurred almost entirely
by requests from customers whose epitaxial wafer needs exceed their
available in-house production capabilities.
The Company fabricates package-ready devices on four-inch diameter
wafers at its facility in Somerset, New Jersey with a combined clean room
area totalling 3,500 square feet. Production capacity is currently 3,000
wafers per year. The Company currently anticipates utilizing a significant
portion of the net proceeds of the Offering to expand this facility to
approximately 7,500 square feet.
The Company is working with its customers to design, engineer and
manufacture commercial quantities of wafers and/or package-ready compound
semiconductor devices such as MR sensors, HBTs, HEMTs, FETs, HB LEDs, solar
cells and other electronic and optoelectronic devices. An example of the
Company's close collaboration with its customers is the Company's ongoing
relationship with General Motors. In 1985, General Motors was the
Company's first customer for compound semiconductor MOCVD production
systems. Over the last twelve years, General Motors has frequently
consulted the Company for assistance in developing its materials process
solutions. In 1995, General Motors asked the Company to determine if it
could develop the capability to manufacture high-performance position
sensors for use in a variety of automotive applications. Following a close
working collaboration, General Motors asked the Company to assess and
develop a plan to manufacture commercial volumes of an indium antimonide
device that can operate at automotive temperatures. In 1996, General
Motors and the Company entered into an agreement under which General Motors
paid the Company approximately $1.6 million to develop and enhance certain
MR position sensors for commercial production. In the first quarter of
fiscal 1997, the Company received a purchase order from General Motors,
pursuant to which it began production of these package-ready position
sensors.
In addition, the Company has worked closely with several large
telecommunications concerns to assist these customers in developing solar
cell process technology for use as the power source on their communications
satellites. After extensive working collaborations, the Company developed
the materials process and a production system for a compound semiconductor
material with outstanding performance characteristics. The Company's
technology has also produced gallium arsenide solar cells that are not only
approximately 50% more efficient in light-to-power conversion than silicon-
based solar cells but also are more radiation-resistant. The resulting
advance allows a satellite manufacturer to increase the useful life and
payload capacity of its satellites. Consequently, over the last two years,
the Company's customers have for this purpose purchased several compound
semiconductor MOCVD production systems from the Company. Recently,
customers have requested the Company to begin producing four-inch epitaxial
wafers for use in the manufacture of solar cells for space satellites.
Additionally, the Company has completed initial process development phase
with a large telecommunications concern. This collaboration has resulted
in prototype solar cells that may lead to more efficient solar cells than
those currently being used. The Company plans to offer solar cell
production to its customers.
CUSTOMERS
The Company's customers include several of the largest semiconductor,
telecommunications and computer manufacturing companies in the world and
thirteen of the largest electronics manufacturers in Japan. In fiscal
1996, only one customer, Hughes-Spectrolab, accounted for more than 10% of
the Company's revenues. In fiscal 1996, sales to this customer accounted
for 23.6% of the Company's revenues. A number of the Company's customers
are listed below:
In fiscal 1996, the Company adopted a comprehensive Total Quality
Management Program with special emphasis on total customer satisfaction.
The Company seeks to encourage active customer involvement with the design
and operation of its production systems. To accomplish this, the Company
conducts user group meetings among its customers on three continents. At
annual meetings, the Company's customers provide valuable feedback on key
operations, process oriented services, problems and recommendations to
improve the Company's products. This direct customer feedback has enabled
the Company to constantly update and improve the design of its systems and
processes. Changes that affect the reliability and capabilities of the
Company's systems are embodied in new designs to enable current and future
customers to utilize systems which the Company believes are high quality
and cost-efficient. As of December 31, 1996, the Company employed 18 field
service engineers who install the Company's systems and provide on-site
support for all of the customers' needs. In its continuing effort to
maintain and enhance its relationships with its customers, the Company is
seeking ISO and QS 9000 quality certification.
SALES AND MARKETING
The Company markets and sells its products through its direct sales
force in Europe and North America, and through representatives and
distributors in Asia. In 1996, the Company signed a seven year exclusive
distributorship agreement with Hakuto, its Asian distributor, whose
territory encompasses seven Asian countries. The Company has reached
preliminary agreement with Hakuto to replace the existing distributorship
agreement with a new distributorship agreement whose term will be five
years and under which Hakuto will distribute additional products of the
Company. The material terms of the agreement will otherwise remain the
same. Hakuto has marketed and serviced the Company's products since 1988
and is a minority shareholder in the Company. As of December 31, 1996, the
Company employed 13 persons in sales and marketing.
The Company'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' problems. The sales
process begins by understanding the customer's requirements and then
attempting to match them with the most optimal solution. Typically, the
Company will first try to match the customer's requirements to an existing
design or a modification of a standard design. Such modifications often
involve changing platform or process design. When necessary, the Company
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. The Company will also frequently produce customized samples and aid
the customer in matching the customized sample to the customer's
requirement. 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. In addition, the sales cycle for wafers and package-ready devices
also includes a period of two to six months during which the Company
develops the formula of materials necessary to meet the customer's
specifications and qualifies the materials, which may also require the
delivery of samples. The Company 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.
International sales as a percentage of total sales in fiscal 1994, 1995,
1996 and the first fiscal quarter of 1997 were 58.6%, 36.0%, 42.5% and
64.0%, respectively. Sales to customers in the U.S. in fiscal 1994, 1995
and 1996 were approximately, $3.7 million, $11.6 million and $16.0 million,
respectively, while the Company's sales in Asia for the same time periods
were $4.9 million, $4.0 million and $8.2 million, respectively, and sales
in Europe were $0.3 million, $2.5 million and $3.6 million, respectively.
In fiscal 1996, sales to Hughes-Spectrolab accounted for 23.6% of the
Company's revenues. The Company receives all payments for all products and
services in U.S. dollars.
SERVICE AND SUPPORT
The Company maintains an international 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 the Company is required to maintain an
inventory of replacement parts and to service the equipment upon the
request of the customer. The Company also sells replacement parts from
inventory for customer needs. The Company pursues a program of system
upgrades for customers to increase the performance of older systems. The
Company generally does not offer extended payment terms to its customers
and generally adheres to a warranty policy of one year. Consistent with
industry practice, the Company 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.
RESEARCH AND DEVELOPMENT
To maintain and improve its competitive position, the Company's research
and development efforts are focused on designing new proprietary products,
improving the performance of existing systems, wafers and package-ready
devices and reducing costs in the product manufacturing process. In
addition, the Company has developed a research and development production
system for thin film ferroelectric oxide applications intended for use in
large area memory and embedded logic devices. The Company has developed
this experimental production system for the deposition of thin-film
ferroelectric materials onto silicon. Ferroelectric oxides are anticipated
to be necessary for the production of advanced memory chips for one-gigabit
memory devices. The Company has sold two such systems.
The Company has dedicated six EMCORE TurboDiscTM systems for both
research and production which are capable of processing virtually all
compound semiconductor materials. The research and development staff
utilizes state-of-the-art x-ray, optical and electrical characterization
equipment which provide instant data allowing for shortened development
cycles and rapid customer response. The Company's research and development
expenses in fiscal 1994, 1995, 1996 and the first fiscal quarter of 1997
were approximately $1.1 million, $1.8 million, $5.4 million and $2.5
million, respectively. The Company expects that it will continue to expend
substantial resources on research and development. As of December 31,
1996, the Company employed 26 persons in research and development, ten of
whom hold Ph.D.s in materials science or related fields.
The Company also competes for research and development funds. In view
of the high cost of development, the Company solicits research contracts
that provide opportunities to enhance its core technology base or promote
the commercialization of targeted products. The Company presently has
three such contracts in process. The contracts fall under the Small
Business Innovative Research programs or similar government sponsored
programs. From inception until December 31, 1996, government and other
external research contracts have provided approximately $10.7 million to
support the Company's research and development efforts. The Company is
also positioned to market technology and process development expertise
directly to customers who require it for their own product development
efforts.
INTELLECTUAL PROPERTY
The Company's success and competitive position both for production
systems, wafers and package-ready devices depend materially on its ability
to maintain trade secrets, patents and other intellectual property protec-
tions. Trade secrets are routinely employed in the Company's manufacturing
processes. 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. In
order to protect its trade secrets, the Company takes certain measures to
ensure their secrecy, such as executing non-disclosure agreements with its
employees, customers and suppliers. Sales of the Company's production
systems are substantially dependent upon the Company's ability to maintain
its trade secrets relating to production system technology and operation.
Sales of the Company's wafers and package-ready devices depend heavily on
the Company's trade secrets related to its MOCVD technology and processes
to give the Company a competitive advantage for winning new customer
orders.
To date, the Company has been issued six U.S. patents. Provided that
all requisite maintenance fees are paid, 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 the Company's
systems, or wafers or devices.
To permit sales of its MOCVD production systems, the Company was in 1992
granted the Rockwell License under the Rockwell Patent issued on January
11, 1983 to Rockwell. The Rockwell Patent claimed, among other things,
intellectual property rights in the use of MOCVD generally in unspecified
applications and expires in 2000. In October 1996, the Company initiated
discussions with Rockwell to receive additional licenses to permit the
Company to utilize MOCVD technology to manufacture and sell certain wafers
and package-ready devices. On November 15, 1996, in litigation not
involving the Company, the Rockwell Patent was declared invalid by the U.S.
Court of Federal Claims. The Company believes that Rockwell will appeal
this judgment. In the event the foregoing judgment is reversed by a court
of appeal, the Company may be liable to Rockwell for royalty payments, as
well as other amounts which the Company may ultimately be deemed to owe
Rockwell in connection with the sales of its systems, wafers and package-
ready devices. Moreover, the Company may require additional licenses from
Rockwell under the Rockwell Patent in order to manufacture and sell certain
wafers and package-ready devices. There can be no assurance that the
foregoing judgment will not be reversed, that the Rockwell License can be
maintained or that licenses for wafers and package-ready devices can be
obtained or maintained on commercially feasible terms, if at all. The
failure to maintain or obtain such licenses could have a material adverse
effect on the Company's business, financial condition and results of
operations.
ENVIRONMENTAL REGULATIONS
The Company 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
Company has retained an environmental consultant to advise it in complying
with applicable environmental and health and safety laws and regulations,
and believes that it is currently, and in the past has been, in substantial
compliance with all such laws and regulations. The Company also believes
that the costs of complying with existing environmental and health and
safety laws and regulations are not likely to have a material adverse
effect on its business, financial position or results of operations. There
can be no assurance, however, that future changes in such laws and
regulations will not result in expenditures or liabilities, or in restric-
tions on the Company's operation, that could have such an effect. The
production of wafers and package-ready devices involves the use of certain
hazardous raw materials, including, but not limited to, ammonia, phosphine
and arsenic. The Company's expansion to offer wafers and package-ready
devices will require the increased usage and maintenance of these materials
on the Company's premises. While the Company believes it currently has and
will continue to have in place sufficient control systems for the safe use
and maintenance of these raw materials, there can be no assurance that the
Company's control systems will be successful in preventing a release of
these materials or other adverse environmental conditions, which could
cause a substantial interruption in the Company's operations. Such an
interruption could have a material adverse effect on the Company's
business, financial condition and results of operation.
BACKLOG
As of December 31, 1996, the Company had an order backlog of
approximately $23.8 million consisting of $20.7 million of production
systems, $1.0 million of research contracts and $2.1 million of package-
ready devices, compared to backlog of $19.0 million as of December 31, 1995
consisting of $17.2 million of production systems and $1.8 million of
research contracts. This increase in backlog was a result of increased
market acceptance of the Company's production systems and multiple unit
orders for such systems, and the introduction of the Company's wafer and
package-ready device product lines. The Company includes in backlog only
customer purchase orders which have been accepted by the Company and for
which shipment dates have been assigned within the twelve months to follow
and research contracts that are in process or awarded. The Company
receives partial advance payments or irrevocable letters of credit on most
production system orders and has never experienced an order cancellation.
The Company recognizes systems and package-ready device revenue upon
shipment. 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 a portion of estimated gross
profit as stipulated in such contracts, based on contract performance. The
Company is seeking to increase capacity to meet anticipated continuing
increased production needs; however, there can be no assurance that the
Company will increase its capacity to meet its scheduled needs.
MANUFACTURING
The Company's manufacturing operations are located at the Company's
headquarters in Somerset, New Jersey and include systems engineering and
production, wafer fabrication and design and production of package-ready
devices. Many of the Company's manufacturing operations are computer
monitored or controlled, enhancing reliability and yield. The Company
manufactures its own systems and outsources some components and sub-assem-
blies, but performs all final system integration, assembly and testing.
Since nearly all steps in the production process are performed by the
Company, any interruption in manufacturing resulting from earthquake, fire,
equipment failures or other causes would have a material adverse effect on
the Company. As of December 31, 1996, the Company employed 119 persons in
its manufacturing operations.
Outside contractors and suppliers are used to supply raw materials and
standard components and to assemble portions of end systems from Company
specifications. The Company depends on sole or a limited number of
suppliers of components and raw materials. The Company generally purchases
these single or limited source products through standard purchase orders.
The Company 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. The Company has recently implemented a vendor program through which
it inspects quality and reviews supplies 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
adversely affected by a stoppage or delay of supply, receipt of defective
parts or contaminated materials, and increase in the pricing of such parts
or the Company's inability to obtain reduced pricing from its suppliers in
response to competitive pressures.
In fiscal 1996, the Company received substantial levels of new orders,
which will require the Company to increase its manufacturing capacity to
meet with demand for its compound semiconductor production systems and its
wafers and package-ready devices. The Company currently anticipates
utilizing a significant portion of the net proceeds from the Offering for
this purpose.
COMPETITION
The markets in which the Company competes are highly competitive. The
Company competes with several companies for sales of MOCVD systems
including Aixtron, Nippon-Sanso and Thomas Swann. The primary competitors
for the Company's wafer foundry include Epitaxial Products Inc., Kopin
Corporation and Q.E.D. The Company also faces competition from manu-
facturers that implement in-house systems for their own use. The Company
may experience competition from corporations that have been in business
longer than the Company and have greater capital resources, more experience
with high volume manufacturing, broader name recognition, substantially
larger installed bases, alternative technologies which may be better
established than the Company's and significantly greater financial,
technical and marketing resources than the Company. The Company competes
with many research institutions and universities for research contract
funding. The Company also sells its products to current competitors and
companies with the capability of becoming competitors. As the markets for
the Company's products grow, new competitors are likely to emerge, and
present competitors may increase their market share.
The Company believes that the primary competitive factors in the markets
in which the Company's products compete are yield, throughput, capital and
direct costs, system performance, size of installed base, breadth of
product line and customer satisfaction, as well as customer commitment to
competing technologies. While the Company believes it is in a position to
deliver low-cost and reliable solutions to its customers, many of the
Company's competitors have significantly greater financial, technical,
manufacturing, marketing, sales and other resources than the Company. The
Company 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. In
marketing its products, the Company may face competition from suppliers
employing new technologies in order to extend the capabilities of
competitive products beyond their current limits or increase their
productivity. In addition, increased competitive pressure could lead to
intensified price-based competition, resulting in lower prices and margins,
which would materially adversely affect the Company's business, financial
condition and results of operations.
LEGAL PROCEEDINGS
The Company is aware of no pending or threatened litigation against it
which would cause a material adverse effect on its operating results.
EMPLOYEES
As of December 31, 1996 the Company employed 204 persons. None of the
Company's employees is covered by a collective bargaining agreement. The
Company considers its relationships with employees to be good.
FACILITIES
The Company's executive office and manufacturing facility are located in
Somerset, New Jersey, where the Company leases a 75,000 square foot
facility. This facility lease expires on February 29, 2000. The Company
has two five-year renewal options.
MANAGEMENT
The executive officers and directors of the Company and their ages as of
the date of this Prospectus are as follows:
_____________________
(1) Member of Audit Committee
(2) Member of Compensation Committee
All directors of the Company hold office until the next annual meeting
of shareholders or until their successors are duly elected and qualified.
All officers serve at the discretion of the Board of Directors.
Reuben F. Richards, Jr. - Mr. Richards joined the Company 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 the Company
since May 1995. From September 1994 to the present, Mr. Richards has been
a Senior Managing Director of Jesup & Lamont Capital Markets Inc. ("Jesup &
Lamont") (an affiliate of a registered broker-dealer). From December 1994
to the present, he has been a member of and President of JLMP, the
Company's largest shareholder. From 1992-1994, Mr. Richards was a
principal with Hauser, Richards & Co., a firm engaged in corporate
restructuring and management turnarounds. From 1986-1992, Mr. Richards was
a Director at Prudential-Bache Capital Funding in its Investment Banking
Division. Mr. Richards also serves as a director of S.A.
Telecommunications, Inc., a full service long distance telecommunications
company, located in Richardson, Texas.
Thomas G. Werthan - Mr. Werthan joined the Company in 1992 as its Chief
Financial Officer, Vice President - Finance and Administration and a
director. Mr. Werthan is a Certified Public Accountant and has over
fourteen years experience in assisting high technology, venture capital
financed growth companies. Prior to joining the Company 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, a member of and Chairman of JLMP and
Chairman of the Board of Directors of the Company. From 1985 to 1989, Mr.
Werthan served as Chief Operating Officer and Chief Financial Officer for
Audio Visual Labs, Inc., a manufacturer of multi-media and computer
graphics equipment.
Richard A. Stall, Ph.D. - Dr. Stall became a director of the Company in
December 1996. Dr. Stall helped found the Company in 1984 and has been
Vice President - Technology at the Company since October, 1984, except for
a sabbatical year in 1993 during which Dr. Stall acted as a consultant to
the Company 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 MBE 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 - Mr. Kroll joined the Company in 1994 as Vice President -
Business Development and in 1996 became Executive Vice President - Business
Development. 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 photoresist
or applications, plasma strip, and related equipment.
Paul T. Fabiano - Mr. Fabiano joined the Company in 1985 as a process
engineer and has served as Vice President - Engineering since March 1996.
Mr. Fabiano has experience in all critical phases of the Company's
operations including sales, service, manufacturing and engineering. During
his tenure at the Company, Mr. Fabiano has held various managerial posi-
tions including Vice President, Manufacturing and Director of Field
Engineering.
Louis A. Koszi - Mr. Koszi joined the Company in 1995 as Vice President -
Device Manufacturing. 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.
Laurence P. Wagner - Mr. Wagner joined the Company in March 1996 as Vice
President - Wafer Manufacturing, and has more than twelve years experience
in operations, engineering and research in the electronic and semiconductor
materials industries. Before joining EMCORE, he spent seven years at Rohm
& Haas, a subsidiary of Shipley Company, L.L.C., where he served
successively as Corporate Projects Manager, Product Engineer, Engineering
Manager, Manufacturing Manager, and, from 1994 to 1996, Operating Unit
Manager.
David A. Hess - Mr. Hess joined the Company in 1989 as General Accounting
Manager. He was named Controller in 1990. He 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 manu-
facturers).
Thomas J. Russell, Ph.D. - Dr. Russell has been a director of the Company
since May 1995 and was elected Chairman of the Board on December 6, 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, Adidas AG, and Uniroyal Technology
Corporation ("UTC"). Mr. Russell is one of three trustees of the AER 1997
Trust, which is a member of JLMP.
Howard R. Curd - Mr. Curd has been a director of the Company since May
1995. Mr. Curd has been Chairman and Chief Executive Officer of UTC from
September 1992 to the present. From 1986 to 1992, he was Chairman of
Uniroyal Plastics Corp. He is the founder of UTC's predecessor business,
Polycast Technology Corporation. He also sits on the advisory board for
Investment Seminars, Inc., a provider of independent investment advice.
Mr. Curd is a member of and Vice President of JLMP, the Company's majority
shareholder. Mr. Curd is the father of Howard F. Curd, a director of the
Company.
Howard F. Curd - Mr. Curd has been a director of the Company since May
1995. Since 1991, Mr. Curd has been president and chief executive officer
and a director of Jesup & Lamont Group Holdings, Inc., a diversified
financial holding company. Mr. Curd is a director of S.A.
Telecommunications, Inc., a long distance telecommunication company,
located in Richardson, Texas. Mr. Curd is the son of Howard R. Curd, a
director of the Company.
Robert Louis-Dreyfus - Mr. Louis-Dreyfus has been nominated to serve on the
Company's Board of Directors. It is expected that immediately following
the Offering, the Board will elect Mr. Louis-Dreyfus to serve as a
Director. Mr. Louis-Dreyfus has been the Chairman of the Board of
Directors 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
at Saatchi & Saatchi plc (now Cordiant plc) in London, and he resigned from
the Board of Directors of Saatchi & Saatchi in 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.
Within 90 days after completion of the Offering, the Company intends to
expand the Company's Board of Directors to nine persons and to elect at
least two outside directors to the Company's Board. It is the intention of
the Company that such outside directors will be appointed to and replace
the existing members of each of the Company's Audit Committee and
Compensation Committee.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee, which consists of Dr. Thomas J.
Russell, Howard F. Curd and Howard R. Curd, reviews and recommends to the
Board of Directors the compensation and benefits of all officers of the
Company, reviews general policy matters relating to compensation and bene-
fits of officers and employees of the Company and administers the issuance
of stock options and stock appreciation rights and awards of restricted
stock to the Company's officers and key salaried employees. No member of
the Compensation Committee is now or ever was an officer or an employee of
the Company. No executive officer of the Company serves as a member of the
compensation committee of the Board of Directors of any entity one or more
of whose executive officers serves as a member of the Company's Board of
Directors or Compensation Committee. See "Certain Transactions."
AUDIT COMMITTEE
The Company's Audit Committee currently consists of Thomas J. Russell,
Howard F. Curd and Howard R. Curd. The Audit Committee recommends the
engagement of the Company's independent accountants, approves the auditing
services performed, and reviews and evaluates the Company's accounting
policies and systems of internal controls.
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth certain information
concerning the annual and long-term compensation for services in all
capacities to the Company in fiscal 1996 of those persons who during such
fiscal year (i) served as the Company's chief executive officer or (ii)
were the five most highly-compensated officers (other than the chief
executive officer) (collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
__________________
(1) Consists of bonuses, commissions and vacation pay.
(2) Consists of insurance premiums and automobile allowances paid by the
Company.
(3) Mr. Richards became Chief Executive Officer in December, 1996.
(4) Of this amount, $145,000 was received from Jesup & Lamont. Mr.
Richards' salary is now paid by the Company and his base annual
compensation is $195,000. See "Certain Transactions."
(5) Dr. Schumaker served as Chairman and Chief Executive Officer until his
retirement in December 1996.
No options were issued to any of the Named Executive Officers in fiscal
1996. There were no option exercises by the Named Executive Officers in
fiscal 1996.
The following table sets forth the number of shares covered by
exercisable and unexercisable options held by the Named Executive Officers
on September 30, 1996 and the aggregate gains that would have been realized
had these options been exercised on September 30, 1996, even though these
options had not been exercised by the Named Executive Officers.
__________________________
(1) Options are in-the-money if the market value of the shares covered
thereby is greater than the option exercise price. This calculation
is based on the fair market value at September 30, 1996 of $10.20 per
share, less the exercise price. If calculated based on the midpoint
of the estimated range of the initial public offering price ($10 per
share), the value of unexercised in-the-money options at fiscal year
end would be slightly lower.
(2) Pursuant to Dr. Schumaker's retirement from the Company, these options
have been cancelled and will not become exercisable.
STOCK OPTION PLAN
In 1995, the Company's Board of Directors and its shareholders approved
the Company's 1995 Incentive and Non-Statutory Stock Option Plan (the
"Plan"). Under the terms of the Plan, as amended by the shareholders of
the Company in March 1996, options to acquire 647,059 shares of Common
Stock may be granted. Options with respect to 339,412 shares were
outstanding as of September 30, 1996, at exercise prices of $3.03 to $10.20
per share. Options granted generally become exercisable over five years.
As of September 30, 1996, options with respect to 162,765 shares were
exercisable.
The purpose of the Plan is to give officers and executive personnel,
and consultants or non-employee directors, of the Company and its
subsidiaries an opportunity to acquire Common Stock, to provide an
incentive for key employees and other participants to continue to promote
the best interests of the Company and enhance its long-term performance,
and to provide an incentive for key employees and other participants to
join or remain with the Company and its subsidiaries.
Incentive stock options ("ISOs") intended to qualify for special tax
treatment in accordance with Section 422 of the Internal Revenue Code of
1986, as amended, ("Code") and non-statutory stock options ("NSOs"), which
do not qualify for such special tax treatment, may be granted under the
Plan. In addition, stock appreciation rights ("SARs") may be granted under
the Plan in conjunction with ISOs.
The Plan is administered by the Board of directors which, to the extent
it shall determine, may delegate its administrative powers (other than its
power to amend or terminate the Plan) to a committee (the "Committee")
appointed by the Board of Directors and composed of not less than three
members of the Board of Directors. The Board of Directors is authorized to
determine (i) the persons to whom awards under the Plan shall be granted,
(ii) the time or times at which such awards shall be granted, (iii) the
form and amount of the awards, and (iv) the limitations, restrictions and
conditions applicable to any such award. In general, the Board of
Directors also may interpret the Plan, prescribe, amend, and rescind rules
and regulations relating to it, and make all other determinations it deems
necessary or advisable for the administration of the Plan.
The Board of Directors may from time to time alter, amend or suspend
the Plan or any award granted thereunder, or may at any time terminate the
Plan, except that it may not, without the approval of the Company's
shareholders (except with respect to certain changes in corporate
structure), (i) materially increase the total number of shares of Common
Stock available for grant under the Plan, (ii) materially modify the class
of eligible employees or participants under the Plan, (iii) materially
increase benefits to any key employee who is subject to the restrictions of
Section 16 of the Securities Exchange Act of 1934, as amended, (the
"Exchange Act") or (iv) effect a change relating to ISOs granted thereunder
which is inconsistent with Section 422 of the Code and the regulations
issued thereunder. No action taken by the Board of Directors in connection
with the Plan, either with or without shareholder approval, may materially
and adversely affect any outstanding award without the consent of the
holder thereof. No award under the Plan may be granted after September 19,
2005.
A stock option granted under the Plan will be exercisable and subject
to such terms and conditions as the Board of Directors or the Committee
determines and which may be set forth in a written option agreement. In
general, the option price for ISOs shall not be less than 100% of the fair
market value of the Common Stock on the date of the grant, and such ISO
shall not be exercisable within one year of the date of grant. The option
price for NSOs shall not be less than 10% of the fair market value of the
Common Stock on the date of the grant. For purposes of the Plan, "fair
market value" means, in general, the average of the mean between the bid
and asked price for the Common Stock at the close of trading for the ten
consecutive trading days immediately preceding a given date.
ISOs granted under the Plan may include a SAR, either at the time of
the granting of the ISO or while the ISO is outstanding, which shall be
exercisable only (i) to the extent that the underlying ISO is exercisable
and (ii) for such period of time as determined by the Board of Directors.
A SAR is exercisable only when the fair market value of a share of Common
Stock exceeds the option price specified for the ISO under which the SAR
was granted. A SAR shall entitle the participant to surrender to the
Company unexercised the ISO, or portion thereof, to which such SAR is
related, and to receive from the Company in exchange therefor that number
of shares of Common Stock having an aggregate fair market value equal to
the excess of the fair market value on the date of exercise of one share of
Common Stock over the option price per share specified in such ISO,
multiplied by the number of shares of Common Stock subject to the ISO, or
portion thereof, which is so surrendered, or, at the election of the Board,
cash in such amount.
ISOs, NSOs, and SARs shall not be exercisable more than ten years after
the date of grant. Upon the termination of employment of an employee, or
if the contractual relationship between a non-employee participant and the
Company terminates, options and SARs granted to such participant shall
expire no later than 30 days after such termination although the Board of
Directors, in its sole discretion, may permit the exercise of such option
or SAR to occur up to three months following such termination; provided,
that if such termination occurs as a result of the participant's death or
disability, outstanding options and SARs shall expire no later than one
year thereafter; and provided further, that outstanding options and SARs
held by a former employee participant shall earlier expire on the date that
such participant violates the terms of any covenant not to compete, if any,
in effect between the Company and such participant. Upon notice of an
intent to exercise an option, the option price shall be paid in full in
cash or by certified check or, in the Board of Directors' discretion, in
shares of Common Stock already owned by the participant.
In the sole discretion of the Board of Directors, adjustments will be
made in the number of shares of Common Stock available under the Plan, and
the number of shares of Common Stock and the option price of shares subject
to outstanding grants of options and SARs to reflect increases or decreases
in the number of shares of issued Common Stock resulting from a
reorganization, recapitalization, stock split-up, stock distribution or
combination of shares, or the payment of a stock dividend or other increase
or decrease in the number of such shares outstanding effected without
receipt of consideration by the Company.
COMPENSATION OF DIRECTORS
All non-employee directors will receive a fee in the amount of $3,000
per Board meeting attended and $500 for each committee meeting attended
($600 for the Chairman of the committee), including in each case reimburse-
ment of reasonable out-of-pocket expenses incurred in connection with such
Board or committee. Payment of all fees will be made in Common Stock of
the Company at the average of the last reported bid and ask prices as of
the close of trading that day on the Nasdaq National Market. No director
who is an employee of the Company will receive compensation for services
rendered as a director.
LIMITATION OF OFFICERS' AND DIRECTORS' LIABILITY AND INDEMNIFICATION
MATTERS
The Company's Certificate of Incorporation and By-Laws include
provisions (i) to reduce the personal liability of the Company's directors
for monetary damage resulting from breaches of their fiduciary duty and
(ii) to permit the Company to indemnify its directors and officers to the
fullest extent permitted by New Jersey law. Prior to the consummation of
this Offering, the Company intends to enter into indemnification agreements
with each of its directors and executive officers and to obtain a policy of
directors' and officers' liability insurance that insures such persons
against the costs of defense, settlement or payment of a judgment under
certain circumstances. There is no pending litigation or proceeding
involving any director, officer, employee or agent of the Company as to
which indemnification is being sought. The Company is not aware of any
pending or threatened litigation that might result in claims for
indemnification by any director or officer.
CERTAIN TRANSACTIONS
In May 1995, approximately 51% of the Company's outstanding shares of
Common Stock were purchased by JLMP, a limited liability company whose five
members are The AER 1997 Trust, Howard R. Curd, Howard F. Curd, Reuben F.
Richards, Jr. and Gallium Enterprises, Inc. Gallium Enterprises Inc. is
controlled by Robert Louis-Dreyfus, a nominee to become a director of the
Company. Howard F. Curd and Reuben F. Richards, Jr. together control a
minority of the membership interests in JLMP and are co-owners of Jesup &
Lamont Group Holdings, Inc., which owns all the shares of Jesup & Lamont
Securities Co., a registered broker-dealer and of Jesup & Lamont Capital
Markets, Inc. ("Jesup & Lamont"), a financial services advisory concern.
Since 1995, four of the Company's six directors have been members of JLMP.
In May 1995, the Company entered into a consulting agreement with Jesup &
Lamont (herein, the "Agreement") pursuant to which Jesup & Lamont agreed to
provide financial advisory services for the Company for one year. The
Agreement provided for monthly retainers to be paid to Jesup & Lamont of
$12,500 per month. In October 1995, Reuben F. Richards, Jr. joined the
Company's management team as President and Chief Operating Officer. On
that date, the retainer to Jesup & Lamont was increased to $25,000 per
month to cover Mr. Richards' salary. At that time, Mr. Richards received
no compensation directly from the Company. Jesup & Lamont covered all
employee benefits and taxes for Mr. Richards until October 1, 1996 when Mr.
Richards became a full-time employee of the Company, and the monthly
retainer paid by the Company to Jesup & Lamont was decreased to $10,000.
The Agreement will terminate upon completion of the Offering.
In May 1996, the Company issued $9,500,000 Subordinated Notes (the
"Subordinated Notes") and warrants to purchase 2,328,432 shares of Common
Stock at $4.08 per share (the "$4.08 Warrants"). The $4.08 Warrants became
exercisable on November 1, 1996. JLMP holds 78.5% of the Subordinated
Notes and $4.08 Warrants. In addition, Thomas G. Werthan, Vice President -
Finance and Administration, Chief Financial Officer, Secretary and a
director, currently holds $96,233 of the Subordinated Notes and 23,587 of
the $4.08 Warrants; Dr. Richard Stall, Vice President - Technology and a
director currently holds $122,450 of the Subordinated Notes and 30,012 of
the $4.08 Warrants; William Kroll, Executive Vice President - Business
Development, currently holds $65,828 of the Subordinated Notes and 16,134
of the $4.08 Warrants; Paul Fabiano, Vice President - Engineering,
currently holds $60,407 of the Subordinated Notes and 14,806 of the $4.08
Warrants; and David Hess, Controller, currently holds $4,753 of the
Subordinated Notes and 1,165 of the $4.08 Warrants.
In connection with the offering of the Subordinated Notes and $4.08
Warrants on May 1, 1996, the Company executed a registration rights
agreement (the "Registration Rights Agreement") with the holders of the
$4.08 Warrants (the "Warrant Holders"). Upon written notice given by a
majority in interest of the Warrant Holders, the Company is obligated to
use its best efforts to register all or part of each Warrant Holders'
registrable securities, and to keep such registration open for period of
not less than nine months. Pursuant to the Registration Rights Agreement,
the Company must give notice to, and include if requested within thirty
days of such notice, the Warrant Holders in any registration statement
filed by the Company under the Securities Act, subject to certain
exceptions. See "Description of Capital Stock - Registration Rights."
On September 1, 1996, the Company issued to JLMP $2,500,000 additional
subordinated notes (the "Additional Notes") with terms identical to those
of the Subordinated Notes, and warrants to purchase 245,098 shares of
Common Stock at $10.20 per share (the "Additional Warrants"). The
Additional Warrants become exercisable six months after issuance. In
December 1996, the Company issued to JLMP warrants to purchase 980,392
shares on the same terms as the Additional Warrants in consideration for
the grant by Thomas Russell, the Chairman of the Company's Board of
Directors, of a security interest over certain assets he controls, in order
to guarantee the Company's $10 million demand note facility from First
Union National Bank. The Company expects to use a portion of the proceeds
of the Offering to pay down this facility. In connection with the issuance
of the warrants in September and December of 1996, the Company has entered
into a registration rights agreement with JLMP similar to the Registration
Rights Agreement.
Upon completion of the Offering, three of the Company's eight directors
will be members of JLMP. Mr. Russell, the Chairman of the Company's Board
of Directors, will be a trustee with respect to certain membership
interests of JLMP. Mr. Louis-Dreyfus, a director-nominee, controls a
company which is a member of JLMP. JLMP will retain an ownership interest
in the Company of approximately 48.9%. Within 90 days of the commencement
of the Offering, the Company will elect two independent directors, neither
of whom will have any affiliation with JLMP.
From time to time, the Company has lent money to certain of its
executive officers and directors. Between October and December, 1995,
pursuant to the due authorization of the Company's Board of Directors the
Company lent $85,000 to Thomas G. Werthan, Vice President - Finance and
Administration, Chief Financial Officer and a director of the Company. The
promissory note executed by Mr. Werthan provides for forgiveness of the
loan via bonuses payable to Mr. Werthan over a period of 25 years.
On December 4, 1996, Norman E. Schumaker, a founder of the Company
and a beneficial holder of more than 5% of the Company's Common Stock,
retired as Chairman and Chief Executive Officer. The Company and Dr.
Schumaker have entered into a Consulting Agreement dated as of December 6,
1996, pursuant to which the Company agreed to retain Dr. Schumaker as a
consultant for $250,000 per year. The Company has also agreed to pay Dr.
Schumaker $103,055 in full satisfaction of accrued bonuses and vacation
time. Dr. Schumaker has agreed to provide consulting services for eight,
eight-hour work days per month (approximately two days a week less vacation
time) for a term of two years commencing January 1, 1997 and ending
December 31, 1998. The Agreement will automatically renew for one
successive two-year term unless either party gives the other notice of his
or its intention not to renew the Agreement. The Company has also agreed
to forgive $115,300 of indebtedness of Dr. Schumaker to the Company and to
provide him with a monthly automobile allowance of $750 during the term of
the Agreement. The Company has agreed to provide Dr. Schumaker with
participation, during the period ending on December 31, 2001, in the
Company's plan of medical benefits and to assign to Dr. Schumaker a
disability insurance policy and two life insurance policies in the
aggregate face amount of $1,075,000. To the extent that these policies may
not be so assigned, the Company has agreed to establish similar policies
for Dr. Schumaker. The Company has also agreed to extend the exercise of
Dr. Schumaker's vested stock options to March 4, 1997. Dr. Schumaker has
agreed during the term of the Agreement not to become involved, directly or
indirectly, in any business activity which the Company's Board of Directors
determines to be competitive with the Company. Dr. Schumaker has also
agreed, among others, to refrain from engaging in any business competing
with the Company in the U.S. for an additional period of two years after
the termination of the Agreement.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information known to the
Company with respect to beneficial ownership of the Company's Common Stock
as of February 1, 1997 and as adjusted to reflect the sale of shares
offered pursuant to this Prospectus by: (i) each person who is known by the
Company to be the beneficial owner of five percent or more of the Company's
Common Stock, (ii) each of the Company's directors, (iii) each Named
Executive Officer, and (iv) all officers and directors of the Company as a
group.
___________________
(1) Unless otherwise indicated in these footnotes, the persons named in
the table above have sole voting and investment power with respect to
all shares beneficially owned.
(2) Based on 2,994,461 shares outstanding prior to the Offering and
5,869,461 shares to be outstanding after the Offering, except that
shares underlying warrants and options exercisable within 60 days of
February 1, 1997, are deemed to be outstanding for purposes of
calculating shares beneficially owned and percentages owned by the
holder of such warrants and options.
(3) Consists of options to purchase 29,412 shares, and 1,621,557 shares
and warrants to purchase 2,073,065 shares held by JLMP. See Note 10.
(4) Includes options to purchase 20,294 shares and warrants to purchase
30,012 shares.
(5) Includes options to purchase 17,647 shares and warrants to purchase
23,587 shares.
(6) Includes options to purchase 8,824 shares and warrants to purchase
14,806 shares.
(7) Includes options to purchase 5,882 shares and warrants to purchase
16,134 shares.
(8) Consists of 1,621,557 shares and warrants to purchase 2,073,065
shares of Common Stock held by JLMP. Gallium Enterprises Inc. is
controlled by Robert Louis-Dreyfus, a nominee to become a member of
the Board of Directors of the Company. See Note 10.
(9) Consists of 1,621,557 shares and warrants to purchase 1,827,967
shares of Common Stock held by JLMP. The AER 1997 Trust is one of
the five members of JLMP. Its three trustees are John Timoney,
Robert Louis-Dreyfus, and Thomas J. Russell, the Chairman of the
Company. The trustees share authority over the assets of the trust.
After January 13, 2002, Avery E. Russell, the daughter of Thomas J.
Russell, will be the primary beneficiary of the trust. See Note 10.
(10) Includes warrants to purchase 2,073,065 shares of Common Stock. Does
not include warrants to purchase 980,392 shares of Common Stock which
become exercisable after May 6, 1997. JLMP is a limited liability
company whose five members are The AER 1997 Trust, Howard R. Curd,
Howard F. Curd, Reuben F. Richards, Jr. and Gallium Enterprises Inc.
The members share voting and investment power. JLMP's address and
its members' addresses are c/o JLMP, 650 Fifth Avenue, New York, New
York 10019.
(11) Includes options to purchase 82,941 shares and warrants to purchase
1,913,671 shares. See Notes 3 through 8 above.
(12) Includes options to purchase 26,471 shares and warrants to purchase
138,831 shares. Pursuant to Dr. Schumaker's consulting agreement
with the Company dated December 6, 1996, the warrants to purchase
138,831 shares of Common Stock have been placed in escrow until
January 6, 1998. See "Certain Transactions." Dr. Schumaker's
business address is 20 Upper Warren Way, Warren, New Jersey 07059.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 23,529,411
shares of Common Stock, no par value, of which 2,994,461 shares are
outstanding prior to completion of this Offering, which shares are held by
a total of 86 shareholders and 5,882,353 shares of Preferred Stock, none of
which are outstanding. In addition, there are outstanding warrants to
purchase 2,330,784 shares of Common Stock at $4.08 per share, warrants to
purchase 9,103 shares of Common Stock at $17.00 a share, and warrants to
purchase 1,225,490 shares of Common Stock at $10.20 per share. Moreover,
options to purchase 437,546 shares have been granted under the Plan ranging
from $3.03 per share to $10.20 a share.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on matters
to be voted upon by the shareholders of the Company. Subject to the
preferences that may be applicable to any outstanding shares of Preferred
Stock, the Holders of Common Stock are entitled to receive ratably such
dividends, if any, as may be declared by the Board of Directors out of
funds legally available therefor. See "Dividend Policy." In the event of
liquidation, dissolution or winding up of the Company, the holders of
Common Stock are entitled to share ratably in all assets remaining after
payment of liabilities, subject to the prior liquidation rights of any
outstanding shares of Preferred Stock. The Common Stock has no preemptive,
redemption, conversion or other subscription rights. The outstanding
shares of Common Stock are, and the shares offered by the Company in the
Offering will be, when issued and paid for, fully paid and nonassessable.
The rights, preferences and privileges of holders of Common Stock are
subject to, and may be adversely affected by, the rights of the holders of
shares of any series of Preferred Stock currently or outstanding or which
the Company may designate and issue in the future.
The Company has applied for listing of the Common Stock on the Nasdaq
National Market under the symbol "EMKR."
PREFERRED STOCK
The Company is authorized to issue up to 5,882,352 shares of Preferred
Stock that may be issued from time to time in one or more classes or series
upon authorization of the Board of Directors. The Board of Directors,
without further approval of the shareholders, is authorized to designate
in any such class or series resolution, such par value and such priorities,
power, preferences and relative, participating, optional or other special
rights and qualifications, limitations and restrictions as it shall
determine.
The ability of the Company to issue Preferred Stock in this manner,
while providing flexibility in connection with possible acquisitions and
other corporate purposes, could adversely effect the voting power of the
voters of the Common Stock and could have the effect of making it more
difficult for a person to acquire, or of discouraging a person from seeking
to acquire, control of the Company. The potential for issuance of this
"blank check preferred stock" may have an adverse impact on the market
price of the Common Stock outstanding after the Offering. The Company has
no present plans to issue any of the Preferred Stock.
WARRANTS
The Company has outstanding the following warrants: warrants to
purchase a total of 9,103 shares of Common Stock at a purchase price of
$17.00 per share, which warrants expire in July 1997; warrants to purchase
a total of 2,330,784 shares of Common Stock at a purchase price of $4.08
per share which expire in May 2001 and warrants to purchase 1,225,490
shares of Common Stock at $10.20 per share, which warrants expire in
September 2001. The last two classes of warrants may be repurchased by the
Company at $0.85 per share after May 1997 and September 1997, respectively.
The Company will not call the warrants unless it can issue registered
securities therefor and the average daily market price of the Company's
Common Stock exceeds 150% of the warrant exercise price for each of thirty
consecutive days.
NEW JERSEY LAW AND OTHER LIMITATIONS UPON TRANSACTIONS WITH "INTERESTED
SHAREHOLDERS"
The New Jersey Business Corporation Act provides that in determining
whether a proposal or offer to acquire a corporation is in the best
interest of the corporation, the Board of Directors may, in addition to
considering the effects of any action on shareholders, consider any of the
following: (a) the effects of the proposed action on the corporation's
employees, suppliers, creditors and customers, (b) the effects on the
community in which the corporation operates and (c) the long-term as well
as short-term interests of the corporation and its shareholders, including
the possibility that these interests may best be served by the continued
independence of the corporation. The statute further provides that if,
based on these factors, the Board of Directors determines that any such
offer is not in the best interest of the corporation, it may reject the
offer. These provisions may make it more difficult for a shareholder to
challenge the Board of Directors' rejection of, and may facilitate the
Board of Directors' rejection of, an offer to acquire the Company.
The Company is also subject to the Protection Act, which prohibits
certain New Jersey corporations such as the Company from engaging in
business combinations (including mergers, consolidations, significant asset
dispositions and certain stock issuances) with any Interested Shareholder
(defined to include, among others, any person that after the Offering
becomes a beneficial owner of 10% or more of the affected corporation's
voting power) for five years after such person becomes an Interested
Shareholder, unless the business combination is approved by the Board of
Directors prior to the date the shareholder became an Interested
Shareholder. In addition, the Protection Act prohibits any business
combination at any time with an Interested Shareholder other than a trans-
action that (i) is approved by the Board of Directors prior to the date the
Interested Shareholder became an Interested Shareholder, or (ii) is
approved by the affirmative vote of the holders of two-thirds of the voting
stock not beneficially owned by the Interested Shareholder, or (iii)
satisfies certain "fair price" and related criteria. The New Jersey Act
does not apply to certain business combinations, including those with
persons who acquired 10% or more of the voting power of the corporation
prior to the time the corporation was required to file periodic reports
pursuant to the Exchange Act, or prior to the time the corporation's
securities began to trade on a national securities exchange.
REGISTRATION RIGHTS
Following the closing of the Offering, persons who hold warrants to
purchase 3,556,274 shares of Common Stock (herein, the "Holders") will be
entitled to certain rights with respect to the registration of such shares
under the Securities Act. Pursuant to terms of registration rights
agreements between the Company and the Holders, the Holders have the right
on written notice given by a majority of the Holders, to require the
Company, on only one occasion, to file a registration statement under the
Securities Act in order to register all or any part of their shares of
Common Stock. The Company may in certain circumstances defer such
registrations, and the underwriters have the right, subject to certain
limitations, to limit the number of shares included in such registrations.
In the event that the Company proposes to register any of its securities
under the Securities Act, either for its own account or the account of
other security holders, the Holders are also entitled to include their
shares of Common Stock in such registration, subject to certain marketing
and other limitations. Generally, the Company is required to bear the
expense of all such registrations.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American
Stock Transfer & Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
5,494,461 shares of Common Stock assuming no exercise of outstanding
options or warrants. Of these shares, 2,500,000 shares sold in the
Offering (plus any shares issued upon exercise of the Underwriters' over-
allotment options) will be freely tradeable without restriction under the
Securities Act, unless purchased by "affiliates" of the Company. As
defined in Rule 144, an "affiliate" of an issuer is a person that directly
or indirectly through one or more intermediaries, controls or is controlled
by, or is under common control with such issuer. The remaining 2,994,461
shares of Common Stock outstanding will be "restricted securities" within
the meaning of Rule 144 under the Securities Act ("Restricted Shares").
Restricted Shares may not be sold in the absence of registration under the
Securities Act unless an exemption from registration is available,
including the exemptions contained in Rule 144. Sales of the Restricted
Shares in the public market, or the availability of such shares for sale,
could adversely affect the market price of the Common Stock.
In general, under Rule 144 as currently in effect, a person (or
persons whose shares are aggregated), including an "affiliate," who has
paid for shares is entitled, beginning two years from the later of the date
of acquisition of the shares from the Company or from an affiliate of the
Company, to sell within any three-month period up to that number of shares
that does not exceed the greater of (i) one percent of the shares
outstanding, as shown by the most recent report or statement published by
the Company, or (ii) the average weekly reported volume of trading in the
shares during the four calendar weeks preceding the date on which notice of
sale is filed with the Commission. A person (or persons whose shares are
aggregated) who is not deemed an affiliate of the Company, who has not been
an affiliate within three months prior to the sale and who has paid for his
shares is entitled, beginning three years from the later of the date of the
acquisition from the Company or from an affiliate of the Company, to sell
such shares under Rule 144(k) without regard to the volume limitations
described above. Affiliates continue to be subject to such volume
limitations after the three-year holding period.
On May 1, 1996, the Company issued warrants to purchase 2,330,784
shares of Common Stock. The exercise price of the warrants sold in May
1996 is $4.08 per share. The Company has entered into a Registration
Rights Agreement in connection with the issuance of such warrants. If such
registration rights are exercised, the shares covered thereunder can be
sold in the open market. On September 1, 1996, the Company issued warrants
to purchase 245,098 shares of Common Stock to JLMP. The exercise price of
the warrants sold in September is $10.20 per share. On December 20, 1996,
the Company issued warrants to purchase 980,392 shares of Common Stock to
JLMP. The exercise price of the warrants issued in December is $10.20 per
share. These warrants are first exercisable on July 1, 1997. In
connection with the issuance of the warrants in September and December,
1996, the Company has entered into a registration rights agreement similar
to the Registration Rights Agreement. See "Description of Capital Stock --
Warrants" and "-- Registration Rights."
The Company, executive officers and directors of the Company and
certain shareholders of the Company have agreed that they will not sell any
shares of Common Stock (other than by operation of law or pursuant to bona
fide gifts or other transactions not involving a public distribution to a
person or other entity who agrees in writing not to so sell) for a period
of 180 days after the date of the final Prospectus (the "lock-up period")
without the written consent of Donaldson, Lufkin & Jenrette Securities
Corporation. Upon expiration of the lock-up period, or earlier upon the
consent of Donaldson, Lufkin & Jenrette Securities Corporation, 777,657
shares will become eligible for sale without restriction under Rule 144(k),
and an additional 2,216,804 shares will become eligible for sale subject to
the restrictions of Rule 144.
Any employee or director of or consultant to the Company who has been
granted options to purchase shares or who has purchased shares pursuant to
a written compensatory plan or written contract prior to the effective date
of this Offering pursuant to Rule 701 will be entitled to rely on the
resale provisions of Rule 701, which permits non-affiliates to sell their
Rule 701 shares without having to comply with the public information,
holding-period, volume-limitation or notice provisions of Rule 144 and
permits affiliates to sell their Rule 701 shares without having to comply
with the Rule 144 holding period restrictions, in each case commencing 90
days after the date of this Prospectus.
Following the Offering, the Company intends to file a registration
statement under the Securities Act to register shares of Common Stock
issuable upon the exercise of stock options granted under the Plan. Shares
issued upon the exercise of stock options after the effective date of such
registration statement generally will be available for sale in the open
market. Immediately following the completion of the Offering, the Company
estimates that there will be 437,546 shares issuable upon the exercise of
options outstanding under the Plan and 209,013 shares of Common Stock
reserved for future grants of options.
The Company is unable to estimate the number of shares that may be
sold under Rule 144 or otherwise because this will depend on the market
price for the Common Stock of the Company, the individual circumstances of
the sellers and other factors. Prior to the Offering, there has been no
public market for the Common Stock. Future sales of shares of Common
Stock, or the availability for sale of substantial amounts of Common Stock,
or the perception that such sales could occur, could adversely affect
prevailing market prices for the Common Stock and could impair the
Company's future ability to raise capital through an offering of its equity
securities.
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting
agreement (the "Underwriting Agreement") the Underwriters named below, for
whom Donaldson, Lufkin & Jenrette Securities Corporation and Needham &
Company, Inc. are acting as representatives (the "Representatives") have
severally agreed to purchase from the Company 2,500,000 shares of Common
Stock. The number of shares of Common Stock that each underwriter has
agreed to purchase is set forth opposite its name below:
NAME NUMBER OF SHARES
Donaldson, Lufkin & Jenrette
Securities Corporation . . . . . . . . . . . . _____________
Needham & Company, Inc. . . . . . . . . . . . . _____________
Total . . . . . . . . . . . . . . . . . . _____________
The Underwriting Agreement provides that the obligation of the several
Underwriters to purchase all of the shares of Common Stock is subject to
the approval of certain legal matters by counsel and as to certain other
conditions. If any of the shares of Common Stock are purchased pursuant to
the Underwriting Agreement, all such shares of Common Stock (other than the
over-allotment option described below) must be so purchased.
Prior to the Offering, there has been no established trading market
for the Common Stock. The initial price to the public for the Common Stock
offered hereby has been determined by negotiations between the Company and
the Representatives. The factors considered in determining the initial
price to the public include the history of and the prospects for the
industry in which the Company competes, the ability of the Company's
management, the past and present future earnings of the Company, the
historical results of operations of the Company, the prospects for future
earnings of the Company, the general condition of the securities markets at
the time of this Offering and the recent market prices of generally
comparable companies.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to
contribute to payments that the Underwriters may be required to make in
respect thereof.
The Company has been advised by the Representatives that the
Underwriters propose to offer the shares of Common Stock to the public
initially at the public offering price set forth on the cover page of this
Prospectus, and to certain securities dealers (who may include the
Underwriters) at such price less a concession not in excess of $____ per
share. The Underwriters may allow, and such dealers may re-allow,
discounts not in excess of $___ per share to any other Underwriter and
certain other dealers.
The Company has granted to the Underwriters an option to purchase up
to an aggregate of 375,000 additional shares of Common Stock at the initial
public offering price less the underwriting discounts and commissions
solely to cover over-allotments. Such option may be exercised at anytime
until 30 days after the date of this Prospectus. To the extent that the
Underwriters exercise such options, each of the Underwriters will be
committed, subject to certain conditions, to purchase a number of option
shares proportionate to such Underwriter's initial commitment as indicated
in the preceding table.
The Company, all directors and executive officers of the Company and
certain shareholders, have agreed that, without the prior written consent
of Donaldson, Lufkin & Jenrette Securities Corporation, they will not,
directly or indirectly, offer, sell, contract to sell, grant any option to
purchase or otherwise dispose of any share of Common Stock or any
securities convertible into or exercisable for such Common Stock, or in any
other manner transfer all or a portion of the economic consequence
associated with ownership of such Common Stock, except to the Underwriters
pursuant to the Underwriting Agreement, for a period of 180 days after the
date of this Prospectus.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon
for the Company by White & Case, New York, New York, who may rely upon
Dillon, Bitar & Luther, New Jersey counsel for the Company as to matters of
New Jersey law. Certain legal matters in connection with the Offering will
be passed upon for the Underwriters by Brobeck, Phleger & Harrison LLP, New
York, New York.
EXPERTS
The balance sheets as of September 30, 1996 and 1995, and the
statements of operations, shareholders' (deficit) equity and cash flow for
the three years in the period ended September 30, 1996, included in this
Registration Statement, have been included herein in reliance on the report
of Coopers & Lybrand L.L.P., independent accountants, given on the
authority of that firm as experts in accounting and auditing.
The statements in this Prospectus set forth under the captions "Risk
Factors - Risks From Reliance on Trade Secrets; No Assurance of Continued
Intellectual Property Protections," " - Risks Arising From Reversal of
Declaratory Judgment in Rockwell Patent Litigation" and "Business -
Intellectual Property" have been reviewed and approved by Lerner David
Littenberg Krumholz & Mentlik, Westfield, New Jersey, patent counsel for
the Company, as experts on such matters, and are included herein in
reliance upon such review and approval.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on
Form S-1 under the Securities Act with respect to the Common Stock offered
hereby. This Prospectus does not contain all the information set forth in
the Registration Statement and the exhibits and schedules thereto. For
further information with respect to the Company and such Common Stock,
reference is made to the Registration Statement and the exhibits and
schedules filed as part thereof. Statements contained in this Prospectus
as to the contents of any contract or other document referred to are
materially complete, and, in each instance, if such contract or document is
filed as an exhibit, reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement. The
Registration Statement, including exhibits and schedules thereto, may be
inspected without charge at the Commission's principal office, the Public
Reference Room of the Securities and Exchange Commission, Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
regional offices of the Commission at Seven World Trade Center, 13th
Floor, New York, New York 10048 and Northwestern Atrium Center, Suite 1400,
500 West Madison Street, Chicago, Illinois 60661. Copies of all or any
part thereof may be obtained from the Commission at its principal office in
Washington, D.C. and its public reference facilities in Chicago, Illinois
and New York, New York after payment of fees prescribed by the Commission.
The Company intends to furnish to its shareholders annual reports
containing consolidated financial statements audited by its independent
public accountants, and quarterly reports containing unaudited consolidated
financial statements for the first three quarters of each fiscal year.
Upon completion of the Offering, the Company shall be subject to the
informational requirements of the Exchange Act, and in accordance therewith
will file reports and other information with the Securities and Exchange
Commission. Such reports, proxy and information statements and other
information filed by the Company can be inspected and copied at the public
reference facilities maintained by the Commission in Washington, D.C., and
at its regional offices set forth above, and copies of such material can be
obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. The Commission
maintains a Web site that contains reports, proxy and information state-
ments and other information regarding the Company and other registrants
that file electronically with the Commission. The address of such site is:
http://www.sec.gov.
EMCORE CORPORATION
INDEX OF FINANCIAL STATEMENTS
Report of Coopers & Lybrand L.L.P., Independent Accountants . . F-2
Financial Statements:
Balance Sheets as of September 30, 1996 and 1995 . . . . . . . . F-3
Statements of Operations for the Years Ended
September 30, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . F-5
Statements of Shareholders' (Deficit) Equity as
of September 30, 1996, 1995 and 1994 . . . . . . . . . . . . . . F-6
Statements of Cash Flows for the Years Ended
September 30, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . F-8
Notes to Financial Statements . . . . . . . . . . . . . . . . . . F-11
REPORT OF COOPERS & LYBRAND L.L.P., INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
EMCORE Corporation:
We have audited the accompanying balance sheets of EMCORE Corporation
(the "Company") as of September 30, 1996 and 1995, the related statements
of operations, shareholders' equity (deficit) and cash flows for each of
the three years in the period ended September 30, 1996. We have also
audited the financial statement schedule listed in Item 16(b). These
financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and the financial
statement 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, 1996 and 1995, and the consolidated results
of its operations and its cash flows for each of the three years in the
period ended September 30, 1996, in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial
statement schedule taken as a whole, presents fairly, in all material
respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Parsippany, New Jersey
November 1, 1996, except for
Notes 13 and 15 as to which
the date is December 6, 1996
and Note 16 as to which the
date is February 3, 1997
EMCORE CORPORATION
BALANCE SHEETS
EMCORE CORPORATION
STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY
As of September 30, 1994, 1995, 1996
and December 31, 1996 (unaudited)
EMCORE CORPORATION
STATEMENTS OF CASH FLOWS
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. The Company offers its customers a complete,
vertically-integrated solution for the design, development and production
of compound semiconductor wafers and devices.
For the year ended September 30, 1996, the Company generated an
operating loss and a negative cash flow from operations. The Company's
operations are subject to a number of risks, including but not limited to
a history of losses, future capital needs, dependence on key personnel,
competition and risk of technological obsolescence, governmental
regulations and approvals and limited compound semiconductor manufacturing
and marketing capabilities. The Company's operations for the year ended
September 30, 1996, were primarily funded through two subordinated debt
issuances completed in May and September of 1996, amounting to $8.5 million
and $2.5 million, respectively, of cash proceeds (see Note 8). A portion
of the proceeds was used to extinguish $3 million of debt due under a
convertible debt agreement. The Company's operating and financing plans
include, among other things, (i) attempting to improve operating cash flow
through increased sales of compound semiconductor systems, wafers and
package-ready devices, (ii) managing its cost structure to its anticipated
level of revenues and (iii) seeking equity and debt financing sufficient to
meet its obligations on a long-term basis in order to fund its business
expansion plans. On October 25, 1996, the Company entered into a $10.0
million demand note facility to finance its operating and capital
requirements.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information. The financial information as of
December 31, 1996 and for the three-month periods ended December 31, 1995
and 1996 is unaudited but includes all adhustments (consisting only of
normal recurring accruals) that the Company considers necessary for a fair
presentation of the the financial position at such date and the operating
results and cash flows for those periods. Operating results for the three
months ended December 31, 1996 are not necessarily indicative of the
results that may be expected for the entire year.
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 $1,205,000
and $106,000 in cash equivalents at September 30, 1995 and 1996,
respectively.
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
the improvements, whichever is less.
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.
In the event that facts and circumstance indicate that the value of
assets may be impaired an evaluation of recoverability is performed. If an
evaluation is required, the estimated future undiscounted cash flows
associated with the asset would be compared to the assets carrying amount
to determine if an adjustment to the carrying amount is required.
Deferred Costs. Included in other assets are deferred costs related
to obtaining product patents and long-term debt refinancing. Such costs
are being amortized over a three to five year period, respectively.
Amortization expense amounted to approximately $56,000, $58,000 and
$128,000 for the years ended September 30, 1994, 1995 and 1996,
respectively.
As of December 31, 1996 deferred cost also included $2,700,000
associated with the warrants issued in connection with the guarantee of the
October demand note facility (See Note 8). It is the Company's intention
to pay down its outstanding notes and to terminate the demand note facility
upon the closing of the initial public offering. Therefore, the Company is
amortizing such debt issuance costs over the estimated period that the
facility will be in place (approximately four months) from December 6,
1996, the date the Company's Board of Directors approved the issuance of
the warrants and instructed management that the facility could be utilized.
Amortization expense for the quarter ending December 31, 1996 was $900,000,
which was reflected as interest expense.
Income Taxes. During fiscal 1994, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes." SFAS No. 109 required a change from the deferred method to the
asset and liability method of accounting for income taxes. Under the asset
and liability method, deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying enacted statutory tax
rates applicable to future years to differences between the financial
statement carrying amounts and the tax bases of existing assets and
liabilities. Under SFAS No. 109, the effect on deferred taxes of a change
in tax rates is recognized in income in the period that includes the
enactment date. Under the deferred method, deferred taxes were recognized
at the tax rate applicable to the year in which the difference between
financial statement carrying amounts and the corresponding tax bases arose.
Revenue and Cost Recognition.
Systems, Components and Service Revenues
Revenue from systems sales is recorded by 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 recorded.
Component sales and service revenues are recognized when goods are
shipped or services are rendered to the customer. Service revenue 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.
Contract Revenue
The Company's research contracts require the development or evaluation
of new material 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 $1,295,000,
$1,321,000, $3,295,000 for the years ended September 30, 1994, 1995 and
1996, 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.
Fair Value of Financial Instruments. The Company has estimated fair
value based upon discounted cash flow analyses using the Company's
incremental borrowing rate on similar instruments as the discount rate. As
of September 30, 1996, the carrying values of the Company's cash and cash
equivalents, receivables and accounts payable recorded on the accompanying
balance sheets approximate fair value. As of September 30, 1996, the fair
value of the Company's subordinated debt exceeded the carrying value by
approximately $387,000.
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 accounts receivable
and inventory valuation reserves, warranty and installation reserves,
estimates of cost and related gross profits on certain research contracts
and the valuation of long-lived assets.
NET (LOSS) INCOME PER SHARE
Net (loss) income per share data included in accompanying statement of
operations was calculated pursuant to the Securities and Exchange
Commission Staff Accounting Bulletin No. 64 ("SAB No. 64"). Under the
provisions of SAB No. 64, common stock and common equivalent shares issued
by the Company at prices below the initial public offering price within one
year or in contemplation of the Company's offering are treated as if they
were outstanding for all periods presented (using the treasury stock
method). Accordingly, the weighted average number of shares outstanding
has been increased by 1,443,936 equivalent shares, reflecting the common
stock purchase warrants and stock options issued during the twelve months
preceding the filing date of the registration statement relating to the
Company's initial public offering. The preferred stock restructuring
activities described in Note 11 have been treated as a recapitalization for
purposes of calculating earnings per share.
The historic per share data, in the following table, has been computed
based on the income or loss for the period divided by the weighted average
number of shares of common stock outstanding. The weighted average number
of shares outstanding excludes the number of common shares issuable upon
the exercise of outstanding stock options and warrants since such inclusion
would be anti-dilutive.
Reclassifications. Prior period balances have been reclassified to
conform with the current period financial statement presentations.
New Accounting Standards. In March 1995, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" ("SFAS No. 121"). This pronouncement establishes accounting standards
for when impairment losses relating to long-lived assets, identifiable
intangibles and goodwill related to those assets should be recognized and
how the losses should be measured. The Company plans to implement SFAS No.
121 in fiscal 1997. The adoption of SFAS No. 121 is not expected to have
an impact on the Company's financial position or results of operations
since Emcore's current policy is to monitor assets for impairment and
record any necessary write-downs.
In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock
Based Compensation" ("SFAS No. 123"). The provision of SFAS No. 123 sets
forth the method of accounting for stock based compensation based on the
fair value of stock options and similar instruments, but does not require
the adoption of this preferred method. SFAS No. 123 also requires the
disclosure of additional information about stock compensation plans, even
if the preferred method of accounting is not adopted. The Company plans to
implement SFAS No. 123 in fiscal 1997. The Company does not intend to
change its method of accounting for stock based compensation to the
preferred method under SFAS No. 123, but instead will continue to apply the
provisions of No. 25 "Accounting for Stock Issued to Employees." However,
the Company will disclose the pro forma effect of SFAS No. 123 on net
income and earnings per share.
NOTE 3. CONCENTRATION OF CREDIT RISK
The Company sells its compound semiconductor systems domestically and
internationally. The Company also sells wafers and package-ready devices
in the U.S. The Company's international sales are generally made under
letter of credit arrangements.
For the years ended September 30, 1994, 1995 and 1996, the Company
sold 59%, 36%, and 43% of its products to foreign customers, respectively.
The Company's sales to major customers were as follows:
The Company's 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 specific
customers, historical trends and other information. To reduce credit risk,
and to fund manufacturing costs, the Company requires periodic prepayments
on equipment orders. Credit losses have generally not exceeded the
Company's expectations.
The Company has temporary cash investments with financial institutions
in excess of the $100,000 insured limit of the Federal Deposit Insurance
Corporation.
NOTE 4. INVENTORIES
The components of inventories consisted of the following:
NOTE 5. PROPERTY AND EQUIPMENT
Major classes of property and equipment are summarized below:
The provisions for depreciation and amortization amounted to
approximately $543,000, $829,000 and $1,743,000 for the years ended
September 30, 1994, 1995 and 1996, respectively and $300,270 and
$1,012,350 for the three-month periods ended December 31, 1995 and 1996,
respectively.
Included in equipment above are twelve systems, ten systems and eight
systems with a combined net book value of approximately $1,220,000,
$2,124,000 and $2,792,000 at September 30, 1995 and 1996 and December 31,
1996, respectively. Such systems are utilized for systems demonstration
purposes, in-house materials applications research, contract research
funded by third parties, system sales support and the production of
compound semiconductor wafers and package-ready devices for sale to third
parties.
NOTE 6. COSTS AND BILLINGS ON UNCOMPLETED CONTRACTS
Costs incurred and billings on uncompleted contracts are summarized
below:
NOTE 7. ACCRUED EXPENSES
Accrued expenses consisted of the following:
NOTE 8. LONG-TERM DEBT
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,
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
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
note 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 in the contra equity note receivable account,
representing the portion of the employee note receivable associated with
common stock purchase warrants issued to them. 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 majority shareholder with terms
identical to the Subordinated Notes issued on May 1, 1996. In addition,
under the terms of this offering, 245,098 common stock purchase warrants
were issued to purchase common stock at $10.20 per share 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
the Black-Scholes Option Pricing Model, incorporating such factors
including the terms of the warrants, the underlying asset price, volatility
and marketability. In addition, the Company compared the resulting
effective interest rate to those which could be obtained from third-party
creditors. 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.
A portion of the proceeds from the May 1, 1996 Subordinated Notes
issuance was used to extinguish $3,000,000 of debt due to Hakuto & Co. Ltd.
("Hakuto"), the Company's Asian distributor, under a convertible debt
agreement (the "Agreement") scheduled to expire on June 2, 1998. Under the
June 2, 1993 Agreement, the Company was permitted to borrow up to
$3,000,000 at an interest rate of 7.5%. As of September 30, 1995, the
entire $3,000,000 was outstanding.
In connection with the Agreement, the Company issued 10,000 warrants
to Hakuto to purchase shares of the Company's Class IV Preferred Stock at
$1.00 per share (See Note 11). The warrants were exercised on January 1,
1995.
Under the Agreement, the $3,000,000 of debt was convertible into
preferred stock subject to the Company authorizing a new Class V series of
preferred stock prior to March 31, 1998. The debt was convertible in
$1,000,000 increments at a conversion rate of $2.50 per share of Class V
Preferred Stock. In addition, Hakuto had certain rights of first refusal,
with respect to the purchase of the Company through June 2, 1998, and the
distribution of the Company's products in Asia, excluding Taiwan and Korea.
The Agreement was collateralized by all the Company's assets. The
New Jersey Economic Development Authority ("NJEDA") had guaranteed 90% of
the Company's obligation pertaining to $1,000,000 of its outstanding debt.
Under the terms of the Agreement, the Company was required to repay
$1,000,000 of the debt upon expiration of the NJEDA guarantee. The NJEDA
guarantee expired on August 31, 1995, however, the lender permanently
waived the $1,000,000 repayment requirement through the expiration date of
the Agreement.
The Agreement contained certain covenants which included an employment
agreement with the Company's Chief Executive Officer for a period of five
years, and a personal guarantee from the Chief Executive Officer in the
amount of $100,000.
The Company had a $250,000 revolving loan agreement (the "Revolving
Loan") with the NJEDA which expired on February 14, 1996. The Revolving
Loan provided for the advancement of funds upon the Company's receipt of an
export sales contract and required repayment upon receipt of payment from
such customer or one hundred twenty days from the date of the advance. The
loan bore interest at a rate of the Federal Discount Rate (5.25% at
September 30, 1995). The Revolving Loan was collateralized by applicable
outstanding letters of credit. As of September 30, 1995, there were no
amounts outstanding under this facility.
The Revolving Loan Agreement contained restrictive covenants which
included among other restrictions, the Company could not issue any
additional stock, declare dividends, purchase its own stock, transfer
excess funds to an affiliated entity, borrow any funds or grant a
collateral position without the expressed written consent of the NJEDA.
The Company did not obtain the required written consent of the NJEDA for
the fiscal year 1995 capital restructuring activities as described in Note
11.
On October 25, 1996, the Company entered into a $10.0 million demand
note facility (the "Facility"). The Facility bears interest at the rate of
LIBOR plus 75 basis points, has a term of one year and is due and payable
on demand. The Facility has been guaranteed by the Company's majority
shareholder who has provided collateral for the Facility. In return for
guaranteeing the facility, in December 1996 the Company granted the
majority shareholder 980,392 common stock purchase warrants at $10.20 per
share which expire September 1, 2001. These warrants are exercisable after
July 1, 1997 and are callable at the Company's option after December 1,
1997 at $0.85 per warrant. As of December 31, 1996, the Company has
utilized $6.0 million of the Facility.
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
the Black-Scholes Option Pricing Model. This value has been accounted for
as debt issuance cost and is reflected as a deferred cost in the
accompanying December 31, 1996 balance sheet.
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.
The Company leases certain equipment under non-cancelable operating
leases.
Facility and equipment rent expense amounted to approximately
$298,000, $292,000 and $350,000 for the years ended September 30, 1994,
1995 and 1996, 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, 1996 are as follows:
In November 1996, the Company signed an agreement to occupy the
remaining 26,000 square feet that they previously had not occupied, which
will increase the total future minimum lease payments over the remaining 4
years of the lease by approximately $ 863,000.
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.
NOTE 10. INCOME TAXES
As described in Note 2, effective October 1, 1993, the Company adopted
SFAS No. 109. The adoption of SFAS No. 109 did not have an impact on the
financial position of the Company, as a full valuation allowance was
provided against the net deferred tax asset position, as of the date of
adoption, due to the uncertainty of the ultimate realization of such
assets.
Income tax expense consists of the following:
The principal differences between the U.S. statutory and effective income
tax rates were as follows:
The components of the Company's net deferred taxes were as follows:
The Company has established a valuation reserve as it has not
determined that it is more likely than not that the deferred tax asset is
realizable, based upon the Company's past earnings history.
As of September 30, 1996, the Company has net operating loss
carryforwards for regular tax purposes of approximately $9,600,000 which
expire in the years 2003 through 2011. The Company 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 ("IRC"). Due to the change
in control, the Company's ability to use its net operating loss carryovers
and research credit carryovers to offset future income and income taxes,
respectively, are subject to substantial annual limitations under IRC
Section 382 and 383.
NOTE 11. PREFERRED STOCK
Preferred Stock Restructuring Activities. In October 1994, the
Company offered the holders of 1,399,333 Class III preferred stock purchase
warrants the right to convert such warrants into 528,450 shares
(representing a reduced ratio of 1 to .38) of the Company's Class I
preferred stock. All the warrant holders exercised such rights. This
transaction increased the outstanding number of Class I preferred stock to
1,222,350 shares.
In November 1994, in an effort to simplify its capital structure, the
Company's Board of Directors and shareholders approved a capital
restructuring plan (the "Plan"). Pursuant to this Plan, a newly formed and
wholly-owned subsidiary of the Company was formed and merged with and into
the Company. Under the Plan, shares of the Company's Class IV preferred
stock were exchanged for shares of Class A senior convertible preferred
stock at an exchange rate of 1.5 to 1.0. The shares of all other classes
of preferred stock were exchanged into common stock at the following
ratios; Class I preferred stock at 100 to 1.18 and Class III preferred
stock at 100 to 2.94. In addition, the Company effected a reverse stock
split of .29 for one hundred and retired its preferred treasury stock.
Prior to this exchange, the Class I preferred stockholders were given the
right to have their stock repurchased for $.09 per share. The holders of
approximately 140,000 shares exercised this right, resulting in a stock
repurchase amounting to $12,645.
In August 1995, the outstanding shares of Class A senior convertible
preferred stock were exchanged for shares of common stock on the basis of
seven shares of common stock for each Class A security. This transaction
reduced the classes of stock outstanding to common stock.
As part of the August 1995 restructuring activities, holders of
warrants to purchase common stock were allowed to exercise their warrants
at $3.03 per share, resulting in the exercise of 30,588 warrants for
aggregate cash consideration of $92,554.
In January 1995, the holder of 15,000 warrants to purchase Class A
senior convertible preferred stock exercised their rights by paying $0.67
per share, or $10,000. In August 1995, these 15,000 shares of Class A
preferred stock were converted into 30,882 shares of common stock.
The basis of all exchanges were approved by the Company's Board of
Directors and its shareholders and reflected the priorities of the Class A
securities upon liquidation and other factors.
The following table summarizes the Company's preferred stock
activities from October 1, 1993 through September 30, 1995.
Class I Preferred Stock. In connection with the restructuring
described above, as of September 30, 1995 and 1996, there were no issued or
outstanding shares of Class I preferred stock.
Each share of 9% cumulative convertible $1.78 par value preferred
stock was entitled to one vote, a cumulative of 9% annual dividend and
certain preference rights in the event of liquidation. Each preferred
share was convertible into .36 shares of the common stock and could be
redeemed for .36 shares of common stock upon an initial public offering of
the Company's common stock.
Class III Preferred Stock. In connection with the restructuring
described above, as of September 30, 1995 and 1996, there were no issued or
outstanding shares of Class III preferred stock.
Each share of the no par, Class III preferred stock was entitled to
one vote, an annual dividend, when and as declared by the Company's Board
of Directors, of $0.225 per share and had a liquidation preference senior
to the Company's Class I preferred stock. This liquidation preference
entitled each shareholder of the Class III preferred stock to $2.50 per
share, $16,543,068, and an amount equal to such amount received by the
Company's common stock shareholders upon liquidation. The Class III
preferred stock had a mandatory redemption feature which required one-third
of the outstanding stock to be redeemed on December 31, 1994, one-third on
December 31, 1995 and one-third on December 31, 1996, for $2.50 per share
and 0.29 share of the Company's common stock. Further, in the event the
Company was acquired, the Class III preferred stock was required to be
redeemed at $2.50 per share plus one share of the acquiring Company's
common stock. The Class III preferred stock mandatory redemption amount of
$16,543,068 was in excess of the $10,210,678 carrying amount of such stock
as of the Company's March 28, 1990 recapitalization. Accordingly, the
carrying amount was subject to periodic accretions, using the interest rate
method, in order for the carrying amount to equal the mandatory redemption
amount upon redemption. Each Class III preferred share was convertible
into 1 share of common stock.
Class IV Preferred Stock. In connection with the restructuring
described above, as of September 30, 1995 and 1996, there were no issued or
outstanding shares of Class IV preferred stock.
During fiscal year 1993, the Company issued 674,709 shares of Class IV
preferred stock in connection with the conversion of $674,709 of then
outstanding 90-day notes. Each share of the Class IV Stock was entitled to
five (5) votes, an annual dividend, when and as declared by the Company's
Board of Directors, of $0.09 per share, which dividend was cumulative, and
had a liquidation preference senior to all other existing classes of stock.
This liquidation preference entitled each shareholder of Class IV Preferred
Stock to an amount equal to the sum of (i) $1.00 per share, (ii) all
accrued and unpaid dividends, and (iii) 95% of the proceeds up to $14.00
per share.
The Class IV preferred stock had a mandatory redemption feature which
required one-third of the outstanding stock to be redeemed on November 30,
1994, one-third on November 30, 1995 and one-third on November 30, 1996,
for $1.00 per 0.29 share plus 0.29 share of common stock. Each share of
Class IV Preferred Stock was convertible into one share of common stock.
During fiscal year 1994, the Company issued 207,690 shares of Class IV
preferred stock for $1 per share. In connection with such issuance, the
Company entered into notes receivable agreements with certain employees
amounting to $146,107. Such notes have been recorded as a reduction to
equity. The notes bear interest at a rate of 6.0%.
Class A Preferred Stock. In connection with the restructuring
described above, as of September 30, 1995 and 1996, there were no issued or
outstanding shares of Class A preferred stock.
In August 1995, all 1,338,599 shares of Class A preferred stock were
converted into 2,755,939 shares of common stock. The Class A stock was
issued in connection with the Company's plan to exchange the Class IV
preferred stock at a ratio of 1.5 shares of Class A for each share of Class
IV. The rights and preferences attached to the Class A preferred stock
were similar to the Class IV preferred stock.
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 Board
of Directors approved the 1995 Incentive and Non-Statutory Stock Option
Plan (the "Option Plan") and such plan was subsequently approved at the
annual meeting of shareholders held on June 23, 1995. 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 323,528 shares of common stock was approved.
Certain options under the Option Plan are intended to qualify as
incentive stock options pursuant to Section 422A of the Internal Revenue
Code. Options with respect to 281,470 and 339,412 shares were outstanding
at September 30, 1995 and 1996 at an exercise prices ranging from $3.03 to
$10.20 per share. At September 30, 1994, options with respect to 32,794
shares were outstanding under previous plan at exercise prices ranging from
$1.70 to $8.50 per share.
Stock options granted generally vest over three to five years and are
exercisable over a six year period. As of September 30, 1994, 1995 and
1996, options with respect to 28,618, 100,382 and 162,764 shares were
exercisable, respectively.
The following table summarizes the activity under the plan:
Outstanding as of
September 30, 1994
Granted 32,794
Exercised 281,470
Cancelled (32,794)
Outstanding as of
September 30, 1995
Granted 281,470
Exercised 57,942
Cancelled
Outstanding as of
September 30, 1996 339,412
Warrants. In connection with the capital restructuring plan described
in Note 11 above, certain of the Company's outstanding preferred stock
purchase warrants were exchanged for common stock purchase warrants. Set
forth below is a summary of the Company's outstanding warrants at
September 30, 1996:
The above table excludes: (i) Class III preferred stock purchase
warrants which were exchanged for Class I preferred stock in October 1994,
(ii) warrants exercised in August 1995, as described in Note 11 and (iii)
warrants to purchase 15,000 shares of Class A senior convertible preferred
stock which were exercised in January 1995, as described in Note 8 and 11.
As described in Note 8 in December 1996, the Company issued an
additional 980,392 common stock purchase warrants with a $10.20 exercise
price and September 1, 2001 expiration date.
NOTE 13. RELATED PARTIES
In May 1995, 52% of the Company's outstanding shares of Common Stock
were purchased by Jesup & Lamont, L.L.C. ("JLMP"). Since that date four of
the Company's six directors have been members of JLMP. As of September 30,
1996, JLMP has an ownership interest in the Company of approximately 59.8%.
In May 1995, the Company entered into a consulting agreement with Jesup &
Lamont Capital Markets, Inc. ("Jesup & Lamont") (the "Agreement") 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 and $288,385 for the years ended
September 30, 1995 and 1996, respectively.
In December 1996, the Company's chairman and chief executive officer
retired. The Company has 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 has agreed to extend the period for the exercise of his
vested stock options to March 4, 1997.
NOTE 13. EXPORT SALES
The information below summarizes the Company's export sales by
geographic area.
The Company's export sales are as follows:
NOTE 15. SUBSEQUENT EVENTS
On December 6, 1996, the Board of Directors authorized management of
the Company to file a Registration Statement with the Securities and
Exchange Commission permitting the Company to sell shares of its common
stock to the public.
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
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.
No dealer, salesperson, or other person has been authorized to give any
information or to make any representations other than those contained in
this Prospectus and, if given or made, such information or representations
must not be relied upon as having been authorized by the Company or any of
the Underwriters. This Prospectus does not constitute an offer to sell or
the solicitation of an offer to buy any securities other than the
securities to which it relates or any offer to sell or the solicitation of
an offer to buy such securities in any jurisdiction where such an offer or
solicitation would be unlawful. Neither the delivery of this Prospectus
nor any sale made hereunder shall, under any circumstances, create any
implication that the information contained herein is correct as of any time
subsequent to the date hereof.
Table of Contents
Page
Prospectus Summary . . . . . . . . . . 2
Risk Factors . . . . . . . . . . . . . 6
Use of Proceeds . . . . . . . . . . . . 16
Dividend Policy . . . . . . . . . . . . 16
Capitalization . . . . . . . . . . . . 17
Dilution . . . . . . . . . . . . . . . 18
Selected Financial Data . . . . . . . . 19
Management's Discussion and
Analysis of Financial Condition
and Results of Operation . . . . . . . 20
Business . . . . . . . . . . . . . . . 28
Management . . . . . . . . . . . . . . 40
Certain Transactions . . . . . . . . . 46
Principal Shareholders . . . . . . . . 49
Description of Capital Stock . . . . . 51
Shares Eligible for Future Sale . . . . 54
Underwriting . . . . . . . . . . . . . 56
Legal Matters . . . . . . . . . . . . . 57
Experts . . . . . . . . . . . . . . . . 57
Additional Information . . . . . . . . 58
Index to Financial Statements . . . . . F-1
Until _______ __, 1997 (25 days after the date of this Prospectus),
all dealers effecting transactions in the registered securities, whether or
not participating in this distribution, may be required to deliver a
Prospectus. This is in addition to the obligation of dealers to deliver a
Prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
2,500,000 SHARES
[LOGO]
EMCORE CORPORATION
COMMON STOCK
PROSPECTUS
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
NEEDHAM & COMPANY, INC.
FEBRUARY __, 1997
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. 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,
the NASD filing fee and the Nasdaq National Market application fee.
To Be Paid
By The
Registrant*
Securities and Exchange Commission
registration fee . . . . . . . . . . . . $ 9,090.91
NASD filing fee . . . . . . . . . . . . 3,500.00
Nasdaq National Market application fee . 19,375.00
Accounting fees and expenses . . . . . . 180,000.00
Printing expenses . . . . . . . . . . . 35,000.00
Transfer agent and registrar fees . . . 2,000.00
Blue Sky fees and expenses . . . . . . . 5,000.00
Legal fees and expenses . . . . . . . . 450,000.00
Other expenses . . . . . . . . . . . . . 6,034.09
Total . . . . . . . . . . . . . . . $710,000.00
______________
*Estimated
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's 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."
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 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 dis-
position 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
(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 deter-
mination 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.
(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 15. RECENT SALES OF UNREGISTERED SECURITIES
Since December 1, 1993, the Company has sold and issued the
following unregistered securities:
1. November 30, 1994. Exchange of 198,439 shares of common stock,
1,081,850 shares of Class I Stock, 6,617,227 shares of Class III
Stock, and 882,399 shares of Class IV Stock pursuant to a merger
by EMCORE Merger Subsidiary Corporation with and into EMCORE
Corporation. All purchasers of these shares were existing
shareholders of the Company. The exchange ratio was as follows:
100 shares of Class IV Stock for 150 shares of Class A Stock; 100
shares of Class III Stock for 10 shares of Common Stock; 100
shares of Class I Stock for 4 shares of Common Stock; and, 100
shares of old Common Stock for 1 share of new Common Stock. No
cash was involved in this transaction. The transaction was
exempt from registration pursuant to Section 3(a)(9) of the
Securities Act.
2. October 25, 1995. The issuance of 9,370,200 shares of Common
Stock in exchange for 1,338,600 shares of Class A Common Stock
pursuant to a merger of EMCORE Merger Subsidiary Two Corporation
with and into EMCORE Corporation. All purchasers of these shares
were existing shareholders of the Company. No cash was involved
in this transaction. This exchange was exempt from registration
pursuant to Section 3(a)(9) of the Securities Act.
3. October 25, 1995. Sale of 103,993 shares at $0.89 a share to
five holders of the Company's warrants to purchase the Company's
Common Stock at $5.00 a share until 1997. The consideration
received included the surrender of warrants plus a total cash
consideration of $92,554. The purchasers were knowledgeable and
able to bear the risk and had access to the information relevant
to their investment. No general selling efforts were made.
Transfer restrictions were imposed. This transaction was exempt
from registration pursuant to Section 4(2) of the Securities Act.
The following description of share exchanges or issuances
indicate share numbers and warrant exercise prices that reflect
the 3.4:1 reverse stock split effective February 3, 1997.
4. December 1, 1995. Issuance of 30,882 shares of Common Stock to
Hakuto, a Japanese corporation, upon exercise of warrants. The
warrants had been issued in connection with a Distributorship
Agreement with Hakuto. The total amount of cash consideration
was $10,000. The offer was made in Japan; the buyer was in Japan
and is not a U.S. person, and no directed selling efforts were
made. This transaction was exempt from registration pursuant to
Regulation S under the Securities Act.
5. May 1, 1996. Issuance to nineteen persons of $9,500,000 of 6%
Subordinated Notes due 2001 in a unit paired with warrants to
purchase 2,328,432 shares of Common Stock at $4.08 a share.
Purchasers of the Notes were all current shareholders of the
Company. Holders have the right to use the principal amount of
the Note to exercise the warrants until the expiration date. The
warrants expire on the maturity date of the Notes. In this
Offering, $9,500,000 was raised, of which $1,000,000 was in the
form of notes from officers of the Company. The purchasers were
knowledgeable and able to bear the risk and had access to the
information relevant to their investment. No general selling
efforts were made. Transfer restrictions were imposed. This
transaction was exempt from registration pursuant to Section 4(2)
of the Securities Act.
6. July 12, 1996. Sale to Dane C. Scott. $9,600 6% Subordinated
Notes due 2001 in a unit paired with warrants to purchase 2,353
shares of Common Stock at $4.08 a share in the aggregate amount
of $9,600. Mr. Scott is a Senior Design Engineer of the Company.
This transaction was exempt from registration pursuant to Section
4(2) of the Securities Act.
7. Employee stock options were granted at various times after the
adoption of the Plan in 1995 at prices ranging from $3.03 a share
to $10.20. These transactions were exempt from registration
pursuant to Section 4(2) of and Rule 701 under the Securities
Act.
8. September 1996. Sale to JLMP of $2.5 million 6% Subordinated
Note and warrants to purchase 2,450,098 shares at $10.20 a share.
This transaction was exempt from registration pursuant to Section
4(2) of the Securities Act.
9. December 1996. Issuance to JLMP of warrants to purchase 980,392
shares at $10.20 a share in consideration for guaranteeing and
securing the guarantee of a $10 million demand note facility.
This transaction was exempt from registration pursuant to Section
4(2) of the Securities Act. JLMP was a shareholder of the
Company; no general selling efforts were made.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following exhibits are filed with this Registration
Statement:
Exhibit No. Description
1.1 Form of Underwriting Agreement*
3.1 Restated Certificate of Incorporation as amended February 3,
1997
3.2 Amended By-Laws, as amended January 11, 1989
4.1 Specimen certificate for shares of Common Stock*
5.1 Opinion of White & Case
10.1 1995 Incentive and Non-Statutory Stock Option Plan
10.2 1996 Amendment to Option Plan
10.3 Specimen Incentive Stock Option Agreement
10.4 Hakuto Distributorship Agreement
10.5 Amendment to Lease for premises at 394 Elizabeth Avenue,
Somerset, New Jersey 08873
10.6 Registration Rights Agreement relating to September 1996
warrant issuance
10.7 Registration Rights Agreement relating to December 1996
warrant issuance
10.8 Form of 6% Subordinated Note Due May 1, 2001
10.9 Form of 6% Subordinated Note Due September 1, 2001
10.10 Form of $4.08 Warrant
10.11 Form of $17.00 Warrant
10.12 Form of $10.20 Warrant
10.13 Demand note facility with First Union National Bank
10.14 Consulting Agreement dated December 6, 1996 between the
Company and Norman E. Schumaker
10.15 Purchase Order issued to the Company by General Motors
Corporation on November 17, 1996. Confidential treatment has
been requested by the Company with respect to portions of this
document. Such portions are indicated by "[*]".
11.1 Statement of Computation of Per Share Amounts
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of White & Case (included in Exhibit 5.1)
23.3 Consent of Lerner David Littenberg Krumholz & Mentlik
23.4 Consent of Robert Louis-Dreyfus
24.1 Power of Attorney**
27.1 Financial Data Schedule**
99.1 Schedule II: Valuation and Qualified Accounts & Reserves**
* To be filed by amendment
** Previously filed
(b) Financial Statement Schedule
The following Financial Statement Schedule is filed pursuant to Item
11(e) of Regulation S-X:
Schedule II: Valuation and Qualified Accounts & Reserves**
All other schedules are omitted because they are not applicable or the
required information is shown in the Financial Statements or Notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
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 to provide to the
Underwriters at the closing specified in the Underwriting Agreement
certificates in such denomination and registered in such names as required
by the Underwriters to permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of 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, 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.
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Township of Somerset, State
of New Jersey, on February 5, 1997.
EMCORE CORPORATION
By /s/ Reuben F. Richards, Jr.
Name: Reuben F. Richards, Jr.
Title: President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act, this Registration
Statement on Form S-1 has been signed by the following persons in the
capacities indicated, on February 5, 1997.
Signature Title
* President, Chief Executive
Reuben F. Richards, Jr. Officer and Director
(Principal Executive Officer)
* Vice President, Chief
Thomas G. Werthan Financial Officer, Secretary
and Director (Principal
Accounting and Financial
Officer)
Richard A. Stall Director
* Chairman of the Board
Thomas J. Russell and Director
* Director
Howard R. Curd
* Director
Howard F. Curd
*By /s/ Reuben F. Richards, Jr.
Reuben F. Richards, Jr.
EXHIBIT INDEX
Exhibit No. Description
1.1 Form of Underwriting Agreement*
3.1 Restated Certificate of Incorporation, as amended February 3,
1997
3.2 Amended By-Laws, as amended January 11, 1989
4.1 Specimen certificate for shares of Common Stock*
5.1 Opinion of White & Case
10.1 1995 Incentive and Non-Statutory Stock Option Plan
10.2 1996 Amendment to Option Plan
10.3 Specimen Incentive Stock Option Agreement
10.4 Hakuto Distributorship Agreement
10.5 Amendment to Lease for premises at 394 Elizabeth Avenue,
Somerset, New Jersey 08873
10.6 Registration Rights Agreement relating to September 1996
warrant issuance
10.7 Registration Rights Agreement relating to December 1996
warrant issuance
10.8 Form of 6% Subordinated Note Due May 1, 2001
10.9 Form of 6% Subordinated Note Due September 1, 2001
10.10 Form of $4.08 Warrant
10.11 Form of $17.00 Warrant
10.12 Form of $10.20 Warrant
10.13 Demand note facility with First Union National Bank
10.14 Consulting Agreement dated December 6, 1996 between the
Company and Norman E. Schumaker
10.15 Purchase Order issued to the Company by General Motors
Corporation on November 17, 1996. Confidential treatment has
been requested by the Company for portions of this document.
Such portions are indicated by "[*]".
11 Statement of Computation of Per Share Amounts
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of White & Case (included in Exhibit 5.1)
23.3 Consent of Lerner David Littenberg Krumholz & Mentlik
23.4 Consent of Robert Louis-Dreyfus
24.1 Power of Attorney**
27.1 Financial Data Schedule**
99.1 Schedule II: Valuation and Qualified Accounts & Reserves**
* To be filed by amendment
** Previously filed
Exhibit 3.1
RESTATED
CERTIFICATE OF INCORPORATION
OF EMCORE CORPORATION
Reuben F. Richards, Jr., being over the age of eighteen and acting
as a duly authorized officer of Emcore Corporation and by virtue of the
provisions of the New Jersey Business Corporation Act, Title 14A of the
Revised Statutes of the State of New Jersey, hereby certifies that the
Restated Certificate of Incorporation of Emcore Corporation is as follows:
FIRST: The name of the Corporation is:
EMCORE Corporation
SECOND: The purpose for which this Corporation is organized is to
engage in any activity within the purposes for which corporations may be
organized under the New Jersey Business Corporation Act.
THIRD: The registered office of the Corporation is:
394 Elizabeth Avenue
Somerset, NJ 08873
and the name of the corporation's registered agent at such address is:
Thomas G. Werthan
FOURTH: The total number of shares of Capital Stock of the
Corporation shall be 29,411,763 shares of which:
A. Of the Capital Stock, 23,529,411 shares shall consist of Common
Stock which shall be entitled to one vote per share of all matters which
holders of the Common Stock shall be entitled to vote on.
B. Of the Capital Stock, 5,882,352 shares shall consist of
Preferred Stock which may be divided into such classes and such series as
shall be established from time to time by resolutions of the Board of
Directors and filed as an amendment to this Certificate of Incorporation,
without any requirement of vote or class vote of shareholders. The Board of
Directors shall have the right and power to establish and designate in any
such Class or Series Resolution such priorities, powers, preferences and rela-
tive, participating, optional or other special rights and qualifications,
limitations and restrictions as it shall determine.
FIFTH: The Board of Directors presently consists of six (6) persons
and the names and addresses of the persons who are to serve on the Board of
Directors are as follows:
Name Address
Reuben F. Richards, Jr. 394 Elizabeth Avenue
Somerset, NJ 08873
Thomas G. Werthan 394 Elizabeth Avenue
Somerset, NJ 08873
Richard A. Stall 394 Elizabeth Avenue
Somerset, NJ 08873
Thomas J. Russell Jesup & Lamont Capital
Markets, Inc.
650 Fifth Avenue
New York, NY 10019
Howard R. Curd Jesup & Lamont Capital
Markets, Inc.
650 Fifth Avenue
New York, NY 10019
Howard F. Curd Jesup & Lamont Capital
Markets, Inc.
650 Fifth Avenue
New York, NY 10019
SIXTH: Neither a Director nor an Officer shall be liable to the
Corporation or its shareholders for damages for breach of any duty owed to the
Corporation or its shareholders, except that this provision shall not relieve
a Director or an 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 the receipt of such person of an
improper personal benefit.
SEVENTH: Any director of the Corporation may be removed with or
without cause by vote of the shareholders except that a director elected by a
class may be removed only by a vote of the class that elected the director.
EIGHTH: The Board of Directors by a vote of a majority of the entire
Board may lend money to, guarantee any obligation of or otherwise assist any
officer or employee of the Corporation who is also a director provided that
such loan shall be adequately secured and no such loan, guarantee or other
assistance shall be made unless there shall be an appropriate business
purpose.
NINTH: The Corporation shall indemnify every officer and director of
the corporation to the full extent permitted by law.
TENTH: The number of directors shall be as determined by any
resolution of the Board of Directors unless a Class or Series Resolution
adopted pursuant to Article FOURTH shall otherwise provide. In the event of an
increase in the number of directors, the Board itself is authorized to fill
any such directorship unless such a Class or Series Resolution shall otherwise
provide.
ELEVENTH: This Corporation shall have perpetual existence.
IN WITNESS, the undersigned has set his hand this 3d day of February
1997.
/s/ Reuben F. Richards, Jr.
Reuben F. Richards, Jr.
President