S-1/A: General form of registration statement for all companies including face-amount certificate companies
Published on March 4, 1997
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 4, 1997
REGISTRATION NO. 333-18565
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 5
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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EMCORE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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NEW JERSEY 3670 22-2746503
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
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)
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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
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: as soon as
practicable after the effective date of this Registration Statement.
If 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. [_]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MARCH 4, 1997
PROSPECTUS
, 1997
2,500,000 SHARES
LOGO
[OF EMCORE}
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 "Underwriting" 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.
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(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 the Public, Underwriting
Discounts and Commissions and Proceeds to the Company will be ,
and , respectively. 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
[Illustrations and descriptions of the technology systems, package-ready devices
and epitaxial wafers offered by the registrant]
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-for-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's market share for
its wafer and package-ready device product offerings is currently not
significant. 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 characteristics 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 communications, 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 TurboDisc(TM) 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
3
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 13 of the largest electronics manufacturers
in Japan. 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 disk ("DVD") players, flat-panel displays
and electronic automotive components. 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. In fiscal 1996,
no other customer individually accounted for more than 7.5% of the Company's
revenues.
THE OFFERING
SUMMARY FINANCIAL DATA
4
(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 9,102 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) Net (loss) income per share and shares used in computing net (loss) income
per share assumes: 1,443,936 shares of Common Stock issuable under 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.
(3) Reflects 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 therefrom. See "Use of Proceeds."
(4) 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 $6.0 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."
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."
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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.
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Certain persons participating in this offering may engage in transactions
that stabilize, maintain or otherwise affect the price of the Common Stock.
Specifically, the Underwriters may overallot in connection with the offering
and may bid for and purchase shares of the Common Stock in the open market. For
a description of these activities, see "Underwriting."
5
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 semiconductor 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 204 as of December 31, 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 and working capital. 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
6
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 as well as, for the
quarter ended 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 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. 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
incurred a loss of $3.8 million in the quarter ended 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 $1.0 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. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
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
7
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. In addition, substantially all of the
wafers fabricated by the Company are currently being used only 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
8
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, invalidated 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 of any third parties that are infringing its intellectual property
rights, 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 would 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 "Business--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
TurboDisc(TM) systems. The Company anticipates that a majority 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.
9
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 recently-established 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%, 42.5% and 64.3% of the Company's revenues in fiscal 1994, 1995, 1996
and the first fiscal quarter of 1997, 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. 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. 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
10
international operations, dependence on and difficulties in managing
international 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 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
11
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, potential 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 persuade certain
potential customers to incorporate compound semiconductor-based package-ready
devices in 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
potential 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 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. 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 Common
Stock outstanding, not including warrants to purchase 980,392 shares of Common
Stock, 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 Common Stock outstanding, not including warrants to
purchase 980,392 shares of Common Stock, 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
12
demand note facility, Thomas J. Russell, the Chairman of the Company's Board
of Directors and one of three trustees of a trust which is a member of JLMP,
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. 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 developments 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 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
13
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 technologies. 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"
could 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 the
net tangible book value per share of Common Stock from the initial public
offering price per share. Assuming an initial public offering price of $10.00
per share, 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."
14
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 3,565,375 shares of
Common Stock. Subsequent to the exercise of such options and warrants, and to
the issuance of shares of Common Stock thereunder, 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."
Risks of Sales of Common Stock Upon Expiration of Rule 144 Holding
Period. After the 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 option) will be freely tradeable without restriction under the
Securities Act, unless purchased by "affiliates." As defined in Rule 144 under
the Securities Act, 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 ("Restricted Shares"). 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.
Furthermore, certain holders of Restricted Shares which are issuable, under
certain conditions, upon the exercise of warrants, hold rights to compel the
inclusion of these Restricted Shares in registration statements filed by the
Company. The inclusion of these Restricted Shares in registration statements,
the availability for sale of these Restricted Shares, 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. See "Description of
Capital Stock--Warrants," "--Registration Rights," and "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.
15
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 $22.5 million ($26.0
million 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, up to $10.0 million 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 (approximately 6.3% at December 31,
1996). The remaining net proceeds allocated to debt repayment, if any, will be
used to repay a portion of the Company's outstanding subordinated notes due
May 1, 2001. These subordinated notes bear interest at a rate of 6.0% per
annum. Approximately $8.0 million 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 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.
16
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1996, and as adjusted to reflect the sale by the Company of
2,500,000 shares of Common Stock being offered hereby (at an assumed initial
public offering price of $10.00 per share) and the application of the
estimated net proceeds therefrom.
- ---------------------
(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 approximately $6.0 million from this facility. The
Company intends to use $10.0 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 464,017 shares were subject to outstanding options at
exercise prices varying from $3.03 per share to $10.20 per share; (ii)
warrants to purchase 9,102 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.
17
DILUTION
The net tangible book value (deficiency) of the Company as of December 31,
1996 was ($3.0 million) 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 ($3.3
million at December 31, 1996 comprised of $3.2 million 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
$19.6 million 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 $10.00 per share:
At December 31, 1996, there were outstanding: (i) stock options to purchase
464,017 shares of Common Stock at a weighted average exercise price of $5.47
per share; (ii) warrants to purchase 9,102 shares of Common Stock at $17.00
per share; (iii) warrants to purchase 2,330,784 shares of Common Stock at
$4.08 per share; and (iv) 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.
18
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 Statements
and the Notes thereto, and Management's Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in this Prospectus. The
Statement of Income Data set forth below with respect to fiscal 1996, 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 months 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.
19
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 TurboDisc(TM) 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
TurboDisc(TM) system and, by 1990, had sold systems in the United States, Asia
and Europe.
Historically, the Company's revenues have consisted primarily of the sales
of MOCVD systems and components, government-sponsored research contracts and
service contracts. 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
consisted principally of the sale of larger production platforms. 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 increased its expense
levels in most operating areas to support anticipated growth in demand for
each of its product offerings, including the hiring of additional
manufacturing, research, engineering, sales and administrative personnel. For
fiscal 1996 and the first quarter of fiscal 1997, such initial operating
expenses amounted to approximately $3.9 million and $2.7 million,
respectively, and related to employee, facility, overhead, depreciation, and
research and development costs incurred to qualify certain production systems
for production capability and to establish manufacturing processes. In fiscal
1996, the Company 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 will spend approximately $8.0 million 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 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. The Company commenced shipment of MR
devices to General Motors in January 1997 and expects that it will
substantially reduce its losses in the remainder of fiscal 1997 and into
fiscal 1998. 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, 1996 and the first fiscal quarter of 1997, international
sales constituted 58.6%, 36.0%, 42.5% and 64.3%, respectively, of revenues.
The Company has made
20
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. There can be no assurance, however, 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 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 evaluation of new materials applications
and have a duration of six to 36 months. Contracts with a duration of six
months or less are accounted for on the completed contract method. A contract
is considered complete when all costs have been incurred and the research
reporting requirements to the customer have been met.
RESULTS OF OPERATIONS
The following table sets forth the Statement of Income Data of the Company
expressed as a percentage of total revenues for the periods indicated.
21
COMPARISON OF THREE MONTHS ENDED DECEMBER 31, 1995 AND 1996
Revenues. Revenue increased 102% from $4.3 million for the three months
ended December 31, 1995 to $8.6 million for the three months ended December
31, 1996. Revenues from international sales increased 252% from $1.6 million
in the quarter ended December 31, 1995 to $5.5 million in the quarter ended
December 31, 1996. These increases were 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. Although the Company installed production of
wafers and package-ready devices in the first quarter of fiscal 1997, revenues
from these products were insignificant.
Cost of Sales/Gross Profit. Cost of sales includes direct material and labor
costs, manufacturing and service overhead, and installation and warranty
costs. Cost of sales increased 142% from $2.8 million for the three months
ended December 31, 1995 to $6.7 million for the three months ended 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 systems
installation and warranty expenses and the continued start-up costs associated
with the Company's new wafer and package-ready devices product lines. The
Company accrues for installation and warranty costs when revenue is recognized
upon shipment, which is when title passes to the customer. During the quarter
ended December 31, 1996, the Company experienced an increase of $300,000 of
installation and warranty costs related to four production systems sold in
fiscal 1996. The Company believes that, at December 31, 1996, it had fully
accrued for installation and warranty expenses relating to shipped systems.
The Company also incurred approximately $700,000 of start-up expenses related
to the establishment of its epitaxial wafer and package-ready device product
offerings. The Company anticipates that it will begin generating revenue from
these product offerings in the quarter ending March 31, 1997. Any delay in
generating revenues could adversely affect the Company's business, financial
condition and results of operations.
Selling, General and Administrative. Selling, general and administrative
expenses increased 45.7% from $1.5 million for the three months ended December
31, 1995 to $2.2 million for the three months 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.
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% from $0.8
million in the three months ended December 31, 1995 to $2.3 million in the
three months 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, an MR configuration. As a percentage of total
revenues, research and development expenses increased from 18.6% in the
quarter ended December 31, 1995 to 26.2% for the quarter ended December 31,
1996.
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. Revenues derived from international sales
increased 81.5% from $6.5 million in fiscal 1995 to $11.8 million in fiscal
1996. These increases were 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
whereby General Motors paid the Company $1.6 million to develop and enhance
certain MR package-ready devices for commercial production.
22
Cost of Sales/Gross Profit. Cost of sales increased 87.9% from $9.9 million
in fiscal 1995 to $18.6 million in fiscal 1996. Gross profit decreased from
45.2% 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) increased production 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 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 45.2% of revenues in fiscal 1995. This
increase was due to a 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.
23
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 nine 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 wafers and
devices, 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.
24
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 28.9%, 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) increased production 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 and enhancement 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 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 33.5% 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.
In connection with the establishment of the Company's demand note facility
in the quarter ended December 31, 1996, the Company issued warrants to
purchase 980,392 shares of Common Stock to JLMP in consideration for a
guaranty by the Chairman of the Company (who was also Chairman of JLMP) and
collateral for the demand note facility. The Company assigned a fair value of
$3.67 per warrant ($3,600,000), and, accordingly, has accounted for such
warrants as debt issuance costs, which are amortized over the estimated period
that the facility will be in place (approximately four months). Consequently,
for the quarter ended December 31, 1996, the Company recognized debt issuance
cost amortization of approximately $900,000 of this amount, which was charged
to imputed warrant interest, non-cash.
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
25
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 and an increase in inventories and receivables, which was 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 TurboDisc(TM) production systems
manufactured for the Company's own use, 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,
TurboDisc(TM) 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 6.0% subordinated notes due 2001. Of this
amount, $3.0 million was used to repay the outstanding 7.5% Notes held by
Hakuto including $3.0 million borrowed in fiscal 1993.
For the quarter ended December 31, 1996, the Company's level of accounts
receivable increased approximately $3.6 million, or 119.1%, to $6.6 million,
principally due to the timing of shipments. During the final month of the
quarter, the Company shipped three TurboDisc production systems, which
represented 31.7% of the Company's revenues for the fiscal quarter.
Approximately 90% of this amount, or $2.4 million, was due from customers as
of December 31, 1996. With respect to the Company's December 31, 1996 accounts
receivable, the Company collected approximately $5 million during January
1997, substantially reducing its balance of accounts receivable. At December
31, 1996, the Company's inventories increased approximately $1.7 million, or
21.7%, to $9.3 million, which was primarily attributable to work-in-process in
production systems scheduled to be shipped in the second quarter of fiscal
1997.
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 (approximately 6.3% 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
is presently in discussions with certain lenders to put in place a revolving
credit facility in place of 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 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'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 $7.2 million will
be limited to annual usage of approximately $680,000
26
per year. The net operating loss tax carryforward of approximately $2.4
million as of September 30, 1996 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.
27
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 TurboDisc(TM) 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: Hughes-Spectrolab, General Motors, Hewlett Packard Co., Lucent
Technologies, Inc., Motorola, Inc., Rockwell, Samsung Co., Siemens AG, L.M.
Ericsson AB, 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. In
fiscal 1996, no other customer individually accounted for more than 7.5% 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.
28
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
29
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 ultra-thin 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 ("VPE") and liquid phase epitaxy. ("LPE"). Compound
semiconductor materials fabricated using LPE or VPE technologies often have
high electronic and optical properties. The use of MBE technology can yield
wafers having high thickness uniformity. However, 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 a better
combination of uniformity and optical and electronic properties, than wafers
manufactured by more traditional methods. The successful use of MOCVD
technology does, however, pose technical, training and safety challenges.
MOCVD-based production systems typically require: (i) expensive reactant
materials, (ii) the use of certain toxic chemicals, and (iii) tight control
over numerous manufacturing parameters by a well-trained production staff.
Notwithstanding these requirements, 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 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 TurboDisc(TM) deposition
technology makes possible one of 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
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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.
LOGO
STRATEGY
The Company believes that its close collaborations with its customers over
the past twelve years have 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
31
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 TurboDisc(TM) 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 TurboDisc(TM) 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 TurboDisc(TM) 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 TurboDisc(TM)
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 TurboDisc(TM) 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.
32
LOGO
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 TurboDisc(TM)
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:
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
33
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 June 1996, the Company achieved positive test results in its
development of MR sensors. The Company successfully completed the General
Motors Pre-Production Approval Process in September 1996. On November 11,
1996, 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 is working 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 has developed
the materials process and a production system for solar cell materials with
outstanding performance characteristics. As a result of this collaboration,
the Company's technology has 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. Over the last two years, the Company's
customers have purchased several MOCVD production systems for this purpose. In
the summer of 1996, a customer 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 an 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.
34
CUSTOMERS
The Company's customers include several of the largest semiconductor,
telecommunications and computer manufacturing companies in the world and 13 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. In fiscal 1996, no other customer individually accounted
for more than 7.5% of the Company's revenues. A number of the Company's
customers are listed below:
General Motors LG Semiconductor Corp. Samsung Co.
Hewlett Packard Co. L.M. Ericsson AB Sharp U.S.A., Inc.
Honeywell Inc. Lucent Technologies, Inc.Siemens AG
Hughes-Spectrolab Motorola, Inc. Texas Instruments
Hyundai Electronics Philips AG Incorporated
International Business Polaroid Corporation Thomson CSF
Machines Corporation Rockwell Westinghouse Electric
Corp.
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 for a production system
is typically two to nine months or longer. In addition, the Company expects
that the sales cycle for wafers and package-ready devices will also include a
period of two to
35
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 64.3%,
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. 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. As of
December 31, 1996, the Company had sold two such systems.
The Company has dedicated six EMCORE TurboDisc(TM) 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, $1.9 million, $5.4 million and $2.3 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, nine 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 $11.0 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.
36
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 protections. 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 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. 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.
37
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 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-assemblies, 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 began to increase its manufacturing capacity to
meet demand for compound semiconductor production systems and 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 manufacturers 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
38
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 have a material adverse effect on its business, financial condition and
results of operations.
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 relationship 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.
39
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.
40
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 positions 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 Shipley
Company, L.L.C., a subsidiary of Rohm & Haas, where he served successively as
Corporate Projects Manager, Product Engineer, Engineering Manager,
Manufacturing Manager, and, from 1994 to 1996, Operating Unit Manager.
David D. 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 manufacturers).
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"). Dr.
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
41
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 of Saatchi & Saatchi plc
(now Cordiant plc) and a director of Saatchi & Saatchi plc from January 1990
until December 1994. Since 1992, he has been an investor and a director of
several other companies. From 1982 until 1988, he served as Chief Operating
Officer (1982 to 1983) and then as Chief Executive Officer (from 1984 to 1988)
of IMS International until its acquisition by Dun & Bradstreet in 1988.
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. The two outside directors will not be affiliates of JLMP, the
Company's majority shareholder. Additionally, the Company intends to elect
Robert-Louis Dreyfus to serve as a member of the Company's Board of Directors.
Mr. Louis-Dreyfus controls a company which is a member of JLMP.
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 benefits
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.
42
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.
43
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.
AGGREGATED OPTION EXERCISES IN FISCAL 1996
AND OPTION VALUES AT FISCAL YEAR END
- ---------------------
(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.
(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.
44
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
45
reimbursement 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, 52.0% 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 a monthly retainer 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 $9.5 million of 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
46
Holders, the Company is obligated to use its best efforts to register all or
part of the Common Stock issuable upon exercise of each Warrant Holders' $4.08
Warrants, 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 30 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 $10.0 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. In addition, Mr. Russell, the Chairman of the Company's
Board of Directors, is a trustee of a trust that is a member of JLMP and Mr.
Louis-Dreyfus, a director-nominee, controls a company which is a member of
JLMP. Following the Offering JLMP will retain an ownership interest in the
Company of approximately 48.9%. Within 90 days 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 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 per 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 $1.1 million. 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 United States for an additional period of two years after the
termination of the Agreement.
47
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 5,494,461
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 2,073,065 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.
48
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 9,102 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 464,017
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 5,882,353 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 9,102 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.
49
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 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. 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
3,556,275 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.
50
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. Pursuant to certain amendments recently adopted by the Securities and
Exchange Commission, the holding periods under Rule 144 and Rule 144(k) will
be reduced to one year and two years, respectively.
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 245,097 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 previously subject to
the lock-up period will become eligible for sale without restriction under
Rule 144(k), and an additional 2,216,804 shares previously subject to the
lock-up period 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-
51
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 464,017 shares issuable upon the exercise of options outstanding under
the Plan and 183,042 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.
52
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:
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. Under Rule 2720 of the
Conduct Rules (the "Conduct Rules") of the National Association of Securities
Dealers, Inc. (the "NASD"), the Company is considered an affiliate of Jesup &
Lamont Securities Corporation, an NASD member, which is expected to
participate in the distribution of the Common Stock offered hereby. This
Offering is being conducted in accordance with Rule 2720, which provides that,
among other things, when an NASD member participates in the underwriting of an
affiliate's securities, the offering price can be no higher than that
recommended by a "qualified independent underwriter" ("QIU") meeting certain
standards. In accordance with this requirement, Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ") has assumed the responsibilities of acting as
QIU and will recommend a price in compliance with the requirements of Rule
2720. In connection with this Offering, DLJ is performing due diligence
investigations and reviewing and participating in this preparation of this
Prospectus and Registration Statement of which this Prospectus forms a part.
As compensation for the services of DLJ as QIU, the Company has agreed to pay
DLJ $5,000.
Jesup & Lamont Securities Corporation has informed the Company that it will
not confirm sales to any account over which it exercises discretionary
authority without prior written approval of such transactions by the customer.
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
53
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.
In connection with the offering, the Underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the Common Stock.
Specifically, the Underwriters may overallot the Offering, creating a
syndicate short position. In addition, the Underwriters may bid for and
purchase shares of Common stock in the open market to cover syndicate short
positions or to stabilize the price of the Common Stock. Finally, the
underwriting syndicate may reclaim selling concessions from syndicate members
in the offering, if the syndicate repurchases previously distributed Common
Stock in syndicate covering transactions, in stabilization transactions or
otherwise. Any of these activities may stabilize or maintain the market price
of the Common Stock above independent market levels. The Underwriters are not
required to engage in these activities, and may end any of these activities at
any time.
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.
54
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 statements
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.
55
EMCORE CORPORATION
INDEX OF FINANCIAL STATEMENTS
F-1
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
F-2
EMCORE CORPORATION
BALANCE SHEETS
The accompanying notes are an integral part of these financial statements.
F-3
EMCORE CORPORATION
STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these financial statements.
F-4
EMCORE CORPORATION
STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY
AS OF SEPTEMBER 30, 1994, 1995, 1996 AND DECEMBER 31, 1996 (UNAUDITED)
The accompanying notes are an integral part of these financial statements.
F-5
EMCORE CORPORATION
STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these financial statements.
F-6
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 adjustments (consisting only of normal recurring
accruals) that the Company considers necessary for a fair presentation of the
financial position at such date and the operating results and cash flows for
those periods. Operating results for the 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.
F-7
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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.
Revenue and Cost Recognition--Contract Revenue. The Company's research
contracts require the development or evaluation of new materials applications
and have a duration of six to 36 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.
F-8
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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 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 and common share equivalents, if dilutive.
The weighted average number of shares outstanding excludes the number of
common shares issuable upon the exercise of outstanding stock options and
warrants and preferred stock in such periods since such inclusion would be
anti-dilutive.
F-9
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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'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:
F-10
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3. CONCENTRATION OF CREDIT RISK--(CONTINUED)
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.
F-11
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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
F-12
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8. LONG-TERM DEBT--(CONTINUED)
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 a commonly recognized
option pricing model and the Company's assessment of the underlying valuation
factors, as well as an assessment of the terms of the subordinated notes
issuances. 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 payment of all amounts due to Hakuto, the Agreement
terminated.
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 required that the Company's
Chief Executive Officer remain employed for a period of five years, and
required 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.
F-13
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8. LONG-TERM DEBT--(CONTINUED)
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 a director of the Company who is also
affiliated with 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.
F-14
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10. INCOME TAXES--(CONTINUED)
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:
F-15
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10. INCOME TAXES--(CONTINUED)
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.
F-16
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11. PREFERRED STOCK--(CONTINUED)
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.
F-17
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11. PREFERRED STOCK--(CONTINUED)
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 323,530
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.
During the first quarter of fiscal 1997, options with respect to 139,512
shares were granted at an exercise price of $10.20 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.
F-18
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12. STOCK OPTIONS AND WARRANTS--(CONTINUED)
The following table summarizes the activity under the plan:
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 Merchant Partners, 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.
F-19
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14. EXPORT SALES
The information below summarizes the Company's export sales by geographic
area.
The Company's export sales are as follows:
NOTE 15. SUBSEQUENT EVENT
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.
NOTE 16. REVERSE STOCK SPLIT
On February 3, 1997, the Board of Directors approved a 3.4:1 reverse stock
split of its Common Stock and approved a decrease in the number of 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.
F-20
[Illustrations and descriptions of the registrant's technology]
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NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION 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 UNDER-
WRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITA-
TION 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 SECU-
RITIES IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAW-
FUL. 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.
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TABLE OF CONTENTS
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UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EF-
FECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPAT-
ING 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.
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2,500,000 SHARES
LOGO
[OF EMCORE]
COMMON STOCK
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PROSPECTUS
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DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
NEEDHAM & COMPANY, INC.
FEBRUARY , 1997
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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.
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* 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;
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(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
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set forth in subsection 14A:3-5(2) or subsection 14A:3-5(3). Unless otherwise
provided in the certificate of incorporation or bylaws, such determination
shall be made
(a) by the board of directors or a committee thereof, acting by a
majority vote of a quorum consisting of directors who were not parties to
or otherwise involved in the proceeding; or
(b) if such a quorum is not obtainable, or, even if obtainable and such
quorum of the board of directors or committee by a majority vote of the
disinterested directors so directs, by independent legal counsel, in a
written opinion, such counsel to be designated by the board of directors;
or
(c) by the shareholders if the certificate of incorporation or bylaws or
a resolution of the board of directors or of the shareholders so directs.
(6) Expenses incurred by a corporate agent in connection with a proceeding
may be paid by the corporation in advance of the final disposition of the
proceeding as authorized by the board of directors upon receipt of an
undertaking by or on behalf of the corporate agent to repay such amount if it
shall ultimately be determined that he is not entitled to be indemnified as
provided in this section.
(7) (a) If a corporation upon application of a corporate agent has failed or
refused to provide indemnification as required under subsection 14A:3-5(4) or
permitted under subsections 14A:3-5(2), 14A:3-5(3) and 14A:3-5(6), a corporate
agent may apply to a court for an award of indemnification by the corporation,
and such court
(i) may award indemnification to the extent authorized under
subsections 14A:3-5(2) and 14A:3-5(3) and shall award indemnification
to the extent required under subsection 14A:3-5(4), notwithstanding any
contrary determination which may have been made under subsection 14A:3-
5(5); and
(ii) may allow reasonable expenses to the extent authorized by, and
subject to the provisions of, subsection 14A:3-5(6), if the court shall
find that the corporate agent has by his pleadings or during the course
of the proceeding raised genuine issues of fact or law.
(b) Application for such indemnification may be made:
(i) in the civil action in which the expenses were or are to be
incurred or other amounts were or are to be paid; or
(ii) to the Superior Court in a separate proceeding. If the
application is for indemnification arising out of a civil action, it
shall set forth reasonable cause for the failure to make application
for such relief in the action or proceeding in which the expenses were
or are to be incurred or other amounts were or are to be paid.
The application shall set forth the disposition of any previous application
for indemnification and shall be made in such manner and form as may be
required by the applicable rules of court or, in the absence thereof, by
direction of the court to which it is made. Such application shall be upon
notice to the corporation. The court may also direct that notice shall be
given at the expense of the corporation to the shareholders and such other
persons as it may designate in such manner as it may require.
(8) The indemnification and advancement of expenses provided by or granted
pursuant to the other subsections of this section shall not exclude any other
rights, including the right to be indemnified against liabilities and expenses
incurred in proceedings by or in the right of the corporation, to which a
corporate agent may be entitled under a certificate of incorporation, bylaw,
agreement, vote of shareholders, or otherwise; provided that no
indemnification shall be made to or on behalf of a corporate agent if a
judgment or other final adjudication adverse to the corporate agent
establishes that his acts or omissions (a) were in breach of his duty of
loyalty to the corporation or its shareholders, as defined in subsection (3)
of N.J.S.14A:2-7, (b) were not in good faith or involved a knowing violation
of law or (c) resulted in receipt by the corporate agent of an improper
personal benefit.
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(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.
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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.
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ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following exhibits are filed with this Registration Statement:
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** 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.
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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.
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SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY
CAUSED THIS AMENDMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO
DULY AUTHORIZED, IN THE TOWNSHIP OF SOMERSET, STATE OF NEW JERSEY, ON MARCH 4,
1997.
EMCORE Corporation
/s/ Reuben F. Richards, Jr.
By___________________________________
Name: Reuben F. Richards, Jr.
Title: President and Chief
Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS AMENDMENT HAS BEEN
SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED, ON MARCH 4, 1997.
SIGNATURE TITLE
* President, Chief Executive Officer and
- ------------------------------------- Director (Principal Executive
REUBEN F. RICHARDS, JR. Officer)
* Vice President, Chief Financial
- ------------------------------------- Officer, Secretary and Director
THOMAS G. WERTHAN (Principal Accounting and Financial
Officer)
Director
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RICHARD A. STALL
* Chairman of the Board and Director
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THOMAS J. RUSSELL
* Director
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HOWARD R. CURD
* Director
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HOWARD F. CURD
/s/ Reuben F. Richards, Jr.
*By__________________________________
Reuben F. Richards, Jr.
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EXHIBIT INDEX
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** Previously filed