S-3: Registration statement for specified transactions by certain issuers
Published on February 4, 1999
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 4, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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EMCORE CORPORATION
(Exact name of Registrant as specified in its charter)
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394 ELIZABETH AVENUE, SOMERSET, NEW JERSEY 08873
(732) 271-9090
(Address, including zip code, and telephone number, including
area code, of registrant's agent for service and principal executive offices)
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THOMAS G. WERTHAN
EMCORE CORPORATION
394 ELIZABETH AVENUE
SOMERSET, NEW JERSEY 08873
(732) 271-9090
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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WITH COPIES TO:
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: as soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act of 1933 registration statement number
of the earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act of 1933 registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457. Includes shares of common stock that the Underwriters
have the option to purchase solely to cover over-allotments, if any.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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SUBJECT TO COMPLETION -- , 1999
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PROSPECTUS
, 1999
[LOGO] EMCORE CORPORATION
SHARES OF COMMON STOCK
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THE COMPANY:
- - We are a leading provider of compound semiconductor wafers, devices, process
technology and production systems
- - EMCORE Corporation
394 Elizabeth Avenue
Somerset, New Jersey 08873
(732) 271-9090
- - NASDAQ Symbol: EMKR
THE OFFERING:
- - The Company is offering of the shares and existing shareholders
are offering of the shares.
- - The underwriters have an option to purchase an additional
shares from the Company to cover over-allotments.
- - There is an existing trading market for these shares. The reported last sale
price on February 1, 1999 was $22.50 per share.
- - We plan to use the proceeds from this offering to repay debt and for general
corporate purposes. We will not receive any proceeds from the shares sold by
the selling shareholders.
- - Closing: , 1999.
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This investment involves risk. See "Risk Factors" beginning on Page 7.
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NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS DETERMINED WHETHER THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. NOR HAVE THEY MADE, NOR WILL THEY MAKE, ANY
DETERMINATION AS TO WHETHER ANYONE SHOULD BUY THESE SECURITIES. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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DONALDSON, LUFKIN & JENRETTE
PRUDENTIAL SECURITIES
NEEDHAM & COMPANY, INC.
VOLPE BROWN WHELAN & COMPANY
WE WILL AMEND AND COMPLETE THE INFORMATION IN THIS PROSPECTUS. ALTHOUGH WE ARE
PERMITTED BY US FEDERAL SECURITIES LAWS TO OFFER THESE SECURITIES USING THIS
PROSPECTUS, WE MAY NOT SELL THEM OR ACCEPT YOUR OFFER TO BUY THEM UNTIL THE
DOCUMENTATION FILED WITH THE SEC RELATING TO THESE SECURITIES HAS BEEN DECLARED
EFFECTIVE BY THE SEC. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES
OR OUR SOLICITATION OF YOUR OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION
WHERE THAT WOULD NOT BE PERMITTED OR LEGAL.
[ARTWORK]
TABLE OF CONTENTS
2
PROSPECTUS SUMMARY
This summary is qualified by more detailed information appearing in other
sections of this prospectus. The other information is important, so please read
this entire prospectus carefully. Unless otherwise indicated, all information in
this prospectus: (a) gives effect to a 3.4-for-1 reverse stock split that was
completed on February 3, 1997 and (b) assumes that the underwriters do not
exercise their over-allotment option. References to EMCORE's fiscal years refer
to fiscal years ended on September 30.
EMCORE CORPORATION
EMCORE designs, develops and manufactures compound semiconductor materials
and process technology and is a leading manufacturer of production systems used
to fabricate compound semiconductor wafers. Our products and technology enable
our customers, both in the U.S. and internationally, to manufacture commercial
volumes of high-performance electronic and optoelectronic devices. Our products
are used in a wide variety of applications in the communications (satellite,
data, telecommunications and wireless), consumer and automotive electronics,
computers and peripherals, and lighting markets. EMCORE's customers include AMP
Incorporated, General Motors, Hughes-Spectrolab, Lucent Technologies, Inc.,
Siemens AG and 12 of the largest electronics manufacturers in Japan.
Compound semiconductors have emerged as an enabling technology to meet the
complex requirements of today's advanced information systems. Many compound
semiconductor materials have unique physical properties that allow electrons to
move at least four times faster than through silicon-based devices. Advantages
of compound semiconductor devices over silicon devices include operation at
higher speeds, lower power consumption, less noise and distortion, and
optoelectronic properties that enable these devices to emit and detect light.
Compound semiconductor devices can be used to perform individual functions
as discrete devices, such as high-brightness light-emitting diodes (HB LEDs),
vertical cavity surface emitting lasers (VCSELs), magneto resistive (MR) sensors
and solar cells. Compound semiconductor devices can also be combined into
integrated circuits, such as transmitters, receivers and alpha-numeric displays.
Although compound semiconductors are more expensive to manufacture than
silicon-based devices, electronics manufacturers are increasingly integrating
compound semiconductor devices into their products in order to achieve higher
performance.
Our objective is to capitalize on our position in compound semiconductor
process technology and production systems to become the leading supplier of
compound semiconductor wafers, devices and production systems. The key elements
of our strategy are to:
- apply our core materials science and metal organic chemical vapor
deposition (MOCVD) production technology across multiple applications;
- target high growth opportunities;
- partner with key industry participants; and
- continue our investment to maintain technology leadership.
3
We have recently established a number of strategic relationships through
joint ventures, long-term supply agreements and an acquisition as summarized
below.
- In January 1999, we signed a transaction agreement with General Electric
Lighting, to form GELcore, a joint venture to develop and market white
light and colored HB LED lighting products and subject to certain
conditions the parties expect this joint venture will be consummated by
March 31, 1999. HB LEDs are solid state compound semiconductor devices
that emit light in a variety of colors. The global demand for HB LEDs is
experiencing rapid growth because LEDs have a long useful life
(approximately 10 years), consume approximately 10% of the power consumed
by incandescent or halogen lighting and improve display visibility.
General Electric Lighting and we have agreed that this joint venture will
be the exclusive vehicle for each party's participation in the solid
state lighting market. GELcore seeks to combine EMCORE's materials
science expertise, process technology and compound semiconductor
production systems with General Electric Lighting's brand name
recognition, phosphor technology and extensive marketing and distribution
capabilities. GELcore's long term goal is to develop HB LED products to
replace traditional lighting.
- In November 1998, we signed a long-term purchase agreement with Space
Systems/Loral, a wholly owned subsidiary of Loral Space & Communications.
Under this agreement, which is contingent upon our compliance with
Loral's product specification requirements, we will supply compound
semiconductor high-efficiency gallium arsenide solar cells for Loral's
satellites. We anticipate completing this qualification in April 1999.
Subject to the foregoing product qualification requirements, we have
received an initial purchase order for $5.25 million of solar cells.
- In November 1998, we formed UMCore, a joint venture with Union Miniere
Inc., a mining and materials company, to explore and develop alternate
uses for germanium using our materials science and production platform
expertise and Union Miniere's access to and experience with germanium.
- In October 1998, we formed Emtech, a joint venture with Optek Technology,
Inc., a packager and distributor of optoelectronic devices, to market an
expanded line of MR sensors to the automotive and related industries.
This joint venture seeks to combine our strength in producing devices
with Optek's strength in packaging and distributing devices to offer
off-the-shelf products and expand market penetration.
- In September 1998, we entered into an agreement with Lockheed Martin to
provide technical management and support of a Cooperative Research and
Development Agreement between Lockheed Martin and Sandia National
Laboratories for the advancement, transfer and commercialization of a new
compound semiconductor high-efficiency solar cell. We also signed a
four-year purchase agreement with AMP Incorporated to provide high speed
VCSELs, initially for use in transceivers for Gigabit Ethernet
applications.
- In February 1998, we and Uniroyal Technology Corporation formed Uniroyal
Optoelectronics, a joint venture to manufacture, sell and distribute HB
LED wafers and package-ready devices.
- In December 1997, we obtained our VCSEL technology through the
acquisition of MicroOptical Devices, Inc. (MODE) to access the data
communications and telecommunications markets.
4
As of December 31, 1998, we had an order backlog of $41.8 million scheduled
to be shipped through September 30, 1999. This represented an increase of
approximately 81.4% over our backlog at September 30, 1998.
We were incorporated in the State of New Jersey in September 1986. Our
principal offices are located at 394 Elizabeth Avenue, Somerset, New Jersey
08873 and our telephone number is (732) 271-9090. Our World Wide Web site is
www.emcore.com. Our web site is not part of this prospectus. EMCORE and
TurboDisc are registered trademarks of EMCORE and Gigalase, Gigarray and the
EMCORE logo are trademarks of EMCORE. Each trademark, trade name or service mark
of any other company appearing in this prospectus belongs to its holder.
THE OFFERING
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(1) This information is based on the number of shares outstanding on
1999. It excludes 3,107,282 shares of common stock issuable upon the
exercise of outstanding options and warrants and 1,550,000 shares of common
stock issuable upon conversion of our outstanding preferred stock. In
connection with our joint venture with General Electric Lighting Company, we
will issue common stock purchase warrants to purchase between 282,010 and
564,019 shares of common stock and a subordinated convertible debenture
which will be convertible into 340,984 shares of common stock.
5
SUMMARY CONSOLIDATED FINANCIAL DATA
(In thousands, except per share amounts)
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(1) Basic and diluted earnings per share have been restated for all periods
presented to give effect to the Commission's Staff Accounting Bulletin No.
98, which eliminated certain computational requirements of the Commission's
Staff Accounting Bulletin No. 64.
(2) Reflects the sale by EMCORE of shares of common stock offered
by this prospectus.
6
RISK FACTORS
Before you invest in our common stock, you should be aware that there are
various risks, including those described below. You should carefully consider
these risks, together with the other information contained in this prospectus,
before you decide whether to purchase shares of our common stock. The risks and
uncertainties described below are not the only ones facing our company.
Additional risks and uncertainties may also adversely impair our business
operations. If any of the following risks actually occur, our business,
financial condition or results of operations would likely suffer. In such case,
the trading price of our common stock could decline, and you may lose all or
part of the money you paid to buy our common stock.
This prospectus contains forward-looking statements based on our current
expectations, assumptions, estimates and projections about EMCORE and our
industry. These forward-looking statements involve numerous risks and
uncertainties. Our actual results could differ materially from those anticipated
in such forward-looking statements as a result of certain factors, as more fully
described in this section and elsewhere in this prospectus. We undertake no
obligation to update publicly any forward-looking statements for any reason,
even if new information becomes available or other events occur in the future.
NEED TO MANAGE GROWTH
We are experiencing rapid growth, having added a significant number of new
employees, acquired MODE and entered into joint ventures with General Electric
Lighting (pending), Uniroyal Technology Corporation, Optek Technology, Inc. and
Union Miniere Inc. We have expanded our facilities to include two manufacturing
facilities in Albuquerque, New Mexico in addition to our original facility in
Somerset, New Jersey and our joint venture with Uniroyal Technology Corporation
has leased a manufacturing facility in Tampa, Florida. Our revenues have
increased from $18.1 million in fiscal 1995 to $43.8 million in fiscal 1998.
This growth has placed and will continue to place a significant strain on our
management, financial, sales and other employees and on our internal systems and
controls. We are in the process of installing new manufacturing software for all
of our facilities and are evaluating replacing our accounting and purchasing
systems. In this transition, we may experience delays, cost overruns and
disruptions in our operations.
Because of the high level of scientific and management expertise necessary
to be successful in the compound semiconductor industry, we must continually
recruit and retain highly qualified and well-trained technical and management
employees. Our business, financial condition and results of operations will be
materially and adversely affected if we are unable to recruit, train and retain
sufficient managerial and technical employees or otherwise effectively manage
our expanding operations. In addition, if we are unable to effectively manage
multiple facilities and multiple joint ventures in geographically distant
locations, our business, financial condition and results of operations will be
materially and adversely affected. Please see "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for more information.
HISTORY OF OPERATING LOSSES
We started operations in 1984 and as of December 31, 1998 had an
accumulated deficit of $73.4 million. We incurred net losses of $6.1 million in
the first quarter of fiscal
7
1999, $43.5 million in fiscal 1998, $5.6 million in fiscal 1997 and $3.2 million
in fiscal 1996. We expect to continue to incur losses. To support our growth, we
have increased our expense levels and our investments in inventory and capital
equipment. As a result, we will need to significantly increase revenues and
profit margins to become and stay profitable. If our sales and profit margins do
not increase to support the higher levels of operating expenses and if our new
product offerings are not successful, our business, financial condition and
results of operations will be materially and adversely affected. Please see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and the Notes thereto for detailed
information on our history of losses.
RELIANCE UPON CONTINUED PRODUCT DEVELOPMENT; RISKS ARISING FROM RAPID
TECHNOLOGICAL CHANGE
We compete in markets characterized by rapid technological change, evolving
industry standards and continuous improvements in products and services. Due to
continual changes in these markets, our future success depends on our ability to
improve production systems, processes, wafers and devices, and develop new
technologies that compete effectively and adequately address customer
requirements. Our production systems must remain competitive on the basis of
cost of ownership and process performance. If we are unable to develop new
products in time or with sufficient performance characteristics to meet the
demands of the market, our business, financial condition and results of
operations will be materially and adversely affected.
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 may exceed budgeted amounts and estimated product
development schedules may be extended. Our business, financial condition and
results of operations may be materially and adversely affected by any budget
overruns or delays. Additionally, if new products or enhancements experience
reliability or quality problems, we may encounter a number of difficulties,
including reduced orders, returns, higher manufacturing costs, delays in
collection of accounts receivable and additional service and warranty expenses,
all of which could materially and adversely affect our business, financial
condition and results of operations.
FLUCTUATIONS IN OPERATING RESULTS
Our revenues and operating results may vary significantly from quarter to
quarter due to a number of factors, many of which are not in our control. These
factors include:
- market acceptance of our products and our customers' products;
- the volume and timing of orders for our products, particularly compound
semiconductor production systems;
- delayed shipping dates due to customer requests or internal delays;
- the mix of our sales by product;
- the timing of our announcement and introduction of new products and of
similar announcements by our competitors;
- a downturn in the market for our customers' products;
8
- the timing of recognition of joint venture revenues;
- variations in the configuration of our production systems or the design
or process conditions for the production of our wafers or devices;
- product discounts and changes in pricing;
- delays in deliveries from suppliers;
- delays in orders or payments from customers due to financial constraints
or competing capital and budget considerations;
- cancellations, returns and warranty claims;
- regional economic conditions, particularly in Asia;
- volatility in the compound semiconductor industry and the markets served
by us and our customers; and
- the ability to obtain export licenses from the U.S. government,
particularly relating to the People's Republic of China.
These factors may cause our operating results for future periods to be
below the expectations of analysts and investors. This may cause a decline in
the price of our common stock. Please see "Management's Discussion and Analysis
of Financial Condition and Results of Operations" for detailed information on
our annual and quarterly operating results.
RISKS RELATED TO THE MANUFACTURE AND ACCEPTANCE OF NEW PRODUCTS
We have recently introduced a number of new products, including the
Gigalase VCSEL and high efficiency solar cells. In connection with recent joint
ventures and internal development, we will be introducing additional new
products, including HB LEDs, in the near future. Our expansion into the
production of new products involves substantial expenditures in research and
development, production and marketing. We may be unable to successfully design
or manufacture these new products. The markets for some of our new products
differ from those we currently serve. In addition, many of our new products are
being incorporated into new products of our customers with new applications such
as Gigabit Ethernet. If our new products or the new products of our customers do
not gain market acceptance, our business, financial condition and results of
operations will be materially and adversely affected.
RISKS RELATED TO NEW JOINT VENTURES
Since December 1997, we have established three joint ventures (with Optek
Technology, Inc., Union Miniere, Inc. and Uniroyal Technology Corporation) and
have signed a transaction agreement to enter into a fourth joint venture with
General Electric Lighting. Certain conditions may not be satisfied and,
therefore, it is possible that this joint venture with General Electric Lighting
will not be established. Failure to consummate this joint venture with General
Electric Lighting could have a material and adverse effect on our business
prospects.
Each of our joint ventures involves the creation of a separate company, and
we will not have a majority interest in any of these entities. Each of these
joint ventures is
9
governed by a board of managers with representatives from both the strategic
partner and us. Many fundamental decisions must be approved by both parties to
the joint venture, which means we will be unable to direct the operation and
direction of these joint ventures without the agreement of our joint venture
partners. If we are unable to agree on important issues with a joint venture
partner, the business of that joint venture may be delayed or interrupted, which
may, in turn, materially and adversely affect our business, financial condition
and results of operations.
Our participation in the joint ventures will place a significant strain on
our management, financial, sales and other employees, as well as on our internal
systems and controls. Some of our employees will devote much of their time and
effort to these joint ventures. Our business and financial condition will be
materially and adversely affected if we are unable to recruit, train and retain
sufficient personnel to staff both our joint venture operations and our other
operations. Moreover, we will be required to devote significant funds and
technologies to our joint ventures to develop and enhance their products. If our
joint ventures are unsuccessful in selling their products, our business,
financial condition and results of operations will be materially and adversely
affected.
General Electric Lighting and we have agreed that our joint venture will be
the sole vehicle for each party's participation in the solid state lighting
market. We and General Electric Lighting have also agreed to several limitations
during the life of the venture and thereafter relating to use that each of us
can make of the joint venture's technology. One consequence of these limitations
is that in certain circumstances, such as a material default by us, we would not
be permitted to use the joint venture's technology to compete against General
Electric Lighting in the solid state lighting market.
Because we do not have a controlling economic and voting interest in our
joint ventures, we will account for these joint ventures under the equity method
of accounting.
RELIANCE ON INTERNATIONAL SALES
Sales to customers located outside the United States accounted for
approximately 42.5% of our revenues in the fiscal 1996, 42.0% of our revenues in
fiscal 1997, 39.1% of our revenues in fiscal 1998 and 35.1% of our revenues in
the first quarter of fiscal 1999. Sales to customers in Asia represent the
majority of our international sales. We believe that international sales will
continue to account for a significant percentage of our revenues. In general,
our international sales are subject to different risks than our domestic sales,
including:
- U.S. and international regulatory requirements and policy changes,
including export controls;
- political and economic instability;
- increased installation costs;
- difficulties in and timeliness of collection of accounts receivable;
- exchange rates affecting end-user purchasers;
- tariffs and other barriers;
- difficulty in staffing and managing international operations;
10
- lack of adequate protection of trade secrets and intellectual property;
- dependence on and difficulties in managing international distributors or
representatives; and
- potentially adverse tax consequences.
In particular, exports of our products to certain destinations, such as the
People's Republic of China, Malaysia and Taiwan, may require pre-shipment
authorization from U.S. export control authorities, including the U.S.
Departments of Commerce and State. Authorization may be conditioned on end-use
restrictions. On certain occasions, we have been denied authorization,
particularly with respect to the People's Republic of China. Failure to receive
these authorizations may materially and adversely affect our revenues and in
turn our business, financial condition and results of operations from
international sales.
Although we seek to meet technical standards established by non-U.S.
regulatory bodies, if we are unable to comply with these standards in the
future, our revenues and in turn our business, financial condition and results
of operations will be materially and adversely affected. Please see
"Business -- Marketing and Sales" for additional information on our
international sales.
CUSTOMER CONCENTRATION
We derive a substantial portion of our revenues from a limited number of
customers. Sales to Hughes-Spectrolab, primarily of production systems and solar
cells, accounted for approximately 23.6% of our revenues in fiscal 1996, 10.2%
of our revenues in fiscal 1997, 17.3% of our revenues in fiscal 1998 and 6.1% of
our revenues in for the first quarter of fiscal 1999. We believe that, at least
in the short-term, Hughes-Spectrolab will produce most of its material
requirements in-house using TurboDisc systems purchased from us. Consequently,
we do not expect sales to Hughes-Spectrolab to continue to be significant in the
short term. General Motors, our main customer for MR sensors, accounted for
approximately 15.1% of our revenues in fiscal 1997, 12.8% of our revenues in
fiscal 1998 and 19.8% of our revenues for the first quarter of fiscal 1999. If
General Motors, or any of our other significant customers, stops ordering our
products, significantly reduces the volume of these orders, or cancels, delays
or reschedules any orders, and we are unable to replace these orders, our
business, financial condition and results of operations could be materially and
adversely affected. Please see "Business -- Customers" for more information on
our significant customers.
MANUFACTURING RISKS
The manufacture of our systems is a highly complex and precise process. We
increasingly outsource the fabrication of certain components and sub-assemblies
of our systems. The revenues derived from sales of our systems will be
materially and adversely affected if we are unable to obtain a high quality,
reliable and timely supply of these components and subassemblies. In addition,
any reduction in the precision of these components will result in sub-standard
end products and will cause delays and interruptions in our production cycle.
We manufacture all of our wafers and devices in our manufacturing
facilities and our joint venture with Uniroyal Technology Corporation plans to
manufacture HB LED wafers
11
and package-ready devices at its facility. Minute impurities, difficulties in
the production process, defects in the layering of the devices' constituent
compounds, wafer breakage or other factors can cause a substantial percentage of
wafers and devices to be rejected or numerous devices on each wafer to be
non-functional. These factors can result in lower than expected production
yields, which would delay product shipments and may materially and adversely
affect our operating results. Because the majority of our costs of manufacture
are relatively fixed, the number of shippable devices per wafer for a given
product is critical to our financial results. Additionally, because we
manufacture all of our products at our facilities in Somerset, New Jersey and
Albuquerque, New Mexico, and our joint venture with Uniroyal Technology
Corporation will manufacture HB LED wafers and package-ready devices at its sole
facility in Tampa, Florida, any interruption in manufacturing resulting from
fire, natural disaster, equipment failures or otherwise would materially and
adversely affect our business, financial condition and results of operations.
Please see "Business -- Manufacturing" for a more detailed description of our
manufacturing processes.
FILLING AVAILABLE CAPACITY
In order to expand our materials production capabilities, we have dedicated
a number of our TurboDisc systems to the manufacture of wafers and devices.
Several of our products are currently being tested to determine whether they
meet customer or industry specifications. During this qualification period, we
invest significant resources and dedicate substantial production capacity to the
manufacture of these new products, prior to any commitment to purchase by the
prospective customer and without generating significant revenues from the
qualification process. If we are unable to meet these specifications or do not
receive sufficient orders to profitably use the dedicated production capacity,
our business, financial condition and results of operations would be materially
and adversely affected.
DEPENDENCE ON KEY EMPLOYEES
Our future success depends, in part, on our ability to attract and retain
certain key personnel, including scientific, operational and management
personnel. We anticipate that we will need to hire additional skilled personnel
to continue to expand all areas of our business. The competition for attracting
and retaining these employees, especially materials scientists, is intense.
Because of this intense competition for these skilled employees, we may be
unable to retain our existing personnel or attract additional qualified
employees in the future. This would materially and adversely affect our
business, financial condition and results of operations.
LENGTHY SALES AND QUALIFICATION CYCLES
Sales of our compound semiconductor production systems primarily depend
upon the decision of a prospective customer to increase its manufacturing
capacity, which typically involves a significant capital commitment by the
customer. Customers usually place orders with us on average two to nine months
after our initial contact with them. We often experience delays in obtaining
system sales orders while customers evaluate and receive internal approvals for
the purchase of these systems. These delays may include the time necessary to
plan, design or complete a new or expanded compound semiconductor fabrication
facility. Due to these factors, we expend substantial funds and sales, marketing
12
and management effort to sell our compound semiconductor production systems.
These expenditures and efforts may not result in sales.
The sales cycle for our wafers and devices typically involves a period of
three to nine months or longer, during which time we develop the formula of
materials necessary to meet the customer's specifications and qualifications.
These efforts, which are often funded by us, may not result in the successful
development of an appropriate product in accordance with customer specifications
and therefore may not result in sales. Please see "Business -- Products,"
"Business -- Marketing and Sales" and "Business -- Competition" for more
information on our products and our marketing and sales efforts.
NO ASSURANCE OF INTELLECTUAL PROPERTY PROTECTIONS
Our success and competitive position depend on protecting our trade secrets
and other intellectual property. Our strategy is to rely more on trade secrets
than patents to protect our manufacturing and sales processes and products, but
reliance on trade secrets is only an effective business practice insofar as
trade secrets remain undisclosed and a proprietary product or process is not
reverse engineered or independently developed. We take certain measures to
protect our trade secrets, including executing non-disclosure agreements with
our employees, joint venture partners, customers and suppliers. If parties
breach these agreements or the measures we take are not properly implemented, we
may not have an adequate remedy. Disclosure of our trade secrets or reverse
engineering of our proprietary products, processes or devices would materially
and adversely affect our business, financial condition and results of
operations.
Although we currently hold 11 U.S. patents, these patents do not protect
any material aspects of the current or planned commercial versions of our
systems, wafers or devices. We are actively pursuing patents on some of our
recent inventions, but these patents may not be issued. Even if these patents
are issued, they may be challenged, invalidated or circumvented. In addition,
the laws of certain other countries may not protect our intellectual property to
the same extent as U.S. laws. Please see "Business -- Intellectual Property and
Licensing" for more information regarding our trade secrets, patents and other
intellectual property.
ROCKWELL PATENT LITIGATION
In 1992, Rockwell International Corporation granted us a non-exclusive
license under U.S. patent number 4,368,098 (Rockwell Patent) issued in January
1983 to Rockwell. The Rockwell Patent claims, among other things, intellectual
property rights in the general use of metal organic chemical vapor deposition
(MOCVD) in unspecified applications and expires in 2000. In October 1996, we
initiated discussions with Rockwell to receive additional licenses to permit us
to utilize MOCVD technology to manufacture and sell certain wafers and devices.
In November 1996, in litigation not involving us, the Rockwell Patent was
declared invalid by the U.S. Court of Federal Claims. Rockwell filed a notice of
appeal on this judgment and, in June 1998, the Court of Appeals for the Federal
Circuit vacated this judgment and sent the case back for trial. In January 1999,
the case was settled and a judgment was entered in favor of Rockwell. Since the
settlement leaves a presumption of validity of the Rockwell Patent, we may be
liable to Rockwell for royalty payments, as well as other amounts in connection
with the sales of our systems, wafers and devices. We have reserved amounts to
pay for royalties to Rockwell, but we do not know whether these reserves will be
adequate. If we are required to pay royalties in excess of our reserves, our
business, financial condition and results of operations may be materially and
adversely affected. In addition until January 2000, we may require additional
licenses from Rockwell under the Rockwell Patent in order to continue to
manufacture and sell certain
13
wafers and devices. The failure to obtain or maintain these licenses on
commercially reasonable terms may materially and adversely affect our business,
financial condition and results of operations. Please see
"Business -- Intellectual Property and Licensing" for more details regarding our
patents and licenses.
LICENSED TECHNOLOGY RISKS
Sandia Corporation licenses to us certain technology and the associated
patent rights related to vertical cavity surface emitting laser (VCSEL) products
and their manufacture. This license grants us (1) exclusive rights (subject to
certain rights granted to the U.S. Department of Energy and AT&T Corporation) to
manufacture and sell certain VCSEL products for barcode scanning and plastic
optical fiber communications applications under five U.S. patents that expire
between 2007 and 2015, (2) nonexclusive rights with respect to all other
applications of these patents and (3) nonexclusive rights to employ a
proprietary oxidation fabrication method in the manufacture of VCSEL products
under a sixth U.S. patent that expires in 2014. Our exclusivity with respect to
the barcode scanning and plastic optical fiber communications applications will
expire at the end of 2003, or earlier if we fail to meet certain development and
marketing criteria. Our success and competitive position as a producer of
certain VCSEL products depends on the continuation of our rights under this
license, the scope and duration of those rights and the ability of Sandia to
protect its proprietary interests in the underlying technology and patents. If
we breach the terms of the license, including certain minimum annual royalty
payments to Sandia, Sandia may terminate our license. This would materially and
adversely affect our manufacture and sale of certain VCSEL products based on the
licensed technology. If AT&T, its successors or the Department of Energy
exercise their rights in the Sandia technology and patents to compete with us,
our share of the market and our revenues may be materially and adversely
affected. If Sandia is unable to effectively protect its proprietary rights
underlying the license from invalidation or infringement by our competitors, our
manufacture and sale of certain VCSEL products would be materially and adversely
affected.
RELIANCE ON SINGLE ASIAN DISTRIBUTOR AND COMPETITION FOR INTERNATIONAL
DISTRIBUTORS
We rely on a single marketing, distribution and service provider, Hakuto
Co. Ltd. to market and service many of our products in Japan, China and
Singapore. Hakuto is one of our shareholders and Hakuto's president is a member
of our Board of Directors. We have distributorship agreements with Hakuto which
expire in March 2008 and give Hakuto exclusive distribution rights for certain
of our products in Japan. Hakuto's failure to continue to effectively market and
service our products or termination of our relationship with Hakuto would result
in significant delays or interruption in our marketing and service programs in
Asia. This would materially and adversely affect our business, financial
condition and results of operations.
We compete with other manufacturers for relationships with reliable
international distributors. Our business, financial condition and results of
operations may be materially and adversely affected if (1) our international
distributors, including Hakuto, market products in competition with our
products, (2) our international distributors otherwise reduce or discontinue
their relationships with us or their support of our products, or (3) we are
unable to attract and retain qualified international distributors.
14
DEPENDENCE ON SOLE SOURCE SUPPLIERS
We generally do not maintain long-term supply agreements with our
suppliers. Various critical components and sub-assemblies included in our
production systems, as well as certain raw materials required for the
fabrication of our wafers and 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.
Our systems cannot be produced without certain critical components and
production of our wafers and devices depends on an adequate source of raw
materials. We may not be able to find alternative suppliers for many of these
components and materials. In addition, we intend to rely to an increasing degree
on outside suppliers because of their specialized expertise. Our 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. We
have experienced occasional delays in obtaining components and materials. The
future failure to obtain adequate, timely deliveries of sub-assemblies,
components and materials could prevent us from meeting scheduled shipment dates,
which may damage relationships with current and prospective customers and
materially and adversely affect our business, financial condition and results of
operations.
RISKS OF COMPETITION
We face substantial competition from both established competitors and
potential new market entrants. We believe that the primary competitive factors
in the markets in which our products are sold are yield, throughput,
performance, breadth of product line, customer satisfaction, customer commitment
to competing technologies and, in the case of production systems, capital and
direct costs and size of installed base. Our principal competitors in the market
for MOCVD systems include Aixtron GmbH, Nippon Sanso K.K. and Thomas Swann Ltd.
Our principal competitors for sales of wafers and devices include Epitaxial
Products International, Kopin Corporation and Quantum Epitaxial Designs, Inc.
Our principal competitors for sales of VCSEL-related products include Honeywell,
Inc. and Mitel Corporation. The principal competitors for our MR sensors include
Honeywell, Inc., Matshushita Electrical Industrial Co. Ltd., Siemens AG and
Asahi. The principal competitors for HB LEDs and our joint venture with Uniroyal
Technology Corporation and our pending joint venture with General Electric
Lighting include the Phillips Electronics and Hewlett Packard Company joint
venture, Siemens AG's Osram GmbH subsidiary, Nichia Chemical Industries and
Toshiba Corporation. We also face competition from manufacturers that produce
wafers and devices for their own use. Some of our competitors have certain
competitive advantages, including:
- a more established business;
- broader product lines;
- more experience with high volume manufacturing;
- broader name recognition;
- larger installed bases;
- alternative technologies that may be better established than ours; and
- significantly greater financial, technical and marketing resources.
15
Our business, financial condition and results of operations will be materially
and adversely affected if we are unable to successfully compete.
Our competitors also may develop enhancements to or future generations of
competitive products that will offer price and performance features superior to
ours. We believe that in order to remain competitive, we must invest significant
financial and other resources to develop new product features and enhancements
to maintain customer satisfaction worldwide. In addition, increased competitive
pressure could lead to intensified price-based competition, resulting in lower
prices and margins, which would materially and adversely affect our business,
financial condition and results of operations.
RISKS OF YEAR 2000 NON-COMPLIANCE
Many currently installed computer systems and software products are coded
to accept or recognize only two digit entries in the date code field. These
systems and software products will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and/or software used by many companies and governmental agencies may
need to be upgraded to comply with such Year 2000 requirements or risk system
failure or miscalculations causing disruptions of normal business activities.
We have made a preliminary assessment of our Year 2000 readiness. We plan
to perform a Year 2000 simulation on our software during the second calendar
quarter of 1999. We are also in the process of contacting certain third-party
vendors, licensors and providers of software, hardware and services regarding
their Year 2000 readiness. Following this testing and after contacting these
vendors and licensors, we will be better able to make a complete evaluation of
Year 2000 readiness, to determine what costs will be necessary to be Year 2000
compliant and to determine whether contingency plans need to be developed.
Please see "Management's Discussion and Analysis of Financial Condition" for
detailed information on our state of readiness, potential risks and contingency
plans regarding the Year 2000 issue.
RISKS FROM CONTINUED EXISTENCE OF CONTROL GROUP
Certain members of our management, specifically Thomas J. Russell, Chairman
of our Board, Reuben F. Richards, President, Chief Executive Officer and a
director, and Robert Louis-Dreyfus, a director, are former members of Jesup &
Lamont Merchant Partners, L.L.C. They collectively beneficially own
approximately 45.7% of our common stock immediately prior to this offering and
will own approximately % of our common stock after the offering.
Accordingly, such persons will continue to hold sufficient voting power to
control our business and affairs for the foreseeable future. This concentration
of ownership may also have the effect of delaying, deferring or preventing a
change in control of our company.
RISKS RELATED TO ENVIRONMENTAL REGULATION
We are subject to numerous federal, state and local environmental laws and
regulations concerning how we use, store, handle, treat and dispose of certain
materials used in our research and development and production operations, as
well as laws and regulations concerning employee health and safety. We have
retained an environmental consultant to advise us in complying with applicable
environmental and health and safety
16
laws and regulations. Future changes in these laws and regulations may result in
unforeseen capital expenditures or liabilities, or in restrictions on our
operations. The production of wafers and devices involves the use of certain
hazardous raw materials, including, but not limited to, ammonia, phosphine and
arsene. If our control systems are unsuccessful in preventing a release of these
materials into the environment or other adverse environmental conditions occur,
we could experience interruptions in our operations and incur substantial
remediation and other costs. Failure to comply with environmental and health and
safety laws and regulations may materially and adversely affect our business,
financial condition and results of operations.
POSSIBLE ADVERSE EFFECTS OF ISSUANCES OF PREFERRED STOCK
We have 1,550,000 shares of Series I Redeemable Convertible Preferred Stock
(Series I Preferred Stock) issued and outstanding, all of which are subject to
mandatory redemption by us on November 17, 2003. If we do not have the funds
available to redeem the Series I Preferred Stock at that time, we will need to
raise additional funds to finance this redemption or we will be in default under
the terms of the Series I Preferred Stock. We may be unable to obtain adequate
financing on acceptable terms, which may adversely affect our business and
financial condition.
Our board of directors is authorized to issue up to an additional 4,332,353
shares of preferred stock with such dividend rates, liquidation preferences,
voting rights, redemption and conversion terms and privileges as our Board of
Directors, in its sole discretion, may determine. The issuance of additional
shares of preferred stock may result in a decrease in the value or market price
of our common stock, or our Board of Directors could use the preferred stock to
delay or discourage hostile bids for control of us in which shareholders may
receive premiums for their common stock or to make the possible sale of the
company or the removal of our management more difficult. The issuance of
additional shares of preferred stock could adversely affect the voting and other
rights of the holders of common stock.
EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS
New Jersey law contains and our certificate of incorporation, if amended as
proposed in the proxy statement for our annual meeting to be held on February
16, 1999, will contain certain provisions that could delay or prevent a takeover
attempt that our shareholders may consider in their best interests. If we adopt
the amendments to our certificate of incorporation, our board of directors will
be divided into three classes. Directors will be elected to serve staggered
three-year terms and will not be subject to removal except for cause by the vote
of the holders of at least 80% of our capital stock. In addition, if these
amendments are adopted, approval by the holders of 80% of our voting stock will
be required for certain business combinations unless these transactions meet
certain fair price criteria and procedural requirements or are approved by
two-thirds of our continuing directors. We may in the future adopt other
measures that may have the effect of delaying or discouraging an unsolicited
takeover, even if the takeover were at a premium price or favored by a majority
of unaffiliated shareholders. Certain of these measures may be adopted without
any further vote or action by our shareholders.
17
VOLATILITY OF COMMON STOCK PRICE
Our common stock is traded on the Nasdaq National Market, which has
experienced and may continue to experience significant price and volume
fluctuations that could adversely affect the market price of our common stock
without regard to our operating performance. In addition, we believe that
factors such as quarterly fluctuations in financial results, earnings below
analysts' estimates, and financial performance and other activities of other
publicly traded companies in the semiconductor industry could cause the price of
our common stock to fluctuate substantially. In addition, in recent periods, our
common stock, 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 similar fluctuations in the
future could adversely affect the market price of our common stock.
SHARES ELIGIBLE FOR FUTURE SALE
If our shareholders sell substantial amounts of our common stock in the
public market following this offering, the market price of our common stock
could fall. These sales also might make it more difficult for us to sell equity
or equity-related securities in the future at a time and price that we deem
appropriate. Upon completion of this offering, we will have shares of
common stock outstanding (based on the number of shares outstanding as of
, 1999 and assuming no exercise of outstanding options). Of these
shares, shares are freely tradeable. This leaves shares eligible
for sale in the public market as follows:
In addition, as of December 31, 1998, stock options to purchase 1,164,921 shares
of our common stock, warrants to purchase 1,942,361 shares of our common stock
and 1,550,000 shares of our Series I Preferred Stock, which are convertible into
shares of common stock on a one-for-one basis, were outstanding. In connection
with our joint venture with General Electric Lighting, we will issue to General
Electric common stock purchase warrants to acquire between 282,010 and 564,019
shares of common stock at an exercise price of $22.875 and a $7.8 million
subordinated convertible debenture with an interest rate of 4.75% per annum due
in seven years. The debenture will be convertible into 340,984 shares of common
stock.
Certain shareholders, representing approximately 6,558,139 shares of our
common stock (including shares of common stock issued upon conversion of our
Series I Preferred Stock) have the right to require us to register their shares.
We agreed to file a shelf registration, for the benefit of the holders of our
Series I Preferred Stock and those holders of up to shares of common
stock who choose to participate, 90 days after completion of this offering. This
shelf registration will remain effective until November 17, 2003 or such earlier
time as all of the shares of our convertible preferred stock and the common
stock issued upon conversion thereof are no longer restricted under Rule 144.
Our company, the selling shareholders and certain of our other shareholders
will enter into restrictive sale agreements with the underwriters of this
offering. These agreements
18
give Donaldson, Lufkin & Jenrette the ability to prevent us and the applicable
shareholders from offering, selling, transferring or registering our common
stock, or other securities convertible into our common stock, for a period of 90
days after the date of this prospectus. However, Donaldson, Lufkin & Jenrette
may waive these restrictions, in whole or in part, with or without public
announcement.
RISKS OF NO DIVIDENDS
We have never declared or paid dividends on our common stock. We currently
do not intend to pay dividends on our common stock in the foreseeable future.
Any payment of dividends in the future will be at the discretion of our board of
directors.
USE OF PROCEEDS
The net proceeds to EMCORE from the sale of the shares of common
stock being offered hereby are estimated to be $ million ($ million if
the underwriters' over-allotment option is exercised in full), assuming a public
offering price of $ per share and after deducting the underwriting discounts
and commissions and estimated offering expenses. EMCORE will not receive any
proceeds from the sale of shares of common stock by the selling shareholders.
EMCORE intends to use $23.0 million to repay outstanding bank indebtedness
to First Union National Bank under three credit facilities, approximately $9.4
million to repay subordinated notes to an affiliate and other investors and the
balance for general corporate purposes, including working capital. The first of
these credit facilities with First Union, for $10.0 million, bears interest at a
rate of prime plus 50 basis points (8.25% at December 31, 1998) and matures on
October 1, 1999. The second of these credit facilities, for $8.0 million, bears
interest at one month LIBOR plus 75 basis points (6.375% at December 31, 1998)
and matures on December 31, 1999. This second credit facility was obtained in
June 1998 and the proceeds were used to buy and equip a new facility in
Albuquerque, New Mexico and for working capital purposes. The third of these
credit facilities with First Union National Bank, dated February 1, 1999, for
$5.0 million, bears interest at one month LIBOR plus 75 basis points (5.72% at
February 1, 1999). The proceeds of this third facility are being used to repay
$3.0 million advanced by Thomas Russell, the Chairman of the Board of EMCORE and
for working capital. The subordinated notes were issued in May and September of
1996, bear interest at 6.0% and mature on May 1, 2001. Thomas Russell holds
approximately $8.7 million of the subordinated notes that are being repaid. The
balance of the subordinated notes being repaid are held by approximately ten
other non-affiliated investors. EMCORE may also use a portion of the net
proceeds to fund acquisitions of complementary businesses, products or
technologies in the semiconductor sector. Although EMCORE periodically reviews
potential acquisition opportunities, EMCORE has not reached any agreements,
commitments or understanding for any future acquisitions. Pending such uses, the
net proceeds of this offering will be invested in short-term, investment-grade,
income producing investments.
EMCORE believes that the remaining net proceeds from this offering will be
sufficient to fund EMCORE's anticipated capital expenditures, and to provide
adequate working capital at least through fiscal 2000. However, future events
may require EMCORE to seek additional capital which may not be available on
terms acceptable to EMCORE.
19
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
EMCORE's common stock has traded on the Nasdaq National Market under the
symbol "EMKR" since March 6, 1997, the date of EMCORE's initial public offering.
The following table sets forth, for the periods indicated, the high and low
sales prices per share of common stock, as reported on the Nasdaq National
Market:
The reported last sale price of the common stock on the Nasdaq National
Market on February 1, 1999 was $22.50 per share. As of December 28, 1998, there
were 1,595 shareholders of record.
EMCORE has not declared or paid dividends on its common stock since its
formation. EMCORE currently does not intend to pay dividends on the common stock
in the foreseeable future so that it may reinvest its earnings in the
development of its business. The shares of EMCORE's Series I Preferred Stock are
entitled to receive cumulative quarterly dividends at the annual rate of 2% of
the liquidation preference thereof (equivalent to $.28 per annum per share). The
payment of dividends, if any, on the common stock in the future will be at the
discretion of EMCORE's board of directors.
20
CAPITALIZATION
The following table sets forth the capitalization of EMCORE as of December
31, 1998, and as adjusted to reflect the sale by EMCORE of shares of
common stock being offered hereby (at an assumed offering price of $ per
share) and the application of the estimated net proceeds therefrom.
- -------------------------
(1) Excludes: (i) 1,372,059 shares of common stock reserved for issuance under
EMCORE's 1995 Incentive and Non-Statutory Stock Option Plan, as amended, of
which 1,001,822 shares are subject to outstanding options at exercise prices
varying from $3.03 per share to $24.75 per share; (ii) warrants to purchase
385,069 shares of common stock at an exercise price of $4.08 per share,
exercisable until May 1, 2001; (iii) warrants to purchase 1,225,490 shares
of common stock at an exercise price of $10.20 per share, exercisable until
September 1, 2001; (iv) options to purchase 163,099 shares of common stock
issued in connection with EMCORE's acquisition of MODE at exercise prices
ranging from $0.43 to $0.60; (v) warrants to purchase 47,118 shares of
common stock at exercise prices ranging from $4.32 to $5.92 per share,
exercisable until September 2000; (vi) shares reserved for issuance pursuant
to warrants to purchase 284,684 shares of common stock at an exercise price
of $11.375 per share, exercisable until May 1, 2001; and (vii) subject to
certain conditions, the issuance to General Electric, upon establishment of
the GELcore joint venture, of between 282,010 and 564,019 common stock
purchase warrants and a subordinated convertible debenture that will be
convertible into 340,984 shares of stock. Please see Notes 11, 12, 17 and 18
of the Notes to Financial Statements included elsewhere in this prospectus
for more information.
21
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for the three months
ended December 31, 1997 and 1998 and the three fiscal years ended September 30,
1998 of EMCORE is qualified by reference to and should be read in conjunction
with the Financial Statements and the Notes thereto, and Management's Discussion
and Analysis of Financial Condition and Results of Operations included elsewhere
in this prospectus. The Statement of Income Data set forth below with respect to
fiscal 1996, 1997 and 1998 and the Balance Sheet Data as of September 30, 1997
and 1998 are derived from EMCORE's audited financial statements included
elsewhere in this prospectus. The Statement of Income Data for fiscal 1994 and
1995 and the Balance Sheet Data as of September 30, 1994, 1995 and 1996 are
derived from audited financial statements not included herein. The financial
data as of December 31, 1998 and for the three months ended December 31, 1997
and 1998 are derived from unaudited consolidated financial statements that, in
the opinion of EMCORE's management, reflect all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of the financial
position and results of operations for these periods. Operating results for the
three months ended December 31, 1998 are not necessarily indicative of the
results that may be expected for the entire fiscal year ended September 30,
1999.
22
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
EMCORE designs, develops and manufactures compound semiconductor materials
and process technology and is a leading manufacturer of production systems used
to fabricate compound semiconductor wafers. EMCORE's products and technology
enable its customers, both in the U.S. and internationally, to manufacture
commercial volumes of high-performance electronic and optoelectronic devices.
EMCORE has recently established a number of strategic relationships through
joint ventures, long-term supply agreements and an acquisition in order to
facilitate the development and manufacture of new products in targeted growth
markets.
Prior to fiscal 1997, EMCORE's revenues consisted primarily of the sales of
metal organic chemical vapor deposition (MOCVD) systems. In fiscal 1997, EMCORE
expanded its product offerings to include compound semiconductor materials
(wafers and devices). EMCORE's two product lines, systems and materials, differ
significantly. Systems-related revenues include sales of EMCORE's TurboDisc
production systems as well as spare parts and services. The book to ship time
period on systems is approximately four to six months, and the average selling
price is in excess of $1.0 million. Materials revenues include wafers, devices
and process development technology. The materials sales cycle is generally
shorter than for systems and average selling prices vary significantly based on
the products and services provided. Generally, EMCORE achieves a higher gross
profit on its materials related products.
EMCORE recognizes revenue upon shipment. For systems, EMCORE incurs certain
installation and warranty costs subsequent to shipment which are estimated and
accrued at the time the sale is recognized. EMCORE reserves for estimated
returns and allowances at the time of shipment. For research contracts with the
U.S. government and commercial enterprises with durations greater than six
months, EMCORE recognizes revenue to the extent of costs incurred plus a pro
rata portion of estimated gross profit as stipulated in these contracts, based
on contract performance. EMCORE's research contracts require the development or
evaluation of new materials applications and have a duration of six to 36
months. Contracts with a duration of six months or less are accounted for on the
completed contract method. A contract is considered complete when all costs have
been incurred and the research reporting requirements to the customer have been
met.
- EMCORE has recently established a number of strategic relationships
through joint ventures, long-term supply agreements and an acquisition as
summarized below.
- January 1999, EMCORE signed a transaction agreement with General Electric
Lighting to form GELcore, a joint venture to develop and market white
light and colored high-brightness light-emitting diode (HB LED) lighting
products, and subject to certain conditions, the parties expect this
joint venture will be consummated by March 31, 1999. HB LEDs are solid
state compound semiconductor devices that emit light in a variety of
colors. The global demand for HB LEDs is experiencing rapid growth
because LEDs have a long useful life (approximately 10 years), consume
approximately 10% of the power consumed by incandescent or halogen
lighting and improve display visibility. General Electric Lighting and
EMCORE have agreed that this joint venture will be the exclusive vehicle
for each party's participation in the solid state lighting market.
GELcore seeks to combine EMCORE's materials science expertise, process
technology and compound semiconductor production systems with General
Electric Lighting's
24
brand name recognition, phosphor technology and extensive marketing and
distribution capabilities. GELcore's long-term goal is to develop HB LED
products to replace traditional lighting.
- In November 1998, EMCORE signed a long term purchase agreement with Space
Systems/Loral, a wholly owned subsidiary of Loral Space & Communications.
Under this agreement, which is contingent upon EMCORE's compliance with
Loral's product specification requirements, EMCORE will supply compound
semiconductor high-efficiency gallium arsenide solar cells for Loral's
satellites. EMCORE anticipates completing this qualification in April
1999. Subject to the product qualification, EMCORE received an initial
purchase order for $5.25 million of solar cells.
- In November 1998, EMCORE formed UMCore, a joint venture with Union
Miniere Inc., a mining and materials company, to explore and develop
alternate uses for germanium using EMCORE's materials science and
production platform expertise and Union Miniere's access to and
experience with germanium.
- In October 1998, EMCORE formed Emtech, a joint venture with Optek
Technology, Inc., a packager and distributor of optoelectronic devices,
to market an expanded line of magneto resistive (MR) sensors to the
automotive and related industries. This joint venture seeks to combine
EMCORE's strength in producing devices with Optek's strength in packaging
and distributing devices to offer off-the-shelf products and expand
market penetration.
- In September 1998, EMCORE entered into an agreement with Lockheed Martin
to provide technical management and support of a Cooperative Research and
Development Agreement between Lockheed Martin and Sandia National
Laboratories for the advancement, transfer and commercialization of a new
compound semiconductor high-efficiency solar cell. EMCORE also signed a
four-year purchase agreement with AMP Incorporated to provide high speed
vertical cavity surface emitting lasers (VCSELs), initially for use in
transceivers for Gigabit Ethernet applications.
- In February 1998, EMCORE and Uniroyal Technology Corporation formed
Uniroyal Optoelectronics, a joint venture to manufacture, sell and
distribute HB LED wafers and package-ready devices. This joint venture
commenced operations in July 1998.
- To expand its technology base into the data communications and
telecommunications markets, on December 5, 1997, EMCORE acquired
MicroOptical Devices, Inc. (MODE) in a stock transaction accounted for
under the purchase method of accounting for a purchase price of $32.8
million.
Because we do not have a controlling economic and voting interest in the
Uniroyal, Union Miniere, Optek and General Electric Lighting joint ventures,
EMCORE will account for such joint ventures under the equity method of
accounting.
25
EMCORE sells its products and has generated a significant portion of its
sales to customers outside the United States. In fiscal 1996, 1997, 1998 and the
first fiscal quarter of 1999, international sales constituted 42.5%, 42.0%,
39.1% and 35.1%, respectively, of revenues. In fiscal 1998, approximately
two-thirds of EMCORE's international sales were made to customers in Asia,
particularly in Japan. EMCORE anticipates that international sales will continue
to account for a significant portion of revenues.
As of December 31, 1998, EMCORE had an order backlog of $41.8 million
scheduled to be shipped through September 30, 1999. This represented an increase
of 81.4% since September 30, 1998 which primarily relates to increased systems
bookings in Asia and an initial order for solar cells from Loral, which is
subject to product qualification. EMCORE includes in backlog only customer
purchase orders that have been accepted by EMCORE and for which shipment dates
have been assigned within the 12 months to follow and research contracts that
are in process or awarded. Wafer and device agreements extending longer than one
year in duration are included in backlog only for the ensuing 12 months. EMCORE
receives partial advance payments or irrevocable letters of credit on most
production system orders.
RESULTS OF OPERATIONS
The following table sets forth the Statement of Operations Data of EMCORE
expressed as a percentage of total revenues for the fiscal years ended September
30, 1996, 1997 and 1998 and the three months ended December 31, 1997 and 1998.
26
COMPARISON OF THREE MONTHS ENDED DECEMBER 31, 1997 AND 1998
REVENUES. EMCORE's revenues decreased 18.1% from $12.4 million for the
three months ended December 31, 1997, to $10.1 million for the three months
ended December 31, 1998. The revenue decrease in the three-month period was
attributable to decreased revenues in the materials-related product lines, which
were impacted primarily by a decrease in process development fees and a decrease
due to the discontinuation of a wafer sales contract in October 1998. This
three-year contract is on hold pending evaluation by the customer. Revenues
relating to systems- and materials-related products accounted for 54.4% and
45.6%, respectively, for the three months ended December 31, 1997 and 72.0% and
28.0%, respectively, for the three months ended December 31, 1998. International
sales accounted for 44.2% of revenues for the three months ended December 31,
1997 and 35.1% of revenues for the three months ended December 31, 1998.
COST OF SALES/GROSS PROFIT. Cost of sales includes direct material and
labor costs, allocated manufacturing and service overhead, and installation and
warranty costs. Gross profit decreased from 48.4% of revenue for the three
months ended December 31, 1997, to 40.6% of revenue for the three months ended
December 31, 1998. The gross profit percentage was negatively affected by a
product mix in favor of lower gross profit system products as well as
under-absorbed overhead due to lower overall revenues. During the three months
ended December 31, 1998, EMCORE sold for approximately $3.0 million two compound
semiconductor production systems to a joint venture in which it has a 49%
minority interest. EMCORE eliminated approximately $711,000 of gross profit on
such sales. Such deferred gross profit will be recognized ratably over the
assigned life of the production systems purchased by the venture.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by 4.7% from $3.0 million for the three months ended December
31, 1997, to $3.1 million in the three months ended December 31, 1998. A
significant portion of the increase was largely due to increases in sales
personnel headcount to support both domestic and foreign markets and general
headcount additions to sustain the internal administrative support. As a
percentage of revenue, selling, general and administrative expenses increased
from 24.3% for the three months ended December 31, 1997 to 31.0% for the three
months ended December 31, 1998. This increase is a result of the decrease in
overall revenues.
GOODWILL AMORTIZATION. EMCORE recognized approximately $284,000 of
goodwill amortization for the three months ended December 31, 1998 in connection
with the acquisition of MODE on December 5, 1997. As of December 31, 1998,
EMCORE has approximately $2.2 million of goodwill remaining which will be fully
amortized by October 31, 2000.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
108.9% from $2.8 million in the three months ended December 31, 1997, to $5.9
million in the three months ended December 31, 1998. As a percentage of revenue,
recurring research and development expenses increased from 23.0% for the first
quarter of the prior year to 58.5% for the first quarter of the current year.
The increase was primarily attributable to EMCORE's acquisition of MODE, startup
of its new Albuquerque, New Mexico facility and increased staffing and equipment
costs necessary to enhance current products and develop new product offerings.
Products introduced or under development include HB LEDs, high-efficiency solar
cells, new generation TurboDisc production systems, VCSELs and other
optoelectronic devices. During the three months ended December 31, 1997, EMCORE
recognized a $29.3 million one-time non-cash charge for acquired in-process
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research and development relating to EMCORE's December 5, 1997 purchase of MODE.
For the three months ended December 31, 1997 and 1998, EMCORE incurred
approximately $321,000 and $844,000, respectively, of research and development
costs associated with MODE's in-process (at the date of acquisition) research
and development projects. To maintain growth and to continue to pursue market
leadership in materials science technology, EMCORE expects to continue to invest
a significant amount of its resources in research and development.
OPERATING LOSS. EMCORE reported an operating loss of $5.2 million for the
three months ended December 31, 1998, as compared to a $29.2 million loss for
the three months ended December 31, 1997. The change in operating income is due
to the loss of gross profit on decreased revenues and a product mix geared
towards lower gross margin system related sales coupled with a higher fixed cost
infrastructure to support those revenues. In addition, EMCORE's operating loss
was impacted by increased research and development spending, the loss generated
from the operations of MODE, a company acquired in December 1997, and the
startup expenses associated with the opening of EMCORE's new Albuquerque, New
Mexico facility.
OTHER EXPENSE. During fiscal 1996, EMCORE issued detachable warrants along
with subordinated notes to certain of its existing shareholders. In fiscal 1997,
EMCORE also issued detachable warrants in return for a $10.0 million demand note
facility (the Facility) guarantee by the Chairman of the Board of EMCORE, who
provided collateral for the Facility. EMCORE subsequently assigned a value to
these detachable warrants issued using the Black-Scholes Option Pricing Model.
EMCORE recorded the subordinated notes at a carrying value that is subject to
periodic accretions, using the interest method, and reflected the Facility's
detachable warrant value as a debt issuance cost. In June 1998, EMCORE issued
284,684 warrants to its Chairman and its Chief Executive Officer for providing a
guarantee in connection with the 1998 $8.0 million 18 month credit facility with
First Union National Bank (1998 Agreement). EMCORE assigned a value to these
warrants using the Black-Scholes Option Pricing Model. The consequent expense of
these warrant accretion amounts is charged to "Imputed warrant interest,
non-cash" and amounted to approximately $96,000 and $316,000 for the three
months ended December 31, 1997 and December 31, 1998, respectively.
For the three months ended December 31, 1998, stated interest expense, net
increased by $160,000 to $230,000 due to additional borrowing and lower interest
income. In the prior year, EMCORE was earning interest income on its initial
public offering proceeds.
NET LOSS. EMCORE reported net loss of $6.1 million for the three months
ended December 31, 1998, as compared to a $29.4 million loss for the three
months ended December 31, 1997. For the three months ended December 31, 1998,
the decrease in the year-to-date loss was attributable to the $29.3 million
write-off of acquired in-process research and development in connection with the
acquisition of MODE on December 5, 1997.
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30, 1997 AND 1998
REVENUES. EMCORE's revenues decreased 8.4% from $47.8 million for the
fiscal year ended September 30, 1997 to $43.8 million for the fiscal year ended
September 30, 1998. The revenue decrease represented a shift in product mix
during the year. Equipment related revenues decreased approximately 22.3% while
materials related revenues increased approximately 26.5%. The decrease in
equipment revenues was primarily attributable to the
28
financial issues in the Asian economies as well as a general slowdown in the
semiconductor equipment market overall. While materials related revenues did
experience a 26.5% increase, the General Motors three month strike adversely
affected revenue, as shipments to General Motors were halted during the strike.
International sales accounted for approximately 42.0% and 39.1% of revenues for
the fiscal years ended September 30, 1997 and 1998, respectively.
COST OF SALES/GROSS PROFIT. Cost of sales includes direct material and
labor costs, allocated manufacturing and service overhead, and installation and
warranty costs. Gross profit increased from 37.0% of revenue to 43.6% of revenue
for the fiscal years ended September 30, 1997 and 1998, respectively. The gross
profit percentage increase was attributable to a shift in product mix towards
higher gross margin materials related revenues.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by 50.7% from $9.3 million for the year ended September 30,
1997, to $14.1 million for the year ended September 30, 1998. The increase was
largely due to sales personnel headcount increases to support both domestic and
foreign markets and general headcount additions to sustain the internal
administrative support necessary for EMCORE's expanded product lines and new
locations. During fiscal 1998, EMCORE wrote-off a $1.0 million receivable due
from an Asian customer which was deemed to be uncollectible. As a percentage of
revenue, selling, general and administrative expenses increased from 19.6% of
revenue during fiscal 1997 to 32.2% of revenue for fiscal 1998. EMCORE believes
that selling, general and administrative expenses will decrease as a percentage
of revenues in fiscal 1999.
GOODWILL AMORTIZATION. In connection with the purchase of MODE, EMCORE
recorded goodwill of $3.4 million which is being amortized over 36 months.
Goodwill amortization expense amounted to $922,000 for the year ended September
30, 1998. Net goodwill at September 30, 1998 was $2,457,000.
RESEARCH AND DEVELOPMENT. Recurring research and development expenses
increased by 83.3% from $9.0 million for the year ended September 30, 1997, to
$16.5 million for the year ended September 30, 1998. The increase was primarily
attributable to EMCORE's acquisition of MODE and increased staffing and
equipment costs necessary to enhance current products and develop new product
offerings. Products introduced or under development include HB LEDs, high
efficiency solar cells, new generation TurboDisc production systems, VCSELs and
other optoelectronic devices. For the year ended September 30, 1998, EMCORE
incurred $3.2 million of research and development costs associated with MODE's
in-process (at the date of acquisition) research and development projects. As a
percentage of revenue, research and development expenses increased from 18.9% of
revenue during fiscal 1997 to 37.7% of revenue for fiscal 1998. To maintain
growth and market leadership in epitaxial technology, EMCORE expects to continue
to invest a significant amount of its resources in research and development.
In connection with the MODE acquisition, EMCORE incurred a one-time charge
for the write-off of acquired in-process research and development amounting to
$29.3 million.
OPERATING LOSS. During fiscal 1998, operating loss increased from a loss
of $0.7 million for the fiscal year ended September 30, 1997, to a loss of $41.7
million for the year ended September 30, 1998. The change in operating loss was
primarily due to the $29.3 million one-time charge for in-process research and
development written off in connection with the purchase of MODE. In addition,
the General Motors three month strike adversely affected operating performance
as shipments to General Motors were halted during the
29
strike. General Motors is among EMCORE's largest customers. EMCORE was unable to
furlough or reduce their workforce during the strike and thereby incurred
charges without the benefit of related revenues.
OTHER EXPENSE. Other expenses decreased, particularly due to the reduced
imputed warrant interest expense associated with EMCORE's subordinated debt and
debt issuance guarantee cost. During fiscal 1996, EMCORE issued detachable
warrants along with subordinated notes to certain of its existing shareholders.
In fiscal year 1997, EMCORE also issued detachable warrants in return for a
$10.0 million demand note facility (the Facility) guarantee by the Chairman of
the Board of EMCORE, who provided collateral for the Facility. EMCORE
subsequently assigned a value to these detachable warrants issued using the
Black-Scholes Option Pricing Model. EMCORE recorded the subordinated notes at a
carrying value that is subject to periodic accretions, using the interest
method, and reflected the Facility's detachable warrant value as debt issuance
cost which was written off in its entirety in fiscal 1997. The consequent
expense of these subordinated note accretion amounts and the now terminated
Facility's debt issuance cost is charged to "imputed warrant interest,
non-cash," and amounted to approximately $4.0 million and $600,000 for the
fiscal years ended September 30, 1997 and 1998, respectively. In June 1998,
EMCORE issued 284,684 warrants to its Chairman and its Chief Executive Officer
for providing a guarantee in connection with the 1998 Agreement, an $8.0 million
18 month credit facility with First Union National Bank. EMCORE assigned a value
to these warrants using the Black-Scholes Option Pricing Model. As a result,
EMCORE will record imputed warrant interest, non-cash of approximately $1.3
million over the life of the credit facility.
INCOME TAXES. EMCORE's effective income tax rate was 0.0% in fiscal 1998,
2.6% in fiscal 1997 and 0.0% in fiscal 1996. The lower effective rate in fiscal
1998 and 1996, relative to fiscal 1997, was attributable to a federal income tax
benefit offset by net operating loss and expenses not utilized or deductible for
tax purposes.
As of September 30, 1998, EMCORE has net operating loss carryforwards for
regular tax purposes of approximately $22.0 million which expire in the years
2003 through 2012. EMCORE believes that the consummation of certain equity
transactions and a significant change in the ownership during fiscal year 1995
has constituted a change in control under Section 382 of the Internal Revenue
Code (IRC). Due to the change in control, EMCORE's ability to use its federal
net operating loss carryovers and federal research credit carryovers to offset
future income and income taxes, respectively, are subject to annual limitations
under IRC Section 382 and 383.
EMCORE believes that the acquisition of MODE and the consummation of
certain other equity transactions has constituted a change in control in fiscal
1998 under Section 382 of the IRC. As such, federal net operating loss
carryovers and research credit carryovers incurred subsequent to EMCORE's fiscal
1995 change in control (as described above) will also be subject to annual
limitations under IRC Section 382 and 383.
EXTRAORDINARY ITEM. In the fiscal year ended September 30, 1997, EMCORE
repaid $2.0 million of its outstanding subordinated notes due May 1, 2001. In
connection with this discharge of EMCORE's subordinated notes, an extraordinary
loss of $286,000 was recognized in fiscal 1997 relating to such early
extinguishment of debt.
NET LOSS. Net loss increased from $5.6 million for the fiscal year ended
September 30, 1997, to $43.5 million for the fiscal year ended September 30,
1998. This
30
increase was primarily attributable to the aforementioned acquisition of MODE
and subsequent write-off of in-process research and development of $29.3
million. In addition, the General Motors three month prolonged strike adversely
affected operating performance.
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30, 1996 AND 1997
REVENUES. EMCORE's revenues for fiscal 1997 increased 71.9% from $27.8
million to $47.8 million for the fiscal year ended September 30, 1996. The
revenue increase was primarily attributable to increased demand of MOCVD systems
and package-ready devices, as well as the introduction of compound semiconductor
wafer products. International sales accounted for approximately 42.5% and 42.0%
of revenues for the fiscal years ended September 30, 1996 and 1997,
respectively.
COST OF SALES/GROSS PROFIT. Cost of sales includes direct material and
labor costs, allocated manufacturing and service overhead, and installation and
warranty costs. Gross profit increased from 33.0% of revenue to 37.0% of revenue
for the fiscal years ended September 30, 1996 and 1997, respectively. The gross
profit percentage increase was attributable to higher margins on wafer, device
and licensing revenues.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by 43.3% from $6.5 million for the year ended September 30,
1996, to $9.3 million for the year ended September 30, 1997. The increase was
largely due to increases in sales personnel headcount to support both domestic
and foreign markets and general headcount additions to sustain the internal
administrative support necessary for EMCORE's increased business as well as
higher expenses attributable to increased revenues. As a percentage of revenue,
selling, general and administrative expenses decreased from 23.5% of revenue
during fiscal 1996 to 19.6% of revenue for fiscal 1997.
RESEARCH AND DEVELOPMENT. Research and development expenses increased by
66.6% from $5.4 million for the year ended September 30, 1996, to $9.0 million
for the year ended September 30, 1997. The increase was primarily attributable
to increased staffing and equipment costs necessary to enhance current products
and research and development activities for the emulation of EMCORE's two new
product lines (epitaxial wafers and package-ready devices). As a percentage of
revenue, research and development expenses decreased from 19.4% of revenue
during fiscal 1996 to 18.8% of revenue for fiscal 1997. To maintain growth and
market leadership in epitaxial technology, EMCORE expects to continue to invest
a significant amount of its resources in research and development.
OPERATING LOSS. During fiscal 1997, operating loss decreased $2.1 million
from a loss of $2.8 million for the fiscal year ended September 30, 1996, to a
loss of $0.7 million for the year ended September 30, 1997. The change in
operating loss was primarily due to higher revenues generating greater overall
gross profit.
OTHER EXPENSE. During fiscal 1996, EMCORE issued detachable warrants along
with subordinated notes to certain of its existing shareholders. In the first
quarter of fiscal year 1997, EMCORE also issued detachable warrants in return
for the $10.0 million Facility guarantee by the Chairman of the Board of EMCORE,
who provided collateral for the Facility. EMCORE subsequently assigned a value
to these detachable warrants issued using the Black-Scholes Option Pricing
Model. EMCORE recorded the subordinated notes at a carrying value that is
subject to periodic accretions, using the interest method, and reflected the
Facility's detachable warrant value as debt issuance cost. The consequent
expense of these subordinated note accretion amounts and the now terminated
Facility's
31
debt issuance cost is charged to "Imputed warrant interest, non-cash," related
to the warrant issuances in connection with the $10.0 million Facility, and
amounted to approximately $126,000 and $4.0 million for the fiscal years ended
September 30, 1996 and 1997, respectively.
Borrowings totaling $8.0 million under the Facility were utilized to fund
capital expenditures in connection with the build-out of EMCORE's manufacturing
facility during the six months ended March 31, 1997. The resultant interest
expense was the primary reason for the increase in "Stated interest expense" for
the year ended September 30, 1997. The outstanding $8.0 million under this
demand note facility was repaid in March 1997.
EXTRAORDINARY ITEM. EMCORE repaid $10.0 million of its outstanding debt
with proceeds from its initial public offering. The entire $8.0 million
outstanding of its Facility was repaid and $2.0 million was used to repay a
portion of EMCORE's outstanding subordinated notes due May l, 2001. In
connection with this discharge of EMCORE's subordinated notes, an extraordinary
loss of $286,000 was recognized in fiscal 1997 relating to such early
extinguishment of debt.
NET LOSS. Net loss increased $2.4 million from $3.2 million for the fiscal
year ended September 30, 1996, to $5.6 million for the fiscal year ended
September 30, 1997. This increase was primarily attributable to the
aforementioned $4.0 million of non-cash imputed warrant interest associated with
certain financing transactions.
QUARTERLY RESULTS OF OPERATIONS
The following tables present EMCORE's unaudited results of operations
expressed in dollars and as a percentage of revenues for the nine most recently
ended fiscal quarters. EMCORE believes that all necessary adjustments,
consisting only of normal recurring adjustments, have been included in the
amounts below to present fairly the selected quarterly information when read in
conjunction with the Financial Statements and Notes thereto included elsewhere
in this prospectus. EMCORE's results from operations may vary substantially from
quarter to quarter. Accordingly, the operating results for a quarter are not
necessarily indicative of results for any subsequent quarter or for the full
year.
32
33
From inception through December 31, 1996, EMCORE derived the majority of
its revenues from the sale of Turbo Disc MOCVD systems. Beginning in January
1997, EMCORE expanded its product lines to offer wafers and devices. Throughout
fiscal 1997 and the first half of fiscal 1998, EMCORE benefited from the
expanded product offerings. Early in fiscal 1998, the capital equipment market
experienced a downturn and bookings of TurboDisc systems decreased
substantially. The result was lower revenues for the last two quarters of fiscal
1998 and the first quarter of fiscal 1999.
Cost of sales was also affected by revenue shifts. Gross profit improved
consistently from the introduction of the new product lines through the second
quarter of fiscal 1998. Thereafter, gross profit was affected primarily by
reduced revenues and the resulting underabsorbed overhead.
Operating expenses have generally increased both in absolute dollars and as
a percentage of revenues, due to increased staffing in research and development,
sales and marketing, and general and administrative functions. The increase in
research expenditures was related to the development of systems for the
processing of gallium nitride materials used in the production of blue HB LEDs,
enhancement of production systems, and the introduction of wafers and devices,
in particular, MR sensors, VCSELs and solar cells. Selling, general and
administrative expenses increased as a result of increased marketing and sales
related activities, including the hiring of additional personnel, commissions,
customer samples, expansion of facilities, and the opening of field offices in
Taiwan and California.
EMCORE has experienced and expects to continue to experience significant
fluctuations in quarterly results. Factors which have had an influence on and
may continue to influence EMCORE's operating results in a particular quarter
include, but are not limited to the timing of receipt of orders, cancellation,
rescheduling or delay in product shipment or supply deliveries, product mix,
competitive pricing pressures, EMCORE's ability to design, manufacture and ship
products on a cost effective and timely basis, including the ability of EMCORE
to achieve and maintain acceptable production yields for wafers and devices,
regional economic conditions and the announcement and introduction of new
products by EMCORE and by its competitors. The timing of sales of EMCORE's
production systems may cause substantial fluctuations in quarterly operating
results due to the substantially higher per unit price of these products
relative to EMCORE's other products. If the compound semiconductor industry
experiences downturns or slowdowns, EMCORE's business, financial condition and
results of operations may be materially and adversely affected.
34
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $2.7 million from $4.5 million at
September 30, 1998, to $1.8 million at December 31, 1998. For the three months
ended December 31, 1998, net cash used for operations amounted to $3.3 million,
primarily due to EMCORE's net losses, and a decrease in accounts payable, which
was partially offset by EMCORE's non-cash depreciation and amortization charges,
and an increase in advance billings.
For the three months ended December 31, 1998, net cash used in investment
activities amounted to $11.5 million, primarily due to the purchase and
manufacture of new equipment for the facilitation of EMCORE's wafer and device
product lines, and clean room modifications and enhancements of approximately
$6.0 million, as well as investments in unconsolidated affiliates of
approximately $5.6 million.
Net cash provided by financing activities for the three months ended
December 31, 1998 amounted to approximately $12.1 million, primarily due to the
$21.2 million of net proceeds from the private placement of preferred stock and
short-term related party borrowings of $1.5 million. This was offset by debt
repayments of $10.5 million ($8.5 million on short-term related party debt and
$2.0 million on the $10.0 million bank loan).
On March 31, 1997, EMCORE entered into a $10.0 million revolving loan
agreement with First Union National Bank (1997 Agreement) which bears interest
at the rate of prime plus 50 basis points (8.25% at December 31, 1998) and
expires October 1, 1999. In addition, Thomas Russell, the Chairman of the Board
of EMCORE, has agreed to guarantee any indebtedness under the 1997 Agreement in
the event that EMCORE does not meet certain financial covenants. On June 22,
1998, EMCORE entered into an $8.0 million loan agreement with First Union
National Bank, which expires December 31, 1999. The 1998 Agreement bears
interest at a rate equal to one-month LIBOR plus three-quarters of one percent
per annum (6.375% at December 31, 1998). As of December 31, 1998, EMCORE had
borrowed approximately $8.0 million under the 1997 Agreement and $8.0 million
under the 1998 Agreement.
On November 30, 1998, EMCORE sold a total of 1,550,000 shares of its Series
I Preferred Stock to three purchasers for $21.2 million, net of expenses. EMCORE
repaid its Chairman $8.5 million, invested approximately $5.6 million in two
unconsolidated joint ventures with Uniroyal Technology Corporation and Union
Miniere Inc., reduced bank debt by $2.0 million and is using the balance for
general working capital purposes.
EMCORE believes that its current liquidity, together with available credit
facilities (including the Chairman's commitment, described below) and the
proceeds from this offering, should be sufficient to meet its cash needs for
working capital through fiscal 2000. However, if the proceeds from this
offering, cash generated from operations and cash on hand are not sufficient to
satisfy EMCORE's liquidity requirements, EMCORE will seek to obtain additional
equity or debt financing. Additional funding may not be available when needed or
on terms acceptable to EMCORE. If EMCORE is required to raise additional
financing and if adequate funds are not available or are not available on
acceptable terms, the ability to continue to fund expansion, develop and enhance
products and services, or otherwise respond to competitive pressures would be
severely limited. Such a limitation could have a material adverse effect on
EMCORE's business, financial condition or operations.
35
SUBSEQUENT EVENTS
In January 1999, EMCORE and General Electric Lighting signed a transaction
agreement to form a joint venture to develop and market white light and colored
HB LED products for lighting applications and, subject to certain conditions,
the parties expect this joint venture will be consummated by March 31, 1999. In
connection with this joint venture, EMCORE will issue to General Electric common
stock purchase warrants to purchase between 282,010 and 564,019 shares of
EMCORE's common stock at an exercise price of $22.875, which will expire in
2006. The number of common stock purchase warrants to be issued is to be
determined based on the market price of EMCORE's common stock upon the
completion of this offering or on March 31, 1999, whichever occurs first.
General Electric will purchase a $7.8 million subordinated convertible debenture
(the Debenture) bearing interest at 4.75% per annum and maturing in 2006. The
Debenture's interest rate will be subject to adjustment in the event EMCORE does
not complete a public offering by June 30, 1999. The debenture will be
convertible into 340,984 shares of common stock.
On February 1, 1999, EMCORE entered into a $5.0 million short-term note
(the Note) with First Union. The Note is due and payable in May 1999. The Note
bears interest at a rate equal to one-month LIBOR plus three-quarters of one
percent per annum. On January 27, 1999, EMCORE borrowed $3.0 million from its
Chairman, Thomas J. Russell. The loan bears interest at 8% per annum. The loan
was repaid from borrowings under the Note. EMCORE's Chairman has committed to
provide up to $30.0 million of long-term financing to EMCORE through July 1,
2000. This commitment terminates upon completion of this offering, subject to a
minimum offering size requirement.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept or recognize only two digit entries in the date code field. These
systems and software products will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and/or software used by many companies and governmental agencies may
need to be upgraded to comply with such Year 2000 requirements or risk system
failure or miscalculations causing disruptions of normal business activities.
STATE OF READINESS. EMCORE has made a preliminary assessment of the Year
2000 readiness of its operating financial and administrative systems, including
the hardware and software that support such systems. EMCORE's assessment plan
consists of (1) quality assurance testing of its internally developed
proprietary software; (2) contacting third-party vendors and licensors of
material hardware, software and services that are both directly and indirectly
related to EMCORE's business; (3) contacting vendors of third-party systems; (4)
assessing repair or replacement requirements; (5) implementing repair or
replacement; and (6) creating contingency plans in the event of Year 2000
failures. EMCORE plans to perform a Year 2000 simulation on its systems during
the second quarter of l999 to test system readiness. Many vendors of material
hardware and software components of its systems have indicated that the products
used by EMCORE are currently Year 2000 compliant. EMCORE will require vendors of
the other material hardware and software components of its systems to provide
assurances of their Year 2000 compliance. EMCORE plans to complete this process
during the first half of 1999. Until this testing is completed and these vendors
and providers are contacted, EMCORE will not be able to completely evaluate
whether its systems will need to be revised or replaced.
36
COSTS. To date, EMCORE has not incurred any material expenditures in
connection with identifying, evaluating or addressing Year 2000 compliance
issues. Most of EMCORE expenses have related to, and are expected to continue to
relate to, the operating costs associated with time spent by employees in the
evaluation process and Year 2000 compliance matters generally. At this time,
EMCORE does not possess the information necessary to estimate the potential
costs of revisions to its systems should such revisions be required or the
replacement of third-party software, hardware or services that are determined
not to be Year 2000 compliant. Although EMCORE does not anticipate that the
expenses will be material, the expenses if higher than anticipated could have a
material adverse effect on EMCORE's business, financial condition and results of
operations.
RISKS. EMCORE is not currently aware of any Year 2000 compliance problems
relating to its systems that would have a material adverse effect on EMCORE's
business, results of operations and financial condition, without taking into
account EMCORE's efforts to avoid or fix such problems. There can be no
assurance that EMCORE will not discover Year 2000 compliance problems in its
systems that will require substantial revision. In addition, there can be no
assurance that third-party software, hardware or services incorporated into
EMCORE's material systems will not need to be revised or replaced, all of which
could be time-consuming and expensive. The failure of EMCORE to fix or replace
its internally developed proprietary software or third-party software, hardware
or services on a timely basis could result in lost revenues, increased operating
costs, the loss of customers and other business interruptions, any of which
could have a material adverse effect on EMCORE's business, result of operations
and financial condition. Moreover, the failure to adequately address Year 2000
compliance issues in its internally developed proprietary software could result
in claims of mismanagement, misrepresentation or breach of contract and related
litigation, which could be costly and time-consuming to defend. In addition, the
failure of governmental agencies, utility companies, third-party service
providers and others outside of EMCORE's control to be Year 2000 compliant could
result in systemic failure beyond EMCORE's control such as a telecommunications
or electrical failure, which could have a material adverse effect on EMCORE's
business, results of operations and financial condition.
CONTINGENCY PLAN. As discussed above, EMCORE is engaged in an ongoing Year
2000 assessment and has not yet developed any contingency plans. The results of
EMCORE's Year 2000 simulation testing and the responses received from
third-party vendors and service providers will be taken into account in
determining the nature and extent of any contingency plans.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS No. 131"), which
establishes standards for reporting information about operating segments in
annual financial statements. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS No. 131 is effective for fiscal years beginning after December 15, 1997.
EMCORE will be required to adopt this standard in its fiscal year ending
September 30, 1999. The adoption of SFAS No. 131 is not expected to have an
impact on EMCORE's results of operations, financial position or cash flows.
37
In February 1998, FASB issued SFAS No. 132, "Employers' Disclosures about
Pension and Other Postretirement Benefits" ("SFAS No. 132"), which requires
disclosure about pension and postretirement benefits. SFAS No. 132 does not
change the measurement or recognition of these plans. SFAS No. 132 is effective
for fiscal years beginning after December 15, 1997. The adoption of SFAS No. 132
is not expected to have an impact on EMCORE's results of operations, financial
position or cash flows.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-l, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
is effective for financial statements for years beginning after December 14,
1998. SOP 98-l provides guidance over accounting for computer software developed
or obtained for internal use including the requirement to capitalize specified
costs and amortization of such costs. EMCORE does not expect the adoption of
this standard to have a material effect on results of operations, financial
position or cash flows.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on
the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5, which is effective for
fiscal years beginning after December 15, 1998, provides guidance on the
financial reporting of start-up costs and organization costs. It requires costs
of start-up activities and organization costs to be expensed as incurred. As
EMCORE has expensed these costs historically, the adoption of this standard is
not expected to have a significant impact on EMCORE's results of operations,
financial position or cash flows.
38
BUSINESS
EMCORE CORPORATION
EMCORE designs, develops, and manufactures compound semiconductor materials
and process technology and is a leading manufacturer of production systems used
to fabricate compound semiconductor wafers. EMCORE's products and technology
enable its customers, both in the U.S. and internationally, to manufacture
commercial volumes of high-performance electronic and optoelectronic devices.
EMCORE has recently established a number of strategic relationships through
joint ventures, long-term supply agreements and an acquisition in order to
facilitate the development and manufacture of new products in targeted growth
markets. EMCORE's products are used for a wide variety of applications in the
communications (satellite, data, telecommunications and wireless), consumer and
automotive electronics, computers and peripherals, and lighting markets.
EMCORE's customers include AMP Incorporated, General Motors, Hughes-Spectrolab,
Lucent Technologies, Inc., Siemens AG and 12 of the largest electronics
manufacturers in Japan.
INDUSTRY OVERVIEW
Recent advances in information technologies have created a growing need for
efficient, high-performance electronic systems that operate at very high
frequencies, have increased storage capacity and computational and display
capabilities, and can be produced cost-effectively in commercial volumes. In the
past, electronic systems manufacturers have relied on advances in silicon
semiconductor technology to meet many of these demands. However, the newest
generation of high-performance electronic and optoelectronic applications
require certain functions that are generally not achievable using silicon-based
components.
Compound semiconductors have emerged as an enabling technology to meet the
complex requirements of today's advanced information systems. Many compound
semiconductor materials have unique physical properties that allow electrons to
move at least four times faster than through silicon-based devices. Advantages
of compound semiconductor devices over silicon devices include:
- operation at higher speeds;
- lower power consumption;
- less noise and distortion; and
- optoelectronic properties that enable these devices to emit and detect
light.
Compound semiconductor devices can be used to perform individual functions
as discrete devices, such as high-brightness light-emitting diodes (HB LEDs),
vertical cavity surface emitting lasers (VCSELs), magneto resistive (MR) sensors
and solar cells. Compound semiconductor devices can also be combined into
integrated circuits, such as transmitters, receivers and alpha-numeric displays.
Although compound semiconductors are more expensive to manufacture than
silicon-based devices, electronics manufacturers are increasingly integrating
compound semiconductor devices into their products in order to achieve higher
performance in applications targeted for a wide variety of markets. These
include satellite communications, data communications, telecommunications,
wireless
39
communications, consumer and automotive electronics, computers and peripherals,
and lighting.
The following factors have resulted in an increased demand for compound
semiconductor products and systems that enable electronic systems manufacturers
to reach the market faster with large volumes of high-performance products and
applications:
- rapid build-out of satellite communications systems;
- widespread deployment of fiber optic networks and the increasing use of
optical systems within these networks;
- launch of new wireless services such as PCS and wireless high speed data
systems;
- increasing use of infrared emitters and optical detectors in computer
systems;
- emergence of advanced consumer electronics applications, such as DVDs and
flat panel displays;
- increasing use of high-performance electronic devices in automobiles; and
- the anticipated conversion to HB LEDs from incandescent, halogen and
compact fluorescent lighting.
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The following chart summarizes the principal markets, examples of
applications for compound semiconductor devices, products incorporating these
devices and certain benefits and characteristics of these devices.
COMPOUND SEMICONDUCTOR PROCESS TECHNOLOGY
Compound semiconductors are composed of two or more elements and usually
consist of a metal such as gallium, aluminum or indium and a non-metal such as
arsenic, phosphorous or nitrogen. The resulting compounds include gallium
arsenide, indium phosphide, gallium nitride, indium antimonide and indium
aluminum phosphide. The performance characteristics of compound semiconductors
are dependent on the composition of these compounds. Many of the unique
properties of compound semiconductor
41
devices are achieved by the layering of different compound semiconductor
materials in the same device. This layered structure creates an optimal
configuration to permit the conversion of electricity into light.
Accordingly, the composition and properties of each layer and the control
of the layering process, or epitaxy, are fundamental to the performance of
advanced electronic and optoelectronic compound semiconductor devices. The
variation of thickness and composition of layers determines the intensity and
color of the light emitted or detected and the efficiency of power conversion.
The ability to vary the intensity, color and efficiency of light generation and
detection enables compound semiconductor devices to be used in a broad range of
advanced information systems.
Compound semiconductor device manufacturers predominantly use four methods
to deposit compound materials: molecular beam epitaxy, vapor phase epitaxy,
liquid phase epitaxy and metal organic chemical vapor deposition (MOCVD). The
use of molecular beam epitaxy technology can yield wafers having high thickness
uniformity. Compound semiconductor materials fabricated using liquid phase
epitaxy or vapor phase epitaxy technologies often have high electronic and
optical properties. However, due to the nature of the underlying processes,
these methods are not easily scaled up to high volume production, which is
necessary for the commercial viability of compound semiconductor devices. All of
the methods used to manufacture compound semiconductor devices pose technical,
training and safety challenges that are not present in the manufacture of
silicon devices. These production systems typically require expensive reactant
materials, the use of certain toxic chemicals, and tight control over numerous
manufacturing parameters. The key differences between MOCVD and the three other
methods is that compound semiconductor wafers fabricated using MOCVD generally
possess a better combination of uniformity and optical and electronic properties
and are easier to produce in high volumes than wafers manufactured by the three
more traditional methods. Currently, MOCVD technology is being used to
manufacture a broad range of compound semiconductor devices.
Historically, manufacturers who use compound semiconductor devices in their
products have met research, pilot production and capacity needs with in-house
systems and technologies. However, as the need for the production of commercial
volumes of high-performance compound semiconductor devices and the variety of
these devices grows, manufacturers are often unable to meet these requirements
using in-house solutions. In response to these growing demands for higher
volumes of a broad range of higher performance devices, manufacturers are
increasingly turning to outside vendors to meet their needs for compound
semiconductor wafers and devices.
THE EMCORE SOLUTION
EMCORE provides its customers with a broad range of compound semiconductor
products and services intended to meet its customers' diverse technology
requirements. EMCORE has developed extensive materials science expertise,
process technology and MOCVD production systems to address these needs and
believes that its proprietary TurboDisc deposition technology makes possible one
of the most cost-effective production processes for the commercial volume
manufacture of high-performance compound semiconductor wafers and devices. This
platform technology provides the basis for the production of various types of
compound semiconductor wafers and devices and enables EMCORE to address the
critical need of manufacturers to cost-effectively get to market
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faster with high volumes of new and improved high-performance products. EMCORE's
compound semiconductor products and services include:
- materials and process development;
- design and development of devices;
- MOCVD production systems; and
- manufacture of wafers and devices in high volumes.
Customers can take advantage of EMCORE's vertically integrated approach by
purchasing custom-designed wafers and devices from EMCORE or manufacturing their
own devices in-house using a TurboDisc production system configured to their
specific needs.
STRATEGY
EMCORE's objective is to capitalize on its position in MOCVD process
technology and production systems to become the leading supplier of compound
semiconductor wafers, devices and production systems. The key elements of
EMCORE's strategy include:
APPLY CORE TECHNOLOGY ACROSS MULTIPLE APPLICATIONS. EMCORE continually
leverages its proprietary core technology to develop compound semiconductor
products for multiple applications in a variety of markets. These activities
include developing new products for targeted applications as well as expanding
existing products into new applications. For example, EMCORE's MR sensors,
currently used by General Motors as crank shaft sensors, also have other
potential product applications, including as sensors in brushless motors and
antilock brakes. Other existing products which EMCORE intends to introduce in
new applications include VCSELs for communications products and HB LEDs for
broader lighting applications.
TARGET HIGH GROWTH OPPORTUNITIES. EMCORE's strategy is to target high
growth opportunities where performance characteristics and high volume
production efficiencies can give compound semiconductors a competitive advantage
over other devices. Historically, while technologically superior, compound
semiconductors have not been widely deployed because they are more expensive to
manufacture than silicon-based semiconductors and other existing solutions.
EMCORE believes that as compound semiconductor production costs are reduced, new
customers will be compelled to use these solutions because of their higher
performance characteristics. For example, EMCORE has reduced the average cost of
compound semiconductor solar cells to the point that they are replacing
silicon-based solar cells because of the compound semiconductor solar cells'
higher overall efficiency and lower weight.
PARTNER WITH KEY INDUSTRY PARTICIPANTS. EMCORE seeks to identify and
develop long-term relationships with leading companies in targeted industries.
EMCORE develops these relationships in a number of ways including through
long-term high-volume supply agreements, joint ventures, and distribution and
other arrangements. For example, EMCORE has agreed to enter into, subject to
certain conditions, a joint venture with General Electric Lighting for the
development and marketing of white light and colored HB LED products for
automotive, traffic, flat panel display and other lighting applications, and has
entered into a long term supply agreement with AMP Incorporated for VCSELs to be
used in its transceivers for Gigabit Ethernet and other applications. EMCORE
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intends to actively seek similar strategic relationships with other key
customers and industry participants in order to further expand its technological
and production base.
CONTINUE INVESTMENT TO MAINTAIN TECHNOLOGY LEADERSHIP. Through substantial
investment in research and development, EMCORE seeks to expand its leadership
position in compound semiconductor production systems, wafers and devices.
EMCORE works with its customers to identify specific performance criteria and
uses this information to enhance the performance of its production systems and
to further expand its process and materials science expertise, including the
development of new low cost, high-volume wafers and devices for its customers.
In addition, EMCORE's development efforts are focused on continually lowering
the production costs of its solutions. EMCORE's joint venture with Union Miniere
Inc. represents an initiative to explore means to use germanium to improve
product performance, identify new product applications and lower the cost and
complexity of production of EMCORE's wafers and devices.
PRODUCTS
PRODUCTION SYSTEMS
EMCORE is a leading supplier of MOCVD compound semiconductor production
systems, with more than 225 systems shipped as of December 31, 1998. According
to VLSI Research, Inc., in 1997 EMCORE's share of the MOCVD production systems
market was over 25%. EMCORE believes that its TurboDisc systems offer
significant ownership advantages over competing systems and that the high
throughput capabilities of its TurboDisc systems make possible superior
reproducibility of thickness, composition, electronic properties and layer
accuracy required for electronic and optoelectronic devices. Each system can be
customized for the customer's throughput, wafer size and process chemistry
requirements. EMCORE's production systems also achieve a high degree of
reliability with an average time available for production, based on customer
data, of approximately 95%.
EMCORE believes its TurboDisc systems enable the lowest cost of ownership
for the manufacture of compound semiconductor materials. The major components of
the cost of ownership include yield, throughput, direct costs and capital costs.
Yield primarily relates to material uniformity, which is a function of the
precision of the physical and chemical processes by which atomic layers are
deposited. Throughput, the volume of wafers produced per unit of time, includes
both the time required for a process cycle and the handling time between process
steps. Direct costs include consumables used in manufacturing and processing and
the clean room space required for the equipment. Capital costs include the cost
of acquisition and installation of the process equipment.
EMCORE's proprietary TurboDisc technology utilizes a unique high speed
rotating disk in a stainless steel growth chamber with integrated
vacuum-compatible loading chambers. To produce a wafer, a bare substrate, such
as gallium arsenide, sapphire or germanium, is placed on a wafer carrier in the
TurboDisc growth chamber and subjected to high temperatures. Based on a
predetermined formula, metal organic gases are released into the growth chamber.
These gases decompose on the hot, rapidly spinning wafer. Semiconductor
materials are then deposited on the substrate in a highly uniform manner. The
resulting wafer thus carries one or more ultra-thin layers of compound
semiconductor material such as gallium arsenide, gallium nitride, or indium
aluminum phosphide. The TurboDisc technology not only produces uniformity of
deposition across the wafer, but also offers flexibility for diverse
applications with improved material results and increased
44
production rates. The unique precision control of reactant gas flow in the
TurboDisc technology platform allows users to scale easily from research to
commercial volumes with substantially reduced time and effort. Upon removal from
the growth chamber, the wafer is transferred to a device processing facility for
various steps such as photolithography, etching, masking, metallization and
dicing. Upon completion of these steps, the devices are then sent for packaging
by the customer or other third parties and inclusion in the customer's product.
[DIAGRAM]
Wafers are loaded on a multiple wafer platter into the growth chamber,
where they are subjected to high-temperature vacuum conditions and spun at high
speeds. Gases are then introduced into the vacuum growth chamber, and
semiconductor materials become deposited onto the substrate in a highly uniform
manner.
EMCORE offers the following family of TurboDisc systems:
EMCORE's next generation of TurboDisc products is being designed to provide
a number of innovations including:
- new reactor design to improve efficiency;
- cassette-to-cassette wafer handling to increase automation;
- digital control system to reduce noise;
- real-time process control and data acquisition on WindowsNT platform;
- modular component design to ease outsourcing and upgrading; and
- improved temperature control.
WAFERS AND DEVICES
Since its inception, EMCORE has worked closely with its customers to design
and develop materials processes for use in production systems for its customers'
end-use applications. EMCORE has leveraged its process and materials science
knowledge base to manufacture a broad range of compound semiconductor wafers and
devices such as solar cells, VCSELs, MR sensors and HB LEDs.
45
Within each of these product lines, EMCORE has established strategic
relationships through joint ventures, long-term supply agreements and an
acquisition. A summary of these relationships is found below.
46
SOLAR CELLS. Compound semiconductor solar cells are used to power
satellites because they are more resistant to radiation levels in space, convert
substantially more light to power and therefore weigh less per unit of power
than silicon-based solar cells. These characteristics increase satellite life,
increase payload capacity and reduce launch costs. EMCORE is currently involved
in four solar cell projects:
- In November 1998, EMCORE signed a four-year purchase agreement with Space
Systems/Loral, a wholly owned subsidiary of Loral Space & Communications.
Under this agreement, which is contingent upon our compliance with
Loral's product specification requirements, EMCORE will supply compound
semiconductor high efficiency gallium arsenide solar cells for Loral's
satellites. EMCORE anticipates completing this qualification in April
1999. Subject to satisfactorily completing these product qualification
requirements, EMCORE has received an initial purchase order from Space
Systems/Loral.
- In August 1998, EMCORE and Union Miniere Inc., a mining and materials
company, entered into a long term supply agreement for germanium, which
EMCORE uses to fabricate solar cells. In addition to their solar cell
relationship, in November 1998, EMCORE formed UMCore, a joint venture
with Union Miniere to explore and develop alternate uses for germanium
using EMCORE's material science and production platform expertise and
Union Miniere's access to and experience with germanium. UMCore commenced
research and development operations in January 1999.
- In September 1998, EMCORE entered into an agreement with Lockheed Martin
Missiles and Space, a strategic business unit of Lockheed Martin
Corporation, to provide technical management and support of a Cooperative
Research and Development Agreement (CRADA) between Lockheed Martin and
Sandia National Laboratory for the advancement and commercialization of a
new compound semiconductor high efficiency solar cell. Pursuant to this
strategic agreement, (1) Lockheed Martin will grant EMCORE a sub-license
for all CRADA related intellectual property developed on behalf of or in
conjunction with Lockheed Martin and (2) EMCORE and Lockheed Martin will
jointly qualify and validate the high efficiency solar cells for
operational satellite use.
- In the summer of 1998, EMCORE received a $2.2 million contract under the
U.S. Air Force's Broad Agency Announcement Program for the development of
high-efficiency advanced solar cells.
HB LEDS. High-brightness light-emitting diodes (HB LEDs) are solid state
compound semiconductor devices that emit light. The global demand for HB LEDs is
experiencing rapid growth because LEDs have a long useful life (approximately 10
years), consume approximately 10% of the power consumed by incandescent or
halogen lighting and improve display visibility. In February 1998, EMCORE and
Uniroyal Technology Corporation formed Uniroyal Optoelectronics, a joint venture
to manufacture, sell and distribute HB LED wafers and package-ready devices.
In January 1999, EMCORE signed a transaction agreement with General
Electric Lighting to form GELcore, a joint venture to develop and market HB LED
lighting products, and subject to certain conditions, the parties expect this
joint venture will be consummated by March 31, 1999. General Electric Lighting
and EMCORE have agreed that this joint venture will be the exclusive vehicle for
each party's participation in solid state lighting. GELcore seeks to combine
EMCORE's materials science expertise, process technology and compound
semiconductor production systems with General Electric
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Lighting's brand name recognition and extensive marketing and distribution
capabilities. GELcore's long-term goal is to develop products to replace
traditional lighting.
VCSELS. Vertical cavity surface emitting lasers (VCSELs) are semiconductor
lasers that emit light in a cylindrical beam. Leading electronic systems
manufacturers are integrating VCSELs into a broad array of end-market
applications including Internet access, digital cross-connect telecommunications
switches, DVD, and fiberoptic switching and routing, such as Gigabit Ethernet.
VCSELs offer significant advantages over traditional laser diodes, including:
- greater control over beam size and wavelength;
- reduced manufacturing complexity and packaging costs;
- lower power consumption; and
- higher frequency performance.
In December 1997, EMCORE acquired MicroOptical Devices, Inc. (MODE), a
development stage company, primarily dedicated to the research and development
of enabling VCSEL technologies. In February 1998, EMCORE announced its first
commercial high speed VCSEL laser (Gigalase). In September 1998, EMCORE signed a
four-year purchase agreement with AMP Incorporated to provide VCSELs for a
family of optical transceivers for the Gigabit Ethernet, FibreChannel and ATM
markets. In December 1998, EMCORE announced its second VCSEL product, a
micro-optical laser array (Gigarray).
MR SENSORS. Magneto resistive (MR) sensors are compound semiconductor
devices that possess sensing capabilities. MR sensors improve vehicle
performance through more accurate control of engine and crank shaft timing,
which allows for improved spark plug efficiency and reduced emissions. In
January 1997, EMCORE initiated shipments of compound semiconductor MR sensors
using technology licensed to EMCORE from General Motors. This license allows
EMCORE to manufacture and sell products using this technology to anyone. As of
December 31, 1998 EMCORE has delivered over five million devices to General
Motors Powertrain for crank and cam speed and position sensing applications for
three engine builds.
In October 1998, EMCORE formed Emtech, a joint venture with Optek
Technology, Inc., a packager and distributor of optoelectronic devices, to
market an expanded line of MR sensors to the automotive and related industries.
This joint venture seeks to combine EMCORE's strength in producing devices with
Optek's strength in packaging and distributing devices to offer off-the-shelf
products and expand market penetration.
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CUSTOMERS
EMCORE's customers include many of the largest semiconductor,
telecommunications, consumer goods and computer manufacturing companies in the
world. In fiscal 1998, sales to Hughes-Spectrolab accounted for 17.3% of
EMCORE's revenues, and sales to General Motors accounted for 12.8% of EMCORE's
revenues. A number of EMCORE's customers are listed below. In addition, EMCORE
has sold its products to 12 of the largest electronics manufacturers in Japan.
AMP Incorporated
The Boeing Company
General Motors
Hewlett Packard Co.
Honeywell Inc.
Hughes-Spectrolab
Hyundai Electronics
IBM Corporation
LG Semiconductor Corp.
L.M. Ericsson AB
Lucent Technologies, Inc.
Motorola, Inc.
Northrop Grumman Corporation
Philips AG Polaroid Corporation
Rockwell
Samsung Co.
Sharp U.S.A., Inc.
Siemens AG
Texas Instruments Incorporated
Thomson CSF
Westinghouse Electric Corp.
EMCORE has a comprehensive Total Quality Management Program with special
emphasis on total customer satisfaction. EMCORE seeks to encourage active
customer involvement with the design and operation of its production systems. To
accomplish this, EMCORE conducts user group meetings among its customers in
Asia, Europe and North America. At annual meetings, EMCORE's customers provide
valuable feedback on key operations, process oriented services, problems and
recommendations to improve EMCORE products. This direct customer feedback has
enabled EMCORE to constantly update and improve the design of its systems and
processes. Changes that affect the reliability and capabilities of EMCORE's
systems are embodied in new designs to enable current and future customers to
utilize systems which EMCORE believes are high quality and cost-efficient. As of
December 31, 1998, EMCORE employed 27 field service engineers who install EMCORE
systems and provide on-site support.
MARKETING AND SALES
EMCORE markets and sells its wafers, devices and systems through its direct
sales force in Europe, North America and Taiwan and through representatives and
distributors elsewhere in Asia. To market and service its products in China,
Japan and Singapore, EMCORE relies on a single marketing, distribution and
service provider, Hakuto. EMCORE's agreements with Hakuto have a term of 10
years, expiring March 2008. Hakuto has exclusive distribution rights for certain
of EMCORE's products in Japan. Hakuto has marketed and serviced EMCORE's
products since 1988, is a minority shareholder in EMCORE, and the President of
Hakuto is a member of EMCORE's Board of Directors. EMCORE recently opened sales
offices in Taiwan and California in order to be closer to its customers. As of
December 31, 1998, EMCORE employed 26 persons in sales and marketing.
EMCORE's sales and marketing staff, senior management and technical staff
work closely with existing and potential customers to provide compound
semiconductor solutions for its customers' needs. The sales process begins by
understanding the customer's requirements and then attempting to match these
requirements with the optimal solution. EMCORE seeks to match the customer's
requirements to an existing design or a modification of a standard design, such
as a change in platform or process design. When necessary, EMCORE will work with
the customer to develop the appropriate design
49
process and to configure and manufacture the production system to meet the
customer's needs. Also, EMCORE will produce samples to demonstrate conformance
to the customer's specifications. For production systems, the amount of time
from the initial contact with the customer to the customer's placement of an
order is typically two to nine months or longer. EMCORE's sales cycle for wafers
and devices usually runs three to nine months, during which time EMCORE develops
the formula of materials necessary to meet the customer's specifications and
qualifies the materials, which may also require the delivery of samples. EMCORE
believes that the high level of marketing, management and engineering support
involved in this process is beneficial in developing competitive differentiation
and long-term relationships with its customers.
The following chart contains a breakdown of EMCORE's worldwide revenues and
percentages by geographic region. Historically, EMCORE has received all payments
for products and services in U.S. dollars.
SERVICE AND SUPPORT
EMCORE maintains a worldwide service and support network responsible for
on-site maintenance and process monitoring on either a contractual or
time-and-materials basis. Customers may purchase annual service contracts under
which EMCORE is required to maintain an inventory of replacement parts and to
service the equipment upon the request of the customer. EMCORE also sells
replacement parts from inventory for customer needs. EMCORE pursues a program of
system upgrades for customers to increase the performance of older systems.
EMCORE generally does not offer extended payment terms to its customers and
generally adheres to a warranty policy of one year. Consistent with industry
practice, EMCORE maintains an inventory of components for servicing systems in
the field and it believes that its inventory is sufficient to satisfy
foreseeable short-term customer requirements. EMCORE recently opened a warehouse
depot in Taiwan to provide improved service to its Asian customers.
RESEARCH AND DEVELOPMENT
To maintain and improve its competitive position, EMCORE's research and
development efforts are focused on designing new proprietary processes and
products, improving the performance of existing systems, wafers and devices and
reducing costs in the product manufacturing process. EMCORE has dedicated 16
TurboDisc systems for both research and production which are capable of
processing virtually all compound semiconductor materials. The research and
development staff utilizes x-ray, optical and electrical characterization
equipment which provide instant data allowing for shortened development cycles
and rapid customer response. EMCORE's recurring research and development
expenses were approximately $5.9 million in the first quarter of fiscal 1999,
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$16.5 million in fiscal 1998, $9.0 million in fiscal 1997 and $5.4 million in
fiscal 1996. EMCORE also incurred a one-time, non-cash research and development
expense in fiscal 1998 in the amount of $29.3 million in connection with the
acquisition of MODE. EMCORE expects that it will continue to expend substantial
resources on research and development. As of December 31, 1998, EMCORE employed
50 persons in research and development, 14 of whom held Ph.D.s in materials
science or related fields.
EMCORE also competes for research and development funds. In view of the
high cost of development, EMCORE solicits research contracts that provide
opportunities to enhance its core technology base or promote the
commercialization of targeted products. EMCORE presently has three contracts
under the Small Business Innovative Research programs or similar government
sponsored programs. From inception until December 31, 1998, government and other
external research contracts have provided approximately $13.3 million to support
EMCORE's research and development efforts. EMCORE is also positioned to market
technology and process development expertise directly to customers who require
it for their own product development efforts.
INTELLECTUAL PROPERTY AND LICENSING
EMCORE's success and competitive position both for production systems and
wafers and devices depend significantly on its ability to maintain trade secrets
and other intellectual property protections. Our strategy is to rely more on
trade secrets than patents. A "trade secret" is information that has value to
the extent it is not generally known, not readily ascertainable by others
through legitimate means, and protected in a way that maintains its secrecy.
Reliance on trade secrets is only an effective business practice insofar as
trade secrets remain undisclosed and a proprietary product or process is not
reverse engineered or independently developed. In order to protect its trade
secrets, EMCORE takes certain measures to ensure their secrecy, such as
executing non-disclosure agreements with its employees, joint venture partners,
customers and suppliers.
To date, EMCORE has been issued 11 U.S. patents and others are either
pending or under review. These U.S. patents will expire between 2005 and 2013.
None of these U.S. patents claim any material aspect of the current or planned
commercial versions of EMCORE's systems, wafers or devices. EMCORE relies on
trade secrets rather than patents to protect its intellectual property because
it believes publishing patents would make it easier for others to reverse
engineer EMCORE's proprietary processes.
EMCORE is a licensee of certain VCSEL technology and associated patent
rights owned by Sandia Corporation (Sandia License). The Sandia License grants
EMCORE (1) exclusive rights (subject to certain rights granted to Department of
Energy and AT&T Corporation) to develop, manufacture and sell products
containing Sandia VCSEL technologies for barcode scanning and plastic optical
fiber communications applications under five U.S. patents that expire between
2007 and 2015, (2) nonexclusive rights with respect to all other applications of
these patents and (3) nonexclusive rights to employ a proprietary oxidation
fabrication method in the manufacture of VCSEL products under a sixth U.S.
patent that expires in 2014. Our exclusivity with respect to the barcode
scanning and plastic optical fiber communications applications expires in 2003
or such earlier time as we fail to meet certain development and marketing
criteria. EMCORE's success and competitive position as a producer of VCSEL
products depends on the continuation of its rights under the Sandia License, the
scope and duration of those rights and the ability of Sandia to protect its
proprietary interests in the underlying technology and patents.
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To permit sales of its MOCVD production systems, in 1992 EMCORE was granted
a license under a patent issued on January 11, 1983 to Rockwell International
Corporation. This patent claimed, among other things, intellectual property
rights in the use of MOCVD generally in unspecified applications and expires in
2000. In October 1996, EMCORE initiated discussions with Rockwell to receive
additional licenses to permit EMCORE to utilize MOCVD technology to manufacture
and sell certain wafers and devices. On November 15, 1996, in litigation not
involving EMCORE, this patent was declared invalid by the U.S. Court of Federal
Claims. Rockwell filed a notice of appeal on this judgment and on June 15, 1998,
the Court of Appeals for the Federal Circuit vacated this judgment and sent the
case back for trial. In January 1999, the case was settled and a judgment was
entered in favor of Rockwell. Since the settlement leaves a presumption of
validity of the Rockwell patent, EMCORE may be liable to Rockwell for royalty
payments, as well as other amounts in connection with the sales of its systems,
wafers and devices. EMCORE has reserved amounts to pay for royalties, but does
not know whether these reserves will be adequate. If EMCORE is required to pay
royalties in excess of its reserves, EMCORE's business, financial condition and
results of operations may be materially and adversely affected. In addition,
until January 2000, EMCORE may require additional licenses from Rockwell under
the patent in order to continue to manufacture and sell certain wafers and
devices. The failure to obtain or maintain these licenses on commercially
reasonable terms may materially and adversely affect EMCORE's business,
financial condition and results of operations.
ENVIRONMENTAL REGULATIONS
EMCORE is subject to federal, state and local laws and regulations
concerning the use, storage, handling, generation, treatment, emission, release,
discharge and disposal of certain materials used in its research and development
and production operations, as well as laws and regulations concerning
environmental remediation and employee health and safety. The production of
wafers and devices involves the use of certain hazardous raw materials,
including, but not limited to, ammonia, phosphine and arsene. If EMCORE's
control systems are unsuccessful in preventing release of these or other
hazardous materials, EMCORE could experience a substantial interruption of
operations. EMCORE has retained an environmental consultant to advise it in
complying with applicable environmental and health and safety laws and
regulations, and believes that it is currently, and in the past has been, in
substantial compliance with all such laws and regulations.
BACKLOG
As of December 31, 1998, EMCORE had an order backlog of $41.8 million,
scheduled to be shipped through September 30, 1999. This represented an increase
of 81.4% since September 30, 1998. This increase primarily relates to increased
system bookings in Asia and an initial order for solar cells from Loral, which
is subject to product qualification. EMCORE includes in backlog only customer
purchase orders that have been accepted by EMCORE and for which shipment dates
have been assigned within the 12 months to follow and research contracts that
are in process or awarded. Wafer and device agreements extending longer than one
year in duration are included in backlog only for the ensuing 12 months. EMCORE
receives partial advance payments or irrevocable letters of credit on most
production system orders. EMCORE recognizes revenue from the sale of its systems
and materials upon shipment. For research contracts with the U.S. government and
commercial enterprises with durations greater than six months, EMCORE
52
recognizes revenue to the extent of costs incurred plus a portion of estimated
gross profit, as stipulated in such contracts, based on contract performance.
MANUFACTURING
EMCORE's manufacturing operations are located at EMCORE's headquarters in
Somerset, New Jersey and in Albuquerque, New Mexico and include systems
engineering and production, wafer fabrication, and design and production of
devices. Many of EMCORE's manufacturing operations are computer monitored or
controlled to enhance reliability and yield. EMCORE manufactures its own systems
and outsources some components and sub-assemblies, but performs all final system
integration, assembly and testing. As of December 31, 1998, EMCORE had 158
employees involved in manufacturing. EMCORE fabricates wafers and devices at its
facilities in Somerset, New Jersey and Albuquerque, New Mexico and has a
combined clean room area totaling approximately 12,000 square feet. EMCORE's
joint venture with Uniroyal Technology Corporation expects to begin
manufacturing HB LED wafers and package-ready devices at its Tampa, Florida
manufacturing facility by summer of 1999. In May 1998, EMCORE received ISO 9001
and QS 9002 quality certification for its Somerset, New Jersey facility. EMCORE
is pursuing ISO 9001 quality certification for its Albuquerque, New Mexico
facilities.
Outside contractors and suppliers are used to supply raw materials and
standard components and to assemble portions of end systems from EMCORE
specifications. EMCORE depends on sole, or a limited number of, suppliers of
components and raw materials. EMCORE generally purchases these single or limited
source products through standard purchase orders. EMCORE also seeks to maintain
ongoing communications with its suppliers to guard against interruptions in
supply and has, to date, generally been able to obtain sufficient supplies in a
timely manner and maintains inventories it believes are sufficient to meet its
near term needs. EMCORE implemented a vendor program through which it inspects
quality and reviews suppliers and prices in order to standardize purchasing
efficiencies and design requirements to maintain as low a cost of sales as
possible. However, operating results could be materially and adversely affected
by a stoppage or delay of supply, receipt of defective parts or contaminated
materials, and increase in the pricing of such parts or EMCORE's inability to
obtain reduced pricing from its suppliers in response to competitive pressures.
COMPETITION
The markets in which EMCORE competes are highly competitive. EMCORE
competes with several companies for sales of MOCVD systems including Aixtron
GmbH, Nippon-Sanso K.K. and Thomas Swann Ltd. The primary competitors for
EMCORE's wafer foundry include Epitaxial Products Inc., Kopin Corporation and
Quantum Epitaxial Designs, Inc. EMCORE's principal competitors for sales of
VCSEL-related products include Honeywell, Inc. and Mitel Corporation. The
principal competitors for MR sensors are Honeywell, Inc., Matshushita Electric
Industrial Co. Ltd., Siemens AG and Asahi. The principal competitors for HB LEDs
and EMCORE's joint venture with Uniroyal Technology Corporation and the pending
joint venture with General Electric Lighting include the Phillips Electronics
and Hewlett Packard Company joint venture, Siemens AG's Osram GmbH subsidiary,
Nichia Chemical Industries and Toshiba Corporation. EMCORE also faces
competition from manufacturers that implement in-house systems for their own
use. In addition, EMCORE competes with many research institutions and
53
universities for research contract funding. EMCORE also sells its products to
current competitors and companies with the capability of becoming competitors.
As the markets for EMCORE's products grow, new competitors are likely to emerge,
and present competitors may increase their market share.
EMCORE believes that the primary competitive factors in the markets in
which EMCORE's products compete are yield, throughput, performance, breadth of
product line, customer satisfaction, customer commitment to competing
technologies and, in the case of production systems, capital and directs costs
and size of installed base. Competitors may develop enhancements to or future
generations of competitive products that offer superior price and performance
factors. EMCORE believes that in order to remain competitive, it must invest
significant financial resources in developing new product features and
enhancements and in maintaining customer satisfaction worldwide.
EMPLOYEES
At December 31, 1998, EMCORE had 310 full-time employees. None of EMCORE's
employees are covered by a collective bargaining agreement. EMCORE considers its
relationship with its employees to be good.
PROPERTIES
The following chart contains certain information regarding each of EMCORE's
principal facilities. Each of these facilities contains office space, marketing
and sales, and research and development space. EMCORE also leases office space
in Hsinchu, Taiwan and Santa Clara, California. In addition to EMCORE's
facilities, Uniroyal Optoelectronics, a joint venture between EMCORE and
Uniroyal Technology Corporation, leases a 75,000 square foot office and
manufacturing facility in Tampa, Florida.
- -------------------------
(1) These leases all have options to renew by EMCORE, subject to cost of living
adjustments.
(2) EMCORE plans a three-phase construction project to expand the facility from
an initial 50,000 square feet in October 1998 to 70,000 square feet by 2002.
LEGAL PROCEEDINGS
EMCORE is not aware of any pending or threatened litigation against it that
could have a material adverse effect on its business, financial condition and
results of operations.
54
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
EMCORE's executive officers and directors and their ages and positions are
as follows:
- -------------------------
(1) Member of Compensation Committee
(2) Member of Nominating Committee
(3) Member of Audit Committee
THOMAS J. RUSSELL, PH.D. has been a director of EMCORE since May 1995 and
was elected Chairman of the Board in December 1996. Dr. Russell founded
Bio/Dynamics, Inc. in 1961 and managed the company until its acquisition by IMS
International in 1973, following which he served as President of that company's
Life Sciences Division. From 1984 until 1988, he served as Director, then as
Chairman of IMS International until its acquisition by Dun & Bradstreet in 1988.
From 1988 to 1992, he served as Chairman of Applied Biosciences, Inc. Since
1992, he has been an investor and director of several companies. Dr. Russell
currently serves as a director of Cordiant plc and Adidas AG. Dr. Russell is one
of three trustees of the AER 1997 Trust, and he was a member of Jessup & Lamont
Merchant Partners, L.L.C. (JLMP).
55
REUBEN F. RICHARDS, JR. joined EMCORE in October 1995 as its President and
Chief Operating Officer and became Chief Executive Officer in December 1996. Mr.
Richards has been a director of EMCORE since May 1995. From September 1994 to
December 1996, Mr. Richards was a Senior Managing Director of Jesup & Lamont
Capital Markets Inc. ("Jesup & Lamont") (an affiliate of a registered
broker-dealer). From December 1994 to 1997, he was a member of and President of
JLMP. From 1992 until 1994, Mr. Richards was a principal with Hauser, Richards &
Co., a firm engaged in corporate restructuring and management turnarounds. From
1986 until 1992, Mr. Richards was a Director at Prudential-Bache Capital Funding
in its Investment Banking Division. Mr. Richards also serves as a director of
S.A. Telecommunications, Inc., a full service long distance telecommunications
company, located in Richardson, Texas, and is on the management boards of
Emtech, Optek and Uniroyal Optoelectronics.
THOMAS G. WERTHAN joined EMCORE in 1992 as its Chief Financial Officer,
Vice President -- Finance, Secretary and a director. Mr. Werthan is a Certified
Public Accountant and has over sixteen years experience in assisting high
technology, venture capital financed growth companies. Prior to joining EMCORE
in 1992, he was associated with The Russell Group, a venture capital
partnership, as Chief Financial Officer for several portfolio companies. The
Russell Group is affiliated with Thomas J. Russell, who was a member of and
Chairman of JLMP and is Chairman of the Board of Directors of EMCORE. From 1985
to 1989, Mr. Werthan served as Chief Operating Officer and Chief Financial
Officer for Audio Visual Labs, Inc., a manufacturer of multimedia and computer
graphics equipment.
RICHARD A. STALL, PH.D became a director of EMCORE in December 1996. Dr.
Stall helped found EMCORE in 1984 and has been Vice President -- Technology at
EMCORE since October 1984, except for a sabbatical year in 1993 during which Dr.
Stall acted as a consultant to EMCORE and his position was left unfilled. Prior
to 1984, Dr. Stall was a member of the technical staff of AT&T Bell Laboratories
and was responsible for the development of molecular beam expitaxy technologies.
He has co-authored more than 75 papers and holds four patents on MBE and MOCVD
technology and the characterization of compound semiconductor materials.
WILLIAM J. KROLL joined EMCORE in 1994 as Vice President -- Business
Development and in 1998 became Executive Vice President -- Strategic Planning.
Prior to 1994, Mr. Kroll served for seven years as Senior Vice President of
Sales and Marketing for Matheson Gas Products, Inc., a manufacturer and
distributor of specialty gases and gas control and handling equipment. In that
position, Mr. Kroll was responsible for $100 million in sales and 700 employees
worldwide. Prior to working at Matheson Gas Products, Mr. Kroll was Vice
President of Marketing for Machine Technology, Inc., a manufacturer of
semiconductor equipment for photoresistor applications, plasma strip, and
related equipment.
PAUL ROTELLA joined EMCORE in 1996 as Director of Manufacturing and has
served as Vice President of TurboDisc Manufacturing since October 1997. Prior to
1996, Mr. Rotella served for three years as worldwide Manufacturing Operations
Manager for Datacolor International, a manufacturer of color measurement and
control instrumentation. Prior to working at Datacolor International, Mr.
Rotella spent 18 years with AlliedSignal Inc., where he held various positions
including Manufacturing Engineer, Manufacturing Engineering Manager and Program
Manager of Quality Improvement Systems.
LOUIS A. KOSZI joined EMCORE in 1995 as Vice President -- Device
Manufacturing. Prior to 1995, Mr. Koszi was a member of AT&T Bell Laboratories
for 25 years.
56
Mr. Koszi has experience in all phases of semiconductor device design and
manufacturing processes and associated quality programs. Mr. Koszi holds 17 U.S.
patents, five foreign patents, and is a co-author of 35 publications. He was
named a Distinguished Member of Technical Staff in 1989. In 1992, he was
presented with the Excellence in Engineering from the Optical Society of
America.
THOMAS M. BRENNAN joined EMCORE as a result of EMCORE's acquisition of MODE
in December 1997 and now serves as a Vice President of EMCORE. Prior to
co-founding MODE, Mr. Brennan was a senior member of the technical staff at
Sandia National Laboratories from 1986 to 1996. At Sandia, he focused his
efforts on the material growth of III-V compound semiconductors, reactor design,
in-situ reactor diagnostics, and material characterization. His responsibilities
and activities included growth of some of the first VCSEL material at Sandia and
in the U.S., and development of new and unique manufacturing techniques for
VCSEL material growth. Prior to joining Sandia, Mr. Brennan was a member of the
technical staff at AT&T Bell Laboratories from 1980 to 1984. At both facilities,
he focused his efforts on expitaxial materials growth and characterization and
expitaxial reactor design.
ROBERT P. BRYAN joined EMCORE as a Vice President as a result of EMCORE's
acquisition of MODE in December 1997. Prior to co-founding MODE in 1995, he was
a co-founder of Vixel Corporation in 1992, a company that develops and
manufactures VCSEL devices for data links. At Vixel, he was the executive in
charge of optoelectronic product development, including all engineering
management. From 1990 to 1992, he was a senior member of the technical staff at
Sandia National Laboratories where his research focused on the areas of VCSEL
design, fabrication and characterization.
CRAIG W. FARLEY joined EMCORE in June 1998 as Vice President -- Wafer
Manufacturing. Dr. Farley has experience in all phases of compound semiconductor
device design and manufacturing. Prior to joining EMCORE, he spent 11 years at
Rockwell International Corporation where he served as a member of the technical
staff at Rockwell's Science Center from 1987 to 1994 and as Manager of Advanced
Device Technology for Rockwell's Gallium Arsenide Manufacturing facility from
1994 to 1998.
DAVID D. HESS joined EMCORE in 1989 as General Accounting Manager. He was
named Corporate Controller in 1990. Mr. Hess is a Certified Public Accountant
and has more than ten years experience in monitoring and controlling all phases
of product and process cost and general accounting systems. Prior to his
employment at EMCORE, he held several positions as cost accounting manager,
divisional accountant and inventory control supervisor in manufacturing firms
such as Emerson Quiet Kool (air conditioner manufacturers), Huls North America
(paint/solvent processors), and Brintec Corporation (screw machine
manufacturers).
ROBERT LOUIS-DREYFUS has been a director of EMCORE since March 1997. 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. Mr. Louis-
Dreyfus controls Gallium Enterprises Inc., and he was a member of JLMP.
57
HUGH H. FENWICK served as a director of EMCORE from 1990 until 1995, and
was again elected to serve on EMCORE's Board of Directors in June 1997. Since
1992, Mr. Fenwick has been a private investor and he currently holds the office
of Mayor of Bernardsville, New Jersey, to which he was elected in 1994. From
1990 until 1992, Mr. Fenwick was the Executive Director of the Alliance for
Technology Management at the Stevens Institute in Hoboken, New Jersey. Prior to
that time, Mr. Fenwick worked as a marketing executive with Lockheed Electronics
and with Alenia (formerly Selenia), an Italian subsidiary of Raytheon.
SHIGEO TAKAYAMA became a director of EMCORE in July 1997. Mr. Takayama is
the Chairman, President and founder of Hakuto, EMCORE's distributor of EMCORE's
products in Japan, China and Singapore. Mr. Takayama is a Director Emeritus of
Semiconductor Equipment & Material International (SEMI), Chairman of the Japan
Electronics Products Importers Association (JEPIA), and Director of the Japan
Machinery Importers' Association (JMIA). Mr. Takayama is also a director of
Temptronic Corp., a semiconductor test equipment manufacturer in Newton,
Massachusetts, and of Anatel Corp., a TOC high-purity water monitor manufacturer
in Boulder, Colorado.
CHARLES T. SCOTT became a director of EMCORE in February 1998. Mr. Scott is
presently Chairman of Cordiant Communications Group plc, the successor
corporation of the Saatchi & Saatchi Advertising Group. He joined Saatchi &
Saatchi Company in 1990 and served as Chief Financial Officer until 1992 when he
was appointed Chief Operating Officer. In 1993, he became Chief Executive
Officer and held that position until 1996 when he assumed the title of Chairman.
JOHN J. HOGAN, JR. has been nominated to serve on EMCORE's Board of
Directors. Mr. Hogan has been President of a private investment management
company since October 1997. Prior to that time, he had been with the law firm of
Dewey Ballentine since 1969. He also serves as a director of several other
corporations and is a former executive officer and/or director of various
subsidiaries of S.A. Louis Dreyfus en Cie.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In January 1999, EMCORE's Chairman advanced $3.0 million to EMCORE. These
funds were repaid with borrowings under a new $5.0 million credit facility with
First Union National Bank. The Chairman has also committed to provide up to
$30.0 million of long-term financing to EMCORE through July 1, 2000. This
commitment terminates upon completion of this offering, subject to a minimum
offering size requirement.
In January 1999, EMCORE and General Electric Lighting agreed, subject to
certain conditions, to form a joint venture to develop and market HB LED
lighting products. In connection with consummation of this joint venture, EMCORE
will issue to General Electric warrants to purchase between 282,010 and 564,019
shares of EMCORE common stock based on the stock price as of this offering or
the closing price on March 31, 1999, whichever is earlier. The warrants, which
will expire in 2006, have an exercise price of $22.875. In addition, General
Electric will purchase a $7.8 million subordinated convertible debenture bearing
interest at 4.75% per annum and maturing in 2006. The debenture will be
convertible into 340,984 shares of common stock at General Electric's option.
58
On November 30, 1998, EMCORE completed a private placement of an aggregate
of 1,550,000 shares of Series I Preferred Stock to Hakuto, Union Miniere Inc.
and Uniroyal Technology Corporation. The net proceeds to EMCORE from the private
placement were approximately $21.2 million which has been used (1) to repay $8.5
million of debt, plus interest, to EMCORE's Chairman of the Board, Dr. Thomas
Russell, (2) to fund EMCORE's $5.0 million portion of a joint venture between
the EMCORE and Uniroyal Technology Corporation to develop and manufacture HB
LEDs and (3) to fund EMCORE's $600,000 portion of its joint venture with Union
Miniere Inc. The remaining net proceeds from the private placement of preferred
stock were used to acquire capital equipment for EMCORE's new Albuquerque, New
Mexico manufacturing facility and for working capital purposes.
In September and October 1998, EMCORE borrowed an aggregate of $8.5 million
from its Chairman, Thomas J. Russell. The loan bears interest at 9.75% per
annum. The entire $8.5 million borrowed from Mr. Russell was repaid from the
proceeds of the private placement of preferred stock.
On June 22, 1998, EMCORE entered into the 1998 Agreement with First Union
National Bank. The 1998 Agreement was guaranteed by the Chairman and the Chief
Executive Officer of EMCORE. In return for guaranteeing the facility, EMCORE
granted the Chairman and the Chief Executive Officer an aggregate of 284,684
common stock purchase warrants at an exercise price of $11.375 per share which
expire May 1, 2001. These warrants are callable at EMCORE's option at $0.85 per
warrant if EMCORE's common stock has traded at or above 150% of the exercise
price for a period of 30 days.
The President of Hakuto Co., Ltd., EMCORE's Asian distributor, is a member
of the EMCORE's Board of Directors and Hakuto Co., Ltd. is a minority
shareholder of EMCORE. During the year ended September 30, 1998, sales made
through Hakuto Co., Ltd. approximated $9.2 million.
In February 1998, EMCORE and Uniroyal Technology Corporation formed
Uniroyal Optoelectronics, a joint venture to produce and market compound
semiconductor products. EMCORE has a non-controlling minority interest in the
joint venture.
In fiscal 1997, EMCORE formed a non-exclusive and non-refundable technology
licensing and royalty agreement with Uniroyal Technology Corporation for the
process technology to develop and manufacture HB LEDs. During fiscal 1998 and
1997, revenue associated with the Uniroyal Technology Corporation licensing
agreement amounted to $2.5 million and $2.5 million, respectively. At the time
the transaction was originally entered into, Uniroyal Technology Corporation's
Chairman and Chief Executive Officer was a member of EMCORE's Board of Directors
and EMCORE's Chairman was on the Board of Directors of Uniroyal Technology
Corporation.
59
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information known to EMCORE with
respect to beneficial ownership of its common stock as of January 29, 1999 and
as adjusted to reflect the sale of the shares offered pursuant to this
prospectus by: (1) each person who is known by EMCORE to be the beneficial owner
of five percent or more of the its common stock; (2) each of EMCORE's directors;
(3) each of EMCORE's executive officers; (4) all officers and directors of
EMCORE as a group (16 persons); and (5) each other Selling Shareholder. Except
as otherwise indicated, EMCORE believes, based on information furnished by such
persons, that each person listed below has the sole voting and investment power
over the shares of common stock shown as beneficially owned, subject to common
property laws, where applicable. Unless otherwise noted, the address for the
individuals listed below is c/o EMCORE Corporation, 394 Elizabeth Avenue,
Somerset, NJ 08873.
- -------------------------
* Less than 1.0%
(1) Includes 1,718,334 shares and 741,657 warrants to purchase shares of which
141,504 are held by The AER 1997 Trust. See note (13).
60
(2) Includes options to purchase 79,412 shares and warrants to purchase 149,952
shares.
(3) Includes options to purchase 64,421 shares and warrants to purchase 23,586
shares.
(4) Includes options to purchase 96,248 shares and warrants to purchase 30,012
shares.
(5) Consists of 1,218,047 shares and 432,535 warrants to purchase shares held
by Gallium Enterprises Inc. See note 14.
(6) Includes 442,368 shares of Common Stock and 264,286 shares of Series I
Preferred Stock owned by Hakuto Co., Ltd.; Hakuto Co., Ltd. is controlled
by Shigeo Takayama.
(7) Includes options to purchase 39,141 shares.
(8) Includes options to purchase 4,412 shares.
(9) Includes options to purchase 10,098 shares.
(10) Includes options to purchase 21,085 shares and warrants to purchase 16,134
shares.
(11) Includes options to purchase 3,578 shares.
(12) Includes options to purchase 353,957 shares and warrants to purchase
1,110,357 shares.
(13) Includes warrants to purchase 141,504 shares. Dr. Thomas J. Russell, one of
the three trustees for The AER 1997 Trust, is the Chairman of EMCORE. After
January 13, 2002, Avery E. Russell, the daughter of Thomas J. Russell will
be the primary beneficiary of the trust. The address of The AER 1997 Trust
is c/o Thomas J. Russell, Two North Tamiami Trail, Sarasota, FL 34236.
(14) Includes warrants to purchase 432,535 shares. Gallium Enterprises Inc. is
controlled by Robert Louis-Dreyfus, a member of the board of directors of
EMCORE. The address of Gallium Enterprises, Inc. is c/o Harborstone Capital
Management., 152 West 57th Street, 21st Floor, New York, NY 10019.
(15) Includes 642,857 shares of Series I Preferred Stock. The address of Union
Miniere Inc. is 13847 West Virginia Drive, Lakewood, Colorado 80228.
(16) Includes 642,857 shares of Series I Preferred Stock. The address of
Uniroyal Technology Corporation is Two North Tamiami Trail, Suite 900,
Sarasota, Florida 34236.
(17) Upon consummation of the GELcore joint venture, EMCORE will issue to
General Electric common stock purchase warrants for between 282,010 and
564,019 shares of EMCORE common stock based on the stock price as of this
offering or the closing price on March 31, 1999, whichever is earlier.
Those warrants will have an exercise price of $22.875 and will expire in
2006. General Electric will also purchase a $7.8 million subordinated
convertible debenture that will be convertible into 340,984 shares of
common stock at General Electric's option.
61
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
(the "Underwriting Agreement"), the Underwriters named below, who are
represented by Donaldson, Lufkin & Jenrette Securities Corporation, Prudential
Securities Incorporated, Needham & Company, Inc. and Volpe Brown Whelan &
Company, LLC (collectively, the "Representatives") have severally agreed to
purchase from EMCORE and the selling shareholders the respective number of
shares of common stock set forth opposite their names below.
The Underwriting Agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares of common stock
offered hereby are subject to approval by their counsel of certain legal matters
and certain other conditions. The underwriters are obligated to purchase and
accept delivery of all the shares of common stock offered hereby (other than
those shares covered by the over-allotment option described below) if any are
purchased.
The underwriters initially propose to offer the shares of common stock in
part directly to the public at the public offering price set forth on the cover
page of this prospectus and in part to certain dealers (including the
underwriters) at such price less a concession not in excess of $ per
share. The underwriters may allow, and such dealers may re-allow, to certain
other dealers a concession not in excess of $ per share. After the
initial offering of the common stock, the public offering price and other
selling terms may be changed by the Representatives at any time without notice.
EMCORE has granted to the Underwriters an option, exercisable within 30
days after the date of this prospectus, to purchase, from time to time, in whole
or in part, up to an aggregate of additional shares of common
stock at the public offering price less underwriting discounts and commissions.
The underwriters may exercise such option solely to cover over-allotments, if
any, made in connection with this offering. To the extent that the underwriters
exercise such option, each underwriter will become obligated, subject to certain
conditions, to purchase its pro rata portion of such additional shares based on
such underwriter's percentage underwriting commitment as indicated in the
preceding table.
EMCORE and the selling shareholders have agreed to indemnify the
underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, or to contribute to payments that the underwriters may
be required to make in respect thereof.
Each of EMCORE, its executive officers and directors and certain
shareholders of EMCORE (including the selling shareholders) has agreed, subject
to certain exceptions, not to (i) offer, pledge, sell, contract to sell, sell
any option or contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase or otherwise transfer or dispose
of, directly or indirectly, any shares of common stock or
62
(ii) enter into any swap or other arrangement that transfers all or a portion of
the economic consequences associated with the ownership of any common stock
(regardless of whether any of the transactions described in clause (i) or (ii)
is to be settled by the delivery of common stock, or such other securities, in
cash or otherwise) for a period of 90 days after the date of the prospectus
without the prior written consent of Donaldson, Lufkin & Jenrette. In addition,
during such period, EMCORE has also agreed not to file any registration
statement with respect to, and each of its executive officers, directors and
certain shareholders of EMCORE (including the selling shareholders) has agreed
not to make any demand for, or exercise any right with respect to, the
registration of any shares of common stock or any securities convertible into or
exercisable or exchangeable for common stock without the prior written consent
of Donaldson, Lufkin & Jenrette.
Other than in the United States, no action has been taken by EMCORE, the
selling shareholders or the underwriters that would permit a public offering of
the shares of common stock offered hereby in any jurisdiction where action for
that purpose is required. The shares of common stock offered hereby may not be
offered or sold, directly or indirectly, nor may this prospectus or any other
offering material or advertisements in connection with the offer and sale of any
such shares of common stock be distributed or published in any jurisdiction,
except under circumstances that will result in compliance with the applicable
rules and regulations of such jurisdiction. Persons into whose possession this
prospectus comes are advised to inform themselves about and to observe any
restrictions relating to this offering of the common stock and the distribution
of this prospectus. This prospectus does not constitute an offer to sell or
solicitation of an offer to buy any shares of common stock offered hereby in any
jurisdiction in which such an offer or a solicitation is unlawful.
The underwriters and dealers may engage in passive market making
transactions in the common stock in accordance with Rule 103 of Regulation M
promulgated by the Commission. In general, a passive market maker may not bid
for or purchase shares of common stock at a price that exceeds the highest
independent bid. In addition, the net daily purchases made by any passive market
maker generally may not exceed 30% of its average daily trading volume in the
common stock during a specified two-month period, or 200 shares, whichever is
greater. A passive maker must identify passive market making bids as such on the
Nasdaq electronic inter-dealer reporting system. Passive market making may
stabilize or maintain the market price of the common stock above independent
market levels. Underwriters and dealers are not required to engage in passive
market making and may end passive market making activities at any time.
In connection with the offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
common stock. Specifically, the underwriters may overallot this offering,
creating a syndicate short position. In addition, the underwriters may bid for
and purchase shares of common stock in the open market to cover syndicate short
positions or to stabilize the price of the common stock. Finally, the
underwriting syndicate may reclaim selling concessions from 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.
63
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
EMCORE by White & Case LLP, Miami, Florida, who may rely upon Dillon, Bitar &
Luther, New Jersey counsel for EMCORE as to matters of New Jersey law. Certain
legal matters in connection with this offering will be passed upon for the
underwriters by Brobeck, Phleger & Harrison LLP, New York, New York.
EXPERTS
The balance sheets as of September 30, 1997 and 1998, and the statements of
operations, shareholders' equity and cash flow for the three year period ended
September 30, 1998, included in this prospectus, have been included herein in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of that firm as experts in accounting and auditing.
Certain Price Waterhouse LLP partners owned an aggregate of approximately
130,000 shares of EMCORE's common stock on July 1, 1998. As a result of the July
1, 1998 merger between Price Waterhouse and Coopers & Lybrand L.L.P., EMCORE's
auditors, those Price Waterhouse partners were required by the applicable
accounting rules promptly to dispose of their securities ownership interest in
EMCORE. PricewaterhouseCoopers LLP has advised EMCORE that such partners had
disposed of their securities ownership in EMCORE on or before February 3, 1999.
The financial statements of MicroOptical Devices, Inc. included in this
prospectus and elsewhere in the registration statement, to the extent and for
the periods indicated in their reports, have been audited by Arthur Andersen
LLP, independent public accountants, and are included herein in reliance upon
the authority of said firm as experts in giving said reports. EMCORE has agreed
to indemnify Arthur Andersen LLP for costs and expenses that Arthur Andersen LLP
might incur in successfully defending itself against litigation resulting from
the incorporation of its report in this registration statement of which this
prospectus forms a part. Such indemnification, however, shall be null and void
should Arthur Andersen LLP be found by a court to be liable for professional
malpractice.
The statements in this Prospectus set forth under the captions "Risk
Factors -- Reliance on Trade Secrets; No Assurance of Continued Intellectual
Property Protections," "-- Rockwell Patent Litigation" and discussions of trade
secrets and the Rockwell Patent litigation in "Business -- Intellectual
Property" have been reviewed and approved by Lerner David Littenberg Krumholz &
Mentlik, Westfield, New Jersey, patent counsel for EMCORE, as experts on such
matters, and are included herein in reliance upon such review and approval.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
On December 5, 1997, EMCORE acquired all of the outstanding capital stock
of MicroOptical Devices, Inc. (MODE) in exchange for 1,461,866 shares of
EMCORE's common stock, 200,966 common stock purchase options and 47,118 common
stock purchase warrants. The purchase price was approximately $32,829,000,
including direct acquisition costs of approximately $500,000. MODE was a
development stage company (incorporated in August 1995) and had 18 employees at
the date of acquisition. MODE's activities were substantially directed towards
the research and development of optical laser devices. The following unaudited
pro forma consolidated balance sheet and the unaudited pro forma consolidated
statement of operations (together the "pro forma financial statements") are
based on the historical financial statements of EMCORE and MODE, adjusted to
give the effect to the acquisition of MODE by EMCORE. The unaudited pro
64
forma consolidated statements of operations assume that the acquisition of MODE
by EMCORE occurred as of October 1, 1997. The pro forma financial information
reflects the purchase method of accounting for the acquisition of MODE. The
accompanying unaudited pro forma information does not give effect to any cost
savings that may be realized as a result of the integration of EMCORE and MODE,
or to any changes in the revenues of the combined entity, resulting from such
integration. The accompanying unaudited pro forma financial information should
be read in conjunction with EMCORE's historical financial statements and the
notes thereto and the MODE historical financial statements and the notes thereto
included herein. Such unaudited pro forma financial information does not purport
to be indicative of the results of operations of EMCORE in the future or what
its financial position and results of operations would have been had the
acquisition occurred at the dates indicated above.
EMCORE's acquisition of MODE (a development stage company), constituted a
significant and strategic investment for EMCORE to acquire and gain access to
MODE's in-process research and development of micro-optical technology. EMCORE's
over-riding investment consideration was that if MODE's research and development
efforts (with continued research and development funding contemplated and
required after acquisition) yielded commercial products for targeted
applications, EMCORE would possess a broader array of enabling advanced
technologies and would be better positioned for entry into certain existing
large and/or high growth technology-dependent markets. The primary value
enhancing asset acquired in the MODE acquisition was the technology under
development by MODE as part of its planned microlaser and optical subassembly
products. EMCORE plans to use MODE's micro-optical laser technology in new
products for data communications and telecommunications applications. As of the
date of acquisition, MODE had six primary micro-optical laser research and
development projects in process. EMCORE expects MODE's microlasers and optical
subassemblies to provide design, performance and significant cost advantages
over their technical predecessors such as edge-emitting solid state lasers.
Through the integration of vertical cavity surface emitting lasers (VCSELs) with
leading original equipment manufacturer systems design, VCSELs are expected to
provide enhanced performance benefits to market applications such as Internet
access, onboard photonics, Gigabit Ethernet, local area networks, microarea
network, digital video discs (DVDs) and fiberoptic switching. In developing
EMCORE's financial projections for future revenues and costs, new micro-optical
laser product introductions were expected to commence in fiscal 1998 and
reflected the impact of entering new markets such as the data communications and
telecommunications industries. Should EMCORE be unable to complete the
development of any of the six projects, EMCORE may not realize the product,
market and financial benefits expected from this acquisition. In February 1998,
MODE announced the introduction of its first commercial product, a Gigalase
VCSEL. Subsequent to such announcement, MODE's Gigalase product efforts were
primarily directed toward engineering, testing and quality control activities to
facilitate commercial production which commenced in May 1998. On December 14,
1998, MODE announced its second commercial product, a Gigarray VCSEL.
As part of the acquisition, EMCORE incurred a one-time in-process research
and development write-off of $29.3 million which is reflected in the
accompanying financial statements. EMCORE also recorded goodwill of
approximately $3.4 million. This is being charged against operations over a
three year period, and will therefore impact financial results through December
2000.
65
- -------------------------
Notes to Pro Forma Statement of Operations
(1) EMCORE acquired MODE on December 5, 1997 in exchange for (i) the issuance of
1,461,866 shares of common stock, and (ii) the assumption of (x) up to
200,966 common stock purchase options (exercise prices ranging from $0.43 to
$0.59) and (y) 47,118 common stock purchase warrants (exercise prices
ranging from $4.32 to $5.92). The transaction purchase price amounted to
approximately $32,800,000, including approximately $500,000 of direct
acquisition costs. EMCORE's common stock was valued based upon the average
closing price of EMCORE's common stock for the five days before and after
the announcement of the acquisition. The purchase price was allocated to the
assets acquired (approximately $2,801,000) and liabilities assumed
(approximately $2,645,000), based upon the fair value at the date of
acquisition. In addition, EMCORE recorded a one-time write-off of
approximately $29,294,000 relating to purchased in-process research and
development. Goodwill of approximately $3,380,000 was recorded as a result
of the acquisition.
(2) To reflect the amortization of goodwill over a period of three years.
66
(3) To reverse the non-recurring one-time-write-off of $29,294,000 relating to
purchased in-process research and development.
(4) The operating results of MODE are from the period of October 1, 1998 through
the date of acquisition. Subsequent to the date of acquisition, MODE's
operations are included with those of EMCORE.
The pro forma statement of operations for the year ended September 30, 1997,
does not reflect the non-recurring write-off of the acquired in-process research
and development.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents have been filed by EMCORE with the Commission under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and are
incorporated herein by reference:
1. EMCORE's Annual Report on Form 10-K for the fiscal year ended
September 30, 1998;
2. EMCORE's Quarterly Report on Form 10-Q for the period ended
December 31, 1998; and
3. The description of the common stock, contained in EMCORE's
Registration Statement on Form 8-A filed pursuant to Section 12 of the
Exchange Act and all amendments thereto and reports filed for the purpose
of updating such description.
All documents filed by us pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Exchange Act: (1) subsequent to the initial filing of this prospectus and
prior to the date it is declared effective; and (2) subsequent to the date of
this prospectus and prior to the termination of this offering are incorporated
by reference and become a part of this prospectus and to be a part hereof from
their date of filing. Any statement contained in this prospectus to the extent
that a statement contained in any such document modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this prospectus.
On request, we will provide anyone who receives a copy of this prospectus
with a copy of any or all of the documents incorporated in this prospectus by
reference. We will provide this information at no cost to you. Written or
telephone requests for such copies should be directed to our principal office:
EMCORE Corporation, 394 Elizabeth Avenue, Somerset, New Jersey 08872, Attn:
Thomas G. Werthan, Secretary, Telephone (732) 271-9090.
AVAILABLE INFORMATION
We file reports, proxy statement and other information with the Commission.
Those reports, proxy statements and other information may be obtained:
- At the Public Reference Room of the Commission, Room 1024 -- Judiciary
Plaza, 450 Fifth Street, N.W., Washington, DC 20549 (for information,
please call 1-800-SEC-0330);
- At the public reference facilities at the Commission's regional offices
located at Seven World Trade Center, 13th Floor, New York, New York 10048
or
67
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661;
- By writing to the Commission, Public Reference Section, Judiciary Plaza,
450 Fifth Street, N.W., Washington, DC 20549;
- At the offices of the National Association of Securities Dealers, Inc.,
Reports Section, 1735 K Street, N.W., Washington, DC 20006; or
- From the Internet site maintained by the Commission at
http://www.sec.gov. which contains reports, proxy and information
statements and other information regarding issuers that file
electronically with the Commission.
Some locations may charge prescribed or modest fees for copies.
EMCORE has filed with the Commission a Registration Statement on Form S-3
(together with any amendments or supplements thereto, the "Registration
Statement") under the Securities Act covering the shares of common stock offered
hereby. As permitted by the Commission, this prospectus, which constitutes a
part of the Registration Statement, does not contain all the information
included in the Registration Statement. Such additional information may be
obtained from the locations described above. Statements contained in this
prospectus as to the contents of any contract or other document are not
necessarily complete. You should refer to the contract or other document for all
the details.
68
EMCORE CORPORATION
INDEX OF FINANCIAL STATEMENTS
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
EMCORE Corporation
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, shareholders' equity and cash
flows present fairly, in all material respects, the financial position of EMCORE
Corporation and its subsidiaries at September 30, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended September 30, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements in accordance with generally accepted auditing standards
which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As discussed in Note 2 (Net loss per share), the Company has changed its
method of calculating earnings per basis and diluted common share.
PricewaterhouseCoopers LLP
Florham Park, New Jersey
November 30, 1998
F-2
EMCORE CORPORATION
BALANCE SHEET
The accompanying notes are an integral part of the financial statements.
F-3
EMCORE CORPORATION
STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of the financial statements.
F-4
EMCORE CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
AS OF SEPTEMBER 30, 1996, 1997, 1998 AND DECEMBER 31, 1998 (UNAUDITED)
The accompanying notes are an integral part of the financial statements.
F-5
EMCORE CORPORATION
STATEMENTS OF CASH FLOWS
F-6
Reference is made to Note 8 -- Debt Facilities -- for disclosure relating to
certain non-cash warrant issuance.
The accompanying notes are an integral part of the financial statements.
F-7
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS
EMCORE is a designer and developer of compound semiconductor materials and
process technology and a manufacturer of production systems used to fabricate
compound semiconductor wafers. Compound semiconductors are used in a broad range
of applications in wireless communications, telecommunications, computers, and
consumer and automotive electronics. The Company has recently capitalized on its
technology base by expanding into the design and production of compound
semiconductor wafers and package-ready devices and under specific arrangements
has licensed certain process technologies. During fiscal 1998, the Company
completed the acquisition of a development stage company focused on the research
and development of optical laser technologies (see Note 3). The Company offers
its customers a complete, vertically-integrated solution for the design,
development and production of compound semiconductor wafers and devices.
BASIS OF PRESENTATION AND LIQUIDITY. The accompanying financial statements
have been prepared on a going concern basis. The Company for the year ended
September 30, 1998, experienced a 10% decline in revenue of approximately $4.0
million and a substantial operating loss amounting to approximately $41.7
million (approximately $12.5 million excluding the effect of acquired in-process
research and development) and had a working capital deficiency of $2.0 million.
The Company's operations are subject to a number of risks, including but
not limited to a history of net losses from operations, future capital needs,
dependence on key personnel, competition and risk of technological obsolescence,
governmental regulations and approvals, technology research and development
results, continued development of its compound semiconductor manufacturing and
marketing capabilities and a concentration of international sales in Asia. The
Company's operations for the year ended September 30, 1998, were primarily
funded through borrowings under existing credit facilities and short-term
advances from the Company's Chairman -- aggregating $7.0 million as of September
30, 1998. The Company's Chairman has from time to time provided credit
enhancements in the form of debt guarantees and has loaned the Company funds to
support its expansion and capital equipment requirements. The Company's Chief
Executive Officer has also provided credit enhancement in the form of debt
guarantees for the Company. Subsequent to September 30, 1998, the Company
completed a preferred stock private placement (the "Private Placement" see Note
17), resulting in net proceeds of $21.2 million. The Company repaid its Chairman
$8.5 million (including $1.5 million advanced to the Company subsequent to
September 30, 1998), invested approximately $5.6 million in two unconsolidated
ventures, used $2 million to repay debt and the balance is being used for
general working capital purposes. In addition, the Company's $10.0 million
credit facility was extended to October 1, 1999. The Company's Chairman has
committed to provide the Company with $30 million of long-term financing through
July 1, 2000. The Chairman's financing commitment terminates if the Company
completes a secondary offering of a specified amount. The Company's operating
plans include, among other things attempting to improve (i) operating cash flow
through increased sales of compound semiconductor systems, wafers and
package-ready devices and (ii) managing its cost structure in relation to its
anticipated level of revenues. The Company believes that its current liquidity,
together with available credit facilities (including the commitment from
F-8
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the Company's Chairman) and the proceeds from the Private Placement, should be
sufficient to meet its cash needs for working capital through fiscal 1999. If
the working capital generated from the Private Placement and cash generated from
operations is not sufficient to satisfy the Company's liquidity requirements,
the Company will seek to obtain additional equity or debt financing. Additional
funding may not be available when needed or on terms acceptable to the Company.
If the Company is required to raise additional financing and if adequate funds
are not available or are not available on acceptable terms, the ability to
continue to fund expansion, develop and enhance products and services, or
otherwise respond to competitive pressures would be severely limited. Such a
limitation could have a material adverse effect on the Company's business,
financial condition or operations and the financial statements do not include
any adjustment that could result therefrom.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL INFORMATION. The financial information as of December
31, 1998 and for the three-month periods ended December 31, 1997 and 1998 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, 1998
are not necessarily indicative of the results that may be expected for the
entire year.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiary. The equity method
of accounting is used for unconsolidated affiliates in which the Company's
equity is at least 20% and not more than 50%. All significant intercompany
transactions are eliminated upon consolidation.
CASH AND CASH EQUIVALENTS. The Company considers all highly liquid
short-term investments purchased with an original maturity of three months or
less to be cash equivalents. The Company had approximately $2,254,000 and
$3,003,000 in cash equivalents at September 30, 1997 and 1998, respectively. As
of September 30, 1998, the Company had restricted cash in the amount of $62,500
due to a contractual obligation.
INVENTORIES. Inventories are stated at the lower of FIFO (first-in,
first-out) cost or market. Reserves are established for slow moving or obsolete
inventory based upon historical and anticipated usage.
PROPERTY AND EQUIPMENT. Property and equipment are stated at cost.
Significant renewals and betterments are capitalized. Maintenance and repairs
which do not extend the useful lives of the respective assets are expensed.
Depreciation is recorded using the straight-line method over the estimated
useful lives of the applicable assets, which range from three to five years.
Leasehold improvements are amortized using the straight-line method over the
term of the related leases or the estimated useful lives of the improvements,
whichever is less. Depreciation expense includes the amortization of capital
lease assets. When assets are retired or otherwise disposed of, the assets and
related
F-9
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
accumulated depreciation accounts are adjusted accordingly, and any resulting
gain or loss is recorded in current operations.
LONG-LIVED ASSETS. The carrying amount of assets is reviewed on a regular
basis for the existence of facts or circumstances, both internally and
externally, that suggest impairment. To date no such impairment has been
indicated. The Company determines if the carrying amount of a long-lived asset
is impaired based on anticipated undiscounted cash flows before interest. In the
event of an impairment, a loss is recognized based on the amount by which the
carrying amount exceeds fair value of the asset. Fair value is determined
primarily using the anticipated cash flows before interest, discounted at a rate
commensurate with the risk involved.
DEFERRED COSTS. Included in other assets are deferred costs related to
obtaining product patents and debt issuance costs and an investment in an
unconsolidated affiliate. Total amortization expense amounted to approximately
$128,000, $40,000 and $79,000 for the years ended September 30, 1996, 1997 and
1998, respectively. During the year ended September 30, 1998, the Company issued
284,684 common stock purchase warrants in exchange for the guaranteeing of a
credit facility by the Company's Chairman and Chief Executive Officer. The
warrants were assigned a value of $1,310,000 which is being amortized over the
eighteen month term of the facility. The warrants were valued by the Company
based upon its application of the Black Scholes Option Pricing Model ("Black
Scholes"). Amortization expense related to such warrant issuance amounted to
approximately $219,000 for fiscal 1998.
GOODWILL. Goodwill is amortized using the straight-line method over three
years. The Company evaluates annually whether there has been a permanent
impairment in the value of goodwill. Any impairment would be recognized when the
sum of expected undiscounted cash flows derived from the acquired business is
less than its carrying value. If such an impairment occurred, the amount of the
impairment would be based on the fair value of the acquired business as
determined by the market value of comparable companies on the present value of
expected cash flows.
INCOME TAXES. The Company recognizes deferred taxes by the asset and
liability method of accounting for income taxes. Under the asset and liability
method, deferred income taxes are recognized for differences between the
financial statement and tax bases of assets and liabilities at enacted statutory
tax rates in effect for the years in which the differences are expected to
reverse. The effect on deferred taxes of a change in tax rates is recognized in
income in the period that includes the enactment date. In addition, valuation
allowances are established when necessary to reduce deferred tax assets to the
amounts expected to be realized. The primary sources of temporary differences
are depreciation and amortization of intangible assets.
REVENUE AND COST RECOGNITION -- SYSTEMS, COMPONENTS AND SERVICE REVENUES.
Revenue from systems sales is recognized upon shipment, when title passes to the
customer. Subsequent to product shipment, the Company incurs certain
installation costs at the customer's facility and warranty costs which are
estimated and accrued at the time the sale is recognized. Component sales and
service revenues are recognized when goods are shipped or services are rendered
to the customer. Service revenue under contracts with
F-10
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
specified service terms is recognized as earned over the service period in
accordance with the terms of the applicable contract. Costs in connection with
the procurement of the contracts are charged to expense as incurred.
REVENUE AND COST RECOGNITION -- CONTRACT REVENUE. The Company's research
contracts require the development or evaluation of new materials applications
and have a duration of six to thirty-six months. For research contracts with the
U.S. Government and commercial enterprises with durations greater than six
months, the Company recognizes revenue to the extent of costs incurred plus the
estimated gross profit as stipulated in such contracts, based upon contract
performance. Contracts with a duration of six months or less are accounted for
on the completed contract method. A contract is considered complete when all
costs, except insignificant items, have been incurred, and the research
reporting requirements to the customer have been met. Contract costs include all
direct material and labor costs and those indirect costs related to contract
performance, such as indirect labor, supplies, tools, repairs and depreciation
costs, as well as coverage of certain general and administrative costs.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined. Revenues from contracts amounted to
approximately $3,295,000, $614,000 and $438,000 for the years ended September
30, 1996, 1997 and 1998, respectively.
RESEARCH AND DEVELOPMENT. Research and development costs related to the
development of both present and future products and Company-sponsored materials
application research are charged to expense as incurred. In connection with the
acquisition of MicroOptical Devices, Inc. ("MODE"), the Company recorded a
charge of $29,294,000 for acquired in-process research and development.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The Company estimates the fair value
of its financial instruments based upon discounted cash flow analyses using the
Company's incremental borrowing rate on similar instruments as the discount
rate. As of September 30, 1998, the fair value of the Company's subordinated
notes exceeded the carrying value of such instruments by approximately $830,000.
As of September 30, 1998, the carrying values of the Company's cash and cash
equivalents, receivables, accounts payable and variable rate based debt as
reflected on the Company's accompanying balance sheet approximates fair value.
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements. Estimates also affect the reported amounts of revenues
and expenses during the reporting period. Actual results may differ from those
estimates. The Company's most significant estimates relate to acquired
in-process research and development, accounts receivable and inventory valuation
reserves, warranty and installation accruals, estimates of cost and related
gross profits on certain research contracts and the valuation of long-lived
assets.
NET LOSS PER SHARE. The Company accounts for earnings per share under the
provisions of Statement of Financial Accounting Standards No. 128 "Earnings per
share" ("SFAS No. 128"). Basic and diluted earnings per share calculated
pursuant to SFAS
F-11
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
No. 128 have been restated for all periods presented to give effect to the
Securities and Exchange Commission's Staff Accounting Bulletin No. 98 which
eliminated certain computational requirements of Staff Accounting Bulletin No.
64.
Basic earnings per common share was calculated by dividing net loss by the
weighted average number of common stock shares outstanding during the period.
Diluted earnings per share was calculated by dividing net loss by the sum of the
weighted average number of common shares outstanding plus all additional common
shares that would have been outstanding if potentially dilutive common shares
had been issued. The following table reconciles the number of shares utilized in
the Company's earnings per share calculations.
The effect of outstanding common stock purchase options and warrants and the
number of shares to be issued upon the conversion of the Company's Series I
Preferred Stock have been excluded from the Company's earnings per share
calculation since the effect of such securities is anti-dilutive.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131 "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS No. 131"), which
establishes standards for reporting information about operating segments in
annual financial statements. It also
F-12
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company will be required to adopt this
standard in its fiscal year ended September 30, 1999. The adoption of SFAS No.
131 is not expected to have an impact on the Company's results of operations,
financial position or cash flows.
In February 1998, FASB issued SFAS No. 132, "Employers' Disclosures about
Pension and Other Postretirement Benefits" ("SFAS No. 132"), which revises
employers' disclosures about pension and other postretirement benefit plans.
SFAS No. 132 does not change the measurement or recognition of those plans. SFAS
No. 132 is effective for fiscal years beginning after December 15, 1997. The
adoption of SFAS No. 132 is not expected to have an impact on the Company's
results of operations, financial position or cash flows.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
is effective for financial statements for years beginning after December 14,
1998. SOP 98-1 provides guidance over accounting for computer software developed
or obtained for internal use, including the requirement to capitalize specified
costs and amortization of such costs. The Company does not expect the adoption
of this standard to have a material effect on its results of operations,
financial position or cash flows.
In April 1998, AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities" ("SOP 98-5"). SOP 98-5, which is effective for fiscal years
beginning after December 15, 1998, provides guidance on the financial reporting
of start-up costs and organization costs. It requires costs of start up
activities and organization costs to be expenses as incurred. As the Company has
expensed these costs historically, the adoption of this standard is not expected
to have a significant impact on its results of operations, financial position or
cash flows.
RECLASSIFICATIONS. Prior period balances have been reclassified to conform
with the current period financial statement presentation.
F-13
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. ACQUISITION
On December 5, 1997, the Company acquired all of the outstanding capital
stock of MODE in exchange for 1,461,866 shares of EMCORE common stock, 200,966
common stock purchase options (exercise prices ranging from $0.43 to $0.59), and
47,118 common stock purchase warrants (exercise prices ranging from $4.32 to
$5.92). The purchase price was approximately $32,829,000 including direct
acquisition costs of approximately $500,000. The acquisition of MODE was
recorded using the purchase method of accounting. Accordingly, the results of
operations of the acquired business and the fair values of the acquired tangible
and intangible assets and assumed liabilities have been included in the
Company's financial statements as of December 5, 1997. The allocation of the
fair value of the net assets acquired is as follows:
MODE was a development stage company (incorporated in August 1995) and had
18 employees at the date of acquisition. MODE's activities were substantially
dedicated towards the research and development of optical laser devices at the
date of acquisition.
The amount allocated to acquired in-process research and development was
determined through an independent valuation, which includes a number of
estimates and assumptions. The amounts allocated to acquired in-process research
and development were immediately written-off. Goodwill is being amortized over a
period of three years.
The following unaudited pro forma basis financial information reflects the
combined results of operations of the Company and MODE, as if MODE had been
acquired as of October 1, 1996, but does not reflect the non-recurring write-off
of the acquired in-process research and development. The summary includes the
impact of certain adjustments, such as goodwill amortization and the number of
shares outstanding.
The unaudited pro forma results of operations are not necessarily
indicative of what actually would have occurred if the acquisition had occurred
on October 1, 1996. In addition, the unaudited pro forma results of operations
are not intended to be a projection of future results that might be achieved
from the combined entity. The foregoing pro forma results of operations does not
reflect the non-recurring write-off of acquired in-process research and
development.
F-14
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. CONCENTRATION OF CREDIT RISK
The Company sells its compound semiconductor products domestically and
internationally. The Company's international sales are generally made under
letter of credit arrangements.
For the years ended September 30, 1996, 1997 and 1998, the Company sold
42.5%, 42.0% and 39.1% of its products to foreign customers, respectively.
The Company's world-wide sales to major customers were as follows:
The Company performs material application research under contract with the
U.S. Government or as a subcontractor of U.S. Government funded projects.
The Company performs ongoing credit evaluations of its customers' financial
condition and collateral is not requested. The Company maintains reserves for
potential credit losses based upon the credit risk of specified customers,
historical trends and other information. To reduce credit risk and to fund
manufacturing costs, the Company requires periodic prepayments or irrevocable
letters of credit on most production system orders. During the quarter ended
June 30, 1998, the Company wrote off outstanding receivables of approximately
$1.0 million which was due from an Asian customer. Prior to this event, the
Company's credit losses generally had not exceeded its expectations.
The Company has maintained cash balances with certain financial
institutions in excess of the $100,000 insured limit of the Federal Deposit
Insurance Corporation.
NOTE 5. INVENTORIES
The components of inventories consisted of the following:
F-15
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6. PROPERTY, PLANT AND EQUIPMENT
Major classes of property and equipment are summarized below:
At September 30, 1998, minimum future lease payments due under the capital
leases are as follows:
The provisions for depreciation and amortization expense on owned property
and equipment amounted to approximately $1,743,000, $3,148,000 and $4,683,000
for the years ended September 30, 1996, 1997 and 1998, respectively. Accumulated
amortization on assets accounted for as capital lease amounted to approximately
$366,000 as of September 30, 1998.
Included in equipment above are ten systems and sixteen systems with a
combined net book value of approximately $5,057,000 and $9,644,000 at September
30, 1997 and 1998, respectively. Such systems are utilized for the production of
compound semiconductor wafers and package-ready devices for sale to third
parties, systems demonstration purposes, system sales support, in-house
materials applications, internal research and contract research funded by third
parties.
F-16
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7. ACCRUED EXPENSES
Accrued expenses consisted of the following:
NOTE 8. DEBT FACILITIES
1998 Agreement:
On June 22, 1998, the Company entered into an $8.0 million loan agreement
with First Union National Bank (the "1998 Agreement"), which expires December
31, 1999. The 1998 Agreement bears interest at a rate equal to one-month LIBOR
plus three-quarters of one percent per annum (or 6.4%) at September 30, 1998. As
of September 30, 1998, $8.0 million was outstanding under the 1998 Agreement and
is due and payable on December 31, 1999. The 1998 Agreement is guaranteed by
both the Company's Chairman and Chief Executive Officer. In exchange for
guaranteeing the facility, the Chairman and the Chief Executive Officer were
granted an aggregate of 284,684 common stock purchase warrants exercisable at
$11.375 per share until May 1, 2001. These warrants are callable at the
Company's option at $0.85 per warrant at such time as the Company's Common Stock
has traded at or above 150% of the exercise price for a period of thirty days.
The Company assigned a value of $1,310,000 to the warrants issued to the
guarantors. This valuation was based upon the Company's application of Black
Scholes. This value is accounted for as debt issuance cost and will be amortized
over the eighteen month life of the 1998 Agreement.
1997 Agreement:
On March 31, 1997, the Company entered into a $10.0 million loan agreement
(the "1997 Agreement"). The Agreement bears interest at the rate of Prime plus
50 basis points (8.0% and 9.0% at September 30, 1998 and 1997, respectively). As
of September 30, 1998 the Company had $9,950,000 outstanding under this
facility. As of September 30, 1997, there were no amounts outstanding under this
facility.
As a result of the net loss for the quarters ended June 30, 1998, the
Company was not in compliance with the 1997 Agreement fixed charged coverage
ratio covenant. The Company received a waiver from the bank regarding this
non-compliance. The Company's 1997 Agreement was subsequently further extended
through October 1, 1999. The 1997 Agreement's financial covenants were modified
under the second extension, and manage-
F-17
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
ment believes that the Company will be able to comply with such requirements
throughout fiscal 1999. In addition, the Company's Chairman has guaranteed such
debt in the event the Company does not meet certain financial covenants.
Subordinated Notes:
On May 1, 1996, the Company issued subordinated notes (the "Subordinated
Notes") in the amount of $9,500,000 to its existing shareholders, $1,000,000 of
which were exchanged for notes receivable from officers and certain employees
with identical payment and interest provisions. The Subordinated Notes are
scheduled to mature on May 1, 2001, and have a stated interest rate of 6.0%
which is payable semi-annually on May 1 and November 1. In addition, the
noteholders were issued 2,328,432 common stock purchase warrants with an
exercise price of $4.08 per share which expire on May 1, 2001. The warrants are
exercisable after November 1, 1996, and are callable at the Company's option,
after May 1, 1997, at $0.85 per warrant. The Company has the legal right of
offset with respect to the notes receivable from officers and certain key
employees, and it is their full intention to offset the corresponding notes
receivable and payable upon maturity. As such, the Company reflected $848,000 of
the officers' and employees' notes receivable as a contra liability, reducing
the Company's Subordinated Notes balance. The remaining $152,000 note receivable
has been reflected as a contra equity note receivable balance, representing the
portion of the employee note receivable associated with common stock purchase
warrants issued to such employees. The Company received cash proceeds of
$8,500,000 in connection with this Subordinated Notes issuance.
On September 1, 1996, the Company issued a subordinated note in the amount
of $2,500,000 to the Company's then majority shareholder with terms identical to
the Subordinated Notes issued on May 1, 1996. In addition, under the terms of
this issuance, 245,098 common stock purchase warrants were issued to purchase
common stock at $10.20 per share and which expire September 1, 2001. These
warrants are exercisable after March 1, 1997, and are callable at the Company's
option after September 1, 1997, at $0.85 per warrant.
The Company assigned a value of $1,440,000 to the May 1, 1996 detachable
warrants and $900,000 to the September 1, 1996 detachable warrants. These
valuations were based upon the Company's application of Black Scholes and the
Company's assessment of the underlying valuation factors, as well as an
assessment of the terms of the Subordinated Notes. The carrying value of the
Subordinated Notes will be subject to periodic accretions, using the interest
method, in order for the carrying amount to equal the Company's obligation upon
maturity. As a result, the May 1, 1996 and September 1, 1996 Subordinated Notes
have an effective interest rate of approximately 9.3% and 15.0%, respectively.
For the years ended September 30, 1998, 1997 and 1996, imputed warrant interest
related to the Subordinated Notes amounted to $593,000, $3,988,000 and $126,000,
respectively.
Demand Note Facilities:
On September 17, 1998, the Company borrowed $7.0 million from its Chairman.
The loan bears interest at 9.75% per annum. In addition, on October 23, 1998 the
Company borrowed an additional $1.5 million from its Chairman on identical
terms. The entire sum
F-18
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
of $8.5 million borrowed plus interest was repaid from the proceeds of the
Private Placement.
On October 25, 1996, the Company entered into a $10.0 million demand note
facility (the "Facility"). The Facility bore interest at the rate of LIBOR plus
75 basis points, had a term of one year and was due and payable on demand. The
Facility was guaranteed by the Chairman of the Company's Board of Directors who
provided collateral for the Facility. In December 1996, in return for
guaranteeing the facility, the Company granted the Chairman 980,392 common stock
purchase warrants at $10.20 per share which expire September 1, 2001. These
warrants are exercisable after July 1, 1997, and are callable at the Company's
option after December 1, 1997 at $0.85 per warrant. The Facility was terminated
in conjunction with the Company's initial public offering.
The Company assigned a value of $3,600,000 to the warrants issued to the
guarantor. This valuation was based upon the Company's application of Black
Scholes. This value was accounted for as debt issuance cost and was amortized
over the expected period that the facility was to be in place (four months).
The Company utilized a portion of the proceeds from its initial public
offering to pay down or discharge certain of its debts. The Company repaid the
entire $8.0 million outstanding under its October 1996 Facility and $2.0 million
was used to repay a portion of the Company's outstanding subordinated notes, due
May 1, 2001. In connection with the discharge of the Company's subordinated
notes, an extraordinary loss of $286,000 was recognized.
NOTE 9. COMMITMENTS AND CONTINGENCIES
On November 16, 1992, the Company entered into a three-year lease agreement
with a bank for 34,000 square feet of space in the building the Company
presently occupies. On March 31, 1995, the agreement was renewed for 5 years for
49,000 square feet. In November 1996, the Company signed an agreement to occupy
the remaining 26,000 square feet that it previously had not occupied.
The Company leases certain equipment under non-cancelable operating leases.
Facility and equipment rent expense under such leases amounted to
approximately $350,000, $548,000 and $554,000 for the years ended September 30,
1996, 1997 and 1998, respectively.
F-19
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum rental payments under the Company's non-cancelable operating
leases with an initial or remaining term of one year or more as of September 30,
1998 are as follows:
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
Income tax expense consists of the following:
The principal differences between the U.S. statutory and effective income
tax rates were as follows:
F-20
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The components of the Company's net deferred taxes were as follows:
The Company has established a valuation reserve as it has not determined
that it is more likely than not that the net deferred tax asset is realizable,
based upon the Company's past earnings history.
As of September 30, 1998, the Company has net operating loss carryforwards
for regular tax purposes of approximately $22.0 million which expire in the
years 2003 through 2013. The Company believes that the consummation of certain
equity transactions and a significant change in the ownership during fiscal
years 1995 and 1998 have constituted a change in control under Section 382 of
the Internal Revenue Code ("IRC"). Due to the change in control, the Company's
ability to use its federal net operating loss carryovers and federal research
credit carryovers to offset future income and income taxes, respectively, are
subject to annual limitations under IRC Section 382 and 383.
The Company believes that the acquisition of MODE and the consummation of
certain other equity transactions has constituted a change in control in fiscal
1998 under Section 382 of the IRC. As such, Federal net operating loss
carryovers and research credit carryovers incurred subsequent to the Company's
fiscal 1995 change in control (as described above) will also be subject to
annual limitations under IRC Section 382 and 383.
NOTE 11. STOCKHOLDERS' EQUITY
REVERSE STOCK SPLIT
On February 3, 1997, the Board of Directors approved a 3.4:1 reverse stock
split of its common stock and approved a decrease in the number of shares of
common stock
F-21
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
authorized. All references in the accompanying financial statements to the
number of common stock and per-share amounts have been restated to reflect the
reverse split.
COMMON STOCK OFFERING
In March 1997, the Company completed an initial public offering of
2,500,000 shares of common stock at a price of $9.00 per share (the "Offering"),
and upon the exercise of the Underwriter's overallotment option, 375,000
additional shares of common stock were also sold at $9.00 per share. The
proceeds, net of commissions and certain expenses, to the Company from the
offering were approximately $22.8 million. Prior to the Offering, there was no
public market for the Company's common stock.
WARRANT EXERCISE
On December 3, 1997, the holders of 1.8 million common stock purchase
warrants (with an exercise price of $4.08) exercised such warrants with the
Company taking full recourse notes amounting to approximately $7.5 million in
exchange for the issued common stock. In addition, the holders are required to
provide collateral at a 2:1 coverage ratio. This collateral is presently held by
the Company.
PREFERRED STOCK
The Company's certificate of incorporation authorizes the Board of
Directors to issue up to 5,882,353 shares of preferred stock of the Company upon
such terms and conditions having such rights, privileges and preferences as the
Board of Directors may determine.
NOTE 12. STOCK OPTIONS AND WARRANTS
STOCK OPTION PLAN. In November 1994, the Company's Incentive Stock Option
Plan, initiated in 1987, was eliminated. On June 5, 1995, the Company adopted
the 1995 Incentive and Non-Statutory Stock Option Plan (the "Option Plan").
Under the terms of the Option Plan, options to acquire 323,529 shares of common
stock may be granted to eligible employees, as defined, at no less than 100
percent of the fair market value on the date of grant. In March 1996, options to
acquire an additional 323,530 shares of common stock were approved.
Certain options under the Option Plan are intended to qualify as incentive
stock options pursuant to Section 422A of the Internal Revenue Code.
During fiscal 1998, options with respect to 816,284 shares were granted
pursuant to the Company's option plan or issued in connection with the MODE
acquisition at exercise prices ranging from $0.44 to $20.00 per share.
Stock options granted generally vest over three to five years and are
exercisable over a ten year period. As of September 30, 1996, 1997 and 1998,
options with respect to 162,764, 199,368 and 481,863 shares were exercisable,
respectively.
F-22
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarized the activity under the plan:
As of September 30, 1998, stock options outstanding were as follows:
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock Based Compensation" ("SFAS 123"). SFAS 123
establishes financial and reporting standards for stock based compensation
plans. The Company has adopted the disclosure only provisions of this standard
and has elected to continue to apply the provision of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees". Had the
Company elected to recognize compensation expense for
F-23
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
stock options based on the fair value at the grant dates of awards, net loss and
net loss per share would have been as follows:
The weighted average fair value of the Company's stock options was
calculated using Black Scholes with the following weighted-average assumptions
used for grants in fiscal 1997: no dividend yield; expected volatility of 0%
prior to the Company's initial public offering and 60% thereafter; a risk-free
interest rate of 6.04% and 5.57% for fiscal years 1997 and 1998, respectively;
and expected lives of 5 years. The weighted average fair value of options
granted during the years ended September 30, 1997 and 1998 is $3.82 and $7.50
per share, respectively. Stock options granted by the Company prior to its
initial public offering were valued using the minimum value method under FASB
No. 123.
WARRANTS
Set forth below is a summary of the Company's outstanding warrants at
September 30, 1998:
- -------------------------
(1) Issued in connection with the Company's May 1996 subordinated note issuance.
(2) Issued in connection with the MODE acquisition.
(3) Issued in connection with the Company's September 1996 subordinated debt
issuance and October 1996 debt guarantee.
(4) Issued in connection with the 1998 Agreement guarantee.
F-24
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13. RELATED PARTIES
In May 1995, 52% of the Company's outstanding shares of Common Stock were
purchased by Jesup & Lamont Merchant Partners, L.L.C. ("JLMP"). Prior to May 12,
1997, a majority of the Company's then six directors were members of JLMP. On
May 12, 1997, JLMP distributed all of its shares of the Company to the
individual members of JLMP. In May 1995, the Company entered into a consulting
agreement (the "Agreement") with Jesup & Lamont Capital Markets, Inc. ("Jesup &
Lamont") pursuant to which Jesup & Lamont agreed to provide financial advisory
and employee services for the Company for one year. Total fees paid to Jesup &
Lamont amounted to approximately $241,697 for the fiscal year ended September
30, 1996. No fees were paid to Jesup & Lamont during the fiscal years ended
September 30, 1998 and 1997.
In December 1996, the Company's chairman and chief executive officer
retired. The Company entered into a consulting agreement with him for a term of
two years and will provide compensation of $250,000 per annum. In addition, the
Company has also forgiven $115,300 of his indebtedness to the Company and had
agreed to extend the period for the exercise of his vested stock options through
March 1997 and accordingly he exercised all 26,471 vested shares.
In fiscal 1997, the Company entered into a non-exclusive and non-refundable
technology licensing and royalty agreement with Uniroyal Technology Corporation
("UTC") for the process technology to develop and manufacture high brightness
light emitting diodes ("LEDs"). During fiscal 1998 and 1997, revenue associated
with the UTC licensing agreement amounted to $2.5 million and $2.5 million,
respectively. At the time the transaction was originally entered into, UTC's
Chairman and CEO was a member of EMCORE's Board of Directors and EMCORE's
Chairman was on the Board of Directors of UTC. All related party accounts
receivable for fiscal 1997 have been paid in full. As of September 30, 1998, the
Company had an outstanding related party receivable of $500,000.
In February 1998, the Company and a wholly-owned subsidiary of UTC formed
Uniroyal Optoelectronics, a venture (the "UTC Venture") to produce and market
compound semiconductor products. The Company has a 49% non-controlling minority
interest. The Company's rights under the venture agreement are protective and as
such, the Company accounts for its interest in the venture under the equity
method of accounting. The investment in the UTC Venture amounted to $490,000 as
of September 30, 1998, and has been classified as a component of other long-term
assets. For the year ended September 30, 1998, the Company recognized a loss of
$198,000 related to the UTC Venture, which has been recorded as a component of
other income and expense.
In November 1998, the Company invested an additional $5.0 million into the
UTC Venture. During the quarter ended December 31, 1998, the Company sold two
compound semiconductor production systems to the UTC Venture totaling $3.0
million in revenues. The Company eliminated gross profit of approximately
$711,000 on such sales to the extent of its minority interest. Such deferred
gross profit will be recognized ratably over the assigned life of the UTC
Venture's production systems. For the three months and the year ended December
31, 1998 and September 30, 1998, respectively, the Company recognized
F-25
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
a loss of $276,000 and $198,000 related to this venture, which has been recorded
as a component of other income and expense. As of December 31, 1998, the
Company's investment in this venture amounted to $5,015,000.
The President of Hakuto Co. Ltd. ("Hakuto"), the Company's Asian
distributor, is a member of the Company's Board of Directors and Hakuto is a
minority shareholder of the Company. During the year ended September 30, 1998,
sales made through Hakuto approximated $9.2 million. During the quarter ended
December 31, 1998, sales made through Hakuto amounted to approximately $3.1
million.
On June 22, 1998, the Company entered into the 1998 Agreement. The 1998
Agreement was guaranteed by the Chairman and the Chief Executive Officer of the
Company (see Note 8). In return for guaranteeing the facility, the Company
granted the Chairman and the Chief Executive Officer an aggregate of 284,684
common stock purchase warrants at $11.375 per share which expire May 1, 2001.
These warrants are callable at the Company's option at $0.85 per warrant at such
time as the Company's common stock has traded at or above 150% of the exercise
price for a period of 30 days.
On September 17, 1998, the Company borrowed $7.0 million from its Chairman,
Thomas J. Russell. The loan bears interest at 9.75% per annum. In addition, on
October 23, 1998 the Company borrowed an additional $1.5 million from its
Chairman on identical terms. The entire $8.5 million, borrowed from Mr. Russell
was repaid from the proceeds of a private placement (See Note 8).
NOTE 14. EXPORT SALES
The information below summarizes the Company's export sales by geographic
area. The Company's export sales to the Far East and Europe are as follows:
F-26
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15. QUARTERLY FINANCIAL DATA (UNAUDITED)
- -------------------------
* includes a $29.3 million one-time charge to acquired in-process research and
development, non-cash.
NOTE 16. EMPLOYEE SAVINGS PLAN
The Company has a savings plan (the "Savings Plan") that qualifies as a
deferred salary arrangement under Section 401(k) of the Internal Revenue Code.
Under the Savings Plan, participating employees may defer a portion of their
pretax earnings, up to the Internal Revenue Service annual contribution limit.
Effective August 1, 1997, the Company began contributing to the Savings Plan.
All employer contributions are made in the Company's common stock. For the year
ended September 30, 1998, the Company contributed approximately $252,000 to the
Savings Plan.
NOTE 17. REDEEMABLE PREFERRED STOCK PRIVATE PLACEMENT (UNAUDITED)
On November 30, 1998, the Company sold an aggregate of 1,550,000 shares of
Series I Redeemable Convertible Preferred Stock (the "Series I Preferred Stock")
for aggregate consideration of $21.7 million before deducting costs and expenses
which amounted to approximately $500,000. The Series I Preferred Stock was
recorded net of issuance costs. The excess of the preference amount over the
carrying value of the Series I Preferred Stock is being accreted by periodic
charges to accumulated deficit in the absence of additional paid in capital. The
shares of Series I Preferred Stock are convertible, at any time, at the option
of the holders thereof, unless previously redeemed, into shares of common stock
at an initial conversion price of $14.00 per share of common stock, subject to
adjustment in certain cases. The market price of the Company's common stock was
$12.875 on the date the Series I Preferred Stock was issued. The Series I
Preferred Stock is redeemable, in whole or in part, at the option of the Company
at any time the Company's stock has traded at or above $28.00 per share for 30
consecutive trading days, at a price of $14.00 per share, plus accrued and
unpaid dividends, if any, to the redemption date. The Series I Preferred stock
carries a dividend of 2% per annum. Dividends are being charged to accumulated
deficit in the absence of additional paid in capital. In addition, the
F-27
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Series I Preferred Stock is subject to mandatory redemption by the Company at
$14.00 per share plus accrued and unpaid dividends, if any, on November 17,
2003.
NOTE 18. JOINT VENTURES (UNAUDITED)
In November 1998, the Company entered into a joint venture with Union
Miniere Inc. to undertake research and development aimed at new material
application of germanium substrates. The Company has a 50% non-controlling
interest in the venture. The Company will account for its interest in the
venture under the equity method of accounting. In November 1998, the Company
invested $600,000 in the venture. The Company is obligated to fund the venture's
capital requirements in proportion to its equity interest. As of December 31,
1998, no expenses have been incurred by the joint venture and it is expected to
commence in the second quarter of fiscal 1999.
In November 1998, the Company also formed a venture with Optek Technology,
Inc. to produce, market and distribute packaged electronic semiconductor
components. The Company has a 50% non-controlling interest in the venture. The
Company will account for its interest in the venture under the equity method of
accounting. The Company is obligated to fund the venture's capital requirements
in proportion to its equity interest. As of December 31, 1998, neither party has
contributed capital to this venture, which is expected to commence in the second
quarter of fiscal 1999.
On January 21, 1999, GE Lighting and the Company agreed, subject to certain
conditions, to form a new joint venture to develop and market "white light"
light-emitting diodes. The new company, GELcore, LLC (the "GELcore Venture"),
will develop and market LEDs as replacements for miniature automotive, compact
fluorescent, halogen and traditional incandescent lighting. Under terms of the
joint venture agreement, the Company will have a 49% non-controlling interest in
the GELcore Venture.
In connection with the GELcore venture, General Electric will loan the
Company $7.8 million at 4.75% per annum. The proceeds will be used to fund part
of the Company's initial capital contribution in GELcore. This subordinated
debenture (the "Debenture") will mature seven years from the date of issuance
and is convertible into common stock of the Company at a conversion price of
$22.875 or 340,984 shares. The Debenture is convertible at any time at the
option of GE Lighting and may be called by the Company after three years, if the
price of the Company's common stock has traded at or above $34 for at least
thirty days. The Debenture's interest rate will be subject to adjustment in the
event the Company does not complete a public offering by June 30, 1999.
General Electric will also receive between 282,010 and 564,019 warrants to
purchase common stock at $22.875 per share. The warrants will be exercisable at
any time and will expire in seven years from the date of issuance. The number of
common stock purchase warrants to be issued is subject to the market price of
the Company's common stock upon the completion of a secondary offering or March
31, 1999, whichever occurs first.
F-28
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 19. SUBSEQUENT EVENTS (UNAUDITED)
SHORT TERM BORROWINGS:
On February 1, 1999, the Company entered into a $5 million short-term note
(the "Note") with First Union. The Note is due and payable in May 1999. The Note
bears interest at a rate equal to one-month LIBOR plus three-quarters of one
percent per annum.
1997 AGREEMENT:
In January 1999, the Company borrowed the remaining balance of $2,050,000
available under the 1997 Agreement.
RELATED PARTY TRANSACTIONS:
On January 27, 1999, the Company borrowed $3.0 million from its Chairman.
The loan bears interest at 8% per annum. The loan will be repaid from borrowings
under the Note.
On January 29, 1999, the Company's Chairman has committed to provide $30
million of long-term financing of the Company through July 1, 2000. The
Chairman's financing commitment terminates if the Company completes a secondary
offering of a specified amount.
F-29
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
MicroOptical Devices, Inc.:
We have audited the accompanying balance sheets of MICROOPTICAL DEVICES,
INC. (a Delaware corporation in the development stage) (the "Company") as of
December 31, 1996 and 1995, and the related statements of operations,
stockholders' equity and cash flows for the year ended December 31, 1996 and for
the period from inception (August 3, 1995) through December 31, 1995 and 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of MicroOptical Devices, Inc.
as of December 31, 1996 and 1995, and the results of its operations and its cash
flows for the year ended December 31, 1996 and for the period from inception
(August 3, 1995) through December 31, 1995 and 1996, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Albuquerque, New Mexico
March 21, 1997
F-30
MICROOPTICAL DEVICES, INC.
(A DEVELOPMENT STAGE CORPORATION)
BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-31
MICROOPTICAL DEVICES, INC.
(A DEVELOPMENT STAGE CORPORATION)
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (AUGUST 3, 1995)
THROUGH DECEMBER 31, 1996
AND FOR THE YEAR ENDED DECEMBER 31, 1996
AND FOR THE PERIOD FROM INCEPTION THROUGH DECEMBER 31, 1995
The accompanying notes to financial statements are an integral part of these
statements.
F-32
MICROOPTICAL DEVICES, INC.
(A DEVELOPMENT STAGE CORPORATION)
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (AUGUST 3, 1995)
THROUGH DECEMBER 31, 1996
The accompanying notes to financial statements are an integral part of these
statements.
F-33
MICROOPTICAL DEVICES, INC.
(A DEVELOPMENT STAGE CORPORATION)
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (AUGUST 3, 1995)
THROUGH DECEMBER 31, 1996
AND FOR THE YEAR ENDED DECEMBER 31, 1996
AND FOR THE PERIOD FROM INCEPTION THROUGH DECEMBER 31, 1995
The accompanying notes to financial statements are an integral part of these
statements.
F-34
MICROOPTICAL DEVICES, INC.
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM INCEPTION (AUGUST 3, 1995)
THROUGH DECEMBER 31, 1996
AND FOR THE YEAR ENDED DECEMBER 31, 1996
AND FOR THE PERIOD FROM INCEPTION THROUGH DECEMBER 31, 1995
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT RISK FACTORS:
MicroOptical Devices, Inc. (the "Company" or "MODE"), was incorporated
under the laws of the State of Delaware on August 3, 1995 for the purpose of
developing technology and manufacturing of advanced optoelectronic components
and systems for specific use in commercial identification and communications
markets.
The Company funded its marketing, development and operational activities to
date from the proceeds of two equity offerings. Since inception, the Company has
devoted substantially all of its efforts and resources to marketing and
development of its technology and remains in the development stage. Ultimately,
the Company's ability to achieve profitable operations is dependent, in large
part, upon making the transition to a manufacturing company.
On July 16, 1996, an amendment to the Certificate of Incorporation of MODE
(the "Amendment") was filed, which (a) increased the total number of its common
shares, which the Company is authorized to issue from two million to four
million, and (b) increased the total number of authorized shares of its
Convertible Preferred Stock, from four thousand to two million (222,222 shares
of Series A Convertible Preferred Stock and 1,777,778 shares of Series B
Convertible Preferred Stock).
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ACCOUNTING BASIS -- The financial books and records of the Company are
maintained on the accrual basis of accounting. As a development stage company,
cumulative results of operations from inception are presented.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS -- For the purposes of presenting cash flows, cash and
cash equivalents represent cash balances and highly liquid investments with
original maturities of less than 90 days.
INVENTORY -- Inventories are stated at the lower of standard cost (which
approximates actual cost using the first-in, first-out method) or market and
consist of raw materials.
PROPERTY AND EQUIPMENT -- Equipment is stated at cost, net of accumulated
depreciation. Depreciation is computed on the straight-line method based on
estimated
F-35
MICROOPTICAL DEVICES, INC.
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
useful lives ranging from three to five years. Leasehold improvements are
amortized using the straight-line method over the shorter of the estimated
useful life of the asset or the remaining term of the lease.
ORGANIZATION COSTS -- Costs to organize the Company are capitalized and
amortized on a straight-line basis over five years.
RESEARCH AND DEVELOPMENT -- The costs of research and development
activities are charged to expense as incurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- The carrying value of all financial
instruments approximates fair market value at December 31, 1996 and 1995.
STOCK-BASED COMPENSATION -- The Company accounts for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25 ("APB Opinion No. 25"), "Accounting for Stock
Issued to Employees," and related Interpretations. Accordingly, compensation
cost for stock options is measured as the excess, if any, of the quoted market
price of the Company's stock at the date of the grant over the amount an
employee must pay to acquire the stock. Financial Accounting Standards Board
Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), was
issued in 1995 and the Company has adopted the disclosure requirements of SFAS
123 (see Note 6).
INCOME TAXES -- MODE accounts for income taxes using the asset and
liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under Financial Accounting Standards Board
Statement No. 109, "Accounting for Income Taxes" ("SFAS No. 109"), the effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
operations in the period that includes the enactment date.
NET LOSS PER SHARE -- Net loss per share for each period was calculated
based upon the weighted average number of Common Stock outstanding during each
period, using post split shares resulting from the three- for-one stock split
effective August 1996. Common Stock equivalents were excluded in the calculation
of weighted average shares outstanding since their inclusion would have had an
anti-dilutive effect.
Accounting Pronouncement Not Yet Adopted -- The Financial Accounting
Standards Board issued SFAS No. 128, "Earnings Per Share," which is effective
for calendar years beginning after December 15, 1997 at which time it will
require restatement of prior years earnings per share calculations. Management
has not yet determined the effect, if any, of SFAS No. 128 on the financial
statements.
F-36
MICROOPTICAL DEVICES, INC.
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(3) PROPERTY AND EQUIPMENT:
Property and equipment at December 31 by major classification are as
follows:
(4) CAPITAL LEASES:
In 1996, the Company financed certain manufacturing equipment, leasehold
improvements, and furniture and fixtures under a Master Equipment Lease
Agreement ("the Lease") expiring June 30, 1997, which provides for financing of
up to $2,000,000. The Company had only nominal borrowings under the Lease at
December 31, 1996. The capital leases have terms of 42 months and are
collateralized by manufacturing equipment. The transactions under the Lease are
accounted for as a financing, whereby the property remains on the books and
continues to be depreciated and amortized. Obligations under capital leases
representing the proceeds was recorded, and is reduced based on payments under
capital lease obligations. All items are sold and leasedback at original
purchase price, therefore no gain or loss was recorded on such transactions
during 1996.
At December 31, 1996, approximately $146,000 of manufacturing equipment was
under capital lease. The future minimum lease payments for assets under capital
lease and the present value of the net minimum lease payments at December 31,
1996, are as follows:
In connection with the Lease, the Company issued a warrant to purchase
208,695 shares of MODE's Series B convertible preferred stock, on a post stock
split basis (see Note 5), exercisable at any time for a period of up to ten
years ending on August 21, 2006
F-37
MICROOPTICAL DEVICES, INC.
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
at a price of $.77 per share. The warrant may terminate sooner in connection
with certain significant corporate events.
(5) STOCKHOLDERS' EQUITY:
Effective August, 1996, the Company declared a stock split on all existing
preferred and common shares at a ratio of three to one. The accompanying
financial statements for the year ended December 31, 1996, have been adjusted to
reflect the stock split.
On July 17, 1996, the Company issued 4,076,088 shares, on a post stock
split basis, of its Series B Convertible Preferred Stock ("Series B"). Each
share of Series B, which has a liquidation preference of $.77, is convertible to
one share of the Company's Common Stock and earns dividends at the rate declared
for each share of Common Stock. No such dividends have been declared as of
December 31, 1996. Terms of the agreements with Preferred Shareholders require
the Company to comply with terms similar to those specified in the Series A
issuance.
As specified in the Series A Convertible Preferred Stock ("Series A")
issuance, the Series A Preferred Stockholder purchased $150,000 of Convertible
Promissory Notes (the "Notes"), during 1996. The Notes, which bore interest at
the prime rate compounded monthly, were convertible at a price equal to the per
share purchase price of the Series B stock issuance. On July 17, 1996, the Notes
and the related interest of $1,169 were converted to Series B convertible
preferred stock in conjunction with the Series B stock issuance.
On August 29, 1995, the Company issued 666,666 shares, on a post stock
split basis, of its Series A. Each share of Series A, which has a liquidation
preference of $.3, is convertible to one share of the Company's Common Stock and
earns dividends at the rate declared for each share of Common Stock. No such
dividends have been declared as of December 31, 1996. An agreement with the
Series A Preferred Stockholder requires the Company to, among other items,
maintain keyman life insurance on certain key employees, and obtain the
Preferred Stockholders' approval to make key changes in the operations of the
Company.
On August 3, 1995, the Company issued 3,000,000 shares, on a post stock
split basis, of its Common Stock at a par value of $.001 per share.
(6) DEFERRED COMPENSATION PLAN:
In July 1996, the Company adopted the 1996 Stock Option Plan (the "Plan"),
where options granted to an employee are qualified "incentive stock options"
under the Internal Revenue Code and options granted to a non-employee are
"non-statutory stock options", for which 1,800,000 shares were reserved, on a
post stock split basis. The Company accounts for options granted to employee's
under this Plan in accordance with APB Opinion No. 25, under which no
compensation cost has been recognized. The compensation costs for the Plan
determined consistent with SFAS 123 is immaterial.
F-38
MICROOPTICAL DEVICES, INC.
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Options granted to non-employee's under this Plan are accounted for in
accordance with the provisions of SFAS 123.
The Company has granted options on 645,500 shares through December 31,
1996. Under the Plan, the option exercise price equals the common stocks market
price on date of grant. All options are immediately exercisable and expire ten
years from date of grant. The options granted to MODE's founders are subject to
repurchase by the Company, at the original exercise price, upon the cessation of
service prior to vesting in such shares. Such shares vest in a series of 72
successive equal monthly installments over a six year period, however, such
vesting shall accelerate to 48 successive equal monthly installments upon the
Company meeting performance milestones as provided for by the Board. At December
31, 1996, the Company has achieved two out of five of its performance measures.
All other shares vest at the rate of 25 percent of the shares upon the
optionee's continued service to the Company through the initial vesting date,
with the remaining shares vesting in a series of 36 successive equal monthly
installments. The vesting period accelerates in connection with certain
significant corporate events.
A summary of the status of the Company's option Plan at December 31, 1996,
and changes during the year then ended is presented in the table and narrative
below:
The options outstanding at December 31, 1996, have a weighted average
remaining contractual life of 9.5 years.
The fair value of each option grant is estimated on the date of grant using
Black-Scholes option pricing model with the following average assumptions used:
risk-free interest rate of 6.65%; expected lives of ten years; a divided yield
of 0%; and expected volatility of .01%.
F-39
MICROOPTICAL DEVICES, INC.
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(7) INCOME TAXES:
MODE had no income tax expense and there were no income taxes currently
payable for the year ended December 31, 1996 and period ended December 31, 1995.
Deferred income taxes at December 31, 1996 and 1995, are offset by a valuation
allowance as follows:
The Company has established a valuation allowance for the entire deferred
tax asset due to the uncertainty of future earnings (see Note 1). A net
operating loss carry forward of $46,214 is available to offset future taxable
income for the next fifteen years.
(8) COMMITMENTS AND CONTINGENCIES:
TECHNOLOGY ASSISTANCE AND ROYALTY AGREEMENT
On February 22, 1996, the Company entered into a technical assistance and
royalty agreement (as subsequently amended) in which the Company agreed to
further develop laser technology in return for eight years of co-exclusive
rights to five existing patents covering this technology. The Company is
required to pay $7,500 in 1997, plus royalty payments beginning in 1998 of 1.5%
to 2.5%, subject to minimum annual payments ranging from up to $50,000 over the
life of the patents provided that the technology is developed and the related
products are manufactured in Albuquerque, New Mexico. In the event that the
Company fails to develop or abandons development of this technology, all rights
to the technology become nonexclusive. The Company paid $7,500 under this
Agreement in 1996.
In October, 1996, the Company signed an agreement for research and
development, which expires March 31, 1998. Under the Agreement, the Buyer paid
the Company $95,000 for non-recurring engineering expense, plus all applicable
fees and taxes, which payment is non-refundable. Buyer will pay MODE the balance
of the payment upon demonstration of feasibility.
F-40
MICROOPTICAL DEVICES, INC.
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
KEYMAN LIFE INSURANCE
The Company is beneficiary to $500,000 of term life insurance for each of
its two founders.
LICENSING AGREEMENT
On March 21, 1996, the Company signed a license agreement (the "Agreement")
with a major manufacturer in the identification market (the "Manufacturer").
Under the Agreement, the Manufacturer paid the Company a $500,000 license fee
(the "Payment") plus all applicable gross receipts tax that the Company is
required to pay thereon.
The Manufacturer retains exclusive rights to use and sell any products or
components which the Company develops for the Manufacturer's portion of the
identification market (the "Product") for a limited period of time. After the
exclusive rights period expires, the Company is required to first offer these
Products, if achieved to the Manufacturer under similar sales terms as the
Products are offered to any other party for a limited period of time.
Within approximately one year of the receipt of the Payment, the Company
and the Manufacturer will negotiate in good faith to enter into a supply
agreement for the Product, if achieved. If no agreement is reached, then the
Company can elect to sell the Product, if achieved to the Manufacturer for an
additional license fee and, for each Product sold, the cost of the Product plus
a specified factor for overhead and profit.
Should the Company fail to pursue development or sell the Product to the
Manufacturer, the Manufacturer will be granted certain nonexclusive
sub-licensing rights.
At December 31, 1996, $325,000 has been earned under the terms of this
agreement.
LEASED PROPERTY
The Company leases its facility under an operating lease with a term of
three years. Rental expense under operating leases was $18,214 for the year end
December 31, 1996. There was no rental expense incurred for the period from
inception through December 31, 1995. The minimum future lease commitments for
all operating leases are $34,332 for each of the years ending December 31, 1997
and 1998 and $17,166 for year end December 31, 1999.
(9) SUBSEQUENT EVENT:
PURCHASE AND SUPPLY AGREEMENT
On February 14, 1997, the Company signed a purchase and supply contract
(the "Contract"). Under the Contract, MODE established the terms and conditions
controlling potential sales of vertical-cavity surface-emitting laser ("VCSEL")
chips, devices and arrays in the event they occur. The initial term of the
Contract is five years, and can be canceled by either party upon written notice
360 days prior to the end of the initial term or
F-41
MICROOPTICAL DEVICES, INC.
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
any subsequent term. The Contract also may terminate prior to the five year
period under certain circumstances. Products sold under the agreement are
subject to a warranty period not to exceed the earlier of 18 months from the
date the product is delivered to customer, or one year from the date of delivery
by customer to its end-users, or one year from the date the products are placed
in service.
SALE/LEASEBACK OF ASSETS
Subsequent to year end, the Company financed an additional $1,850,000 of
its property via a sale-leaseback transaction with a leasing company under the
terms of the Master Equipment Lease Agreement (see Note 4).
F-42
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
, 1999
[LOGO] EMCORE CORPORATION
SHARES OF COMMON STOCK
------------------------
PROSPECTUS
------------------------
DONALDSON, LUFKIN & JENRETTE
PRUDENTIAL SECURITIES
NEEDHAM & COMPANY, INC.
VOLPE BROWN WHELAN & COMPANY
- --------------------------------------------------------------------------------
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER PERSON TO GIVE YOU
WRITTEN INFORMATION OTHER THAN THIS PROSPECTUS OR TO MAKE REPRESENTATIONS AS TO
MATTERS NOT STATED IN THIS PROSPECTUS. YOU MUST NOT RELY ON UNAUTHORIZED
INFORMATION. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES OR OUR
SOLICITATION OF YOUR OFFER TO BUY THE SECURITIES IN ANY JURISDICTION WHERE THAT
WOULD NOT BE PERMITTED OR LEGAL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALES MADE HEREUNDER AFTER THE DATE OF THIS PROSPECTUS SHALL CREATE AN
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN OR THE AFFAIRS OF THE COMPANY
HAVE NOT CHANGED SINCE THE DATE HEREOF.
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than
underwriting discounts and commissions. All amounts shown are estimates except
the Securities and Exchange Commission registration fee and the NASD filing fee.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
EMCORE's Restated Certificate of Incorporation provides that the Company
shall indemnify its directors and officers to the full extent permitted by New
Jersey law, including in circumstances in which indemnification is otherwise
discretionary under New Jersey law.
Section 14A:2-7 of the New Jersey Business Corporation Act provides that a
New Jersey corporation's:
"certificate of incorporation may provide that a director or officer shall
not be personally liable, or shall be liable only to the extent therein
provided, to the corporation or its shareholders for damages for breach of any
duty owed to the corporation or its shareholders, except that such provision
shall not relieve a director or officer from liability for any breach of duty
based upon an act or omission (a) in breach of such person's duty of loyalty to
the corporation or its shareholders, (b) not in good faith or involving a
knowing violation of law or (c) resulting in receipt by such person of an
improper personal benefit. As used in this subsection, an act or omission in
breach of a person's duty of loyalty means an act or omission which that person
knows or believes to be contrary to the best interests of the corporation or its
shareholders in connection with a matter in which he has a material conflict of
interest."
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
II-1
who is or was a director, officer, trustee, employee or agent of any other
enterprise, serving as such at the request of the indemnifying corporation,
or of any such constituent corporation, or the legal representative of any
such director, officer, trustee, employee or agent;
(b) "Other enterprise" means any domestic or foreign corporation,
other than the indemnifying corporation, and any partnership, joint
venture, sole proprietorship, trust or other enterprise, whether or not for
profit, served by a corporate agent;
(c) "Expenses" means reasonable costs, disbursements and counsel fees;
(d) "Liabilities" means amounts paid or incurred in satisfaction of
settlements, judgments, fines and penalties;
(e) "Proceeding" means any pending, threatened or completed civil,
criminal, administrative or arbitrative action, suit or proceeding, and any
appeal therein and any inquiry or investigation which could lead to such
action, suit or proceeding; and
(f) References to "other enterprises" include employee benefit plans;
references to "fines" include any excise taxes assessed on a person with
respect to an employee benefit plan; and references to "serving at the
request of the indemnifying corporation" include any service as a corporate
agent which imposes duties on, or involves services by, the corporate agent
with respect to an employee benefit plan, its participants, or
beneficiaries; and a person who acted in good faith and in a manner the
person reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in
a manner "not opposed to the best interests of the corporation" as referred
to in this section.
(2) Any corporation organized for any purpose under any general or special
law of this State shall have the power to indemnify a corporate agent against
his expenses and liabilities in connection with any proceeding involving the
corporate agent by reason of his being or having been such a corporate agent,
other than a proceeding by or in the right of the corporation, if
(a) such corporate agent acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation; and
(b) with respect to any criminal proceeding, such corporate agent had
no reasonable cause to believe his conduct was unlawful. The termination of
any proceeding by judgment, order, settlement, conviction or upon a plea of
nolo contendere or its equivalent, shall not of itself create a presumption
that such corporate agent did not meet the applicable standards of conduct
set forth in paragraphs 14A:3-5(2)(a) and 14A:3-5(2)(b).
(3) Any corporation organized for any purpose under any general or special
law of this State shall have the power to indemnify a corporate agent against
his expenses in connection with any proceeding by or in the right of the
corporation to procure a judgment in its favor which involves the corporate
agent by reason of his being or having been such corporate agent, if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation. However, in such proceeding no
indemnification shall be provided in respect of any claim, issue or matter as to
which such corporate agent shall have been adjudged to be liable to the
corporation, unless and only to the extent that the Superior Court or the court
in which such proceeding was brought shall determine upon application that
despite the adjudication of liability, but in view of all
II-2
circumstances of the case, such corporate agent is fairly and reasonably
entitled to indemnity for such expenses as the Superior Court or such other
court shall deem proper.
(4) Any corporation organized for any purpose under any general or special
law of this State shall indemnify a corporate agent against expenses to the
extent that such corporate agent has been successful on the merits or otherwise
in any proceeding referred to in subsections 14A:3-5(2) and 14A:3-5(3) or in
defense of any claim, issue or matter therein.
(5) Any indemnification under subsection 14A:3-5(2) and, unless ordered by
a court, under subsection 14A:3-5(3) may be made by the corporation only as
authorized in a specific case upon a determination that indemnification is
proper in the circumstances because the corporate agent met the applicable
standard of conduct set forth in subsection 14A:3-5(2) or subsection 14A:3-5(3).
Unless otherwise provided in the certificate of incorporation or bylaws, such
determination shall be made
(a) by the board of directors or a committee thereof, acting by a
majority vote of a quorum consisting of directors who were not parties to
or otherwise involved in the proceeding; or
(b) if such a quorum is not obtainable, or, even if obtainable and
such quorum of the board of directors or committee by a majority vote of
the disinterested directors so directs, by independent legal counsel, in a
written opinion, such counsel to be designated by the board of directors;
or
(c) by the shareholders if the certificate of incorporation or bylaws
or a resolution of the board of directors or of the shareholders so
directs.
(6) Expenses incurred by a corporate agent in connection with a proceeding
may be paid by the corporation in advance of the final disposition of the
proceeding as authorized by the board of directors upon receipt of an
undertaking by or on behalf of the corporate agent to repay such amount if it
shall ultimately be determined that he is not entitled to be indemnified as
provided in this section.
(7) (a) If a corporation upon application of a corporate agent has failed
or refused to provide indemnification as required under subsection 14A:3-5(4) or
permitted under subsections 14A:3-5(2), 14A:3-5(3) and 14A:3-5(6), a corporate
agent may apply to a court for an award of indemnification by the corporation,
and such court
(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-3
(ii) to the Superior Court in a separate proceeding. If the
application is for indemnification arising out of a civil action, it
shall set forth reasonable cause for the failure to make application for
such relief in the action or proceeding in which the expenses were or
are to be incurred or other amounts were or are to be paid.
The application shall set forth the disposition of any previous application
for indemnification and shall be made in such manner and form as may be required
by the applicable rules of court or, in the absence thereof, by direction of the
court to which it is made. Such application shall be upon notice to the
corporation. The court may also direct that notice shall be given at the expense
of the corporation to the shareholders and such other persons as it may
designate in such manner as it may require.
(8) The indemnification and advancement of expenses provided by or granted
pursuant to the other subsections of this section shall not exclude any other
rights, including the right to be indemnified against liabilities and expenses
incurred in proceedings by or in the right of the corporation, to which a
corporate agent may be entitled under a certificate of incorporation, bylaw,
agreement, vote of shareholders, or otherwise; provided that no indemnification
shall be made to or on behalf of a corporate agent if a judgment or other final
adjudication adverse to the corporate agent establishes that his acts or
omissions (a) were in breach of his duty of loyalty to the corporation or its
shareholders, as defined in subsection (3) of N.J.S.14A:2-7, (b) were not in
good faith or involved a knowing violation of law or (c) resulted in receipt by
the corporate agent of an improper personal benefit.
(9) Any corporation organized for any purpose under any general or special
law of this State shall have the power to purchase and maintain insurance on
behalf of any corporate agent against any expenses incurred in any proceeding
and any liabilities asserted against him by reason of his being or having been a
corporate agent, whether or not the corporation would have the power to
indemnify him against such expenses and liabilities under the provisions of this
section. The corporation may purchase such insurance from, or such insurance may
be reinsured in whole or in part by, an insurer owned by or otherwise affiliated
with the corporation, whether or not such insurer does business with other
insureds.
(10) The powers granted by this section may be exercised by the
corporation, notwithstanding the absence of any provision in its certificate of
incorporation or bylaws authorizing the exercise of such powers.
(11) Except as required by subsection 14A:3-5(4), no indemnification shall
be made or expenses advanced by a corporation under this section, and none shall
be ordered by a court, if such action would be inconsistent with a provision of
the certificate of incorporation, a bylaw, a resolution of the board of
directors or of the shareholders, an agreement or other proper corporate action,
in effect at the time of the accrual of the alleged cause of action asserted in
the proceeding, which prohibits, limits or otherwise conditions the exercise of
indemnification powers by the corporation or the rights of indemnification to
which a corporate agent may be entitled.
(12) This section does not limit a corporation's power to pay or reimburse
expenses incurred by a corporate agent in connection with the corporate agent's
appearance as a witness in a proceeding at a time when the corporate agent has
not been made a party to the proceeding.
II-4
The Underwriting Agreement provides for indemnification by the Underwriters
of the Registrant and its officers and directors for certain liabilities,
including liabilities under the Securities Act.
ITEM 16. EXHIBITS
The following exhibits are filed with this Registration Statement:
II-5
II-6
- -------------------------
* To be filed by amendment.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a)or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether
II-7
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of a registration statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-8
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Township of Somerset, State of
New Jersey, on February 4, 1999.
EMCORE CORPORATION
By /s/ REUBEN F. RICHARDS, JR.
------------------------------------
Reuben F. Richards, Jr.
President and Chief Executive
Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints and
hereby authorizes Reuben F. Richards, Jr. and Thomas G. Werthan, severally, such
person's true and lawful attorneys-in-fact, with full power of substitution or
resubstitution, for such person and in his name, place and stead, in any and all
capacities, to sign on such person's behalf, individually and in each capacity
stated below, any and all amendments, including post-effective amendments to
this registration statement and to sign any and all additional registration
statements relating to the same offering of securities as this registration
statement that are filed pursuant to Rule 462(b) of the Securities Act, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Commission granting unto said attorneys-in-fact, full power
and authority to do and perform each and every act and thing requisite or
necessary to be done in and about the premises, as fully to all intents and
purposes as such person might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact, or their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement on Form S-3 has been signed by the following persons in the capacities
indicated, on February 4, 1999.
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