<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 27, 1998
REGISTRATION NO. 333-44843
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
EPITAXX, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 3674 22-2497461
(Primary Standard Industrial (I.R.S. Employer
(State or other Classification Code Number) Identification No.)
jurisdiction of
incorporation or
organization)
7 GRAPHICS DRIVE
WEST TRENTON, NEW JERSEY 08628
(609) 538-1800
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
NOBORU HIRAGURI
CHIEF EXECUTIVE OFFICER AND VICE CHAIRMAN
EPITAXX, INC.
7 GRAPHICS DRIVE
WEST TRENTON, NEW JERSEY 08628
(609) 538-1800
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
COPIES TO:
THOMAS J. KELLY, ESQ. JULIE M. ALLEN, ESQ.
MINTZ, LEVIN, COHN, FERRIS, O'SULLIVAN GRAEV AND KARABELL, LLP
GLOVSKY AND POPEO, P.C. 30 ROCKEFELLER PLAZA
ONE FINANCIAL CENTER NEW YORK, NY 10112
BOSTON, MA 02111 (212) 408-2400
(617) 542-6000
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, 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, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Dated February 27, 1998 2,150,000 SHARES
LOGO
CLASS A COMMON STOCK
------------
All of the shares of Class A Common Stock, $.01 par value per share (the
"Class A Common Stock"), offered hereby are being sold by EPITAXX, Inc.
("EPITAXX" or the "Company"). NSG Holding USA, Inc. ("NSG Holding"), a wholly
owned subsidiary of Nippon Sheet Glass Co., Ltd. ("NSG"), is the holder of all
of the 5,088,000 outstanding shares of the Company's Class B Common Stock, $.01
par value per share (the "Class B Common Stock" and, together with the Class A
Common Stock, the "Common Stock"). See "Relationship Between the Company and
NSG." Upon the completion of the offering, the Class B Common Stock will
represent 70.05% of the total outstanding Common Stock on an as-converted basis
and 87.53% of the total voting power of the outstanding Common Stock. The
Company anticipates using approximately $10.1 million of the net proceeds from
the offering to repay amounts owed to the stockholders of record on December
11, 1997, including NSG Holding, pursuant to a dividend declared by the Company
and approximately $3.7 million to repay the outstanding balance of a line of
credit with NSG. See "Use of Proceeds."
The rights, preferences and privileges of each class of Common Stock are
identical in all respects except for voting rights. Each share of Class A
Common Stock entitles its holder to one vote and each share of Class B Common
Stock entitles its holder to three votes for each share of Class A Common Stock
into which the Class B Common Stock is convertible. The Class B Common Stock is
convertible into Class A Common Stock on a share-for-share basis, subject to
adjustment for stock dividends, stock splits, subdivisions or combinations. See
"Description of Capital Stock."
Prior to the offering, there has been no public market for any class of the
Company's capital stock. The Company does not believe that there will ever be a
public market for the Class B Common Stock. It is currently anticipated that
the initial public offering price of the Class A Common Stock will be between
$9.00 and $11.00 per share. See "Underwriting" for a discussion of the factors
to be considered in determining the initial public offering price of the Class
A Common Stock. The Company has been approved to have the Class A Common Stock
quoted on the Nasdaq National Market under the symbol "EPXX."
------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON
PAGE 6 OF THIS PROSPECTUS.
------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share............................... $ $ $
Total(3)................................ $ $ $
</TABLE>
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- --------------------------------------------------------------------------------
(1) The Company and NSG have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company, estimated to be $700,263.
(3) The Company has granted to the Underwriters an option, exercisable within
30 days of the date hereof, to purchase an aggregate of up to 322,500
additional shares of Class A Common Stock at the Price to Public less
Underwriting Discounts and Commissions to cover over-allotments, if any. If
all such additional shares are purchased, the Price to Public, the
Underwriting Discounts and Commissions and the Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."
------------
The Class A Common Stock is offered by the several Underwriters named herein
when, as and if received and accepted by them, and subject to their right to
reject orders in whole or in part and certain other conditions. It is expected
that delivery of certificates for the shares will be made at the offices of
Cowen & Company, New York, New York on or about , 1998.
------------
COWEN & COMPANY
CIBC OPPENHEIMER
DAIWA SECURITIES AMERICA INC.
, 1998
<PAGE>
[Inside front cover contains graphics of the EPITAXX logo and three
photographs of representative products under the following categories of
products offered by the Company: (a) long-haul transmission; (b) cable
television, and test and measurement; and (c) digital access and high speed
computer networking. In addition, the following text appears above the images:
Optical detectors and receivers for fiber optics communications.]
----------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON
STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE
OFFERING, AND MAY BID FOR, AND PURCHASE, SHARES OF CLASS A COMMON STOCK IN THE
OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information, including the Consolidated
Financial Statements and Notes thereto, appearing elsewhere in this Prospectus.
The discussion in this Prospectus contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors discussed herein under the caption "Risk Factors" and
elsewhere in this Prospectus. Unless otherwise indicated, all information
presented in this Prospectus (i) gives effect to the amendment and restatement
of the Company's Restated Certificate of Incorporation filed on January 23,
1998, pursuant to which (a) the shares of capital stock held by NSG Holding
were converted into 5,088,000 shares of Class B Common Stock, (b) all of the
shares of capital stock that were not held by NSG Holding were converted into
an equal number of shares of Class A Common Stock and (c) an aggregate of
12,500,000 shares of Class A Common Stock was authorized (the
"Recapitalization") and (ii) assumes no exercise of the Underwriters' over-
allotment option.
THE COMPANY
The Company designs, manufactures and markets semiconductor optical detectors
and receivers for fiber optics communications. By virtue of its specialization
in optical detector and receiver products, the Company is able to serve many
different markets in the fiber optics communications industry. The Company's
products are integral to the development and implementation of fiber optics
systems for applications such as high capacity, long-haul terrestrial and
undersea transmission; digital local loop and access networks; multi-channel
cable television ("CATV") distribution; high-speed computer networking; and
test and measurement equipment.
EPITAXX believes that its expertise in Indium Gallium Arsenide ("InGaAs")
semiconductor material and optical detector device engineering, precision opto-
mechanical assembly processes and high-performance digital and analog receiver
circuits enables the Company to provide a broad range of high-performance
optical detector products that can be quickly and cost-effectively adapted to a
variety of customer needs and technologies. Further, because of its focus on
detectors, EPITAXX is able to respond quickly to evolving technologies and
increasingly complex applications.
The global communications industry has undergone significant transformation
and growth since the mid-1980s as a result of increased demand for
communications services and applications, as well as advances in technology and
changes in public policy. Communications service providers continue to increase
the capacity of their networks and build new networks to meet the demand for
high bandwidth applications, which in turn has significantly increased the use
of fiber optics equipment.
The Company is an independent supplier and counts among its customers many of
the leading fiber optics communications equipment manufacturers, including such
companies as CIENA Corporation, Finisar Corporation, Harmonic Lightwave, Inc.,
Hewlett-Packard Company, Inc., JDS FITEL, Inc., Lucent Technologies, Inc.,
Philips Broadband Networks, Inc., Philips N.V., Pirelli SpA and Siemens AG.
The Company was founded in 1984 and purchased in 1990 by NSG. NSG, which is
listed on the Tokyo Stock Exchange, is one of Japan's largest manufacturers of
flat glass products for the construction and automotive industries. NSG is also
one of the world's leading suppliers of specialty graded-index lenses and
associated products for the fiber optics industry. The Company's executive
offices are located at 7 Graphics Drive, West Trenton, New Jersey 08628 and its
telephone number is (609) 538-1800.
3
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Class A Common Stock offered by the Company....... 2,150,000 shares
Common Stock to be outstanding after the offering:
Class A Common Stock........................... 2,175,200 shares
Class B Common Stock........................... 5,088,000 shares
----------------
Total...................................... 7,263,200 shares(1)
Use of proceeds................................... For the repayment of
approximately $13.7 million
principal amount of
indebtedness, including
interest thereon, to
stockholders and general
corporate purposes,
including working capital.
See "Use of Proceeds."
Proposed Nasdaq National Market Symbol............ EPXX
</TABLE>
- --------
(1) Based on 5,113,200 shares of capital stock outstanding on December 31,
1997. Excludes 574,800 shares of Class A Common Stock reserved for issuance
under the Company's Amended and Restated 1996 Employee, Director and
Consultant Stock Option Plan (the "Stock Option Plan"), of which options to
purchase an aggregate of 171,072 shares were outstanding on December 31,
1997 at a weighted average exercise price of $3.92 per share, assuming an
exercise price of $10.00 per share for options to purchase 15,000 shares of
Class A Common Stock which become exercisable upon consummation of the
offering at the initial public offering price. See "Management--Benefit
Plans--Amended and Restated 1996 Employee, Director and Consultant Stock
Option Plan."
RELATIONSHIP WITH NSG
In December 1997, the Company declared a $10,049,528 cash dividend to the
stockholders of record on December 11, 1997, of which $10.0 million is payable
to NSG Holding. The purpose of the dividend was to implement general financial
planning policies within the NSG global organization, which contemplate
distribution of assets of international affiliates to the ultimate parent where
appropriate and consistent with the financial needs and objectives of such
affiliates. The dividend is evidenced by promissory notes dated February 9,
1998, bearing interest at a rate of 6.02% per annum, payable semi-annually (the
"Dividend Notes"). The principal amount of the Dividend Notes is payable on the
earlier of (i) the date the Company's total stockholders' equity first equals
or exceeds $15.0 million and (ii) February 9, 2001, provided that on such date
the Company's total stockholders' equity equals or exceeds $15 million. The
sale of Class A Common Stock offered hereby will cause the Company's total
stockholders' equity to exceed $15.0 million. As a result, the Company will use
approximately $10.1 million of the net proceeds from the offering to repay the
principal amount of the Dividend Notes plus interest thereon. See "Use of
Proceeds."
Prior to the offering, NSG Holding owned 99.51% of the outstanding shares of
the Company's capital stock. Upon the completion of the offering, NSG Holding
will own no shares of Class A Common Stock and all of the 5,088,000 outstanding
shares of Class B Common Stock. Holders of Class A Common Stock are entitled to
one vote per share and holders of Class B Common Stock are entitled to three
votes for each share of Class A Common Stock into which the Class B Common
Stock is convertible. The Class B Common Stock is convertible into Class A
Common Stock on a share-for-share basis, subject to adjustments for stock
dividends, stock splits, subdivisions or combinations. See "Description of
Capital Stock." The Class B Common Stock will represent 70.05% of the total
outstanding Common Stock on an as-converted basis and 87.53% of the total
voting power of the outstanding Common Stock upon completion of the offering
(85.94% if the Underwriters' over-allotment is exercised in full). Accordingly,
NSG Holding will be able to control the vote on all matters submitted to
stockholders, including the election of directors and the approval of
extraordinary corporate transactions. The Company and NSG or NSG Holding have
entered into a number of agreements for the purpose of defining their ongoing
relationship. While NSG will continue to provide the Company with certain
services pursuant to these agreements, the Company is only entitled to the
ongoing assistance of NSG for a limited time and it may not receive such
services beyond the terms of the agreements. See "Risk Factors--Control by and
Relationship with NSG" and "Relationship Between the Company and NSG."
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
----------------------- -----------------------
1995 1996 1997 1996(1) 1997
------- ------- ------- ------- --------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OP-
ERATIONS DATA:
Total revenue................. $15,622 $19,762 $21,209 $15,487 $18,348
Gross profit................. 5,674 8,886 7,231 5,246 7,628
Income from operations ....... 1,456 3,249 1,503 1,002 2,676
Net income.................... $ 1,469 $ 1,855 $ 638 $ 392 $ 1,554
======= ======= ======= ======= =======
Net income per share(2)
Basic....................... $ 0.29 $ 0.36 $ 0.12 $ 0.08 $ 0.30
Diluted..................... $ 0.29 $ 0.36 $ 0.12 $ 0.08 $ 0.30
Shares used in per share cal-
culation(2)
Basic....................... 5,113 5,113 5,113 5,113 5,113
Diluted..................... 5,113 5,113 5,135 5,113 5,228
Pro forma net income per
share(3)
Basic....................... $ 0.10 $ 0.25
Diluted..................... $ 0.10 $ 0.25
Shares used in pro forma net
income per share
calculation(3)
Basic....................... 6,118 6,118
Diluted..................... 6,140 6,233
OTHER FINANCIAL DATA:
Capital expenditures.......... $ 908 $ 2,061 $ 2,418 $ 1,719 $ 1,479
<CAPTION>
MARCH 31, DECEMBER 31, 1997
----------------------- -----------------------
1995 1996 1997 ACTUAL AS ADJUSTED(4)
------- ------- ------- ------- --------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DA-
TA:
Cash.......................... $ 59 $ 91 $ 109 $ 940 $ 7,235
Working capital (deficit)..... 2,189 2,852 1,395 (7,694) 11,801
Total assets.................. 12,613 16,771 16,977 18,286 24,381
Short-term borrowings from
affiliate under line of
credit ...................... 2,050 2,700 3,400 3,150 --
Promissory notes to be issued
for dividend declared........ -- -- -- 10,050 --
Long-term obligations, net of
current portion.............. 5,000 5,000 5,133 5,052 5,052
Stockholders' equity (defi-
cit)......................... $ 3,613 $ 4,967 $ 4,730 $(3,766) $15,529
</TABLE>
- --------
(1) The Company's third quarter for the 1997 fiscal year ended on December 28,
1996 (unaudited).
(2) See Note 3 to the Consolidated Financial Statements for an explanation of
the determination of shares used to compute net income per share.
(3) Pro forma basic and diluted net income per share was calculated in a manner
consistent with basic and diluted net income per share except that the
weighted average number of shares was adjusted to include the number of
shares that would be required to be sold to fund the $10,050 dividend to
NSG Holding and other shareholders (using an estimated initial public
offering price of $10.00 per share).
(4) Adjusted to give effect to the sale of 2,150 shares of Class A Common Stock
offered by the Company, assuming an initial public offering price of $10.00
per share and after deducting underwriting discounts and commissions and
estimated offering expenses payable by the Company (excluding $200 of
offering expenses previously paid by the Company) and the initial
application of the net proceeds thereof to repay the Dividend Notes and
short-term borrowings from NSG Holding of $3,150.
5
<PAGE>
RISK FACTORS
In addition to other information contained in this Prospectus, prospective
investors should carefully consider the following factors in evaluating the
Company and its business before purchasing shares of Class A Common Stock
offered hereby.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's operating results have fluctuated significantly in the past
and may fluctuate in the future on a quarterly and annual basis as a result of
a number of factors, many of which are beyond the Company's control. Sales for
a given quarter may depend to a significant degree upon product shipments to a
limited number of customers. Sales to individual large customers are often
related to the customer's specific equipment deployment projects, the timing
of which is subject to change on limited notice. The Company has experienced
both acceleration and slowdown in orders related to such projects, causing
changes in the sales level of a given quarter relative to both the preceding
and subsequent quarters. Since most of the Company's sales are in the form of
large orders with short delivery times to a limited number of customers, the
Company's ability to predict revenues is difficult. In addition, announcements
by the Company or its competitors of new products and technologies could cause
customers to defer purchases of the Company's existing products. In the event
that anticipated orders from major customers fail to materialize, or delivery
schedules are deferred or canceled, the Company's business, financial
condition and operating results could be materially adversely affected. As a
result, the Company believes that period-to-period comparisons of its
operating results are not meaningful and should not be relied upon as
indicative of future performance.
The Company's gross margin is affected by a number of factors, including
product mix, product pricing, cost of materials and manufacturing costs. For
example, a price reduction of a particular product in response to competitive
pressure which is not offset by a reduction in production costs or by sales of
other products with higher gross margins would decrease the Company's overall
gross margin and could have a material adverse effect on the Company's
business, financial condition and operating results. The Company's anticipated
increase in overall spending in future periods in order to pursue new market
opportunities may also affect operating margins. The Company establishes
product development costs and other operating expenses based on projected
sales levels and margins because expenses are relatively fixed in the short
term. Accordingly, if sales are below expectations in any given short-term
period, the Company may be unable to adjust spending during such period to
compensate for the revenue shortfall.
Operating results in any period could also be affected by changes in market
demand, competitive market conditions, market acceptance of new or existing
products, the cost and availability of components, the composition of the
Company's customer base and sales channels, the mix of products sold,
marketing activities, the Company's ability to attract and retain key
technical and managerial employees and general economic conditions. In the
event that the Company's financial performance fails to meet the expectations
of public market analysts and investors, the price of the Class A Common Stock
could be materially adversely affected. See""--Dependence on Availability of
Materials and Key Suppliers" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
VOLATILITY OF MARKETS SERVED
Certain markets served by the Company are affected by capital expenditure
cycles. These cycles can precipitate pricing pressures on and decreased demand
for the Company's products. The Company's current optical detector and
receiver products serve applications in the following markets: high capacity,
long-haul terrestrial and undersea transmission; digital local loop and access
networks; multi-channel CATV distribution; high-speed computer networking; and
test and measurement equipment. In many cases, the Company's products are used
by customers who have not yet completed development of their own products. In
addition, the Company and certain of its customers are currently in the
process of developing new products which are in various stages of development,
testing and qualification, and are sometimes in emerging applications or new
markets. No assurances can be given that the Company or its customers will
continue their existing product development
6
<PAGE>
efforts, or, if continued, that such efforts will be successful, that markets
will continue to develop for any of the Company's new products, that the
Company's technology or pricing will enable such markets to develop or that
the Company's products will not be superseded by other technology or products.
See "Business--Research and Product Development."
CONTROL BY AND RELATIONSHIP WITH NSG
The Company's capital stock consists of Class A Common Stock and Class B
Common Stock. Holders of Class A Common Stock are entitled to one vote per
share and holders of Class B Common Stock are entitled to three votes for each
share of Class A Common Stock into which Class B Common Stock is convertible.
The Class B Common Stock is convertible into Class A Common Stock on a share-
for-share basis, subject to adjustment for stock dividends, stock splits,
subdivisions or combinations. Upon the completion of the offering, NSG Holding
will own no shares of Class A Common Stock and all of the 5,088,000
outstanding shares of Class B Common Stock. The Class B Common Stock will
represent 70.05% of the total outstanding Common Stock on an as-converted
basis and 87.53% (85.94% if the Underwriters' over-allotment option is
exercised in full) of the total voting power of the outstanding Common Stock
upon completion of the offering. Such control may have the effect of limiting
the manner in which the Company conducts its business, discouraging certain
types of transactions involving an actual or potential change of control of
the Company, including transactions in which the holders of Class A Common
Stock might otherwise receive a premium for their shares over the then-current
market price, or generally restricting the price that investors might be
willing to pay for shares of Class A Common Stock.
Historically, the Company has derived certain benefits from being a
subsidiary of NSG. The relationship between the Company and NSG is defined
pursuant to several agreements. Because of the nature of the various
agreements between the Company and NSG and NSG Holding's ownership of Class B
Common Stock, there can be no assurance that such agreements, or the
transactions provided for therein, will be effected on terms at least as
favorable to the Company as could have been obtained from unaffiliated third
parties. While these agreements will continue to provide the Company with
certain benefits, the Company is only entitled to the ongoing assistance of
NSG for the term of the agreements and it may not enjoy benefits from its
relationship with NSG after the term of the agreements, including benefits
derived from NSG's reputation and credit support in the form of a line of
credit. Several of these agreements initially terminate on March 31, 2000, and
automatically renew for successive three-year periods unless either party
gives written termination notice to the other party at least 30 days prior to
the expiration of the then-current term. The remaining agreements will be
terminated on a specific date or upon written notice terminating such
agreement. There can be no assurance that the Company, upon termination of
such assistance from NSG, will be able to develop such services internally or
obtain arrangements from third parties to replace such services on favorable
terms, if at all, however, the Company does not believe that the loss of
credit support from NSG Holding would have a material adverse effect on the
Company's business, financial condition and operating results. See
"Relationship Between the Company and NSG."
The offering will provide substantial benefits to NSG Holding. The Company
will use approximately $3.7 million of the net proceeds from the offering to
repay indebtedness to NSG Holding. After the consummation of the offering, NSG
Holding will also benefit from the creation of a public market for the Class A
Common Stock into which its Class B Common Stock is convertible. Upon the
consummation of the offering, the shares of Class A Common Stock into which
the Class B Common Stock then held by NSG Holding would be convertible, will
have an aggregate market value of approximately $50.9 million (assuming an
initial public offering price of $10.00 per share).
Given that NSG is a Japanese corporation with the majority of its assets and
operations located outside of the United States, investors may not be able to
enforce United States judgments against NSG, including judgments predicated
upon the civil liability provisions of United States federal and state
securities laws. In addition, certain directors and officers of NSG and
certain of the directors of the Company are residents of Japan, and all or
substantially all of the assets of such persons are or may be located outside
the United States. As a result, investors may not be able to effect service of
process within the United States upon such persons, or to
7
<PAGE>
enforce against them judgments obtained in United States courts, including
judgments predicated upon the civil liability provisions of United States
federal and state securities laws. See "Description of Capital Stock" and
"Relationship Between the Company and NSG."
DEPENDENCE ON AVAILABILITY OF MATERIALS AND KEY SUPPLIERS
On-time delivery of the Company's products depends upon the availability of
materials used in its products. The Company depends upon its suppliers to
produce materials in a timely and satisfactory manner. Certain materials
necessary for the manufacture of the Company's products are obtained from a
sole supplier or a small group of suppliers. In particular, the Company
presently obtains a key material, the epitaxial wafers of InGaAs used to
manufacture the Company's products, from one primary vendor. Although the
Company has identified and qualified several alternative sources for the
epitaxial wafers, as well as other materials currently obtained from single
sources, should the Company need to turn to alternative sources of materials,
there is no assurance that such materials could be made available at
competitive prices, at acceptable reliability standards or in a timely fashion
to respond to customer needs. Further, an inability by present or alternative
suppliers to meet the Company's demand, a prolonged interruption in supply or
a significant price increase of one or more materials could have a material
adverse effect on the Company's business, financial condition and operating
results. The Company generally does not have any long-term contracts with
suppliers. While the quality, yield and timeliness of supply deliveries to
date have been acceptable, there can be no assurance that these suppliers will
continue to be able and willing to meet the Company's requirements or that
problems will not occur in the future. Any significant interruption in the
supply or degradation in the quality of any raw materials could have a
material adverse effect on the Company's business, financial condition and
operating results. Purchase orders from the Company's customers frequently
require delivery shortly after placement of the order. The Company maintains a
supply of finished goods inventories at its manufacturing facility, as well as
safety stocks of critical materials, in order to respond quickly to customer
needs. However, there can be no assurance that interrupted or delayed supplies
of key materials will not occur. Such interruption or delay could have a
material adverse effect on the Company's business, financial condition and
operating results. See "--Fluctuations in Quarterly Operating Results,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Manufacturing and Facilities."
COMPETITION
The markets in which the Company sells optical detectors and receivers are
highly competitive, rapidly changing and significantly affected by new product
introductions and other market activities of industry participants. Some of
the Company's customers are both primary customers for certain of the
Company's products and competitors in the optical detector market. The
Company's business, financial condition and operating results could be
materially adversely affected if these customer relationships were to decline
or otherwise change in any manner which is detrimental to the Company. In
addition, the Company's ability to continue to develop, market and sell new
products or enhancements of existing products may require significant
additional research and development expenditures. Many of the Company's
current and potential competitors have larger research and development
departments, larger sales organizations and substantially greater financial
resources than does the Company. These competitors include Fujitsu Ltd.,
Lucent Technologies, Inc., Mitsubishi Electric Corp. and Siemens AG. Other
companies, not always addressing the same markets as EPITAXX, have competitive
offerings in some of the Company's product areas. Companies in this category
include Hamamatsu Photonics KK, Mitel Corporation and Ortel Corporation. There
can be no assurance that competitors will not develop products that are
superior to the Company's products or that achieve greater market acceptance.
The introduction by competitors of new products, or the reduction in price of
competitive products, could have a material adverse effect on the Company's
business, financial condition and operating results. See "Business--
Competition."
EVOLVING MARKETS AND RAPID TECHNOLOGICAL CHANGE; NEW PRODUCTS
The Company expects that new technologies will emerge as competition in the
fiber optics communications industry increases and the need for higher and
more cost efficient bandwidth expands. The Company's ability to
8
<PAGE>
anticipate changes in technology, industry standards, customer requirements
and product offerings, as well as its proficiency at developing new and
advanced products, will be significant factors in maintaining its competitive
advantage as a leading independent supplier to the fiber optics communications
industry. To remain competitive, the Company must timely select, develop and
market new products and enhancements on a cost-effective basis. There can be
no assurance that the Company will be successful in selecting, developing and
marketing such new products and enhancements.
The fiber optics communications markets are characterized by continuing
technological advancement. This constant development of technology increases
the risk that current or new competitors could develop products that would
reduce the competitiveness of the Company's products. To compete successfully,
the Company must design, develop, manufacture and sell new products that
provide increasingly higher levels of performance and reliability. The
Company's success in designing, developing, manufacturing and selling such new
products will depend on a variety of factors, including, without limitation,
the identification of market demand for new products, product selection, the
timely implementation of product design and development, product performance,
effective manufacturing processes and sales and marketing. There can be no
assurance that the technologies and applications under development by the
Company will be successfully developed, that the Company will successfully
develop new products or that new products developed by the Company will
achieve market acceptance. The Company is currently devoting substantial
resources toward the development of an avalanche photodetector ("APD") which
is designed to provide sensitivity at higher data transmission speeds and
greater bandwidth. The Company expects that the APD will be commercially
introduced in the fourth quarter of fiscal 1998; however, there can be no
assurance that it will be commercially introduced at such time or achieve
commercial acceptance. See "Business--Technology," "--Products" and "--
Research and Product Development."
DEVELOPMENT OF COMPETING TECHNOLOGIES
The markets for the Company's products continue to develop and change,
making it difficult to accurately predict each market's future growth rate,
size and technological direction. In view of the evolving nature of the
various markets utilizing fiber optics technology, there can be no assurance
that providers of telecommunications services will not decide to adopt
alternative architectures or technologies that are incompatible with the
Company's products. Such alternative architectures or technologies would have
a material adverse effect on the Company's business, financial condition and
operating results.
In the video market, direct broadcast satellite and wireless cable delivery
systems compete with CATV operators utilizing fiber optics systems. In
telephone networks, asymmetrical digital subscriber line technology enables
digitally compressed video signals to be transmitted through existing
telephone lines to the home, thereby increasing capacity without the need for
installation of new fiber optics transmission systems. In the event that any
competing architecture or technology were to limit or supplant fiber optics
technology, the Company's business, financial condition and operating results
would be materially adversely affected. See "Business--Technology."
DEPENDENCE ON KEY PERSONNEL
The Company's future success is highly dependent on the continued services
of its executive officers and key management, sales and technical personnel,
and its ability to attract and retain additional key employees. Competition
for such personnel in the fiber optics communications industry is intense, and
there can be no assurance that the Company will be successful in attracting
and retaining such personnel. While the Company does not believe it is
dependent on any one individual, the loss of the services of one or more of
the Company's executive officers or key personnel, including Noboru Hiraguri,
Vice Chairman and Chief Executive Officer, Yves Dzialowski, President and
Chief Operating Officer, and James Coleman, Vice President and Chief Financial
Officer, could have a material adverse effect on the Company's business,
financial condition and operating results. The Company does not maintain key-
man life insurance for any of its employees. All executive employees have
executed noncompetition agreements and all employees are required to sign
nondisclosure
9
<PAGE>
agreements. Such agreements do not, however, ensure the continued services of
such employees. See "Business--Employees" and "Management."
MANAGEMENT OF EXPANDING OPERATIONS
The growth in the Company's business has placed a significant strain on the
Company's personnel, management and other resources, and is expected to
continue to do so. In order to manage any future expansion effectively, the
Company must successfully attract, train, motivate, manage and retain new
employees, integrate such employees into its overall operations and continue
to improve its operational, financial and management systems. Availability of
qualified sales and technical personnel is limited. Moreover, the Company
expects to increase significantly the size of its domestic and international
sales support staff and expand the scope of its sales and marketing
activities. The Company's failure to manage any expansion effectively could
have a material adverse effect on the Company's business, financial condition
and operating results. See "--Dependence on Key Personnel" and "Business--The
EPITAXX Strategy."
MANUFACTURING RISKS
The Company relies exclusively on its own production capability in wafer
processing, chip fabrication, device packaging, final assembly and testing of
products. Because the Company manufactures, packages and tests these
components at its own facility, and because the Company only has a single
facility, any interruption in manufacturing resulting from fire, natural
disaster, equipment failures or otherwise could have a material adverse effect
on the Company's business, financial condition and operating results. Although
the Company maintains business interruption insurance, such insurance would be
insufficient to guarantee the Company's continued profitability. See
"Business--Manufacturing and Facilities."
LIMITED PROTECTION OF INTELLECTUAL PROPERTY; PROPRIETARY INFORMATION
The Company relies upon a combination of trade secrets, contractual
restrictions, copyrights, trademark laws and patents to establish and protect
proprietary rights in its products and technologies. Although the Company has
been issued one U.S. patent to date, much of the Company's proprietary
information and technology is not patented and may not be patentable. The
Company believes that the success of its business depends primarily on its
proprietary technology, information and processes and know-how, rather than
patents. There can be no assurance that the Company will be able to
independently protect its technology or that competitors will not be able to
develop similar technology. The Company has entered into confidentiality and
invention assignment agreements with all of its employees, and enters into
non-disclosure agreements with its suppliers, distributors and appropriate
customers so as to limit access to and disclosure of its proprietary
information. There can be no assurance that these statutory and contractual
arrangements will deter misappropriation of the Company's technologies or
discourage independent third-party development of similar technologies. In the
event such arrangements are insufficient, the Company's business, financial
condition and operating results could be materially adversely affected. See
"Business--Proprietary Rights."
RISK OF THIRD-PARTY CLAIMS OF INFRINGEMENT
The fiber optics communications industry is characterized by the existence
of a large number of patents and frequent litigation based on allegations of
patent infringement. From time to time, third parties may assert exclusive
patent, copyright, trademark and other intellectual property rights to
technologies that are important to the Company. In addition, since patent
applications in the U.S. are not publicly disclosed until the patent is
issued, applications may have been filed by competitors of the Company that
could relate to the Company's products. Although no claim has ever been
asserted against the Company with respect to infringement, the Company may
receive communications from third parties in the future asserting that the
Company's products infringe or may infringe on the proprietary rights of such
third parties. In its distribution agreements, the Company typically agrees to
indemnify its customers for any expenses or liabilities resulting from claimed
infringements of patents, trademarks or copyrights of third parties. In the
event of litigation to determine the
10
<PAGE>
validity of any third-party claims, such litigation, whether or not determined
in favor of the Company, could result in significant expense to the Company
and divert the efforts of the Company's technical and management personnel. In
the event of an adverse ruling in such litigation, the Company might be
required to discontinue the use and sale of infringing products, expend
significant resources to develop non-infringing technology or obtain licenses
from third parties. There can be no assurance that licenses from third parties
would be available on acceptable terms, if at all. A successful claim against
the Company and the failure of the Company to develop or license a substitute
technology could have a material adverse effect on the Company's business,
financial condition and operating results. See "Business--Proprietary Rights."
ENVIRONMENTAL REGULATION
The Company is subject to a variety of local, state and federal government
regulations relating to air and water emissions from its manufacturing
facility and to the storage, discharge, handling, emission, generation,
manufacture and disposal of toxic or other hazardous substances used to
manufacture the Company's products. Although the Company believes that it is
in compliance with current environmental regulations, the failure to comply
with current or future regulations could result in substantial fines or
liabilities being imposed on the Company, suspension of production, alteration
of its manufacturing process or cessation of operations. Such regulations
could require the Company to acquire expensive remediation or abatement
equipment or to incur substantial expenses to comply with environmental
regulations. Any failure by the Company to control the use, disposal or
storage of, or adequately restrict the discharge of, hazardous or toxic
substances could subject the Company to significant liabilities or
obligations.
RISKS ASSOCIATED WITH SALES TO INTERNATIONAL MARKETS
Although the Company has been selling internationally since its inception
and has had substantial experience and success with its products in the
international marketplace, the conduct of business outside the United States
is subject to certain risks, including unexpected changes in regulatory
requirements and tariffs, difficulties in staffing and managing foreign
operations, longer payment cycles, greater difficulty in accounts receivable
collection, currency fluctuations, expropriation and potentially adverse tax
consequences. During the nine months ended December 31, 1997, approximately
49% of the Company's revenues were generated from international sales.
Although less than 5% of the Company's revenue is derived from direct sales to
Asia (excluding Japan), certain of the Company's customers may sell products
into Asian markets. Recent adverse economic developments in Asia could affect
sales by certain of the Company's customers into this region, which may, in
turn, have a material adverse effect on the Company's business, financial
condition and operating results. In addition, in order to sell its products
internationally, the Company must meet standards established by
telecommunications authorities in various countries, as well as
recommendations of the International Telecommunications Union. A delay in
obtaining, or the failure to obtain, certification of its products in
countries outside the United States could frustrate or impede the Company's
efforts to increase its market share in such countries, which could have a
material adverse effect on the Company's business, financial condition and
operating results. See "Business--The EPITAXX Strategy" and "--Marketing and
Sales."
NO PRIOR MARKET; STOCK PRICE VOLATILITY
Prior to the offering, there has been no public market for the Company's
capital stock. The initial public offering price will be determined by
negotiations between the Company and the representatives of the Underwriters.
There can be no assurance that an active public market for the Class A Common
Stock will develop or be sustained after the offering or that the market price
of the Class A Common Stock will not decline below the initial public offering
price. The trading price of the Class A Common Stock could be subject to wide
fluctuations in response to quarter-to-quarter variations in operating
results, announcements of technological innovations or new products by the
Company or its competitors, developments with respect to patents or
proprietary rights, general conditions in the data and telecommunications
industries, changes in earnings estimates by analysts or other events or
factors. In addition, the stock market has experienced extreme price and
volume fluctuations that have particularly affected the market prices of many
technology companies and have
11
<PAGE>
often been unrelated to the operating performances of such companies. The
Company's revenues or operating results in future quarters may be below the
expectations of public market securities analysts and investors. In such
event, the price of the Class A Common Stock would likely decline, perhaps
substantially. These Company-specific factors or broad market fluctuations may
materially adversely affect the market price of the Class A Common Stock. See
"--Fluctuations in Quarterly Operating Results" and "Underwriting."
CERTAIN ANTI-TAKEOVER EFFECTS
The Company's Board of Directors is divided into three classes, each of
which is elected to serve staggered three-year terms. The Board of Directors
is authorized, without further action by the stockholders, to provide for the
issuance of preferred stock in one or more series (the "Preferred Stock") and
to fix the designations, preferences, powers and relative, participating,
optional or other rights and restrictions thereof. Accordingly, the Company
may issue a series of Preferred Stock in the future that has preferences over
the Class A Common Stock with respect to the payment of dividends and upon
liquidation, dissolution or winding up of the Company, or which could
otherwise adversely affect holders of Class A Common Stock, or which could
discourage or make difficult any attempt to obtain control of the Company. In
addition, voting control by NSG Holding may discourage certain types of
transactions involving an actual or potential change of control of the
Company. See "--Control By and Relationship with NSG," "Relationship Between
the Company and NSG," "Description of Capital Stock--Preferred Stock" and "--
Anti-Takeover Effects of Restated Certificate of Incorporation and Amended and
Restated Bylaws."
MANAGEMENT'S DISCRETION AS TO USE OF UNALLOCATED NET PROCEEDS
The Company has designated only limited specific uses for the net proceeds
from the offering. After repayment of indebtedness, an aggregate of
approximately $5.8 million of net proceeds will be available for general
corporate purposes, including working capital and capital expenditures.
Consequently, the Board of Directors and management of the Company will have
broad discretion in the use of a significant portion of the net proceeds from
the offering. See "Use of Proceeds."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Class A Common Stock (including shares
issuable upon conversion of outstanding Class B Common Stock) in the public
market after the offering may materially adversely affect prevailing market
prices for the Class A Common Stock and could impair the Company's ability to
raise capital in the future through the sale of its equity securities. Upon
the consummation of the offering, the Company will have 2,175,200 shares of
Class A Common Stock and 5,088,000 shares of Class B Common Stock outstanding.
Of these shares of Common Stock, 2,150,000 shares of Class A Common Stock
offered hereby will be freely tradable without restriction under the
Securities Act of 1933, as amended (the "Securities Act"). The remaining
25,200 shares of Class A Common Stock and all of the shares of Class B Common
Stock will be "restricted securities" within the meaning of the Securities Act
(the "Restricted Shares") and will be eligible for sale in the public market
beginning 180 days after the date of this Prospectus, pursuant to Rule 144
promulgated under the Securities Act ("Rule 144") and the expiration of
certain lock-up agreements entered into between the Underwriters and the
holders of such Restricted Shares. In addition, the Company intends to file a
Registration Statement on Form S-8 under the Securities Act ("Form S-8") after
the effective date of the offering to register 574,800 shares of Class A
Common Stock issuable upon the exercise of stock options granted under the
Stock Option Plan. Such shares of Class A Common Stock issued pursuant to the
Stock Option Plan, after the effective date of the Form S-8, will be available
for sale in the public market, subject to expiration of certain lock-up
agreements with the Underwriters.
DILUTION TO PURCHASERS IN OFFERING
Purchasers of Class A Common Stock will experience immediate and substantial
dilution in net tangible book value per share of the Class A Common Stock from
the initial public offering price per share. After giving
12
<PAGE>
effect to the sale by the Company of 2,150,000 shares of Class A Common Stock
offered hereby, assuming an initial public offering price of $10.00 per share
and after deducting the underwriting discounts and commissions and estimated
offering expenses payable by the Company, the Company's pro forma net tangible
book value at December 31, 1997 would have been $15.4 million, or $2.11 per
share of Common Stock. This represents an immediate dilution in net tangible
book value of $7.89 per share to new investors purchasing shares in the
offering. See "Dilution."
USE OF PROCEEDS
The net proceeds from the sale of the Class A Common Stock offered hereby,
assuming an initial public offering price of $10.00 per share and after
deducting underwriting discounts and commissions and estimated offering
expenses payable by the Company (excluding $200,000 of offering expenses
previously paid by the Company), are approximately $19.5 million
(approximately $22.5 million if the Underwriters' over-allotment option is
exercised in full).
The Company will use approximately $13.7 million of such proceeds (i) to
repay indebtedness and interest thereon owed on the Dividend Notes, which bear
interest at 6.02% per annum, issued in February 1998 in connection with a cash
dividend the Company declared to the stockholders of record on December 11,
1997 and (ii) to pay down the full balance on the Company's line of credit
from NSG, including an additional $500,000 drawn under the line of credit
since December 31, 1997. See "Relationship Between the Company and NSG--
Agreement for Line of Credit." The balance of the net proceeds will be used
for general corporate purposes, including working capital and capital
expenditures. Pending such uses, the Company intends to invest the proceeds in
short-term, investment-grade, interest-bearing securities. See "Risk Factors--
Management's Discretion as to Use of Unallocated Net Proceeds" and
"Relationship Between the Company and NSG."
DIVIDEND POLICY
The Company previously declared a $10,049,528 cash dividend to the
stockholders of record on December 11, 1997, of which $10.0 million is payable
to NSG Holding. The Company also declared and paid dividends of $927,000 and
$500,000 to NSG Holding with respect to the fiscal years 1997 and 1996,
respectively. In order to retain earnings to finance future growth, the
Company does not intend to pay any further cash dividends in the foreseeable
future. The declaration and payment of dividends, if any, will be subject to
the discretion of the Company's Board of Directors and will depend on the
Company's earnings, capital requirements, financial condition, statutory
restrictions and other factors deemed to be relevant by the Board of
Directors.
13
<PAGE>
CAPITALIZATION
The following table sets forth certain short-term obligations and
capitalization of the Company as of December 31, 1997 (i) on an actual basis
after giving effect to the Recapitalization and (ii) as adjusted to reflect
the issuance and sale by the Company of 2,150,000 shares of Class A Common
Stock offered hereby, assuming an initial public offering price of $10.00 per
share and after deducting underwriting discounts and commissions and estimated
expenses payable by the Company, and the initial application of the estimated
net proceeds thereof to repay the Dividend Notes and short-term borrowings
from NSG Holding of $3,150,000. The following table should be read in
conjunction with "Use of Proceeds," "Selected Consolidated Financial Data" and
the Consolidated Financial Statements and Notes thereto appearing elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term borrowings from affiliate under line of cred-
it(1).................................................... $ 3,150 $
Promissory notes to be issued for dividend declared....... 10,050 --
------- -------
$13,200 --
======= =======
Long-term obligations, net of current portion(2).......... 5,052 5,052
------- -------
Stockholders' equity (deficit):
Preferred Stock, $0.01 par value; 5,000,000 shares
authorized; no shares issued and outstanding........... $ -- $ --
Class A Common Stock, $0.01 par value; 12,500,000 shares
authorized;
25,200 shares issued and outstanding, actual; and
2,175,200 shares issued and outstanding, as
adjusted(3)............................................ -- 22
Class B Common Stock, convertible, $0.01 par value;
7,500,000 shares authorized;
5,088,000 shares issued and outstanding, actual; and
5,088,000 shares issued and outstanding, as adjusted... 51 51
Additional paid-in capital.............................. 12,185 31,458
Accumulated deficit..................................... (16,002) (16,002)
------- -------
Total stockholders' equity (deficit).................. (3,766) 15,529
------- -------
Total capitalization................................ $ 1,286 $20,581
======= =======
</TABLE>
- --------
(1) Does not include an additional $500,000 drawn on the line of credit since
December 31, 1997 which will be repaid with the net proceeds from the
offering.
(2) See Notes 6 and 11 to the Consolidated Financial Statements.
(3) Excludes 574,800 shares of Class A Common Stock reserved for issuance
under the Stock Option Plan, of which options to purchase an aggregate of
171,072 shares were outstanding on December 31, 1997 at a weighted average
exercise price of $3.92, assuming an exercise price of $10.00 per share
for 15,000 shares of Class A Common Stock which become exercisable upon
consummation of the offering at the initial public offering price. See
"Management--Benefit Plans--Amended and Restated 1996 Employee, Director
and Consultant Stock Option Plan."
14
<PAGE>
DILUTION
As of December 31, 1997, the net tangible book value (deficit) of the
Company was $(4.1) million, and the net tangible book value per share of
Common Stock was $(0.81), after giving effect to the Recapitalization. Net
tangible book value per share represents the amount of total tangible assets
less total liabilities of the Company, divided by the number of shares of
Common Stock outstanding. After giving effect to the sale by the Company of
2,150,000 shares of Class A Common Stock in the offering, assuming an initial
public offering price of $10.00 per share and after deducting underwriting
discounts and commissions and estimated offering expenses payable by the
Company, the pro forma net tangible book value of the Company as of December
31, 1997 would have been $15.4 million or $2.11 per share of Common Stock.
This represents an immediate dilution in net tangible book value of $7.89 per
share to new investors purchasing shares in the offering. The following table
illustrates such per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............. $10.00
Net tangible book value per share before the offering...... $(0.81)
Increase per share attributable to new investors........... 2.92
Pro forma net tangible book value per share after the offer-
ing......................................................... 2.11
------
Dilution per share to new investors.......................... $ 7.89
======
</TABLE>
The following table sets forth, as of December 31, 1997, the number of
shares of Common Stock purchased from the Company, the total consideration
paid and the average price per share paid by existing stockholders and by new
investors purchasing shares of Class A Common Stock offered by the Company
hereby, assuming an initial public offering price of $10.00 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------- ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 5,113,200 70.4% $12,184,735 36.2% $ 2.38
New investors........... 2,150,000 29.6 21,500,000 63.8 $10.00
--------- ----- ----------- -----
Total................. 7,263,200 100.0% $33,684,735 100.0%
========= ===== =========== =====
</TABLE>
The foregoing tables assume no exercise of any outstanding stock options to
purchase Common Stock. As of December 31, 1997, there were outstanding options
to purchase 171,072 shares of Class A Common Stock at a weighted average
exercise price of $3.92 per share, assuming an exercise price of $10.00 per
share for options to purchase 15,000 shares of Class A Common Stock which
become exercisable upon consummation of the offering at the initial public
offering price. If all outstanding options as of December 31, 1997 were
included above, the pro forma net tangible book value per share at December
31, 1997, after giving effect to the offering, would have been $2.16 and the
dilution per share to new investors would have been $7.84. See
"Capitalization," "Management--Benefit Plans--Amended and Restated 1996
Employee, Director and Consultant Stock Option Plan" and "Description of
Capital Stock."
(1) The $12,184,735 figure represents the price paid by NSG for 100% ownership
of the Company upon its acquisition in 1990 and the amount paid by
existing stockholders other than NSG. See "Relationship Between the
Company and NSG."
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with, and are qualified by reference to, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements and Notes thereto appearing elsewhere in
this Prospectus. The selected consolidated financial data set forth below as
of March 31, 1996 and 1997 and as of December 31, 1997 and for each of the
years ended March 31, 1995, 1996 and 1997 and for the nine months ended
December 31, 1997 are derived from the Company's Consolidated Financial
Statements including the Notes thereto which have been audited by KPMG Peat
Marwick LLP, independent certified public accountants. The selected
consolidated financial data as of March 31, 1993, 1994 and 1995 and for each
of the years ended March 31, 1993 and 1994 are derived from audited
Consolidated Financial Statements not included in this Prospectus. The
consolidated financial data as of and for the nine months ended December 28,
1996 are derived from unaudited consolidated financial statements. The
unaudited consolidated financial statements have been prepared on a basis
consistent with the Company's audited consolidated financial statements and,
in the opinion of management, include all normal recurring adjustments
necessary for a fair presentation of the financial data for the period
presented. The operating results for the nine months ended December 31, 1997
are not necessarily indicative of the results that may be expected for the
full year ending March 31, 1998.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
------------------------------------------- ------------------
1993 1994 1995 1996 1997 1996(1) 1997
------- ------- ------- ------- ------- ------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Total revenues.......... $ 7,666 $12,342 $15,622 $19,762 $21,209 $ 15,487 $ 18,348
Cost of revenue......... 4,916 7,175 9,948 10,876 13,978 10,241 10,720
------- ------- ------- ------- ------- -------- --------
Gross profit......... 2,750 5,167 5,674 8,886 7,231 5,246 7,628
------- ------- ------- ------- ------- -------- --------
Operating expenses:
Research and develop-
ment expense.......... 935 711 1,513 2,082 2,541 1,982 2,158
Selling, general and
administrative ex-
pense................. 2,001 2,949 2,705 3,555 3,187 2,262 2,794
------- ------- ------- ------- ------- -------- --------
Total operating ex-
penses.............. 2,936 3,660 4,218 5,637 5,728 4,244 4,952
------- ------- ------- ------- ------- -------- --------
Income (loss) from oper-
ations................. (186) 1,507 1,456 3,249 1,503 1,002 2,676
Other income (expense).. (210) (378) (447) (458) (456) (360) (357)
Amortization costs in
excess of net assets
acquired and other
intangible assets...... 2,524 -- -- -- -- -- --
------- ------- ------- ------- ------- -------- --------
Income (loss) before
income tax expense
(benefit).............. (2,920) 1,129 1,009 2,791 1,047 642 2,319
Income tax expense (ben-
efit).................. -- 58 (460) 936 409 250 765
------- ------- ------- ------- ------- -------- --------
Net income (loss)....... $(2,920) $ 1,071 $ 1,469 $ 1,855 $ 638 $ 392 $ 1,554
======= ======= ======= ======= ======= ======== ========
Net income (loss) per
share(2):
Basic ................. $ (0.57) $ 0.21 $ 0.29 $ 0.36 $ 0.12 $ 0.08 $ 0.30
Diluted................ $ (0.57) $ 0.21 $ 0.29 $ 0.36 $ 0.12 $ 0.08 $ 0.30
Shares used in per share
calculation:
Basic.................. 5,113 5,113 5,113 5,113 5,113 5,113 5,113
Diluted................ 5,113 5,113 5,113 5,113 5,135 5,113 5,228
Pro forma net income per
share(3):
Basic ................. $ 0.10 $ 0.25
Diluted................ $ 0.10 $ 0.25
Shares used in pro forma
net income per share
calculation:
Basic.................. 6,118 6,118
Diluted................ 6,140 6,233
OTHER FINANCIAL DATA:
Capital expenditures.... $ 2,780 $ 973 $ 908 $ 2,061 $ 2,418 $ 1,719 $ 1,479
Cash dividends de-
clared................. -- -- -- $ 500 $ 927 $ 927 $ 10,050
CONSOLIDATED BALANCE
SHEET DATA (AT PERIOD
END):
Cash.................... $ 312 $ 14 $ 59 $ 91 $ 109 $ 823 $ 940
Working capital (defi-
cit)................... (312) 816 2,189 2,852 1,395 1,334 (7,694)
Total assets............ 10,230 11,482 12,613 16,771 16,977 16,491 18,286
Long-term obligations,
net of current por-
tion................... 5,000 5,000 5,000 5,000 5,133 5,000 5,052
Stockholders' equity
(deficit).............. 1,073 2,143 3,613 4,967 4,730 4,483 (3,766)
</TABLE>
- --------
(1) The Company's third quarter for the 1997 fiscal year ended on December 28,
1996.
(2) See Note 3 to the Consolidated Financial Statements for an explanation of
the determination of shares used to compute net income per share.
(3) Pro forma basic and diluted net income per share was calculated in a
manner consistent with basic and diluted net income per share except that
the weighted average number of shares was adjusted to include the number
of shares that would be required to be sold to fund the $10,050 dividend
to NSG Holding and other shareholders (using an estimated initial public
offering price of $10.00 per share).
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company designs, manufactures and markets semiconductor optical
detectors and receivers for fiber optics communications. By virtue of its
specialization, the Company is able to serve many different markets in the
fiber optics communications industry. The Company's products are integral to
the development and implementation of fiber optics systems for applications
such as high capacity, long-haul terrestrial and undersea transmission;
digital local loop and access networks; multi-channel CATV distribution; high-
speed computer networking; and test and measurement equipment. Each sector of
the fiber optics market requires a degree of specialization which differs from
that of the others. The growth or decline in one sector does not necessarily
affect the other sectors. Profitability varies from product to product and
trends in profitability from the different sectors are not necessarily linked.
The Company derives nearly all of its sales from the production and sale of
optical detectors and receivers used in the fiber optics industry. A small
percentage of sales is derived from contracts for research and development of
products for government agencies and private concerns. The Company has grown
in revenue over the past five years at a compounded annual growth rate of 29%,
and has been profitable for the last four years. Income has increased as a
percentage of revenue over this time, with the exception of fiscal year 1997,
when the Company was exposed to decreasing margins in the high-speed computer
networking sector to inventory obsolescence. As the Company has grown,
however, the rate of new product introductions has increased, the mix of
product revenue has changed and the customer base has broadened. In the past,
certain significant customers' purchase patterns have materially affected the
Company's operating results. The Company believes that it has reduced this
uncertainty. While the Company does not have any customers whose sales
represent more than 10% of the Company's revenue in the nine months ended
December 31, 1997, the Company has historically had such customers, including:
AMS GMBH, NSG (an affiliate that distributes the Company's products) and
Siemens AG in fiscal year 1995; Siemens AG in fiscal year 1996; and NSG in
fiscal year 1997. Additionally, in the future, the Company anticipates having
customers who will account for more than 10% of the Company's revenue in a
single fiscal year.
The Company recognizes revenue upon shipment, passage of title and when all
significant obligations of the Company have been satisfied. Some international
sales are secured by letters of credit. Reserves for estimated warranty and
bad debts are maintained. Revenue from research and development contracts is
recognized based upon the percentage completion method and, in some instances,
based upon specified contract milestones. Revenue from achievement of
milestone events is recognized when all parties concur that the scientific
results and/or milestones stipulated in the agreement have been met. In fiscal
years 1995, 1996 and 1997, revenue from research and development contracts
included in total revenue was $1.1 million, $0.8 million and $0.6 million,
respectively. No revenue was recognized under research and development
contracts in the nine-months ended December 31, 1997.
The Company sells its products worldwide and generates a significant portion
of its sales outside North America, including Europe, Canada, Japan, China and
Israel. All sales are quoted and delivered in U.S. dollars, which prevents
currency risk; however, the Company competes with international suppliers with
price structures affected by currency fluctuations. The percentage of revenue
by geographic region in fiscal years 1995, 1996 and 1997 and the nine months
ended December 31, 1997 was approximately: 45%, 40%, 51% and 51% from North
America, respectively; 40%, 44%, 21% and 36% from Europe, respectively; and
15%, 16%, 28% and 13% from Asia and other countries, respectively.
The Company has entered into a Distribution Agreement with NSG pursuant to
which NSG acts as the exclusive distributor of all the Company's products in
Japan. In fiscal years 1995, 1996 and 1997 and the nine months ended December
31, 1997, revenue from NSG pursuant to the Distribution Agreement was $1.8
million, $1.9 million, $2.5 million and $1.1 million, respectively.
17
<PAGE>
Over the past several years, EPITAXX has consistently increased its research
and development spending as it strives to introduce new products as quickly as
possible. The Company allocates a significant percentage of revenue toward
research and development. New products are seen as a key factor in maintaining
continued growth in sales and profitability. Spending for research and
development in fiscal years 1995, 1996, 1997 and the nine months ended
December 31, 1997 was $1.5 million, $2.1 million, $2.5 million and $2.2
million, respectively (9.7%, 10.5%, 12.0% and 11.8% of total revenue,
respectively).
As of December 31, 1997, the Company had an order backlog of $9.3 million
compared to a backlog of $5.7 million a year earlier. Backlog consists only of
customer orders that the Company has accepted and are deliverable within one
year.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain income
and expense items expressed as a percentage of the Company's total revenue.
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUE
----------------------------------
NINE MONTHS
YEAR ENDED ENDED
MARCH 31, DECEMBER 31,
------------------- -------------
1995 1996 1997 1996(1) 1997
----- ----- ----- ------- -----
<S> <C> <C> <C> <C> <C>
Revenue................................. 88.5% 90.3% 88.2% 88.1% 93.9%
Revenue from affiliate.................. 11.5 9.7 11.8 11.9 6.1
----- ----- ----- ----- -----
Total revenue......................... 100.0 100.0 100.0 100.0 100.0
Cost of revenue......................... 63.7 55.0 65.9 66.1 58.4
----- ----- ----- ----- -----
Gross profit.......................... 36.3 45.0 34.1 33.9 41.6
Operating expenses:
Research and development.............. 9.7 10.6 12.0 12.8 11.8
Selling, general and administrative... 17.3 18.0 15.0 14.6 15.2
----- ----- ----- ----- -----
Total operating expenses................ 27.0 28.6 27.0 27.4 27.0
----- ----- ----- ----- -----
Income from operations.................. 9.3 16.4 7.1 6.5 14.6
Other income (expense).................. (2.9) (2.3) (2.2) (2.3) (1.9)
Income tax expense (benefit)............ (3.0) 4.7 1.9 1.7 4.2
----- ----- ----- ----- -----
Net income.............................. 9.4% 9.4% 3.0% 2.5% 8.5%
===== ===== ===== ===== =====
</TABLE>
- --------
(1) The Company's third quarter for the 1997 fiscal year ended on December 28,
1996.
Nine Months Ended December 31, 1997 Compared to Nine Months Ended December
28, 1996
Revenue. Revenue for the nine months ended December 31, 1997 increased
18.5% to $18.3 million from $15.5 million for the nine months ended December
28, 1996. The Company increased its sales of products for long-haul
transmission, CATV and test and measurement equipment applications while
reducing its sales of products for computer networking due to price erosion in
that market. In addition, the Company introduced new products for the long-
haul transmission market while shifting away from some of its less specialized
products. Although unit volume decreased by approximately 6.0%, the average
unit selling price increased by approximately 29.8%.
Gross Profit. Gross profit for the nine months ended December 31, 1997
increased by 45.4% to $7.6 million from $5.2 million for the nine months ended
December 28, 1996. Gross profit as a percentage of revenue increased to 41.6%
from 33.9%. This improvement in profitability was mainly due to the change in
product mix.
Research and Development Expenses. Research and development expenses for the
nine months ended December 31, 1997 increased by 8.9% to $2.2 million from
$2.0 million for the nine months ended December 28,
18
<PAGE>
1996. Research and development expenses as a percentage of revenue decreased
to 11.8% from 12.8%. Research and development expenses consist primarily of
employee compensation and costs related to new product prototyping.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the nine months ended December 31, 1997 increased
23.5% to $2.8 million from $2.3 million for the nine months ended December 28,
1996. Selling, general and administrative expenses as a percentage of revenue
increased to 15.2% from 14.6%. These expenses consist primarily of salaries
and benefits, sales commissions and travel. Such increase was the result of
the hiring of additional staff for the marketing department and higher
commissions paid on additional sales.
Other Income (Expense). Other income (expense) remained relatively constant
for the nine months ended December 31, 1997 at ($357,000) compared to
($360,000) for the nine months ended December 28, 1996. Other expense,
consisting primarily of interest expense, as a percentage of revenue decreased
to 1.9% from 2.3%.
Income Tax Expense (Benefit). Income tax expense for the nine months ended
December 31, 1997 was $765,000 compared to $250,000 for the nine months ended
December 28, 1996. Income tax expense was incurred at an effective rate of
33.0% for the nine months ended December 31, 1997, compared to 38.9% for the
nine months ended December 28, 1996, reflecting higher research and
development credits and preferred tax treatment from the Company's subsidiary,
a foreign sales corporation in St. Thomas, U.S. Virgin Islands, formed in the
third quarter of the 1997 fiscal year.
Year Ended March 31, 1997, Compared to Year Ended March 31, 1996
Revenue. Revenue for the year ended March 31, 1997 increased 7.3% to $21.2
million from $19.8 million for the year ended March 31, 1996. Sales in the
transmission, access and CATV markets increased by approximately 20.0%. This
increase was offset, however, by pricing pressure and subsequent decreased
sales in the computer networking market such that overall volume increased by
approximately 10.7% and the average unit selling price decreased by
approximately 2.0%. Pricing pressure in the computer networking market was
primarily generated from those vertically integrated customers for which the
Company is a second source. The Company no longer pursues business of this
type solely on the basis of price. In addition, the Company completed the
sales of custom products for a defense application and saw a reduction in
development contracts, both of which totaled approximately $1.0 million. Any
reduction in development contracts for defense and space applications since
fiscal year 1996 has had little impact on continued revenue growth.
Gross Profit. Gross profit for the year ended March 31, 1997 decreased by
18.6% to $7.2 million from $8.9 million for the year ended March 31, 1996.
Gross profit as a percentage of revenue decreased to 34.1% from 45.0%. Such a
decline was primarily due to price erosion in the computer networking product
market. The decline in gross profit was also due to the reduction in special
product sales for defense and space applications. Additionally, inventory was
reduced by 28.1% or $1.4 million, in part to account for product obsolescence
and to reduce work-in-process.
Research and Development Expenses. Research and development expenses for the
year ended March 31, 1997 increased by 22.0% to $2.5 million from $2.1 million
for the year ended March 31, 1996. Research and development expenses as a
percentage of revenue increased to 12.0% in 1997 from 10.6% in 1996. Increased
spending in the development of new CATV and transmission products, including
the APD, was the primary cause of this increase.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended March 13, 1997 decreased 10.4% to
$3.2 million from $3.6 million for the year ended March 31, 1996. Selling,
general and administrative expenses as a percentage of revenue decreased to
15.0% in 1997 from 18.0% in 1996. Such decrease was due to a normalization of
expenses. In the year ended March 31, 1996, several multi-year management
incentive targets were met, triggering an additional provision for that year.
19
<PAGE>
Other Income (Expense). Other income (expense) remained relatively constant
at ($456,000) for the year ended March 31, 1997 compared to ($458,000) for the
year ended March 31, 1996. Other expense, consisting primarily of interest
expense, as a percentage of revenue, decreased to 2.2% from 2.3%.
Income Tax Expense (Benefit). Income tax expense for the year ended March
31, 1997 was $409,000 in 1997 compared to $936,000 for the year ended March
31, 1996. The effective income tax rate for the fiscal year ended March 31,
1997 increased to 39.1% from 33.5% for the fiscal year ended March 31, 1996.
Included in the percentage increase is an adjustment of deferred income taxes
estimated in prior years associated with net operating loss carryforwards and
depreciation.
Year Ended March 31, 1996, Compared to Year Ended March 31, 1995
Revenue. Revenue for the year ended March 31, 1996 increased 26.5% to $19.8
million from $15.6 million for the year ended March 31, 1995. This increase
resulted mostly from sales of products for digital local loop and access
networks as well as for CATV applications. Sales for CATV applications more
than doubled; at the same time, the Company's new products for digital
applications found commercial acceptance. As a result, the average unit
selling price increased by approximately 16.3% and unit volume increased by
approximately 12.4%.
Gross Profit. Gross profit for the year ended March 31, 1996 increased by
56.6% to $8.9 million from $5.7 million for the year ended March 31, 1995.
Gross profit as a percentage of revenue increased to 45.0% from 36.3%. This
increase resulted primarily from the sale of new products for CATV and digital
local loop applications. Additionally, inventory increased by 65% to $5.1
million in the year ended March 31, 1996, in anticipation of future demand in
the high-speed computer networking market. The absorption of overhead from
this higher level of production helped to reduce the Company's overall cost of
sales.
Research and Development Expenses. Research and development expenses for the
year ended March 31, 1996 increased by 37.6% to $2.1 million from $1.5 million
for the year ended March 31, 1995. Research and development expenses as a
percentage of revenue increased to 10.6% in 1996 from 9.7% in 1995. Increased
spending in the development of products for high-speed data communications and
custom products for the defense industry were the primary causes of the
increase in research and development expenses.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended March 31, 1996 increased 31.4% to
$3.6 million from $2.7 million for the year ended March 31, 1995. Selling,
general and administrative expenses as a percentage of revenue increased to
18.0% in 1996 from 17.3% in 1995. Such an increase was due primarily to the
impact of a management incentive program that covered the two prior years.
Several multi-year targets for revenue growth were met in 1996, triggering the
additional provision that year. The charge in 1996 and 1995 for such provision
was $660,000 and $337,000, respectively.
Other Income (Expense). Other income (expense) remained relatively constant
at ($458,000) for the year ended March 31, 1996 compared to ($447,000) for the
year ended March 31, 1995. Other expense, consisting primarily of interest
expense, as a percentage of revenue decreased to 2.3% from 2.9%.
Income Tax Expense (Benefit). Income tax expense for the year ended March
31, 1996 was $936,000 compared to ($460,000) benefit for the year ended March
31, 1995. The effective income tax rate for the year ended March 31, 1996
increased to 33.5% from (45.6)% for the year ended March 31, 1995. The change
in the effective tax rate is primarily due to the utilization of net operating
loss and tax credit carryforwards by NSG Holding for which the Company
received a benefit under a tax sharing agreement entered into by the Company
and NSG Holding. Such agreement became effective for the fiscal year ended
March 31, 1994 and the Company realized the benefit in the year ended March
31, 1995 upon NSG Holding filing, for the first time, a consolidated United
States Federal corporation income tax return for the year ended March 31, 1994
utilizing the Company's net operating loss and tax credit carryforwards. The
Company's results of operations have been included in NSG Holding's
consolidated income tax return since 1994.
20
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following tables present the Company's unaudited quarterly consolidated
financial information, expressed in dollars and as a percentage of total
revenue, for the eight most recent fiscal quarters. The Company believes that
all necessary adjustments have been included in the amounts below to present
the selected quarterly information fairly when read in conjunction with the
Consolidated Financial Statements and Notes thereto appearing elsewhere in
this Prospectus. These quarterly operating results are not necessarily
indicative of results that may be expected for any full fiscal year or any
subsequent periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------
MAR. 31, JUN. 30, SEPT. 30, DEC. 28, MAR. 31, JUN. 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996 1997 1997 1997 1997
-------- -------- --------- -------- -------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED RESULTS OF
OPERATIONS:
Total revenue........... $6,019 $5,400 $5,165 $4,922 $5,722 $6,120 $5,887 $6,341
Cost of revenue......... 3,412 3,525 3,809 2,907 3,737 3,565 3,501 3,654
------ ------ ------ ------ ------ ------ ------ ------
Gross profit........... 2,607 1,875 1,356 2,015 1,985 2,555 2,386 2,687
------ ------ ------ ------ ------ ------ ------ ------
Operating expenses:
Research and
development........... 605 713 675 594 559 697 671 790
Selling, general and
administrative........ 933 765 668 829 925 889 919 986
------ ------ ------ ------ ------ ------ ------ ------
Total operating
expenses .............. 1,538 1,478 1,343 1,423 1,484 1,586 1,590 1,776
------ ------ ------ ------ ------ ------ ------ ------
Income from
operations............. 1,069 397 13 592 501 969 796 911
Other income (expense).. (109) (113) (125) (122) (96) (133) (190) (34)
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before
income tax expense
(benefit).............. 960 284 (112) 470 405 836 606 877
Income tax expense (ben-
efit).................. 323 111 (44) 183 159 275 200 290
------ ------ ------ ------ ------ ------ ------ ------
Net income.............. $ 637 $ 173 $ (68) $ 287 $ 246 $ 561 $ 406 $ 587
====== ====== ====== ====== ====== ====== ====== ======
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------
MAR. 31, JUN. 30, SEPT. 30, DEC. 28, MAR. 31, JUN. 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996 1997 1997 1997 1997
-------- -------- --------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF TOTAL
REVENUE:
Total revenue........... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue......... 56.7 65.3 73.7 59.1 65.3 58.3 59.5 57.6
------ ------ ------ ------ ------ ------ ------ ------
Gross profit........... 43.3 34.7 26.3 40.9 34.7 41.7 40.5 42.4
------ ------ ------ ------ ------ ------ ------ ------
Operating expenses:
Research and
development........... 10.1 13.2 13.1 12.1 9.8 11.4 11.4 12.5
Selling, general and
administrative........ 15.5 14.2 12.9 16.8 16.1 14.5 15.6 15.5
------ ------ ------ ------ ------ ------ ------ ------
Total operating
expenses............... 25.6 27.4 26.0 28.9 25.9 25.9 27.0 28.0
------ ------ ------ ------ ------ ------ ------ ------
Income from
operations............. 17.8 7.3 0.3 12.0 8.8 15.8 13.5 14.4
Other income (expense).. (1.8) (2.0) (2.4) (2.4) (1.7) (2.1) (3.2) (0.5)
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before
income tax expense
(benefit).............. 16.0 5.3 (2.1) 9.6 7.1 13.7 10.3 13.9
Income tax expense (ben-
efit).................. 5.4 2.1 (0.9) 3.7 2.8 4.5 3.4 4.6
------ ------ ------ ------ ------ ------ ------ ------
Net income.............. 10.6% 3.2% (1.2)% 5.9% 4.3% 9.2% 6.9% 9.3%
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
21
<PAGE>
Revenue has fluctuated from quarter to quarter. There are no seasonal
fluctuations in any particular customer's buying habits; however, the Company
generally experiences a larger volume of shipments in its fourth quarter.
Variation in sales from quarter to quarter is primarily influenced by large
short-term increases in demand for specific products from large customers.
Gross profit on a quarterly basis has fluctuated primarily due to sales mix.
Other factors, such as obsolete inventory adjustments and factory efficiency
have had and may continue to have an impact in any given quarter.
The Company's operating expense levels have fluctuated over time. Sales,
general and administrative expenses are typically budgeted in accordance with
anticipated future sales. Fluctuations due to variation in quarterly sales
commission and management bonus accrual can impact the expense accrued in any
quarter. During fiscal year 1996, selling, general and administrative expenses
were accrued at a higher than average rate due to the payment of multi-year
management bonus compensation for meeting performance targets. Several multi-
year targets for revenue growth were met in 1996, triggering the additional
provision that year. The Company anticipates that such bonuses in the future
will be replaced by option grants under the Stock Option Plan and smaller,
short-term bonuses which are earned and paid on an annual basis. Quarterly
research and development costs are determined on an annual basis and depend on
the development effort required for the products proposed by the marketing
department or customers. Some research and development projects are funded by
customers. During any given period, some effort and corresponding expenses can
be diverted to customer funded research projects. The Company has experienced,
and expects to continue to experience, fluctuations in sales and operating
results from quarter to quarter. As a result, the Company believes that
period-to-period comparisons of its operating results are not necessarily
meaningful, and that such comparisons cannot be relied upon as indicators of
future performance. See "Risk Factors--Fluctuations in Quarterly Operating
Results."
LIQUIDITY AND CAPITAL RESOURCES
Cash provided from operations was approximately $2.7 million for the nine
months ended December 31, 1997 and $2.7 million and $1.9 million for the
fiscal years ended March 31, 1997 and 1996, respectively.
The Company has financed recent working capital needs and capital
requirements primarily with internally generated funds and a line of credit
from NSG Holding during fiscal years 1997 and 1996, and from Sumitomo Bank
during fiscal year 1995. On May 31, 1997, the Company renewed the line of
credit from NSG Holding in the amount of $6.0 million. The line of credit
allows the Company to borrow at LIBOR plus 0.25% with a maturity date of May
31, 1998 which has been extended to March 31, 1999. See "Relationship Between
the Company and NSG--Agreement for Line of Credit." The outstanding balance on
the line of credit was $3.2 million as of December 31, 1997 and $3.4 million
and $2.7 million at the end of fiscal years 1997 and 1996, respectively. Since
December 31, 1997, the Company has drawn an additional $500,000 under the line
of credit. The Company intends to pay down the full balance on the line of
credit with the net proceeds from the sale of the Class A Common Stock offered
hereby. See "Use of Proceeds."
Capital expenditures were $1.5 million for the nine months ended December
31, 1997 and $2.4 million and $2.1 million for the fiscal years ended March
31, 1997 and 1996, respectively. Machinery and equipment additions were $1.2
million for the nine months ended December 31, 1997 and $2.9 million and $1.3
million for the fiscal years ended March 31, 1997 and 1996, respectively.
Building and improvements accounted for nearly all of the remaining capital
expenditures. The Company plans an addition of approximately 24,000 square
feet of office and manufacturing space during fiscal year 1999 at an estimated
cost of $2.0 million. The Company has not yet entered into any contracts for
construction of the planned addition, and believes that internally generated
funds, together with the net proceeds of the offering, are sufficient to fund
the planned expansion.
Working capital (deficit) was ($7.7) million as of December 31, 1997 and
$1.4 million and $2.9 million at the end of fiscal years 1997 and 1996,
respectively. The primary reason for the working capital deficit as of
December 31, 1997 was the $10.0 million cash dividend declared in December
1997. The dividend is evidenced by the Dividend Notes, payable upon
consummation of the offering.
22
<PAGE>
The Company believes that the net proceeds from the offering, together with
internally generated funds and the line of credit facility, will provide it
with sufficient funds for at least the next 12 months.
RECENT ACCOUNTING PRONOUCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130") and Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 130 establishes
standards for the reporting and display of comprehensive income in the
financial statements. Comprehensive income is the total of net income and all
other non-owner changes in equity. SFAS 131 requires that companies disclose
segment data based on how management makes decisions about allocating
resources to segments and measuring segment performance. SFAS 130 and 131 are
effective for the Company's 1999 fiscal year. Adoption of these standards is
expected to result in additional disclosures, but is not expected to have a
material adverse effect on the Company's business, financial condition or
operating results.
23
<PAGE>
BUSINESS
OVERVIEW
The Company designs, manufactures and markets semiconductor optical
detectors and receivers for fiber optics communications. By virtue of its
specialization in optical detector and receiver products, the Company is able
to serve many different markets in the fiber optics communications industry.
The Company's products are integral to the development and implementation of
fiber optics systems for applications such as high capacity, long-haul
terrestrial and undersea transmission; digital local loop and access networks;
multi-channel CATV distribution; high-speed computer networking; and test and
measurement equipment.
The Company believes that its expertise in InGaAs semiconductor material and
optical detector device engineering, precision opto-mechanical assembly
processes and high-performance digital and analog receiver circuits enables
the Company to provide a broad range of high-performance optical detector
products that can be quickly and cost-effectively adapted to a variety of
customer needs and technologies. Further, because of its focus on detectors,
EPITAXX is able to respond quickly to evolving technologies and increasingly
complex applications.
The global communications industry has undergone significant transformation
and growth since the mid-1980s as a result of increased demand for
communications services and applications, as well as advances in technology
and changes in public policy. Communications service providers continue to
increase the capacity of their networks and build new networks to meet the
demand for high bandwidth applications, which in turn has significantly
increased the use of fiber optics equipment.
The Company is an independent supplier and counts among its customers many
of the leading fiber optics communications equipment manufacturers, including
such companies as CIENA Corporation, Finisar Corporation, Harmonic Lightwave,
Inc., Hewlett-Packard Company, Inc., JDS FITEL, Inc., Lucent Technologies,
Inc., Philips Broadband Networks, Inc., Philips N.V., Pirelli SpA and Siemens
AG.
INDUSTRY BACKGROUND
Demand for new data services and global communications connectivity is
growing at an unprecedented rate. Facsimile, electronic mail and, more
recently, the increasing demand for access to the World Wide Web have combined
to create a rapidly growing demand for digital data bandwidth. This increasing
volume of data, which by nature is long distance, of longer duration and
higher density, has placed a heightened burden on networks originally designed
only for voice transmission. Industry sources estimate that the transmission
of digital signals will increase the growth in telecommunications network
bandwidth by 35% per year from 1996 through 2006.
Concurrently, the worldwide deregulation of the telecommunications industry
has created significant competition for the provision of voice, video and data
services. In telephony, new inter-exchange carriers ("IXCs") are implementing
their own networks in order to avoid dependence on their established
competitors in the long distance transmission market. To meet this competition
at the local level, competitive access providers are building new
infrastructure for both voice and data traffic. In addition, CATV system
operators have been modernizing their networks over the past few years in
response to emerging competition from telecommunications and direct broadcast
satellite operators. Even the traditionally protected market of undersea
transoceanic communications is now open to competition as many current systems
reach capacity.
For high bandwidth applications, fiber optics systems, as opposed to other
media or technologies, presently provide the greatest transmission capacity
with a high degree of efficiency. Fiber optics systems, limited only by the
speed of electronic switching, are capable of carrying more bandwidth than
competing media due to their ability to carry multiple channels, or
wavelengths, on the same fiber. Fiber optics systems have demonstrated their
value in the long-haul part of the network where high-volume traffic makes
them a lower cost choice. As traffic increases, this cost per bit advantage is
also realized at the network's access level. Moreover, optical fiber allows
longer transmission distances without the need for regenerators, provides
increased reliability and is immune to the electromagnetic interference which
affects conventional copper wire lines.
24
<PAGE>
A typical fiber optics communications link consists of: light sources,
either lasers or light-emitting diodes, which convert electronic signals into
light pulses or modulated beams; the fiber itself, which is the transmission
medium; different passive components to route, insert, or split signals,
depending on the topology of the network; and optical detectors and receivers
which relay or reconvert the optical signal into electronic format for
delivery to a common electronic device such as a telephone, TV or computer.
The optical receiver provides essential performance characteristics to the
optical link. For example, the sensitivity of an optical receiver (i.e., its
ability to detect signals that have been attenuated during transmission)
ultimately sets the maximum length of the optical link at a given data rate.
The transformation from electronic to optical transmission infrastructures
has been made possible in large part by technical breakthroughs in the optical
components that constitute the system fabric. New optical components are
enabling new communications architectures with increased bandwidth and
improved network performance, as well as reduced system implementation and
operation costs. For instance, dense wavelength division multiplexing ("DWDM")
is now creating a major shift in network infrastructure design, which, in
turn, intensifies the need for new components. Increasingly, network
architectures are becoming more complex and suppliers of components are
required to sharpen their specific skills in order to respond to technological
challenges and provide increasingly higher performance and customization to
the specific needs of equipment designers and manufacturers. Additionally, due
to rapid implementation of new transmission technologies, shorter product
development cycles are required.
Historically, the fiber optics equipment industry consisted of vertically
integrated companies that provided entire systems, complete with the internal
capabilities to produce components for use in their own systems. These
companies have been challenged by new system designers focusing on specific
markets within the industry. The increasingly competitive landscape has caused
the vertically integrated companies to seek specialized expertise from
independent, non-competing suppliers, allowing the vertically integrated
companies to focus their resources on their core business at the system level.
At the same time, the new system providers who compete with the vertically
integrated companies lack photonics components technology. As a result, these
new system providers also value independent suppliers of such critical
components.
THE EPITAXX SOLUTION
EPITAXX provides leading telecommunications equipment manufacturers with a
variety of efficient, high-performance optical detectors and receivers for
fiber optics systems. The Company distinguishes itself by focusing on optical
detector and receiver products and believes that this focus gives it both a
technical and a service advantage over companies that make both laser sources
and detectors. The Company's focus on optical detectors and receivers permits
more rapid and accurate responses to the needs of customers developing new
applications. EPITAXX's manufacturing, assembling and testing processes are
designed to satisfy its customers' needs for key engineering and manufacturing
flexibility since they often require customization, small batches and short
lead time. The Company seeks to establish itself as the preferred provider of
optical detector products to the new system providers. Additionally, the
Company's status as an independent supplier creates opportunities to replace
the internal production, or to become an alternate production source, of
certain components at vertically integrated companies wishing to focus on
their core competencies. As a result of the Company's concentration on
detector products and its technological strengths in optical packaging and
electronic interfaces, it is able to offer a very diverse product portfolio of
high performance products such as: digital optical detectors for short
distance, medium data rate communications in the local loop and access
markets; receivers for transmission at higher data rates from 50 megabits per
second ("Mbps") to 2.5 gigabits per second ("Gbps"); analog detectors and
receivers for CATV applications; high reliability detectors for undersea
communications systems; and detector assemblies for instrumentation and fiber
optics test equipment.
25
<PAGE>
THE EPITAXX STRATEGY
The Company's goal is to become the dominant provider of high-performance
optical detectors. The key elements of the EPITAXX strategy are:
Target New Applications in Rapidly Growing Markets. The Company leverages
its expertise in optical detector products and its technical strengths in
exotic semiconductors, electronic interfaces and optics to develop products
with the highest added value in the markets with high growth potential. For
example, long-haul transmission currently constitutes the fastest growing
segment of the fiber optics component market, including development of DWDM
equipment. EPITAXX has pursued this opportunity since its emergence and as a
result, for the nine months ended December 31, 1997, the long-haul
transmission market utilizing DWDM represented more than 20.0% of the
Company's revenue compared to approximately 6.0% for the same period a year
ago.
Extend Technology Leadership. EPITAXX seeks to build upon its strength in
technology innovation to ensure that its products remain in the forefront of
the fiber optics market. The Company's overall objective is to fulfill its
customers' expectations with more complete solutions through continued
investment in research and development. The rapid advancement of fiber optics
systems is creating the need for many new, more sophisticated optoelectronics
products. EPITAXX is developing advanced components for future customer
applications such as new detector products with increased functionality for
both multi-channel monitoring and signal conversion for DWDM, ultrafast
detectors and receivers for 10 Gbps systems and novel packaging platforms for
distributing fiber closer to the home. See "Risk Factors--Evolving Markets and
Rapid Technological Change; New Products."
Intensify Customer Collaborations. EPITAXX works closely with its key
customers in order to jointly engineer future generations of complex photonic
devices. As a result, the Company's products are tailored for, and often
designed into, its customers' products. The migration toward all-optical
networks requires collaboration with customers at very early stages of
development. By maintaining and further developing this collaborative approach
to the product development cycle, the Company seeks to continue to be designed
into products going into future optical architectures.
Broaden Customer Base. The Company intends to continue to broaden its
customer base by leveraging its expertise in detectors and receivers,
developing new fiber optics products and expanding its market reach. EPITAXX
seeks to build upon its current position as an industry specialist in order to
attract the emerging equipment suppliers in a rapidly growing industry. As a
result of its experience in the development of optical detectors and
receivers, the Company can provide new system suppliers with more rapid access
to the market. The Company also believes that an opportunity exists for it to
sell its products to additional vertically integrated equipment suppliers as
competitive pressures force these suppliers to focus increasingly on system,
rather than component, development.
Continue Commitment to Improve Response Times and Customer Service. EPITAXX
has differentiated itself from its competitors through the quality of its
products and its rapid response time. The Company intends to continue to
reduce its engineering and customization cycles through the development of
flexible product and process platforms. This development will allow the
Company to respond quickly to different market requirements with reliable
products while optimizing engineering and manufacturing resources. Moreover,
the Company will continue the streamlining of its operation in order to reduce
manufacturing cycle times and product costs. Continued attention to the
improvement of the operating process is necessary to advance the Company's
competitive position.
26
<PAGE>
TECHNOLOGY
Fiber optics links contain three basic elements: the transmitter that
converts electrical signal input to optical output; the fiber optic link that
carries the signal; and the receiver, which includes an optical detector, that
converts the optical signal into electrical output. EPITAXX focuses on the
receiver element.
[SCHEMATIC OF A BASIC FIBER OPTICS LINK; COMPONENTS OF THE LINK ARE IDENTIFIED
WITH CAPTIONS]
Current telecommunications and CATV transmissions use fiber which carries
signals in the 1.3 micron to 1.5 micron wavelength region. Optical detectors
for signals at such wavelengths are generally made of Indium Gallium Arsenide
("InGaAs"). InGaAs is a compound semiconductor crystal fabricated by growing
successive thin layers of different materials on an Indium Phosphide substrate
through a deposition process known as epitaxy. The resulting material is a
semiconductor material sensitive to light in the 0.8 micron to 1.7 micron
wavelength range. From this material, manufactured in wafer form, the
fabricated semiconductor detector chip is at the core of all optical detector
and receiver products. This chip generates an outgoing electron upon receiving
an incoming photon.
EPITAXX applies its semiconductor materials expertise to design the proper
InGaAs structure which enables the chip to meet required performance
characteristics. Such designs involve precise specifications of materials
composition, doping levels and device geometry to meet a combination of
performance requirements such as signaling speed, noise level, linearity and
sensitivity. The Company is currently developing InGaAs avalanche
photodetectors ("APDs") which generate multiple electrons for each incoming
photon. Conventional InGaAs photodetectors convert light into electrical
current without signal gain. However, APDs create gain during the conversion
process and consequently amplify the incoming signal. This additional gain
provides flexibility to system designers by allowing transmission over longer
distances, or by saving optical and electrical amplification stages. InGaAs
APDs are designed to use the same compound semiconductor materials as their
conventional counterparts, albeit with a much higher level of complexity in
device structure and fabrication.
[SCHEMATIC OF DETECTOR CHIP, DETECTOR MODULE AND OPTICAL RECEIVER; COMPONENTS
ARE IDENTIFIED WITH CAPTIONS]
In most cases, the InGaAs detector chip is attached to a package and
encapsulated. The resulting structure provides an optical interface, such as a
lens or a window, which allows incoming light to be guided to the detector. A
detector module incorporates this assembly with a fiber pigtail or connector
housing and is used by system designers at the board level. Since these high-
speed InGaAs chips range from 10 to 100 microns in diameter for most high speed
products and since these detectors have to collect light coming from a very
narrow fiber aperture, the packaging process requires extreme precision. The
Company conducts rigid assembly of the detectors, optical coupling lenses and
optical fiber, all within tolerances measured in microns.
27
<PAGE>
Receivers incorporate a low-noise optical detector chip with high
performance front-end amplifier circuitry, for either digital or analog
operation. Receivers provide pre-amplified voltage, rather than electrical
current, to the output interface and drive electronic circuitry within video
or networking equipment. The stringent performance requirements include
operation at very high frequencies up to several gigahertz ("GHz") and low
current (picoampere), both of which are contingent on integrating the detector
and the electronic circuitry in a small package. Receivers for high-speed
digital operation are optimized for low noise and bandwidth. By comparison,
receivers for analog CATV are optimized for low distortion.
In addition to the basic signal reception function, optical detectors and
receivers are used in many other portions of the network. Detectors at various
levels of integration (chip, module) are used throughout the optical network.
For example, laser transmitters incorporate a detector to monitor and
stabilize the laser power. Optical amplifiers include several detector modules
to monitor the input and output signals of the amplifier and to regulate the
pump power of the amplifier. Receivers are ubiquitous in the network. For
instance, receivers are found not only at the end of the transmission line,
but also where signals are dropped or added as well as in switching offices.
Increasingly complex network architectures such as DWDM involve management of
multiple wavelengths. Each wavelength requires a distinct receiver at the end
of the transmission path, therefore the use of DWDM multiplies the number of
receivers used in portions of the network. Furthermore, detectors and
receivers serve new roles in support of the higher precision required to
effect multiple wavelength signaling. Examples of such use include monitors to
adjust wavelength power and signal converters, both used to ensure the signal
integrity for each of the multiple wavelength transmissions.
[SCHEMATIC DRAWING OF CATV NETWORK; SCHEMATIC DRAWING OF OPTICAL AMPLIFIER AND
DWDM SYSTEM; COMPONENTS ARE IDENTIFIED WITH CAPTIONS]
28
<PAGE>
[SCHEMATIC OF A BASIC FIBER OPTICS LINK; COMPONENTS OF THE LINK ARE IDENTIFIED
WITH CAPTIONS]
The increasing use of InGaAs detectors and receivers at all levels of the
network has led to increasing levels of customization; the operational and
packaging requirements diverge depending on the function performed by that
specific component. A significant number of the Company's customers purchase
products specially adapted to certain levels of performance or to specific
operating environments. This customization requires technological expertise in
material or device engineering at the chip level or in submicron or opto-
mechanical assemblies at the packaging level, as well as in preamplifier
circuit design.
PRODUCTS
The Company offers optical detectors and receivers designed to conform to
worldwide digital transmission standards. The synchronous optical network
("SONET"), asynchronous transfer mode ("ATM"), fiber distributed data interface
("FDDI") and other telecommunications and data communications standards specify
operations at data rates from 52 Mbps to 10 Gbps. The Company's optical
detectors are available for manufacturer-specific laser modules, optical
receivers and datalinks for computer networking. EPITAXX's line of
photodetector modules are directed to applications such as low bit-rate
telecommunications for access networks. Optical receivers at 155 and 622 Mbps,
which incorporate an optical detector along with a matched preamplifier set to
the proper data transmission rate, are used mostly in access networks. Higher
capacity transmission and DWDM networks operate at 2.5 Gbps and increasingly at
10 Gbps. The Company offers a line of 2.5 Gbps digital receivers for short-haul
transmission and DWDM. The Company has introduced an APD-based receiver
operating at 2.5 Gbps for long-haul applications. The Company also offers high
performance pigtailed detectors for the monitoring of optical amplifiers in
long-distance terrestrial and undersea communications.
In CATV applications, the method of transmission is analog as opposed to
digital. Optical links are used for the transmission of high bandwidth video
signals from head-ends to hubs or nodes. At the node, current systems use
coaxial cable for the final connection to the home. Fiber optics systems for
CATV carry multiple television channels at bandwidth from 200 megahertz ("MHz")
to 900 MHz depending on downstream or upstream operation. The CATV industry is
branching out of the traditional video delivery market with new services such
as Internet access through cable modems. The Company offers detector modules as
well as complete receivers for analog applications. These products incorporate
detector chips specially designed to provide increased linearity and electronic
circuitry adapted to CATV specifications.
EPITAXX also offers a line of InGaAs detectors utilized for instrumentation
purposes. Products in this line include a series of detectors with varying
diameters for use in optical power meters or fault detectors. Also included are
arrays of detectors and special assemblies for spectroscopy and wavelength
measurement, environmental detection and military uses.
29
<PAGE>
The following table lists certain of the Company's standard products for
each major application.
<TABLE>
<CAPTION>
PRODUCT APPLICATIONS
- ------------------------------------------------------------------------------
<S> <C>
Detector chip in window or lens
capsule Receiver for FDDI, ATM and other data links
- ------------------------------------------------------------------------------
Detector module in pigtailed or Receiver for short-haul, low bit rate data
connector receptacle transmission
Optical power monitor for optical amplifier
Wavelength monitor for DWDM
- ------------------------------------------------------------------------------
Linear detector modules Receiver for analog CATV transmission
- ------------------------------------------------------------------------------
52 MBps receiver Receiver for SONET OC1
- ------------------------------------------------------------------------------
155 MBps receiver Receiver for SONET OC3 and ATM
- ------------------------------------------------------------------------------
622 MBps receiver Receiver for SONET OC12 and ATM
- ------------------------------------------------------------------------------
2.5 GBps receiver Receiver for SONET OC48 and DWDM wavelength
converters
- ------------------------------------------------------------------------------
900 MHz linear receiver Receiver for analog CATV transmission
- ------------------------------------------------------------------------------
Large size detectors (1 to 5mm) Detectors for optical power test and
measurement
- ------------------------------------------------------------------------------
Detector arrays and multi-ele- Detectors for environmental sensing,
ment detectors defense and industrial test and measurement
</TABLE>
RESEARCH AND PRODUCT DEVELOPMENT
EPITAXX's ability to design, develop and introduce new product offerings on
a timely basis to take advantage of market opportunities has been a major
driver in the Company's growth. The Company provides a broad line of products,
supplying varying levels of functionality as well as a variety of packaging
options, based on the Company's core optical detector technology. Many of
these products are jointly developed with customers early in the design phase.
The Company continues to work on delivering products that operate at higher
transmission frequencies and that address customer-specific operational
requirements. Current research programs include: 2.5 Gbps and 10 Gbps APD
receivers, 10 Gbps optical detectors and receivers and new optical platforms
using surface mount technology for future products.
The Company maintains collaborative research efforts with outside
organizations in the areas of materials growth, device engineering and optical
transmission. One such collaborative effort is with NSG Research Laboratory in
Tsukuba Science City, Japan, where NSG maintains active efforts in InGaAs
material growth and processing and in advanced optical products based on its
extensive knowledge of glass. This relationship is managed under a formal
agreement between EPITAXX and NSG. See "Relationship Between the Company and
NSG." The Company is also a member of POEM at Princeton University, a multi-
disciplinary laboratory focusing on photonics and optoelectronic materials.
As of January 31, 1998, the Company had 22 full-time employees engaged in
research and development. There can be no assurance that the Company will
continue to be successful in attracting and retaining key personnel with the
skills and expertise necessary to develop new products in the future.
Expenditures for research and development for fiscal years 1995, 1996, 1997
and the nine months ended December 31, 1997 were $1.5 million, $2.1 million,
$2.5 million and $2.2 million, respectively. The Company currently expects to
increase research and development spending as its revenues increase in order
to sustain continuing future product introductions.
The markets for the Company's products are characterized by rapid
technological change, evolving industry needs and product obsolescence. The
Company's success is highly dependent upon the timely completion and
introduction of new products at competitive prices and performance levels. No
assurance can be given that the Company will successfully introduce new
products. See "Risk Factors--Evolving Markets and Rapid Technological Change;
New Products" and "--Development of Competing Technologies."
30
<PAGE>
MARKETING AND SALES
Due to the complex nature of the Company's products and the variety of
applications in which such products are deployed, EPITAXX works closely with
customers to meet their current demands and to build future sales
opportunities by understanding technical and market demands influencing their
customers. Sales efforts are supported by the commitment of management and the
technical staff to maintain and strengthen customer relationships by offering
responsive, reliable service. As of January 31, 1998, the Company had 14 full-
time employees engaged in sales and marketing.
The Company markets its products through a direct sales force based in the
United States, and indirectly through a worldwide network of independent
manufacturer representatives in many countries worldwide. For the nine months
ended December 31, 1997, 49% of revenue was generated outside North America.
EPITAXX's marketing efforts are focused on positioning and promoting the
Company's products for application in targeted end-markets. The Company's
primary marketing activities include trade show participation and promotion of
the Company's products in trade publications.
CUSTOMERS
The Company's products are used by customers in industries such as
telecommunications, computer networking and CATV. While the Company does not
have any customers whose sales represent more than 10% of the Company's
revenue in the nine months ended December 31, 1997, the Company historically
had such customers, including: AMS GMBH, NSG (an affiliate that distributes
the Company's products) and Siemens AG in fiscal year 1995; Siemens AG in
fiscal year 1996; and NSG in fiscal year 1997. Additionally, in the future,
the Company anticipates having customers who will account for more than 10% of
the Company's revenue in a single year. For the nine months ended December 31,
1997, the Company's largest non-affiliated customers include:
CIENA Corporation Lucent Technologies, Inc.
Finisar Corporation Philips Broadband Networks, Inc.
Harmonic Lightwave, Inc. Philips, N.V.
Hewlett-Packard Company, Inc. Pirelli SpA
JDS FITEL, Inc. Siemens AG
COMPETITION
The Company operates in a highly competitive market. Although the Company
believes that it is the only company specializing solely in optical detectors
and receivers that address multiple markets, it has numerous competitors
worldwide that produce optical detector products in addition to other
products. The Company's ability to continue to develop and introduce new
products or enhancements of existing products may require significant
additional research and development expenditures. Many of the Company's
current and potential competitors have larger research and development
departments, larger sales organizations and substantially greater financial
resources than does the Company. These competitors include Fujitsu Ltd.,
Lucent Technologies, Inc., Mitsubishi Electric Corp. and Siemens AG. Other
companies compete with only a portion of EPITAXX's product line. Companies in
this category include Hamamatsu Photonics KK, Mitel Corporation and Ortel
Corporation. There can be no assurance that competitors will not develop
products that are superior to the Company's products or that achieve greater
market acceptance. In addition, the introduction by competitors of new
products or the reduction in price of competitive products could have a
material adverse effect on the Company's business, financial condition and
operating results. The Company believes that the principal competitive factors
in its markets are product performance, industry expertise, technical
expertise, flexibility, responsiveness to customer needs, quality of service
and perceived value. See "Risk Factors--Competition."
31
<PAGE>
MANUFACTURING AND FACILITIES
The Company owns a 45,000 square foot manufacturing facility on six acres in
West Trenton, New Jersey. Wafer processing, device packaging, hybrid
microelectronics packaging and final assembly and testing are performed in
this facility. Given EPITAXX's strategy to concentrate its resources on
serving markets that value its engineering expertise and ability to quickly
respond to customer demands, the Company's manufacturing operations are
designed for flexibility and short-run batches. The Company believes that the
property owned by the Company is sufficient to meet demand for the foreseeable
future, although some expansion of the manufacturing facility is planned. The
Company plans an addition of approximately 24,000 square feet of office and
manufacturing space during fiscal year 1999 at an estimated cost of $2.0
million. The Company has not yet entered into any contracts for construction
of the planned addition, and believes that internally generated funds,
together with the net proceeds of the offering, will be sufficient to fund the
planned expansion. See "Risk Factors--Manufacturing Risks" and "--Dependence
on Availability of Materials and Key Suppliers."
A number of the processes and techniques used in manufacturing the Company's
products are internally designed or customized. The Company relies exclusively
on its own production capabilities for critical optical detector assemblies
used in its products. These semiconductor devices are manufactured under
cleanroom conditions ranging from class 100 to class 10,000 using two-inch
wafer fabrication technology. The Company's facility has approximately 9,000
square feet of cleanroom space. EPITAXX assembles all of its products using
techniques including die-attachment, wirebonding, packaging and coupling of
optical fibers. The Company inspects and tests products throughout the
manufacturing cycle using commercially available test systems as well as
EPITAXX-designed, proprietary test systems and procedures.
The Company's design and manufacturing processes were certified as ISO 9001
compliant in December 1996 and EPITAXX has maintained compliance with this
standard since that time.
PROPRIETARY RIGHTS
The fiber optics communications industry is characterized by the existence
of a large number of patents and frequent litigation based on allegations of
patent infringement. From time to time, third parties may assert exclusive
patent, copyright, trademark and other intellectual property rights to
technologies that are important to the Company. The Company relies on a
combination of trade secrets, contractual restrictions, copyrights and
trademark laws to establish and protect proprietary rights in its products and
technologies. However, since patent applications in the United States are not
publicly disclosed until the patent is issued, applications may have been
filed by competitors of the Company which could relate to the Company's
products.
Although the Company has been issued one United States patent to date, much
of the Company's proprietary information and technology is not patented and
may not be patentable. The Company believes that the success of its business
depends primarily on its proprietary technology, information and processes and
know-how, rather than patents. There can be no assurance that the Company will
be able to protect its technology or that competitors will not be able to
develop similar technology independently. The Company has entered into
confidentiality and invention assignment agreements with all of its employees,
and enters into non-disclosure agreements with its suppliers, distributors and
appropriate customers so as to limit access to and disclosure of its
proprietary information. There can be no assurance that these statutory and
contractual arrangements will deter misappropriation of the Company's
technologies or discourage independent third-party development of similar
technologies.
While the Company's ability to maintain its leadership position in the
optical detector market may be affected by its ability to protect its
proprietary information and technology, the Company believes that, because of
the rapid pace of technological change in the fiber optics communications
markets, its technical expertise and ability to introduce new products on a
timely basis will be more important in maintaining its competitive position
than protection of its intellectual property. Although the Company continues
to implement protective measures and intends to vigorously defend its
intellectual property rights, there can be no assurance that these measures
will be successful.
32
<PAGE>
The Company may receive communications from third parties in the future
asserting that the Company's products infringe on the proprietary rights of
such third parties. In the event of litigation to determine the validity of
any third-party claims, such litigation, whether or not determined in favor of
the Company, could result in significant expense to the Company and divert the
efforts of the Company's technical and management personnel. In the event of
an adverse ruling in such litigation, the Company might be required to
discontinue the use and sale of infringing products, expend significant
resources to develop non-infringing technology or obtain licenses from third
parties. There can be no assurance that licenses from third parties would be
available on acceptable terms, if at all. A successful claim against the
Company and the failure of the Company to develop or license a substitute
technology could have a material adverse effect on the Company's business,
financial condition and operating results. In addition, the laws of certain
countries in which the Company's products are or may be developed,
manufactured or sold may not protect the Company's products or intellectual
property rights to the same extent as do the laws of the United States and
thus make the possibility of misappropriation of the Company's technology and
products more likely.
EMPLOYEES
As of January 31, 1998, the Company employed 209 persons, including 142 in
manufacturing, 22 in research and development, 14 in sales and marketing, 12
in quality control and 19 in a general and administrative capacity. None of
the Company's employees is represented by a labor union. The Company has not
experienced any work stoppages and considers its relations with its employees
to be good.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
33
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company as of January 31, 1998
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------ --- ----------------------------------------------------------------
<S> <C> <C>
Noboru Hiraguri......... 58 Chief Executive Officer and Vice Chairman of the Board
Yves Dzialowski......... 45 President, Chief Operating Officer and Director
James D. Coleman........ 47 Vice President, Chief Financial Officer, Treasurer and Secretary
George K. Roshon........ 55 Vice President of Manufacturing
Chen-Show Wang.......... 61 Vice President of Advanced Research
Kenji Fujiwara (1)...... 59 Chairman of the Board
Arnold S. Hoff-
man(1)(2).............. 62 Director
Richard J.
Pinola(1)(2)........... 52 Director
Masahiko Tarumizu....... 63 Director
Naotaka Todoroki........ 49 Director
</TABLE>
- --------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
Noboru Hiraguri has served as the Company's Chief Executive Officer since
October 1994, and Vice Chairman of the Board since December 1996. From October
1994 to December 1996, Mr. Hiraguri, in addition to serving as the Company's
Chief Executive Officer, also served as President and a Director of the
Company. From May 1991 to October 1994, Mr. Hiraguri was Chairman of the
Board. From 1973 to October 1994, Mr. Hiraguri held a variety of management
positions with NSG, most recently as General Manager of its Fiber Optics
Division. Mr. Hiraguri received a B.S. in Industrial Chemistry from Kyoto
University.
Yves Dzialowski has served as the Company's President and Chief Operating
Officer since December 1996, and as a Director since August 1990. From 1985 to
December 1996, Dr. Dzialowski served as the Company's Vice President of Sales
and Marketing and Executive Vice President supervising the Sales and Marketing
and Research and Development Groups. Dr. Dzialowski received a Master's degree
in Physics and a Doctorate in Optics from the University of Paris.
James D. Coleman has served as the Company's Vice President and Chief
Financial Officer since December 1996 and has also served as the Company's
Treasurer and Secretary since April 1987. From 1986 to December 1996, Mr.
Coleman held a variety of management positions with the Company, most recently
as Vice President of Operations. Mr. Coleman received a B.S. in Management and
an M.B.A. from LaSalle University.
George K. Roshon has served as the Company's Vice President of Manufacturing
since April 1995. From November 1992 to April 1995, Mr. Roshon served as the
Company's Director of Manufacturing. Mr. Roshon received a B.S. in Electrical
Engineering from Pennsylvania State University and an M.S.E.E. from Drexel
University.
Chen-Show Wang has served as the Company's Vice President of Advanced
Research since December 1996. From June 1991 to December 1996, Dr. Wang held
several executive and managerial positions with the Company in the technology
area. Dr. Wang received an M.S. in Physics from the University of Iowa and a
Ph.D. in Physics from the University of California at San Diego.
Kenji Fujiwara has served as a Director of the Company since May 1991 and as
Chairman of the Board since October 1994. From May 1991 to October 1994, Mr.
Fujiwara served as the Company's President and Chief Executive Officer. Since
October 1994, Mr. Fujiwara has served as a General Manager of NSG. Mr.
Fujiwara received a B.S. in Industrial Chemistry and an M.S. in Engineering
from Kyoto University.
34
<PAGE>
Arnold S. Hoffman has served as a Director of the Company since December
1997. Mr. Hoffman is currently a Senior Managing Director of Legg Mason Wood
Walker, Incorporated, a financial services and brokerage firm, where he has
been employed since January 1992. From August 1989 to January 1992, Mr.
Hoffman was Chairman of the Middle Market Group, an investment bank affiliated
with Shearson Lehman Brothers Inc. Mr. Hoffman is also currently a Director of
Sunsources, L.P., Intelligent Electronics Incorporated and several privately-
held companies. Mr. Hoffman received a B.A. in Journalism from Pennsylvania
State University.
Richard J. Pinola has served as a Director of the Company since December
1997. Mr. Pinola is currently the Chairman and Chief Executive Officer of
Right Management Consultants, Inc. ("Right Management"), a publicly-held
company specializing in career management and human resource consulting. Mr.
Pinola became Chief Executive Officer of Right Management in July 1992 and
Chairman in January 1994. Mr. Pinola is also currently a Director of K-Tron
International, Inc. and several privately-held companies. Mr. Pinola received
a B.A. in Accounting from King's College.
Masahiko Tarumizu has served as a Director of the Company since June 1994.
Mr. Tarumizu is currently a Senior Managing Director of NSG. Since 1988, Mr.
Tarumizu has held a variety of management positions with NSG. Mr. Tarumizu
received a B.S. in Chemistry from Tokyo University.
Naotaka Todoroki has served as a Director of the Company since June 1996.
Mr. Todoroki is currently a Deputy General Manager of Corporate Planning of
NSG. Since 1987, Mr. Todoroki has held a variety of management positions with
NSG. Mr. Todoroki is also currently a Director of several privately-held
companies. Mr. Todoroki received a B.S. in Economics from Hitotsubashi
University.
The Board of Directors is divided into three classes, as nearly equal in
number as possible, having terms expiring at the annual meeting of the
Company's stockholders in 1998 (comprised of Messrs. Hoffman and Tarumizu),
1999 (comprised of Messrs. Fujiwara, Hiraguri and Pinola) and 2000 (comprised
of Messrs. Dzialowski and Todoroki). At each annual meeting of stockholders,
successors to the class of directors whose term expires at such meeting will
be elected to serve for three-year terms and until their successors are
elected and qualified.
DIRECTOR COMPENSATION
Each director who is not an employee of the Company, NSG or an affiliate of
NSG ("Non-Employee Director") will receive fees of $4,000 per year plus $1,200
for each meeting of the Board of Directors attended. In addition, each Non-
Employee Director who is a member of any committee of the Board of Directors
will receive $600 for each committee meeting attended plus another $600 per
meeting of any committee on which such Non-Employee Director serves as the
Chairperson. Further, each Non-Employee Director, upon his or her election to
the Board of Directors, will receive an option to purchase an aggregate of
7,500 shares of Class A Common Stock. Each Non-Employee Director will also
receive an option to purchase an aggregate of 1,500 shares of Class A Common
Stock on the date of each annual stockholders' meeting. All of the options
described above will be granted under the Stock Option Plan at the fair market
value of the Class A Common Stock on the date of grant and will vest in three
equal annual installments commencing on the date of such grant, with the
exception of Messrs. Hoffman and Pinola, whose vesting schedules will begin
upon the consummation of the offering. See "--Benefit Plans--Amended and
Restated 1996 Employee, Director and Consultant Stock Option Plan."
COMMITTEES OF THE BOARD
The Board of Directors has established an Audit Committee and a Compensation
Committee. The Audit Committee oversees the engagement of the Company's
independent accountants, reviews the annual financial statements and the scope
of annual audits and considers matters relating to accounting policy and
internal controls. The members of the Audit Committee are Messrs. Hoffman
(Chairman), Fujiwara and Pinola. The Compensation Committee reviews, approves
and makes recommendations to the Board of Directors concerning the Company's
compensation policies, practices and procedures, as well as reviews and
determines the salaries and bonuses of the Company's executive officers. The
Compensation Committee also administers the Stock Option Plan. The members of
the Compensation Committee are Messrs. Pinola (Chairman) and Hoffman.
35
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to or earned by the
following individuals for services rendered to the Company in all capacities
during the fiscal year ended March 31, 1997: (i) the Chief Executive Officer
of the Company and (ii) the four additional executive officers of the Company
whose salary and bonus for such fiscal year exceeded $100,000 (collectively,
the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
------------------------------
ANNUAL COMPENSATION
---------------------
SECURITIES
RESTRICTED UNDERLYING ALL OTHER
NAME AND POSITIONS SALARY($) BONUS($) STOCK AWARD ($)(1) OPTIONS (#) COMPENSATION($)(2)
- ------------------------ ---------- --------- ------------------ ----------- ------------------
<S> <C> <C> <C> <C> <C>
Noboru Hiraguri......... 161,133 66,915 17,262 27,600 --
Chief Executive Officer
and Vice Chairman
Yves Dzialowski......... 154,133 59,620 17,262 22,800 3,000
President and Chief
Operating Officer
James D. Coleman........ 128,600 44,762 17,262 18,000 3,000
Vice President, Chief
Financial Officer,
Treasurer and
Secretary
George K. Roshon........ 109,850 39,900 -- 18,000 2,878
Vice President of
Manufacturing
Chen-Show Wang.......... 116,641 39,108 -- 13,200 3,000
Vice President of
Advanced Research
</TABLE>
- --------
(1) As of March 31, 1997, Messrs. Hiraguri, Dzialowski and Coleman
(collectively, the "Restricted Stockholders") held 8,400 shares of Class A
Common Stock, having a market value of $2.08 per share, based upon the
fair market value of the Class A Common Stock on the date of grant as
determined by the Board of Directors. Pursuant to the terms of Restricted
Stock Agreements, dated January 21, 1997, between the Company and each of
the Restricted Stockholders (the "Restricted Stock Agreements"), all of
the shares are subject to repurchase by the Company at $2.08 per share in
the event such Restricted Stockholder ceases to be an employee of the
Company prior to the date which is six months after the completion of the
offering.
(2) The amounts in this column represent matching contributions made by the
Company to the Named Executive Officer under the Company's 401(k) Profit-
Sharing Plan.
36
<PAGE>
OPTION GRANTS DURING LAST FISCAL YEAR
The following table sets forth for each of the Named Executive Officers
certain information concerning stock options granted during the fiscal year
ended March 31, 1997.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM(4)
--------------------------------------------------------- --------------------
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN OR BASE EXPIRATION
NAME GRANTED(#)(1) FISCAL YEAR(2) PRICE ($/SH)(3) DATE 5%($) 10%($)
- ------------------------ ------------- ---------------- --------------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Noboru Hiraguri......... 27,600 15.75% 3.33 01/21/07 57,684 146,556
Yves Dzialowski......... 22,800 13.01% 3.33 01/21/07 47,652 121,068
James D. Coleman........ 18,000 10.27% 3.33 01/21/07 37,620 95,580
George K. Roshon........ 18,000 10.27% 3.33 01/21/07 37,620 95,580
Chen-Show Wang.......... 13,200 7.53% 3.33 01/21/07 27,588 70,092
</TABLE>
- --------
(1) The options were granted under the Stock Option Plan and do not become
exercisable until April 1, 2000.
(2) Based on options to purchase an aggregate of 175,200 shares of the Class A
Common Stock granted during the fiscal year ended March 31, 1997 to
employees of the Company, including the Named Executive Officers.
(3) The exercise price per share of each option was determined by the Board of
Directors on the date of grant (as determined by an independent appraisal
conducted by AUS Consultants).
(4) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission and do not
represent the Company's estimate or projection of the Company's future
capital stock prices. The actual value realized may be greater or less
than the potential realizable values set forth in the table.
FISCAL YEAR-END OPTION VALUES
The following table sets forth, for each of the Named Executive Officers,
the fiscal year-end value of unexercised options as of March 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT FISCAL YEAR-
AT FISCAL YEAR-END (#): END($)(1):
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---------------------------- ------------------------- -------------------------
<S> <C> <C>
Noboru Hiraguri............. --/27,600 --/--
Yves Dzialowski............. --/22,800 --/--
James D. Coleman............ --/18,000 --/--
George K. Roshon............ --/18,000 --/--
Chen-Show Wang.............. --/13,200 --/--
</TABLE>
- --------
(1) The options were granted at 142% of the fair market value of the Class A
Common Stock of the Company on the date of grant.
EMPLOYMENT CONTRACTS
The Company has entered into Executive Employment Agreements (the
"Employment Agreements") with each of the Named Executive Officers. The
Employment Agreements are for terms ending March 31, 2000 for each of the
Named Executive Officers, with the exception of Mr. Roshon whose Employment
Agreement expires on April 1, 1998. Each of the Employment Agreements will
automatically renew for three-year periods unless the Company provides the
Named Executive Officer with a written notice of nonrenewal at least 180 days
prior to the expiration of the then-current term of the relevant Employment
Agreement. Such agreements provide for annual base salaries of not less than
$180,000, $165,000, $135,000, $105,000 and $110,000 for Messrs. Hiraguri,
Dzialowski, Coleman, Roshon and Wang, respectively. Such salaries are reviewed
annually by the Board of
37
<PAGE>
Directors. The Employment Agreements also provide each of the Named Executive
Officers with an opportunity for an annual bonus dependent upon certain
performance criteria specified in an annual management incentive compensation
program. In addition, Messrs. Hiraguri, Dzialowski and Coleman each have a
total of 8,400 shares of restricted stock under the Restricted Stock
Agreements. In the event that any Restricted Stockholder ceases to be an
employee of the Company prior to the date which is six months after the
completion of this offering, the Company has the right to repurchase such
restricted stock at $2.08 per share. Further, Messrs. Hiraguri, Dzialowski,
Coleman, Roshon and Wang have options to purchase a total of 27,600, 22,800
and 18,000, 18,000 and 13,200 shares of Class A Common Stock, respectively,
under the Stock Option Plan. Such options will become fully vested on April 1,
2000.
Under the Employment Agreements, in the event a Named Executive Officer is
terminated as a result of the Company undergoing a "Change of Control," or a
Named Executive Officer terminates his employment because of a lessening of
job responsibilities or because the Company's headquarters are moved more than
35 miles, such Named Executive Officer will be able to immediately exercise
all of his shares of restricted stock and stock options, as applicable, shall
receive a lump-sum payment equal to two times the sum of his highest annual
salary and his highest annual bonus received within the last three years,
shall continue for two years to receive benefits identical to those then
currently received and shall have the opportunity to receive out-placement and
career counseling services at a cost not to exceed 15% of his then-current
annual salary. A "Change of Control" is defined as the acquisition of the
beneficial ownership of a majority of the Company's voting securities or all
or substantially all of the assets of the Company by an unaffiliated person or
group of persons, or the merger, consolidation or combination of the Company
with an unaffiliated corporation in which a change in the majority of the
members of the Board of Directors occurs. If a Named Executive Officer is
terminated without cause during the term of his Employment Agreement, he will
be paid his full salary from the date of notice of termination until 12 months
thereafter and he shall receive benefits identical to those then currently
received for such 12-month period, provided that his continued participation
under the relevant benefit plans is permissible. If a Named Executive Officer
is terminated because of retirement, death, disability, or for cause, then he
will be paid only such salary as is then due him. Should termination occur
because of retirement, death or disability, the Company may elect to pay such
Named Executive Officer or his estate a prorated award under the Company's
annual incentive pay plan, and may elect to accelerate the vesting of his
shares of restricted stock and stock options, as applicable. If a Named
Executive Officer terminates his employment without good reason, as such term
is defined in the Employment Agreements, the Company may elect to continue to
make salary payments for a period of up to 12 months thereafter. During the
term of the Employment Agreement and for one year following its termination, a
Named Executive Officer shall not, either directly or indirectly, compete with
the Company. In addition, a Named Executive Officer is prohibited from
disclosing any material confidential information of the Company during the
term of his employment or at any time thereafter. Upon the successful
completion of the offering, each of Messrs. Hiraguri, Dzialowski and Coleman
will receive a car allowance of $500 per month for three years.
BENEFIT PLANS
Amended and Restated 1996 Employee, Director and Consultant Stock Option Plan
The Stock Option Plan was initially approved by the Board of Directors and
the stockholder in December 1996. The Board of Directors amended the Stock
Option Plan in December 1997. A total of 574,800 shares of Class A Common
Stock have been reserved for issuance under the Plan upon the exercise of
options.
Options granted under the Stock Option Plan may be either (i) options
intended to qualify as "incentive stock options" under Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), or (ii) nonqualified
stock options. Incentive stock options may be granted under the Stock Option
Plan only to employees of the Company and its affiliates. Nonqualified stock
options may be granted to consultants, directors, employees or officers of the
Company and its affiliates. The Stock Option Plan provides that each Non-
Employee Director will receive, upon his or her election to the Board of
Directors, an option to purchase an aggregate of 7,500 shares of Class A
Common Stock, and, on the date of each annual stockholders' meeting, an
additional option to purchase an aggregate of 1,500 shares of Class A Common
Stock. Each of the above-mentioned options
38
<PAGE>
will vest in three equal annual installments beginning on the date of grant
and will have an exercise price equal to the fair market value of the Class A
Common Stock on the date of grant. Messrs. Hoffman and Pinola have each
received an option to purchase 7,500 shares of Class A Common Stock which will
vest in three equal annual installments beginning upon the consummation of the
offering and will have an exercise price equal to the initial public offering
price of the Class A Common Stock.
The Stock Option Plan is administered by the Compensation Committee of the
Board of Directors. Subject to the provisions of the Stock Option Plan, the
Compensation Committee has the authority to interpret the provisions of the
Stock Option Plan, and to determine the persons to whom options will be
granted, the number of shares to be covered by each option and the terms and
conditions upon which an option may be granted. The aggregate fair market
value (determined at the time of grant) of shares issuable pursuant to
incentive stock options which become exercisable in any calendar year by any
employee or officer may not exceed $100,000. Incentive stock options granted
under the Stock Option Plan may not be granted at an exercise price less than
fair market value of the Class A Common Stock on the date of grant (or 110% of
the fair market value in the case of employees or officers holding 10% or more
of the voting stock of the Company). Nonqualified stock options granted under
the Stock Option Plan may not be granted at an exercise price less than the
par value of a share of Class A Common Stock. Incentive stock options granted
under the Stock Option Plan expire not more than 10 years from the date of
grant, or not more than five years from the date of grant in the case of
incentive stock options granted to an employee or officer holding 10% or more
of the voting stock of the Company.
An option granted under the Stock Option Plan is exercisable, during the
optionholder's lifetime, only by the optionholder and is not transferable by
him or her except by will or by the laws of descent and distribution. An
incentive stock option granted under the Stock Option Plan may, at the Board
of Directors' discretion, be exercised after the termination of the
optionholder's employment with the Company (other than by reason of death,
disability or termination for cause as defined in the Stock Option Plan) to
the extent exercisable on the date of such termination, for up to 90 days
following such termination, provided that such incentive stock option has not
expired on the date of such exercise. In granting any nonqualified stock
option, the Board of Directors may specify that such nonqualified stock option
shall be subject to such termination or cancellation provisions as the Board
of Directors may specify. In the event of the optionholder's death, both
incentive stock options and nonqualified stock options may be exercised, to
the extent exercisable on the date of death, by the optionholder's survivors
at any time prior to the earlier of the option's specified expiration date or
one year from the date of the optionholder's death.
As of January 31, 1998, options to purchase an aggregate of 169,272 shares
of Class A Common Stock were outstanding under the Stock Option Plan at a
weighted average exercise price of $3.92 per share, assuming an exercise price
of $10.00 per share for options to purchase 15,000 shares of Class A Common
Stock which become exercisable upon consummation of the offering at the
initial public offering price. All other outstanding options to purchase
shares of Class A Common Stock were granted at a price of $3.33 per share.
401(k) Plan
Employees of the Company who have completed at least six months of service
and who are at least 18 years of age are eligible to participate in the
Company's 401(k) Profit-Sharing Plan, as amended (the "401(k) Plan"). The
401(k) Plan is intended to qualify under Section 401(k) of the Code. Employees
may elect to defer their eligible current compensation up to the statutorily
and 401(k) Plan prescribed limits and have the amount of such deferral
contributed to the 401(k) Plan. A Company match of employee contributions up
to the 401(k) Plan prescribed limit may also be contributed to the 401(k) Plan
and becomes an asset of the employee upon vesting. Contributions to the 401(k)
Plan may be used to purchase units in various investment funds.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee are Messrs. Pinola (Chairman) and
Hoffman. No executive officer of the Company serves as a member of the board
of directors or compensation committee of any entity that has one or more
executive officers serving as members of the Company's Board of Directors or
Compensation Committee.
39
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Company's Common Stock as of January 31, 1998, and
adjusted to reflect the consummation of the offering by (i) each of the Named
Executive Officers, (ii) each of the Company's directors, (iii) all executive
officers and directors of the Company as a group and (iv) NSG, the only person
known to beneficially own 5% or more of the outstanding shares of either Class
A Common Stock or Class B Common Stock.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK SHARES OF COMMON STOCK
BENEFICIALLY OWNED BENEFICIALLY OWNED
PRIOR TO THE OFFERING(1) AFTER THE OFFERING
--------------------------------- ---------------------------------------
NUMBER % OF VOTING NUMBER % OF VOTING
NAME OF SHARES OUTSTANDING(2) POWER(2) OF SHARES OUTSTANDING(2) POWER(2)(3)
- ------------------------ --------- -------------- -------- --------- -------------- -----------
CLASS A COMMON STOCK(4)(5)
--------------------------
<S> <C> <C> <C> <C> <C> <C>
NAMED EXECUTIVE OFFI-
CERS:
Noboru Hiraguri......... 8,400 * * 8,400 * *
Yves Dzialowski......... 8,400 * * 8,400 * *
James D. Coleman........ 8,400 * * 8,400 * *
George K. Roshon........ -- * * -- * *
Chen-Show Wang.......... -- * * -- * *
DIRECTORS:
Kenji Fujiwara(5)....... -- * * -- * *
Arnold S. Hoffman(6).... 2,500 * * 2,500 * *
Richard J. Pinola(6).... 2,500 * * 2,500 * *
Masahiko Tarumizu(5).... -- * * -- * *
Naotaka Todoroki(5)..... -- * * -- * *
All directors and
executive officers as a
group (10
persons)(7):........... 30,200 * * 30,200(7) * *
<CAPTION>
CLASS B COMMON STOCK(4)
-----------------------
<S> <C> <C> <C> <C> <C> <C>
5% STOCKHOLDER:
Nippon Sheet Glass Co., 5,088,000 99.51% 99.84% 5,088,000 70.05% 87.53%
Ltd.(8)(9)(10).........
NSG Tokyo Bldg., 1-7 2-
chome, Kaigan, Minato-
Ku Tokyo 105, Japan
</TABLE>
- --------
* Represents beneficial ownership of less than 1% of the outstanding shares
of Common Stock.
(1) Except as indicated in footnotes to this table, the Company believes that
the stockholders named in this table have sole voting and investment power
with respect to all shares of Common Stock shown to be beneficially owned
by them based on information provided to the Company by such stockholders.
(2) Represents percentage of all outstanding Common Stock.
(3) Holders of both classes of Common Stock vote as a single class on all
matters submitted to a vote of stockholders, with each share of Class A
Common Stock entitled to one vote and each share of Class B Common Stock
entitled to three votes for each share of Class A Common Stock into which
Class B Common Stock is convertible.
(4) The Class B Common Stock is convertible into Class A Common Stock on a
share-for-share basis, subject to adjustment for stock dividends, stock
splits, subdivisions or combinations. See "Description of Capital Stock--
Common Stock--Voting Rights."
(5) Excludes the shares of Class B Common Stock held by NSG, as to which
Messrs. Fujiwara, Tarumizu and Todoroki disclaim beneficial ownership.
Messrs. Fujiwara, Tarumizu and Todoroki are General Manager, Senior
Managing Director and Deputy General Manager of Corporate Planning of NSG,
respectively.
(6) Consists of shares of Class A Common Stock underlying options which become
exercisable upon the consummation of the offering.
(7) Includes 5,000 shares of Class A Common Stock underlying options which
become exercisable upon the consummation of the offering.
(8) NSG will not own any shares of Class A Common Stock upon the consummation
of the offering.
(9) The shares of Class B Common Stock are owned of record by NSG Holding, a
wholly owned subsidiary of NSG.
(10) No natural person is deemed to beneficially own 5% or more of NSG.
40
<PAGE>
RELATIONSHIP BETWEEN THE COMPANY AND NSG
Prior to the offering, the Company had been a subsidiary of NSG Holding,
which is a wholly owned subsidiary of NSG, located at NSG Tokyo Bldg., 1-7, 2-
chome, Kaigan, Minato-Ku, Tokyo 105, Japan. Upon the consummation of the
offering, NSG Holding will own 5,088,000 shares of Class B Common Stock, which
will represent 87.53% of the voting power of the outstanding Common Stock
(85.94% if the Underwriters' over-allotment option is exercised in full). See
"Risk Factors--Control by and Relationship with NSG" and "Description of
Capital Stock."
In December 1997, the Company declared a $10,049,528 cash dividend to the
stockholders of record on December 11, 1997, of which $10.0 million is payable
to NSG Holding. The purpose of the dividend was to implement general financial
planning policies within the NSG global organization, which contemplate
distribution of assets of international affiliates to the ultimate parent
where appropriate and consistent with the financial needs and objectives of
such affiliates. The dividend is evidenced by the Dividend Notes dated
February 9, 1998, bearing interest at a rate of 6.02% per annum, payable semi-
annually. The principal amount of the Dividend Notes is payable on the earlier
of (i) the date the Company's total stockholders' equity first equals or
exceeds $15.0 million and (ii) February 9, 2001, provided that on such date
the Company's total stockholders' equity equals or exceeds $15.0 million. The
sale of Class A Common Stock offered hereby will cause the Company's total
stockholders' equity to exceed $15.0 million. As a result, the Company will
use approximately $10.1 million of the net proceeds from the offering to repay
the principal amount of the Dividend Notes plus interest thereon. See "Use of
Proceeds."
The Company and NSG or NSG Holding have entered into a number of agreements
for the purpose of defining the ongoing relationship between them. These
agreements were negotiated in the context of a parent-subsidiary relationship
and therefore are not the result of negotiations between independent parties.
The Company and NSG intended for such agreements and the transactions provided
for therein to be mutually beneficial and on overall terms which the Company
and NSG believed to be at least as favorable to the Company as could have been
obtained from unrelated third parties. However, because of the complexity of
the various relationships between the Company and NSG, there can be no
assurance that the terms of any individual element of such arrangements are as
favorable to the Company as could have been obtained from unaffiliated third
parties. While these agreements will provide the Company with certain
benefits, the Company is only entitled to the ongoing assistance of NSG for a
limited time and may not enjoy benefits from its relationship with NSG beyond
the terms of the agreements. There can be no assurance that the Company, upon
termination of such assistance from NSG, will be able to adequately provide
such services internally or will be able to obtain favorable arrangements from
third parties to replace such services. See "Risk Factors--Control by and
Relationship with NSG."
Additional or modified arrangements and transactions may be entered into by
the Company and NSG upon the consummation of the offering. Any such future
arrangements and transactions will be determined through negotiation between
the Company and NSG. All future agreements between the Company and NSG will be
on terms that the Company believes are no less favorable to the Company than
the terms the Company believes would be available from unaffiliated parties.
In that regard, the Company intends to follow the procedures provided by the
Delaware General Corporation Law (the "DGCL") which include a vote to affirm
any such future agreements by a majority of the Company's directors who are
not employees of NSG (even though such directors may be less than a quorum).
There can be no assurance that any such arrangements or transactions will be
the same as that which would be negotiated between independent parties.
The following is a summary of certain arrangements between the Company and
NSG. Each description is qualified in its entirety by reference to the
applicable agreement, a copy of which is filed as an exhibit to the
Registration Statement of which this Prospectus is a part. The following
summaries address all material provisions of such agreements. See "Additional
Information."
41
<PAGE>
MASTER COOPERATION AGREEMENT
The Company and NSG entered into a Master Cooperation Agreement, dated as of
April 1, 1997 (the "Cooperation Agreement"), pursuant to which NSG agreed to
continue to cooperate with the Company to pursue effective business
development and synergy of the Company's business and NSG's fiber optics
related business.
The Cooperation Agreement initially terminates on March 31, 2000. After such
initial term, the Cooperation Agreement will be automatically renewed for
successive three-year periods unless either party gives written termination
notice to the other party at least 30 days prior to the expiration of the
then-current term. Under the Cooperation Agreement, neither party is required
to pay the other party any fees or other monetary compensation.
MANAGEMENT SERVICES AGREEMENT
The Company and NSG entered into a Management Services Agreement, dated as
of April 1, 1997 (the "Services Agreement"), pursuant to which NSG agreed to
continue to provide certain management services, including personnel, banking
and credit services, productivity improvement advice, and assistance in the
development of relationships in Asia and Europe with potential customers for
the Company's products. NSG, if requested by the Company, will also be
required to bear a portion of the compensation expense associated with the
personnel provided by NSG.
The Services Agreement initially terminates on March 31, 2000. After such
initial term, the Services Agreement will be automatically renewed for
successive three-year periods unless either party gives written termination
notice to the other party at least 30 days prior to the expiration of the
then-current term.
The Company is obligated to pay fees established in the Services Agreement
of not less than 0.5% and not more than 1.0% of Net Sales (as defined in the
Services Agreement). The fees are payable semi-annually on October 1 and April
1 of each year with respect to services provided and Net Sales generated in
the previous six-month period. For the nine months ended December 31, 1997,
the Company incurred $91,742 in fees under the Management Services Agreement,
of which $60,000 was paid at December 31, 1997.
RESEARCH AND DEVELOPMENT AGREEMENT
The Company and NSG entered into a Research and Development Agreement, dated
as of April 1, 1997 (the "R&D Agreement"), pursuant to which NSG agreed to
provide the Company with certain research and development services on a basis
the parties believe will permit the Company to enhance the development of its
technology.
The Company agreed to pay such fees to NSG as are mutually agreed upon as
consideration for services provided pursuant to the R&D Agreement. For the
nine months ended December 31, 1997, the Company incurred $75,000 in fees
under the R&D Agreement, of which $50,000 was paid at December 31, 1997.
The R&D Agreement initially terminates on March 31, 2000. After such initial
term, the R&D Agreement will be automatically renewed for successive three-
year periods unless either party gives written termination notice to the other
party at least 30 days prior to the expiration of the then-current term.
DISTRIBUTION AGREEMENT
The Company and NSG entered into a Distribution Agreement, dated as of April
1, 1997 (the "Distribution Agreement"), pursuant to which NSG agreed to act as
the exclusive distributor of all of the Company's products in Japan. The
Distribution Agreement provides that the Company will sell its products to NSG
at prices to be agreed upon from time to time, on a case-by-case basis, for
resale in Japan. For the nine months ended December 31, 1997, sales by the
Company to NSG under the Distribution Agreement totaled $1.1 million.
42
<PAGE>
The Distribution Agreement will continue until terminated by agreement of
the parties, or by written notice from one party to the other, at least 90
days before the proposed termination date, or by either party during the
period beginning on the date NSG ceases to own, directly or indirectly, at
least 30% of the capital stock of the Company.
TAX SHARING AGREEMENT
Pursuant to a Tax Sharing Agreement between the Company and NSG Holding,
dated as of April 1, 1993 (the "Tax Sharing Agreement"), NSG Holding agreed to
prepare and file all tax returns that are required of the Company with NSG
Holding on a consolidated basis, to the extent permitted by applicable tax
laws, beginning with the taxable year ended March 31, 1994 and continuing for
all subsequent tax periods. Upon completion of the offering, NSG Holding and
the Company will no longer file on a consolidated basis. Under the Tax Sharing
Agreement, the Company pays NSG Holding an amount equal to the income tax
liability that the Company would have incurred had it filed an income tax
return on a separate basis for the relevant tax period. If, on the other hand,
the Company would have had a net tax loss or tax credits in excess of tax
liabilities had it filed an income tax return on a separate basis, then NSG
Holding pays the Company an amount equal to any refund.
AGREEMENT FOR LINE OF CREDIT
On May 31, 1997, the Company and NSG Holding entered into a one-year, $6.0
million dollar Agreement for Line of Credit (the "Line of Credit"). On January
15, 1998, this one-year agreement was extended to March 31, 1999, such
extension to be effective on May 31, 1998. The Company borrows under the Line
of Credit to meet working capital requirements and to fund certain capital
expenditures. The Company does not believe that the loss of credit support
from NSG Holding, if it were to occur, would have a material adverse effect on
the Company's business, financial condition and operating results. Borrowings
under the Line of Credit bear interest at LIBOR plus 0.25%. Principal and
accrued interest must be paid no later than the May 31, 1998 maturity date, as
extended to March 31, 1999. If such amount is not paid on the maturity date,
however, then interest from such date will accrue at LIBOR plus 2.00%. As of
December 31, 1997, the Company had drawn down $3.2 million under the Line of
Credit. Since December 31, 1997, the Company has drawn an additional $500,000
under the Line of Credit. The Company intends to use a portion of the net
proceeds from the offering to repay all amounts owed to NSG Holding under the
Line of Credit. See "Use of Proceeds."
43
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 12,500,000 shares of
Class A Common Stock, 7,500,000 shares of Class B Common Stock and 5,000,000
shares of Preferred Stock, each with a par value of $0.01 per share. After the
consummation of the offering, 2,175,200 shares of Class A Common Stock and
5,088,000 shares of Class B Common Stock will be issued and outstanding. No
shares of Preferred Stock will be issued and outstanding upon the consummation
of the offering.
The following description of the capital stock of the Company and certain
provisions of the Company's Restated Certificate of Incorporation and Amended
and Restated Bylaws is a summary of all material terms thereof and is
qualified in its entirety by the provisions of the Restated Certificate of
Incorporation and Amended and Restated Bylaws, which have been filed as
exhibits to the Company's Registration Statement, of which this Prospectus is
a part.
COMMON STOCK
Dividends. Holders of record of shares of Common Stock are entitled to
receive such dividends when, if and as may be declared by the Board of
Directors out of funds legally available for such purposes. No dividends may
be declared or paid on any share of Class A Common Stock unless such dividend
is simultaneously declared or paid on each share of Class B Common Stock equal
to the amount which would have been payable with respect to such shares of
Class B Common Stock had such shares been converted into Class A Common Stock
immediately prior to the record date of such dividend. No dividends may be
declared or paid on any shares of Class B Common Stock unless a similar
dividend is simultaneously declared or paid on each share of Class A Common
Stock.
Voting Rights. Upon the consummation of the offering, holders of Class A
Common Stock are entitled to one vote per share and holders of Class B Common
Stock are entitled to three votes for each share of Class A Common Stock into
which Class B Common Stock is convertible, subject to adjustment to preserve
such initial voting ratio. Holders of shares of Class A Common Stock and Class
B Common Stock will vote as a single class on all matters submitted to a vote
of stockholders, except as otherwise required by law. Upon the consummation of
the offering, NSG Holding will own 5,088,000 shares of Class B Common Stock,
which will represent 87.53% of the voting power of the outstanding Common
Stock (85.94% if the Underwriters' over-allotment option is exercised in
full). As a result, NSG Holding will have sufficient voting power to control
the direction and policies of the Company, including stockholder votes with
respect to mergers, consolidations, the sale of all or substantially all of
the assets of the Company, the election of the Board of Directors and whether
a change in control of the Company occurs.
Convertibility. Each share of Class B Common Stock is convertible, at the
option of the holder, into one share of Class A Common Stock at any time,
subject to adjustment for stock dividends, stock splits, subdivisions or
combinations with respect to the shares of Class A Common Stock. If, however,
NSG Holding sells or otherwise transfers beneficial ownership of any shares of
Class B Common Stock to a third person or entity (other than NSG or a wholly
owned subsidiary of NSG), such shares will be automatically converted into
shares of Class A Common Stock. The shares of Class A Common Stock are not
convertible into shares of Class B Common Stock.
Liquidation Rights. Upon liquidation, dissolution or winding up of the
Company, the holders of Class A Common Stock are entitled to share ratably
with the holders of Class B Common Stock in all assets available for
distributions after payment in full to creditors, subject to adjustment for
stock dividends, stock splits, subdivisions or combinations with respect to
Class A Common Stock, as well as any rights of holders of any shares of
Preferred Stock that may be issued in the future.
Other Provisions. The holders of Common Stock are not entitled to preemptive
or subscription rights. In any merger, consolidation or business combination,
the consideration to be received per share by holders of Class A Common Stock
must be identical to that received by holders of Class B Common Stock.
PREFERRED STOCK
The Board of Directors has the authority to issue up to 5,000,000 shares of
Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, conversion
44
<PAGE>
rights, voting rights, terms of redemption, liquidation preferences, sinking
fund terms and the number of shares constituting any series or the designation
of such series, without any further vote or action by stockholders. The
Company believes that this authority will provide flexibility in connection
with possible corporate transactions. However, the issuance of Preferred Stock
could also adversely affect the voting power of holders of Common Stock and
the likelihood that such holders will receive dividend payments and payments
upon liquidation of the Company. Further, Preferred Stock could also have the
effect of delaying, deferring or preventing a change in control of the
Company. The Company has no present plan to issue any shares of Preferred
Stock.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Restated Certificate of Incorporation contains provisions (i)
eliminating the personal liability of its directors, officers, employees and
other agents for monetary damages resulting from breaches of their fiduciary
duty to the fullest extent permitted by law and (ii) indemnifying its
directors and officers to the fullest extent permitted by the DGCL. These
provisions in the Restated Certificate of Incorporation do not eliminate the
duty of care and, in appropriate circumstances, equitable remedies such as an
injunction or other forms of non-monetary relief would remain available under
the DGCL. Each director will continue to be subject to liability for breach of
a director's duty of loyalty to the Company or its stockholders, for acts or
omissions not in good faith or involving intentional misconduct, for knowing
violations of law, for any transactions from which the director derived an
improper personal benefit and for improper distributions to stockholders.
These provisions also do not affect a director's responsibilities under any
other laws, such as the federal securities laws or state or federal
environmental laws.
The Company's Restated Certificate of Incorporation and Amended and Restated
Bylaws also permit the Company to secure insurance on behalf of any person it
is required or permitted to indemnify for any liability arising out of his or
her actions in such capacity, regardless of whether the DGCL would permit
indemnification. The Company maintains liability insurance for its directors
and officers.
At present there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company where indemnification will
be required or permitted and the Company is not aware of any other threatened
litigation or proceeding that might result in a claim for such
indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, employees and other agents of the
Company pursuant to the foregoing provisions or otherwise, the Company has
been advised that, in the opinion of the Securities and Exchange Commission
(the "Commission"), such indemnification is against public policy as expressed
in the Securities Act and is therefore unenforceable.
ANTI-TAKEOVER EFFECTS OF RESTATED CERTIFICATE OF INCORPORATION AND AMENDED AND
RESTATED BYLAWS
The Company's Restated Certificate of Incorporation or Amended and Restated
Bylaws, as applicable, among other things, (i) require stockholders to follow
an advance notification procedure for stockholder nominations of candidates to
the Board of Directors and for new business to be conducted at stockholder
meetings, (ii) provide that the Board of Directors, without action by the
stockholders, may issue and fix the rights and preferences of shares of
Preferred Stock and (iii) divide the members of the Board of Directors into
three classes, as nearly equal in number as possible, such that the current
directors will serve initial terms expiring at the 1998, 1999 and 2000 annual
stockholders' meeting, respectively, with the directors in each class
thereafter being elected for three-year terms. These provisions may have the
effect of delaying, deferring or preventing a change of control of the Company
without further action by the stockholders, may discourage bids for the Class
A Common Stock at a premium over the market price of the Class A Common Stock,
may adversely affect the market price of, and the voting and other rights of
the holders of, the Class A Common Stock and could have the effect of
discouraging certain attempts to acquire the Company or remove incumbent
management or members of the Board of Directors even if some or a majority of
the Company's stockholders deemed such an attempt to be in their best
interests. Furthermore, after the offering, NSG will have 87.53% of the voting
control
45
<PAGE>
of the Company (85.94% if the Underwriters' over-allotment option is exercised
in full). Voting control by NSG may discourage certain types of transactions
involving an actual or potential change of control of the Company, including
transactions in which the holders of the Class A Common Stock might receive a
premium for their shares over the prevailing market price of the Class A
Common Stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Class A Common Stock is American
Stock Transfer and Trust Company, New York, New York.
LISTING
The Company has been approved to have the Class A Common Stock quoted on the
Nasdaq National Market under the symbol "EPXX."
46
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of the offering, the Company will have outstanding an
aggregate of 2,175,200 shares of Class A Common Stock (2,497,700 if the
Underwriters' over-allotment option is exercised in full) and 5,088,000 shares
of Class B Common Stock. Of the total outstanding shares of Common Stock,
2,150,000 shares of Class A Common Stock sold in the offering will be freely
tradable without restriction or further registration under the Securities Act,
unless purchased by "affiliates" of the Company, as that term is defined in
Rule 144 under the Securities Act ("Rule 144"). Sales by such affiliates will
be subject to certain volume limitations and other restrictions described
below.
The 5,088,000 shares of Class B Common Stock held by NSG Holding and the
remaining 25,200 shares of Class A Common Stock will be "restricted
securities" as that term is defined in Rule 144 (the "Restricted Shares"). In
general, under Rule 144, a person (or persons whose shares are aggregated with
those of others), including any affiliate of the Company, is entitled to sell
in brokers' transactions or directly to market makers, within any three-month
period, a number of Restricted Shares that does not exceed the greater of (i)
1.0% of the class of such shares then outstanding or (ii) the average weekly
trading volume of the class of such shares in the over-the-counter market
during the four calendar weeks preceding the date on which notice of such sale
is filed with the Commission, provided that certain current public information
concerning the Company is then available, that the seller complies with
certain manner-of-sale provisions and notice requirements, and that at least
one year has elapsed since the Restricted Shares were fully paid for and
acquired from the Company or an affiliate of the Company. A person (or persons
whose shares are aggregated with those of others) who is not an affiliate of
the Company at any time during the three months preceding any sale by such
person, is entitled to sell such shares under Rule 144(k) without regard to
the limitations described above, provided that at least two years have lapsed
since the Restricted Shares were fully paid for and acquired from the Company
or an affiliate of the Company. (However, Rule 144(k) is not expected to be
available to NSG Holding for the foreseeable future.) The above is a summary
of Rule 144 and is not intended to be a complete description thereof or a
complete description of the rights of the parties to sell shares of Common
Stock thereunder.
Approximately 5,113,200 Restricted Shares will be eligible for sale in the
public market beginning 180 days after the effective date of the offering,
pursuant to Rule 144 upon the expiration of certain lock-up agreements entered
into between the Underwriters and the holders of such Restricted Shares. All
of the 5,113,200 Restricted Shares will be subject to certain volume
limitations and other restrictions pursuant to Rule 144. In addition, the
Company intends to file a Registration Statement on Form S-8 after the
effective date of the offering to register 574,800 shares of Class A Common
Stock issuable upon the exercise of stock options under the Stock Option Plan.
Such shares of Class A Common Stock issued pursuant to the Stock Option Plan
will be available for sale in the public market after the effective date of
the Registration Statement on Form S-8, subject to the expiration of the lock-
up agreements with the Underwriters. See "Management--Benefit Plans--Amended
and Restated 1996 Employee, Director and Consultant Stock Option Plan."
Except as indicated above, the Company is unable to estimate the amount,
timing or nature of future sales of outstanding Common Stock. There was no
market for the Company's capital stock prior to the offering, and no
predictions can be made as to the effect, if any, that market sales of shares
or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of substantial amounts of
the Class A Common Stock in the public market may have an adverse effect on
the market price thereof, and could impair the Company's ability to raise
capital through the future sale of its equity securities.
LOCK-UP AGREEMENTS
Pursuant to certain agreements, all of the Company's directors, executive
officers and shareholders, owning as of the date hereof all of the outstanding
Common Stock and all outstanding vested and unvested stock options, have
agreed that they will not, without the prior written consent of Cowen &
Company, offer, sell, contract to sell or otherwise dispose of any shares of
Class A Common Stock or options to acquire shares of Class A Common Stock or
securities exchangeable for or convertible into shares of Class A Common Stock
or any right to acquire shares of Class A Common Stock owned by them, for a
period of 180 days after the date of this Prospectus. See "Underwriting."
47
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
(the "Underwriting Agreement"), the Company has agreed to sell to each of the
underwriters named below (the "Underwriters"), and each of the Underwriters,
for whom Cowen & Company, CIBC Oppenheimer Corp. and Daiwa Securities America
Inc. are acting as representatives (the "Representatives"), have severally
agreed to purchase from the Company, the respective number of shares of Class
A Common Stock set forth opposite the name of such Underwriter below:
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF CLASS A
UNDERWRITERS COMMON STOCK
- ------------ ----------------
<S> <C>
Cowen & Company................................................
CIBC Oppenheimer Corp. ........................................
Daiwa Securities America Inc. .................................
---------
Total...................................................... 2,150,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters are
committed to purchase all shares of Class A Common Stock offered hereby (other
than those covered by the over-allotment option described below), if any of
such shares are purchased.
The Underwriters propose to offer the shares of Class A Common Stock,
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and to certain dealers at a price less a
concession not in excess of $ per share. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $ per share to certain
brokers and dealers. After the shares of Class A Common Stock are released for
sale to the public, the offering price and other selling terms may from time
to time be varied by the Underwriters.
The Company has granted the Underwriters an option, exercisable for up to 30
days after the date of this Prospectus, to purchase up to an aggregate of
322,500 additional shares of Class A Common Stock to cover over-allotments, if
any. If the Underwriters exercise such over-allotment option, the Underwriters
have severally agreed, subject to certain conditions, to purchase
approximately the same percentage thereof that the number of shares of Class A
Common Stock to be purchased by each of them shown in the foregoing table
bears to the total number of shares of Class A Common Stock offered hereby.
The Underwriters may exercise such option only to cover over-allotments made
in connection with the sale of shares of Class A Common Stock made hereby.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments that the Underwriters may be required to make in respect thereof.
The Company and the Company's officers, directors, and shareholders have
agreed not to offer, sell, contract to sell or otherwise dispose of any shares
of Class A Common Stock or any securities convertible into or exercisable or
exchangeable for Class A Common Stock or any right to acquire shares of Class
A Common Stock owned by them for a period of 180 days after the date of this
Prospectus without the prior written consent (which consent may be given
without notice to the Company, the stockholders or by other public
announcement) of Cowen & Company.
The Representatives have advised the Company that they currently intend to
make a market in the Class A Common Stock following this offering although
they have no obligation to do so and may cease such market making at any time.
There can be no assurance that a market in the Class A Common Stock will
develop after the offering.
48
<PAGE>
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales in excess of 5% of the shares of Class A Common Stock
offered hereby to any accounts over which they exercise discretionary
authority.
In order to facilitate the offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Class A Common Stock. Specifically, the Underwriters may over-allot in
connection with the offering, creating a short position in the Class A Common
Stock for their own account. In addition, to cover over-allotments or to
stabilize the price of the Class A Common Stock, the Underwriters may bid for,
and purchase, shares of the Class A Common Stock in the open market. The
Underwriters may also reclaim selling concessions allowed to an underwriter or
a dealer for distributing the Class A Common Stock in the offering, if the
Underwriters repurchase previously distributed Class A Common Stock in
transactions to cover their short positions, in stabilization transactions or
otherwise. Finally, the Underwriters may bid for, and purchase, shares of the
Class A Common Stock in market making transactions and impose penalty bids.
These activities may stabilize or maintain the market price of the Class A
Common Stock above market levels that may otherwise prevail. The Underwriters
are not required to engage in these activities and may end any of these
activities at any time.
Prior to the offering, there has been no public market for the Company's
capital stock. Consequently, the initial public offering price for the Class A
Common Stock will be determined by negotiations among the Company and the
Representatives. Among the factors to be considered in such negotiations, in
addition to prevailing market conditions, will be the Company's historical
performance, estimates of the business potential and earnings prospects of the
Company, an assessment of the Company's management and the consideration of
the above factors in relation to market valuation of companies in related
businesses. The estimated initial public offering price range set forth on the
cover page of this Preliminary Prospectus is subject to change as a result of
market conditions or other factors.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Class A Common
Stock offered hereby will be passed upon for the Company by Mintz, Levin,
Cohn, Ferris, Glovsky and Popeo, P.C., Boston, Massachusetts, and for the
Underwriters by O'Sullivan Graev and Karabell, LLP, New York, New York.
EXPERTS
The Consolidated Financial Statements and schedule of the Company as of
March 31, 1997 and 1996 and December 31, 1997 and for each of the years in the
three-year period ended March 31, 1997 and for the nine-month period ended
December 31, 1997, have been included herein and in this Prospectus in
reliance upon the reports of KPMG Peat Marwick LLP, independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing. The firm of AUS Consultants
provided an appraisal to the Company as of March 31, 1997, related to the
grant of stock options by the Board of Directors.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act, with respect to the Class A Common Stock offered
hereby. As permitted by the rules and regulations of the Commission, this
Prospectus, which is part of the Registration Statement, omits certain
information, exhibits, schedules and undertakings set forth in the
Registration Statement. For further information pertaining to the Company and
the Class A Common Stock, reference is made to such Registration Statement and
the exhibits and schedules thereto. Statements contained in this Prospectus as
to the contents or provisions of any documents referred to herein are not
necessarily complete, and in each instance where a copy of the document has
been filed as an exhibit to the Registration Statement, reference is made to
the exhibit so filed.
49
<PAGE>
The Registration Statement, and the exhibits and schedules thereto, may be
inspected without charge at the principal office of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549. Copies of the Registration Statement may
be obtained from the Commission at prescribed rates from the Public Reference
Section of the Commission at such address, and at the Commission's regional
offices located at 7 World Trade Center, 13th Floor, New York, New York 10048,
and at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. In addition, registration statements and certain other filings made
with the Commission through its Electronic Data Gathering, Analysis and
Retrieval ("EDGAR") system are publicly available through the Commission's
site on the Internet's World Wide Web, located at http://www.sec.gov. The
Registration Statement, including all exhibits thereto and amendments thereof,
has been filed with the Commission through EDGAR.
50
<PAGE>
EPITAXX, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report ............................................. F-2
Consolidated Balance Sheets as of March 31, 1996 and 1997 and December 31,
1997..................................................................... F-3
Consolidated Statements of Income for the years ended March 31, 1995, 1996
and 1997 and for the nine-month period ended December 28, 1996 (unau-
dited) and December 31, 1997............................................. F-4
Consolidated Statements of Stockholders' Equity for the years ended March
31, 1995, 1996 and 1997 and for the nine-month period ended December 31,
1997..................................................................... F-5
Consolidated Statements of Cash Flows for the years ended March 31, 1995,
1996 and 1997 and for the nine-month period ended December 28, 1996 (un-
audited) and December 31, 1997........................................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
EPITAXX, Inc.:
We have audited the accompanying consolidated balance sheets of EPITAXX,
Inc. (an indirect subsidiary of Nippon Sheet Glass Co., Ltd.) and subsidiary
as of March 31, 1996 and 1997, and December 31, 1997, and the related
consolidated statements of income, stockholders' equity (deficit), and cash
flows for each of the years in the three-year period ended March 31, 1997 and
the nine-month period ended December 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of EPITAXX,
Inc. and subsidiary as of March 31, 1996 and 1997, and December 31, 1997, and
the results of their operations and their cash flows for each of the years in
the three-year period ended March 31, 1997 and the nine-month period ended
December 31, 1997 in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Short Hills, New Jersey
January 19, 1998, except
for note 3, which is as of
February 3, 1998
F-2
<PAGE>
EPITAXX, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DEC. 31, 1997
-------------------------
PRO FORMA
MAR. 31, STOCKHOLDERS'
--------------- EQUITY (DEFICIT)
1996 1997 ACTUAL (NOTE 3)
------- ------ ------- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash.............................. $ 91 109 940
Trade accounts receivable, less
allowance for doubtful accounts
of $36, $47 and $75 at March 31,
1996, March 31, 1997 and December
31, 1997, respectively (note
10).............................. 3,018 2,379 2,437
Inventories (note 4).............. 5,111 3,676 3,995
Due from affiliates (notes 9 and
11).............................. 200 886 65
Deferred income tax assets (note
9)............................... 690 466 732
Prepaid expenses and other current
assets........................... 44 140 97
------- ------ -------
Total current assets............ 9,154 7,656 8,266
Property, plant and equipment, net
(notes 5 and 13)................... 7,337 8,932 9,495
Other assets, net................... 280 389 525
------- ------ -------
$16,771 16,977 18,286
======= ====== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Short-term borrowings from
affiliate under line of credit
(note 11)........................ $ 2,700 3,400 3,150
Current portion of obligation
under capital lease (note 13).... -- 145 185
Trade accounts payable............ 1,232 1,326 695
Accrued compensation and
benefits......................... 1,167 1,065 809
Accrued expenses.................. 174 325 606
Due to affiliates (notes 9 and
11).............................. 1,029 -- 465
Promissory Notes to be issued for
dividend declared (note 7):
NSG Holding USA, Inc............. -- -- 10,000
Other stockholders............... -- -- 50
------- ------ -------
Total current liabilities....... 6,302 6,261 15,960
Long-term debt (note 6)............. 5,000 5,000 5,000
Obligation under capital lease, net
of current portion (note 13)....... -- 133 52
Deferred income tax liabilities
(note 9)........................... 502 853 1,040
------- ------ -------
Total liabilities............... 11,804 12,247 22,052
------- ------ -------
Stockholders' equity (deficit)
(notes 3 and 7):
Preferred stock $.01 par value.
Authorized 5,000,000 shares at
December 31, 1997; no shares
issued or outstanding--pro
forma............................ -- -- -- --
Common stock, no par value at
March 31, 1996, $.01 par value at
March 31, 1997 and December 31,
1997. Authorized 42,400,000
shares in 1996, 20,000,000 shares
at March 31, 1997 and December
31, 1997; issued and outstanding
5,088,000 shares at March 31,
1996 and 1997, and 5,113,200
shares at December 31, 1997...... 12,184 51 51 --
Class A common stock, $.01 par
value. Authorized 12,500,000
shares; 25,200 shares issued and
outstanding--pro forma........... -- -- -- --
Class B common stock, convertible,
$.01 par value. Authorized
7,500,000 shares; 5,088,000
shares issued and outstanding--
pro forma........................ -- -- -- 51
Additional paid-in capital........ -- 12,185 12,185 12,185
Accumulated deficit............... (7,217) (7,506) (16,002) (16,002)
------- ------ ------- -------
Total stockholders' equity
(deficit)...................... 4,967 4,730 (3,766) (3,766)
Commitments (note 13)
------- ------ ------- -------
$16,771 16,977 18,286 18,286
======= ====== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
EPITAXX, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE-MONTH
PERIOD ENDED
YEAR ENDED MAR. 31, --------------------
------------------------- DEC. 28, DEC. 31,
1995 1996 1997 1996 1997
------- ------- ------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue...................... $13,832 17,845 18,700 13,646 17,228
Revenue--Affiliate (note
11)......................... 1,790 1,917 2,509 1,841 1,120
------- ------- ------- ------- -------
Total revenue (note 10).... 15,622 19,762 21,209 15,487 18,348
Cost of revenue.............. 9,948 10,876 13,978 10,241 10,720
------- ------- ------- ------- -------
Gross profit............. 5,674 8,886 7,231 5,246 7,628
------- ------- ------- ------- -------
Operating expenses:
Research and development
expense..................... 1,513 2,082 2,541 1,982 2,158
Selling, general and
administrative expense...... 2,705 3,555 3,187 2,262 2,794
------- ------- ------- ------- -------
4,218 5,637 5,728 4,244 4,952
------- ------- ------- ------- -------
Income from operations... 1,456 3,249 1,503 1,002 2,676
------- ------- ------- ------- -------
Other income (expense):
Interest income.............. 1 12 31 24 20
Interest expense (note 6).... (429) (276) (279) (220) (197)
Interest expense--Affiliate
(note 11)................... (19) (178) (207) (164) (180)
Other........................ -- (16) (1) -- --
------- ------- ------- ------- -------
(447) (458) (456) (360) (357)
------- ------- ------- ------- -------
Income before income tax
expense (benefit)....... 1,009 2,791 1,047 642 2,319
Income tax expense (benefit)
(note 9)...................... (460) 936 409 250 765
------- ------- ------- ------- -------
Net income............... $ 1,469 1,855 638 392 1,554
======= ======= ======= ======= =======
Net income per share (note 3):
Basic........................ $ 0.29 $ 0.36 $ 0.12 $ 0.08 $ 0.30
Diluted...................... 0.29 0.36 0.12 0.08 0.30
======= ======= ======= ======= =======
Pro forma net income per share
(note 3):
Basic........................ $ 0.10 $ 0.25
Diluted...................... 0.10 0.25
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
EPITAXX, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
TOTAL
ADDI- STOCK-
COMMON STOCK TIONAL ACCUMU- HOLDERS'
------------------ PAID-IN LATED EQUITY
SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
--------- -------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1994....... 5,088,000 $ 12,184 -- (10,041) 2,143
Net income...................... -- -- -- 1,469 1,469
--------- -------- ------ ------- -------
Balance at March 31, 1995....... 5,088,000 12,184 -- (8,572) 3,612
Dividends paid.................. -- -- -- (500) (500)
Net income...................... -- -- -- 1,855 1,855
--------- -------- ------ ------- -------
Balance at March 31, 1996....... 5,088,000 12,184 -- (7,217) 4,967
Change in par value per share
from no par value to $.01 per
share (note 7)................. -- (12,133) 12,133 -- --
Shares issuable under restricted
stock agreement (note 7)....... -- -- 52 -- 52
Dividends paid.................. -- -- -- (927) (927)
Net income...................... -- -- -- 638 638
--------- -------- ------ ------- -------
Balance at March 31, 1997....... 5,088,000 51 12,185 (7,506) 4,730
Issuance of restricted shares... 25,200 -- -- -- --
Net income...................... -- -- -- 1,554 1,554
Dividends declared (note 7)..... -- -- -- (10,050) (10,050)
--------- -------- ------ ------- -------
Balance at December 31, 1997.... 5,113,200 $ 51 12,185 (16,002) (3,766)
========= ======== ====== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
EPITAXX, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE-MONTH
YEAR ENDED MAR. 31, PERIOD ENDED
---------------------- --------------------
DEC. 28, DEC. 31,
1995 1996 1997 1996 1997
------ ------ ------ ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income...................... $1,469 1,855 638 392 1,554
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation.................. 801 904 1,101 738 986
Provision for bad debt
expense...................... -- 4 11 11 28
Loss on disposal of property,
plant and equipment.......... -- -- -- -- 14
Deferred income tax expense
(benefit).................... -- (188) 575 -- (79)
Compensation expense related
to restricted stock
agreement.................... -- -- 52 52 --
Changes in operating assets
and liabilities:
Trade accounts receivable... (163) (963) 628 824 (86)
Inventories................. (141) (2,005) 1,435 1,346 (319)
Prepaid expenses and other
current assets............. (31) (12) (96) (9) 43
Due from affiliates......... (652) 738 (686) (115) 821
Other assets................ 10 (37) (109) (52) (136)
Trade accounts payable...... 368 169 94 (875) (631)
Accrued compensation and
benefits................... (498) 406 (102) 607 (256)
Accrued expenses............ 1 103 151 118 281
Due to affiliates........... (11) 969 (1,029) (811) 465
------ ------ ------ ------ ------
Net cash provided by
operating activities ...... 1,153 1,943 2,663 2,226 2,685
------ ------ ------ ------ ------
Cash flows from investing
activities--capital
expenditures..................... (908) (2,061) (2,418) (1,719) (1,479)
------ ------ ------ ------ ------
Cash flows from financing
activities:
Borrowings under line of
credit......................... -- 1,350 -- -- --
Repayments under line of
credit......................... (200) (3,950) -- -- --
Proceeds from borrowings from
affiliate...................... 750 3,950 2,552 2,253 750
Payments on borrowings from
affiliate...................... (750) (700) (1,852) (1,101) (1,000)
Repayment of obligation under
capital leases................. -- -- -- -- (125)
Dividends paid to parent........ -- (500) (927) (927) --
------ ------ ------ ------ ------
Net cash (used in) provided
by financing activities.... (200) 150 (227) 225 (375)
------ ------ ------ ------ ------
Net increase in cash........ 45 32 18 732 831
Cash at beginning of period....... 14 59 91 91 109
------ ------ ------ ------ ------
Cash at end of period............. $ 59 91 109 823 940
====== ====== ====== ====== ======
Supplemental disclosure of cash
flow information--cash paid
during the year for:
Interest....................... $ 448 454 514 302 267
Income taxes................... -- 20 1,454 120 395
------ ------ ------ ------ ------
Noncash information disclosure--
net present value of capital
lease obligation incurred in
connection with lease of computer
hardware and software............ $ -- -- 277 -- 84
====== ====== ====== ====== ======
</TABLE>
In December 1997, the Company declared a cash dividend of $10,050 to
stockholders of record on December 11, 1997. The dividend payable will be
evidenced by promissory notes payable (note 7).
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
EPITAXX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996 AND 1997, AND DECEMBER 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) DESCRIPTION OF COMPANY BUSINESS
EPITAXX, Inc. and Subsidiary (the "Company") designs, manufactures and
markets semiconductor optical detectors and receivers for fiber optics
communications. The Company's products are integral to the development and
implementation of fiber optic systems for applications such as high capacity
long-haul terrestrial and undersea transmission; digital local loop and access
networks; multi-channel cable television ("CATV") distribution; high speed
computer networking; and test and measurement equipment.
NSG Holding USA, Inc. ("NSG Holding" or the "Parent"), a wholly owned
subsidiary of Nippon Sheet Glass Co., Ltd. ("NSG"), owns 99.51% of the
outstanding shares of the Company's capital stock.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of EPITAXX, Inc.
and its wholly owned subsidiary. All material intercompany transactions and
balances have been eliminated in consolidation.
Revenue
Revenue is recognized upon product shipment, passage of title and when all
significant obligations of the Company have been fully satisfied.
Revenue from research and development contracts is recognized based upon the
percentage of completion method and, in some instances, based upon specified
contract milestones. Revenue from achievement of milestone events is
recognized when all parties concur that the scientific results and/or
milestones stipulated in the agreement have been met. The terms of research
and development contracts generally provide for the design, development,
prototyping and, in certain cases, the delivery of a limited number of
products.
The Company recognized revenue of $1,104, $795 and $625 under research and
development contracts in the years ended March 31, 1995, 1996 and 1997,
respectively. Costs incurred under such contracts aggregated $818, $328 and
$208 in the years ended March 31, 1995, 1996 and 1997, respectively. No
revenue was recognized and no costs were incurred under research and
development contracts in the nine month period ended December 31, 1997.
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. Examples include provisions for returns, bad debts, and
obsolete inventories. Actual results could differ from those estimates.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Equipment under capital
leases is stated at the present value of minimum lease payments.
F-7
<PAGE>
EPITAXX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Depreciation of plant and equipment is calculated using the straight-line
method over the estimated useful lives of the respective assets, which range
from 3 to 30 years. Equipment under capital leases is amortized using the
straight-line method over the shorter of the lease term or estimated useful
life of the asset.
Research and Development
Research and development costs are expensed as incurred.
NSG Services
NSG provides certain services to the Company including management,
personnel, banking and credit, productivity improvement, research and
development and distribution services (note 11). Effective April 1997, such
services were provided based upon formal agreements between NSG and the
Company. Prior to April 1997 such services were provided without a formal
agreement and charged to the Company based upon the estimated costs incurred
by NSG. Management believes that such charges are reasonable and that no
additional costs would have been incurred had the Company operated as an
unaffiliated entity.
Income Taxes
Income taxes are accounted for using the asset and liability method.
Deferred tax assets and liabilities are recognized for the estimated 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 carry forwards. Deferred tax assets
and liabilities are measured using enacted tax rates in effect for the year in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
During 1995, NSG Holding and the Company entered into a tax sharing
agreement pursuant to which the Company's results of operations are included
in the consolidated federal income tax return of NSG Holding. Under the terms
of the agreement, the Company provides for federal income taxes as if it were
a stand-alone taxpayer; any income tax benefits derived from net operating
losses and tax credits generated by the Company but utilized by NSG Holding in
its consolidated return are allocated to the Company.
Risks and Uncertainties
The Company relies exclusively on its own production capability in wafer
processing, chip fabrication, device packaging, final assembly and testing of
products. Because the Company manufactures, packages and tests these
components at its own facility and because the Company only has a single
facility, any interruption in manufacturing resulting from fire, natural
disaster, equipment failures or otherwise would have a material adverse effect
on the Company's business and financial condition. Other factors may also
cause the Company's results to differ from historic levels. Some of the more
significant factors include the prolonged interruption in supply of one or
more key materials, the emergence of new technologies in the fiber optics
communications industry and the introduction by competitors of new products.
Fair Value of Financial Instruments
The fair value of financial instruments is determined by reference to market
data and other valuation techniques as appropriate. The Company believes the
fair value of its financial instruments, principally cash, trade accounts
receivable, other current assets, accounts payable and accrued expenses and
debt obligations approximates their recorded values.
F-8
<PAGE>
EPITAXX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Stock-Based Compensation
Stock-based compensation is recognized using the intrinsic value method in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stocks Issued to Employees" ("APB 25"), and related
interpretations. For disclosure purposes, pro forma net income and pro forma
net income per share data included in note 8 are provided in accordance with
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS 123"), as if the fair-value-based method had been
applied.
Impairment of Long-lived Assets and Long-lived Assets to Be Disposed Of
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell.
Impact of Recent Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"), and Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information" ("SFAS
131").
SFAS 130 establishes standards for the reporting and display of
comprehensive income in the financial statements. Comprehensive income is the
total of net income and all other non-owner changes in equity. SFAS 131
requires that companies disclose segment data based on how management makes
decisions about allocating resources to segments and measuring their
performance. SFAS 130 and 131 are effective for fiscal 1999. Adoption of these
standards is expected to result in additional disclosures, but will not have
an effect on the Company's financial position or results of operations.
Interim Results (Unaudited)
The accompanying consolidated statements of income and cash flows for the
nine-month period ended December 28, 1996 are unaudited. In the opinion of
management, these statements have been prepared on the same basis as the
audited consolidated financial statements and include all adjustments,
consisting of only normal recurring adjustments, necessary for the fair
presentation of the results for such nine-month period.
(3) RECAPITALIZATION AND NET INCOME PER SHARE
General
In December 1997, the Company's Board of Directors authorized the filing of
a Registration Statement on Form S-1 in connection with a planned initial
public offering (the "Offering") of the Company's common stock. In connection
with the Offering, the Board of Directors and shareholders approved a
recapitalization providing for a restatement of the Company's Restated
Certificate of Incorporation to increase the total number of shares of all
classes of share capital, which the Company shall be authorized to issue to
25,000,000 shares, consisting of 12,500,000 shares of Class A common stock,
par value $.01 per share, 7,500,000 shares of Class B common stock, par value
$.01 per share, and 5,000,000 shares of preferred stock, par value $.01 per
share.
F-9
<PAGE>
EPITAXX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Pursuant to the Restated Certificate of Incorporation, filed on January 23,
1998, each share of the Company's issued and outstanding common stock, except
for shares of common stock held by NSG Holding, were converted into Class A
common stock on a one-for-one basis. Each share of common stock held by NSG
Holding were converted into Class B common stock on a one-for-one basis. The
rights, preferences and privileges of Class A and Class B common stock are
identical in all respects except for voting rights. Each share of Class A
common stock entitles its holder to one vote and each share of Class B common
stock entitles its holder to three votes for each share of Class A common
stock into which the Class B common stock is convertible. The Class B common
stock is convertible into Class A common stock on a share-for-share basis,
subject to adjustment for stock dividends, stock splits, subdivisions or
combinations.
Following the filing of the Restated Certificate of Incorporation, NSG
Holding owns no shares of Class A common stock and all of the 5,088,000
outstanding shares of Class B common stock.
As further discussed in note 7, the Company plans to use $10,050 of the net
proceeds from the Offering to pay the $10,050 dividend declared to
stockholders of record on December 11, 1997.
The accompanying consolidated financial statements include unaudited pro
forma stockholders' equity information which gives effect to these events as
further explained below:
(a) The authorization to issue 25,000,000 shares, consisting of
12,500,000 shares of Class A common stock, par value $.01 per share,
7,500,000 shares of Class B common stock, par value $.01 per share, and
5,000,000 shares of preferred stock, par value $.01 per share.
(b) The conversion of 5,113,200 shares of currently issued and
outstanding common stock, par value $.01 per share, to 25,200 and 5,088,000
shares of Class A common stock, par value $.01 and Class B common stock,
par value $.01, respectively.
Net Income Per Share
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128 establishes
standards for computing and presenting earnings per share and is effective for
financial statements for both interim and annual periods ending after December
15, 1997. Accordingly, the accompanying net income per share information has
been calculated and presented in accordance with the provisions of SFAS 128
and as further prescribed by Securities and Exchange Commission Staff
Accounting Bulletin (SAB) No. 98 which is effective as of February 3, 1998.
Basic net income per share was calculated by dividing net income by the
weighted average number of common shares outstanding during the period
assuming the shares of restricted stock issued for a nominal amount were
outstanding from the beginning of each period. Diluted net income per share
was calculated in a manner consistent with Basic net income per share except
that the weighted average number of common shares outstanding also includes
the dilutive effect of stock options outstanding (using the treasury stock
method and an estimated initial public offering price of $10.00 per share).
The conversion of the issued and outstanding common stock into Class A and
Class B shares at the effective date of this Offering will have no effect on
the calculation of historical earnings per share.
F-10
<PAGE>
EPITAXX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following presents a reconciliation of the numerator and denominator
used in computing Basic and Diluted net income per share:
<TABLE>
<CAPTION>
YEAR ENDED MAR. 31, 1995
--------------------------------
PER
INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
<S> <C> <C> <C>
Basic net income per share--net income and
weighted average common shares
outstanding.............................. $1,469 5,113,200 $0.29
Effect of dilutive securities--stock op-
tions.................................... -- -- --
------ --------- -----
Diluted net income per share--net income,
weighted average common shares
outstanding and effect of stock options.. $1,469 5,113,200 $0.29
====== ========= =====
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED MAR. 31, 1996
--------------------------------
PER
INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
<S> <C> <C> <C>
Basic net income per share--net income and
weighted average common shares
outstanding.............................. $1,855 5,113,200 $0.36
Effect of dilutive securities--stock op-
tions.................................... -- -- --
------ --------- -----
Diluted net income per share--net income,
weighted average common shares
outstanding and effect of stock options.. $1,855 5,113,200 $0.36
====== ========= =====
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED MAR. 31, 1997
--------------------------------
PER
INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
<S> <C> <C> <C>
Basic net income per share--net income and
weighted average common shares
outstanding.............................. $638 5,113,200 $0.12
Effect of dilutive securities--stock op-
tions.................................... -- 22,091 --
---- --------- -----
Diluted net income per share--net income,
weighted average common shares
outstanding and effect of stock options.. $638 5,135,291 $0.12
==== ========= =====
</TABLE>
<TABLE>
<CAPTION>
NINE MONTH PERIOD ENDED DEC. 31,
1996 (UNAUDITED)
--------------------------------
PER
INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
<S> <C> <C> <C>
Basic net income per share--net income and
weighted average common shares
outstanding.............................. $392 5,113,200 $0.08
Effect of dilutive securities--stock op-
tions.................................... -- -- --
---- --------- -----
Diluted net income per share--net income,
weighted average common shares
outstanding and effect of stock options.. $392 5,113,200 $0.08
==== ========= =====
</TABLE>
F-11
<PAGE>
EPITAXX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
NINE-MONTH PERIOD
ENDED DEC. 31, 1997
--------------------------------
PER
INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
<S> <C> <C> <C>
Basic net income per share--net income and
weighted average common shares
outstanding.............................. $1,554 5,113,200 $ 0.30
Effect of dilutive securities--stock op-
tions.................................... -- 114,724 --
------ --------- ------
Diluted net income per share--net income,
weighted average common shares
outstanding and effect of stock options.. $1,554 5,227,924 $ 0.30
====== ========= ======
</TABLE>
Pro Forma Net Income Per Share
Pro forma Basic net income per share was calculated by dividing net income
by the weighted average number of common shares outstanding during the period
assuming the shares of restricted stock were outstanding from the beginning of
each period. The weighted average number of common shares was further adjusted
to include the number of shares that would be required to be sold to fund the
$10,050 dividend to NSG Holding and other shareholders (using an estimated
initial public offering price of $10.00 per share).
Pro forma Diluted net income per share was calculated in a manner consistent
with pro forma Basic net income per share except that the weighted average
number of common shares outstanding also includes the dilutive effect of stock
options outstanding (using the treasury stock method and an estimated initial
public offering price of $10.00 per share).
The following presents a reconciliation of the numerator and denominator
used in computing pro forma Basic and Diluted net income per share:
<TABLE>
<CAPTION>
YEAR ENDED MAR. 31, 1997
-----------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Pro forma Basic net income per share:
Net income and weighted average common
shares outstanding.................... $ 638 5,113,200
Additional shares assumed issued to fund
dividend................................ -- 1,005,000
------ --------- -----
638 6,118,200 $0.10
Effect of dilutive securities--stock op-
tions................................... -- 22,091 --
------ --------- -----
Pro forma diluted net income per share--
net income, weighted average common
shares outstanding and assumed share
issuance and effect of stock options.... $ 638 6,140,291 $0.10
====== ========= =====
<CAPTION>
NINE MONTH PERIOD
ENDED DEC. 31, 1997
-----------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Pro forma Basic net income per share:
Net income and weighted average common
shares outstanding.................... $1,554 5,113,200
Additional shares assumed issued to
fund dividend......................... -- 1,005,000
------ --------- -----
1,554 6,118,200 $0.25
Effect of dilutive securities--stock op-
tions................................... -- 114,724 --
------ --------- -----
Pro forma Diluted net income per share--
net income, weighted average common
shares outstanding and assumed share
issuance and effect of stock options.... $1,554 6,232,924 $0.25
====== ========= =====
</TABLE>
F-12
<PAGE>
EPITAXX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(4) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
MAR. 31,
------------ DEC. 31,
1996 1997 1997
------ ----- --------
<S> <C> <C> <C>
Raw materials.......................................... $1,424 1,380 1,556
Work-in-process........................................ 3,244 1,869 2,219
Finished goods......................................... 443 427 220
------ ----- -----
$5,111 3,676 3,995
====== ===== =====
</TABLE>
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, including equipment under capital leases,
consists of the following:
<TABLE>
<CAPTION>
MAR. 31,
-------------- DEC. 31,
1996 1997 1997
------- ------ --------
<S> <C> <C> <C>
Land................................................. $ 422 422 422
Building and building improvements................... 3,329 3,961 4,026
Machinery and equipment.............................. 7,048 9,943 11,146
Furniture and fixtures............................... 146 149 163
Construction in progress............................. 834 -- 254
------- ------ ------
11,779 14,475 16,011
Less accumulated depreciation........................ 4,442 5,543 6,516
------- ------ ------
$ 7,337 8,932 9,495
======= ====== ======
</TABLE>
(6) LONG-TERM DEBT
The Company has a loan agreement with the New Jersey Economic Development
Authority (the "Authority") for $5,000, financed by the issuance of Economic
Development Revenue Bonds (the "Revenue Bonds") by the Authority. Proceeds
from this borrowing were used to acquire and refurbish the current
manufacturing and administrative facility for the Company. The Revenue Bonds,
which are secured by a letter of credit in the amount of $5,250 issued by the
Company and guaranteed by NSG, mature on August 1, 2016. The loan agreement
provides for quarterly interest payments at the "TENR" rate, as defined, plus
0.25% (actual interest rate was 3.87% at December 31, 1997) and allows for the
redemption of the bonds prior to the scheduled maturity date under certain
circumstances, as defined in the bond indenture. The bond indenture also
provides for the conversion of the interest rate on the bonds into a fixed
interest rate, as defined, under certain circumstances.
(7) COMMON STOCK
In connection with the Offering of the Company's common stock, the Company
effected a stock split of its common stock in the form of a stock dividend in
the amount of 1.2 shares for every one share outstanding in December 1997. The
Company also effected a 42,400-for-1 stock split of its common stock and
increased the number of authorized shares of common stock from 1,000 shares,
with no par value, to 20,000,000 shares, par value $.01 in December 1996. All
share and per share data in the accompanying consolidated financial statements
have been retroactively adjusted to reflect the effects of the stock splits.
In December 1997, the Company declared a cash dividend of $10,050 to the
stockholders of record on December 11, 1997, of which $10,000 is payable to
NSG Holding. The dividend is evidenced by promissory
F-13
<PAGE>
EPITAXX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
notes to be issued in February 1998, which will bear interest at a rate of
6.02% per annum, payable semiannually. The principal amount of such promissory
notes is payable on the earlier of: (i) the date the Company's total
consolidated stockholders' equity first equals or exceeds $15,000 and (ii)
February 9, 2001, provided that on such date the Company's total consolidated
stockholders' equity equals or exceeds $15,000.
In December 1996, the Company's Board of Directors authorized the issuance
and sale of 25,200 shares of the Company's common stock to three officers of
the Company at a purchase price of $0.01 per share under restricted stock
agreements with each officer. Vesting under the agreements is immediate. The
shares were issued on April 1, 1997 and are subject to a repurchase option in
favor of the Company at a price per share of $2.08 for a specified period
during which they are also restricted as to sale and transfer. The Company
recognized approximately $52 of compensation expense in the year ended March
31, 1997 in connection with these restricted stock agreements.
(8) STOCK OPTIONS
Pursuant to the Company's Amended and Restated 1996 Employee, Director, and
Consultant Stock Option Plan (the "Plan"), the Company's Board of Directors
may grant incentive and nonqualified stock options to key employees,
directors, and certain consultants, of the Company. The Plan authorizes grants
of options to purchase up to 574,800 shares of authorized but unissued Class A
common stock.
Options granted under the Plan are set forth in an option agreement with
each participant. The terms of each option agreement may vary at the
discretion of the Board of Directors and shares issued upon exercise of the
options may be restricted as to transferability. Options granted during the
year ended March 31, 1997 had an exercise price equal to the fair market value
(as determined by an appraisal conducted by AUS Consultants) of the underlying
common stock at the date of grant, are generally exercisable 39 months from
their date of grant and have a term not exceeding 10 years. During the nine-
month period ended December 31, 1997, 15,000 options were granted to certain
directors at exercise prices to be equal to the initial public offering price
(estimated at $10.00 per share) of the Company's Class A common stock. Such
options are exercisable in three annual installments and have a term of 10
years.
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
NINE-MONTH
YEAR ENDED PERIOD ENDED
MAR. 31, 1997 DEC. 31, 1997
----------------- ------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Outstanding at beginning of period: -- $ -- 175,200 $ 3.33
Granted............................. 175,200 3.33 15,000 10.00
Exercised........................... -- -- -- --
Canceled............................ -- -- (19,128) 3.33
------- ----- ------- ------
Outstanding at end of period.......... 175,200 $3.33 171,072 $ 3.92
======= ===== ======= ======
</TABLE>
At December 31, 1997, there were 403,728 additional shares available for
grant under the Plan. All outstanding options were nonqualified options.
The per share weighted-average fair value of stock options granted during
the year ended March 31, 1997 and the nine-month period ended December 31,
1997 was $1.23 and $4.55, respectively, on the date of grant using the Black-
Scholes option-pricing model with the following assumptions for the year ended
March 31, 1997 and the nine-month period ended December 31, 1997: risk free
rate of 6.07%; expected option life of 10 years; and no dividend yield.
F-14
<PAGE>
EPITAXX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company applies APB 25 in accounting for its Plan and, accordingly, no
compensation cost has been recognized for its stock options in the
consolidated financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under
SFAS 123, the Company's net income and net income per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
NINE-
MONTH
YEAR PERIOD
ENDED ENDED
MAR. 31, DEC.31,
1997 1997
-------- -------
<S> <C> <C>
Net income:
As reported............................................... $ 638 1,554
Pro forma................................................. 627 1,499
===== =====
Net income per share:
Basic:
Pro forma net income per share, as reported............. $0.10 0.25
Supplemental pro forma net income per share............. 0.10 0.25
Diluted:
Pro forma net income per share, as reported............. 0.10 0.25
Supplemental pro forma net income per share............. 0.10 0.24
===== =====
</TABLE>
At March 31, 1997 and December 31, 1997, the weighted average remaining
contractual life of outstanding options was 9 and 9.1 years, respectively. At
December 31, 1997, no options were exercisable.
(9) INCOME TAXES
Income tax expense (benefit) attributable to income from operations consists
of the following:
<TABLE>
<CAPTION>
NINE-
MONTH
PERIOD
YEAR ENDED MAR. 31, ENDED
---------------------- DEC.31,
1995 1996 1997 1997
------ ------ ------ -------
<S> <C> <C> <C> <C>
Current:
Federal..................................... $ (460) 1,025 (166) 788
State....................................... -- 99 -- 56
------ ------ ----- ---
(460) 1,124 (166) 844
------ ------ ----- ---
Deferred:
Federal..................................... -- (104) 585 (62)
State....................................... -- (84) (10) (17)
------ ------ ----- ---
-- (188) 575 (79)
------ ------ ----- ---
Total income tax expense (benefit)........ $ (460) 936 409 765
====== ====== ===== ===
</TABLE>
F-15
<PAGE>
EPITAXX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The actual income tax expense (benefit) differs from the expected income tax
expense (computed by applying the U.S. corporate income tax rate of 34% to
income before income tax expense) as follows:
<TABLE>
<CAPTION>
NINE-
MONTH
PERIOD
YEAR ENDED MAR. 31, ENDED
----------------------- DEC.31,
1995 1996 1997 1997
------- ------ ------ -------
<S> <C> <C> <C> <C>
Computed "expected" federal income tax expense.. $ 343 949 356 788
State income taxes (benefit), net of federal
benefit........................................ -- 10 (7) 26
Change in beginning-of-the-year balance of the
federal valuation allowance for deferred tax
assets allocated to income tax expense......... (774) -- -- --
Research and experimentation credit............. (65) (33) (78) (89)
Other, net (including adjustment related to
prior year amounts in fiscal 1997)................ 36 10 138 40
------- ----- ----- ---
$ (460) 936 409 765
======= ===== ===== ===
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as
follows:
<TABLE>
<CAPTION>
MAR. 31,
--------- DEC. 31,
1996 1997 1997
---- ---- --------
<S> <C> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to allowance for
doubtful accounts.................................... $ 14 18 28
Inventories, principally due to additional costs
inventoried for tax purposes pursuant to the Tax
Reform Act of 1986 and reserves for obsolescence..... 455 393 541
Compensated absences, principally due to accrual for
financial reporting purposes......................... 39 55 55
Management incentives, principally due to accrual for
financial reporting purposes......................... 137 -- 108
Tax credit carryforwards.............................. 48 126 136
Other................................................. 27 7 23
---- ---- -----
Total gross deferred tax assets..................... 720 599 891
Deferred tax liabilities--plant and equipment,
principally due to differences in depreciation......... 532 986 1,199
---- ---- -----
Net deferred tax asset (liability).................. $188 (387) (308)
==== ==== =====
</TABLE>
There is no valuation allowance for deferred tax assets at March 31, 1996
and 1997, and December 31, 1997; the net change in the total valuation
allowance for the year ended March 31, 1996 was a decrease of $81. In
assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies in making this assessment. Based
upon the level of historical taxable income and projections for future taxable
income over the periods in which the deferred tax assets are deductible,
management believes it is more likely than not the Company will realize the
benefits of these deductible differences. The amount of the deferred tax asset
considered realizable, however, could be reduced in the near term if estimates
of future taxable income during the carryforward period are reduced.
F-16
<PAGE>
EPITAXX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's results of operations are included in the consolidated federal
income tax return filed by the Parent under a tax sharing agreement with the
Parent. At March 31, 1996 and 1997, and December 31, 1997, amounts due (to)
from the Parent under this agreement amounted to $(1,026), $429 and $(405),
respectively.
At December 31, 1997, the Company has a research and experimentation tax
credit carryforward for state income tax purposes of approximately $136 which
is available to reduce future state income taxes, if any, through 2005.
(10) GEOGRAPHIC INFORMATION, BUSINESS AND CREDIT CONCENTRATIONS
The Company operates in a single industry segment: the design, manufacture,
and marketing of semiconductor optical detectors (see note 1). The Company has
one manufacturing facility located in the United States. Certain materials
necessary for the manufacture of the Company's products are obtained from a
sole supplier or a small group of suppliers. In particular, the Company
currently obtains a key material, the epitaxial wafers of InGaAs used to
manufacture the Company's products from one primary vendor. Although the
Company has identified and qualified several alternative sources for the
epitaxial wafers and other materials currently obtained from single sources,
there can be no assurance that such materials could be made available at
competitive prices, at acceptable reliability standards or in a timely fashion
to respond to customer needs. Interrupted or delayed supplies of key materials
could have a material adverse effect on the Company's business, financial
condition and operating results.
Revenues from one customer were 12.0% and 12.8% of total net revenues during
the years ended March 31, 1995 and 1996, respectively, and revenues from
another customer were 11.0% of total net revenues during the year ended March
31, 1995. In addition, revenues from NSG were 11.6% and 11.8% of total net
revenues during the years ended March 31, 1995 and 1997, respectively.
Additionally, 10% of the Company's accounts receivable was due from such
customer at March 31, 1996.
Revenue by geographic area is summarized as follows:
<TABLE>
<CAPTION>
NINE-
MONTH
PERIOD
YEAR ENDED MAR. 31, ENDED
--------------------- DEC. 31,
1995 1996 1997 1997
------- ------ ------ --------
<S> <C> <C> <C> <C>
North America............................... $ 7,120 7,788 10,921 9,256
Europe...................................... 6,174 8,786 4,420 6,678
Asia and other (including revenue from an
affiliate)................................. 2,328 3,188 5,868 2,414
------- ------ ------ ------
$15,622 19,762 21,209 18,348
======= ====== ====== ======
</TABLE>
The Company's principal financial instrument subject to potential
concentration of credit risk is accounts receivable which is unsecured. The
Company estimates an allowance for doubtful accounts based upon the
creditworthiness of its customers as well as general economic conditions.
Consequently, an adverse change in those factors could affect the Company's
estimates of bad debts.
(11) RELATED PARTY TRANSACTIONS
Effective April 1997, the Company and NSG entered into a number of
agreements for the purpose of defining their ongoing relationship. Pursuant to
a Master Cooperation Agreement (the "Master Agreement"), NSG agreed to
continue to cooperate with the Company to pursue effective business
development and synergy of the Company's business and NSG's fiber optics
related business. Pursuant to the Master Agreement, the
F-17
<PAGE>
EPITAXX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Company also entered into a Management Services Agreement ("Services
Agreement"), a Research and Development Agreement ("R & D Agreement") and a
Distribution Agreement with NSG. Prior to the formalization of the Master
Agreement and related agreements, such services were provided between the
Company and NSG on an informal basis.
The Services Agreement requires NSG to continue to provide management
services, including personnel, banking and credit services, productivity
improvement advice, and assistance in the development of relationships in Asia
and Europe. Fees payable under the Services Agreement range from 0.5% to 1.0%
of net sales (as defined). Pursuant to the R & D Agreement, NSG has agreed to
provide the Company with certain research and development services to enhance
the development of its technology.
Fees charged by NSG under the Service Agreement and the R & D Agreement
during the nine-month period ended December 31, 1997 were $91 and $75,
respectively.
The Master Agreement, Services Agreement and R & D Agreement terminate on
March 31, 2000, at which time they will be renewed automatically for
successive three-year periods unless terminated by either party at least 30
days prior to the end of their then-current term.
In addition, the Company entered into a Distribution Agreement with NSG
pursuant to which NSG acts as the exclusive distributor of all of the
Company's products in Japan. The Distribution Agreement may be terminated by
agreement between the parties or by either party if NSG ceases to own at least
30% of the capital stock of the Company.
The Company also has a tax sharing agreement pursuant to which the Company's
results of operations are included in the consolidated federal income tax
return of NSG Holding (see note 9).
Purchases and other charges from affiliates were $345, $353 and $191 in the
years ended March 31, 1995, 1996 and 1997, respectively, and $70 in the nine-
month period ended December 31, 1997.
The Company has a $6,000 line of credit with NSG Holding to meet working
capital requirements and to fund certain capital expenditures. The amount and
length of borrowings are negotiable and bear interest at LIBOR plus 0.25%
(6.19% at December 31, 1997). On January 15, 1998, the maturity date of the
facility was extended through March 31, 1999. Borrowings outstanding under
this facility aggregated $2,700 as of March 31, 1996, $3,400 as of March 31,
1997 and $3,150 as of December 31, 1997. The weighted average interest rate on
short-term borrowings was 6.1%, 5.8% and 6.09% as of March 31, 1996 and 1997
and December 31, 1997, respectively.
(12) EMPLOYEE BENEFIT PLANS
The Company has a 401(k) and profit sharing plan covering substantially all
of its employees. Under the plan, employees may elect to contribute a portion
of their compensation to the 401(k) plan, subject to certain limitations.
Company-matching contributions are made on a discretionary basis subject to a
guaranteed minimum. Pension costs incurred under the 401(k) plan were $73,
$93, $84 and $185 in the years ended March 31, 1995, 1996 and 1997 and the
nine-month period ended December 31, 1997, respectively.
F-18
<PAGE>
EPITAXX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(13) COMMITMENTS
The Company is obligated under capital lease arrangements that expire in
1999 for certain computer hardware and software equipment. At December 31,
1997, the gross amount of computer hardware and software equipment and related
accumulated amortization recorded under capital leases is as follows:
<TABLE>
<S> <C>
Computer equipment..................................................... $367
Less accumulated amortization........................................ 25
----
$342
====
</TABLE>
The Company also leases certain equipment and machinery under various
capital and operating leases. Rent expense charged to operations under such
lease agreements aggregated approximately $148, $209, $217 and $60 in the
years ended March 31, 1995, 1996 and 1997 and the nine-month period ended
December 31, 1997, respectively.
Approximate future minimum rental payments required for all noncancellable
operating leases and future minimum capital lease payments as of December 31,
1997 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
Year ending March 31:
1998................................................... $ 47 17
1999................................................... 177 37
2000................................................... 18 16
---- ---
Total minimum lease payments......................... 242 $70
===
Less amount representing interest (at 3.0% per annum).. 5
----
Present value of net minimum capital lease payments.. 237
Less current installments of obligation under capital
leases................................................ 185
----
Obligation under capital leases excluding current in-
stallments.......................................... $ 52
====
</TABLE>
The Company has entered into employment contracts with several officers of
the Company. Such contracts extend through March 2000 with terms for automatic
renewal for consecutive three-year periods. Compensation accrues to the
officers over the term of the contract as the respective services are
provided. Amounts charged to operations under the aforementioned contracts
aggregated approximately $360, $588 and $579 in the years ended March 31,
1995, 1996 and 1997, respectively, and $539 in the nine-month period ended
December 31, 1997.
The Company also has management incentive compensation arrangements
available to certain key employees. Under such arrangements, eligible
employees earn additional compensation based upon the Company attaining
certain annual and multiyear performance objectives, as defined. Amounts
charged to operations under such management incentive compensation
arrangements aggregated approximately $337, $660 and $250 in the years ended
March 31, 1995, 1996 and 1997, respectively, and $326 in the nine-month period
ended December 31, 1997.
F-19
<PAGE>
[Inside back cover contains photographs of the Company's manufacturing
facilities and personnel. In addition, the Company's logo appears on the inside
back cover.]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS OR ANY OTHER
PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SHARES OF CLASS A COMMON STOCK
OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN
ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION TO
SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUN-
DER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 13
Dividend Policy.......................................................... 13
Capitalization........................................................... 14
Dilution................................................................. 15
Selected Consolidated Financial Data..................................... 16
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 17
Business................................................................. 24
Management............................................................... 34
Principal Stockholders................................................... 40
Relationship Between the Company and NSG................................. 41
Description of Capital Stock............................................. 44
Shares Eligible for Future Sale.......................................... 47
Underwriting............................................................. 48
Legal Matters............................................................ 49
Experts.................................................................. 49
Additional Information................................................... 49
Index To Consolidated Financial Statements............................... F-1
</TABLE>
------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EF-
FECTING TRANSACTIONS IN THE CLASS A COMMON STOCK OFFERED HEREBY, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2,150,000 SHARES
LOGO
CLASS A COMMON STOCK
------------------
PROSPECTUS
------------------
COWEN & COMPANY
CIBC OPPENHEIMER
DAIWA SECURITIES
AMERICA INC.
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses, other than underwriting
discounts and commissions, payable by the Company in connection with the sale
of the Class A Common Stock being registered. Except for the Commission
Registration Fee, the NASD Filing Fee and the Nasdaq National Market Listing
Fee, the amounts listed below are estimates.
<TABLE>
<S> <C>
Commission Registration Fee........................................ $ 7,294
NASD Filing Fee.................................................... 3,219
Nasdaq National Market Listing Fee................................. 48,750
Printing and Engraving Expenses.................................... 75,000
Legal Fees and Expenses............................................ 300,000
Accounting Fees and Expenses....................................... 250,000
Blue Sky Fees and Expenses......................................... 1,000
Transfer Agent and Registrar Fees and Expenses..................... 5,000
Miscellaneous Expenses............................................. 10,000
--------
TOTAL............................................................ $700,263
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The General Corporation Law of the State of Delaware and the Registrant's
Restated Certificate of Incorporation and Amended and Restated Bylaws provide
for indemnification of the Registrant's directors and officers for liabilities
and expenses that they may incur in such capacities. In general, directors and
officers are indemnified with respect to actions taken in good faith in a
manner reasonably believed to be in, or not opposed to, the best interests of
the Registrant, and, with respect to any criminal action or proceeding,
actions that the indemnitee had no reasonable cause to believe were unlawful.
Reference is made to the Registrant's Restated Certificate of Incorporation
and Amended and Restated Bylaws filed as Exhibits 3.1 and 3.2 hereto,
respectively.
Additionally, reference is made to the Underwriting Agreement filed as
Exhibit 1.1 hereto, which provides for indemnification by the Underwriters of
the Company, its directors and officers who sign the Registration Statement
and persons who control the Company, under certain circumstances.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In the three years preceding the filing of this Registration Statement, the
Registrant has sold the following securities that were not registered under
the Securities Act:
1. On January 21, 1997, pursuant to Restricted Stock Agreements, the
Registrant sold 8,400 shares of its Common Stock, par value $.01 per share,
to each of Noboru Hiraguri, Yves Dzialowski and James D. Coleman for an
aggregate purchase price of $210. In the foregoing instance, the Registrant
relied on Section 4(2) of the Securities Act for the exemption from the
registration requirements of the Securities Act, since no public offering
was involved.
2. The Registrant's Amended and Restated 1996 Employee, Director and
Consultant Stock Option Plan (the "Stock Option Plan") was adopted by the
Registrant in December 1996. As of January 31, 1998, options to purchase
169,272 shares of Common Stock were outstanding under the Stock Option
Plan, which options to purchase 15,000 shares of Class A Common Stock were
granted at an exercise price equal to the initial public offering price and
the remaining options were granted at an exercise price of $3.33 per share.
In the foregoing instance, the Registrant relied on Rule 701 promulgated
under the Securities Act for the exemption from the registration
requirements of the Securities Act.
II-1
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
(1.1)* Form of Underwriting Agreement
(3.1)** Restated Certificate of Incorporation of the Registrant
(3.2)** Amended and Restated Bylaws of the Registrant
(4.1)** Article Fourth of the Restated Certificate of Incorporation of
Registrant (see Exhibit 3.1)
(4.2)* Form of Class A Common Stock Certificate
(5.1)* Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. with
respect to the legality of the securities being registered
(10.1)** Distribution Agreement, dated as of April 1, 1997, between the
Registrant and Nippon Sheet Glass Co., Ltd.
(10.2)** Management Services Agreement, dated as of April 1, 1997, between the
Registrant and Nippon Street Glass Co., Ltd.
(10.3)** Master Cooperation Agreement, dated as of April 1, 1997, between the
Registrant and Nippon Sheet Glass Co., Ltd.
(10.4)** Research and Development Agreement, dated as of April 1, 1997,
between the Registrant and Nippon Sheet Glass Co., Ltd.
(10.5)** Amended and Restated 1996 Employee, Director and Consultant Stock
Option Plan
(10.6)** Tax Sharing Agreement, dated as of April 1, 1993, between the
Registrant and NSG Holding USA, Inc.
(10.7)** Agreement for Line of Credit, dated as of January 15, 1998 to become
effective on May 31, 1998, between the Registrant and NSG Holding
USA, Inc.
(10.8)** Loan Agreement, dated as of August 15, 1991, between the Registrant
and the New Jersey Economic Development Authority
(10.9)** Form of Promissory Note dated as of February 26, 1998, from the
Registrant to certain stockholders of the Registrant
(10.11)* Registrant's Form of Executive Employment Agreement
(23.1)* Independent Auditors' Report and Consent of KPMG Peat Marwick LLP
(23.2)* Consent of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
(included in Exhibit 5.1)
(23.3)* Consent of AUS Consultants
(24.1)** Power of Attorney
(27.1)** Financial Data Schedule
</TABLE>
- --------
* Filed herewith.
** Previously filed.
(B) FINANCIAL STATEMENT SCHEDULES:
Schedule II-Valuation and Qualifying Accounts
II-2
<PAGE>
SCHEDULE II
EPITAXX, INC. AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
NINE MONTHS ENDED DECEMBER 31, 1997 AND
YEARS ENDED MARCH 31, 1997, 1996, AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
-----------------------
CHARGED TO
BALANCE AT CHARGED OTHER
BEGINNING OF TO COSTS AND ACCOUNTS- DEDUCTIONS- BALANCE AT
DESCRIPTION PERIOD EXPENSES DESCRIBE DESCRIBE END OF PERIOD
----------- ------------ ------------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts:
Period ending:
December 31, 1997..... $ 47 $ 28 -- -- $ 75
March 31, 1997........ 36 11 -- -- 47
March 31, 1996........ 32 4 -- -- 36
March 31, 1995........ 32 -- -- -- 32
Inventory--reserves for
obsolescence:
Period ending:
December 31, 1997..... $476 $455 -- -- $931
March 31, 1997........ 702 -- -- (226) 476
March 31, 1996........ 200 502 -- -- 702
March 31, 1995........ 200 -- -- -- 200
Warranty reserve:
Period ending:
December 31, 1997..... $185 -- -- $ (52) $133
March 31, 1997........ 141 44 -- -- 185
March 31, 1996........ 117 24 -- -- 141
March 31, 1995........ 95 22 -- -- 117
</TABLE>
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To provide to the Underwriters at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in
such names as required by the Underwriters to permit prompt delivery to
each purchaser.
(2) That for purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(3) That for the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
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
II-3
<PAGE>
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 of the Registrant in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT NO. 1 TO REGISTRATION STATEMENT TO
BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF WEST TRENTON, NEW JERSEY ON THIS 27TH DAY OF FEBRUARY, 1998.
EPITAXX, INC.
(Registrant)
By: /s/ Noboru Hiraguri
--------------------------------
NOBORU HIRAGURI
CHIEF EXECUTIVE OFFICER AND VICE
CHAIRMAN
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT NO. 1 TO REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE
FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
Chief Executive
* Officer and Vice February 27,
- ------------------------------------- Chairman (principal 1998
NOBORU HIRAGURI executive officer
and Director)
President and Chief
* Operating Officer February 27,
- ------------------------------------- and Director 1998
YVES DZIALOWSKI
* Vice President, February 27,
- ------------------------------------- Chief Financial 1998
JAMES D. COLEMAN Officer, Treasurer
and Secretary
(principal
financial and
accounting officer)
* Chairman of the February 27,
- ------------------------------------- Board 1998
KENJI FUJIWARA
* Director February 27,
- ------------------------------------- 1998
ARNOLD S. HOFFMAN
II-5
<PAGE>
SIGNATURE TITLE DATE
* Director February 27,
- ------------------------------------- 1998
RICHARD J. PINOLA
* Director February 27,
- ------------------------------------- 1998
MASAHIKO TARUMIZU
* Director February 27,
- ------------------------------------- 1998
NAOTAKA TODOROKI
By /s/ James D. Coleman
----------------------------
ATTORNEY-IN-FACT
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
(1.1)* Form of Underwriting Agreement
(3.1)** Restated Certificate of Incorporation of the Registrant
(3.2)** Amended and Restated Bylaws of the Registrant
(4.1)** Article Fourth of the Restated Certificate of Incorporation of
Registrant (see Exhibit 3.1)
(4.2)* Form of Class A Common Stock Certificate
(5.1)* Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. with
respect to the legality of the securities being registered
(10.1)** Distribution Agreement, dated as of April 1, 1997, between the
Registrant and Nippon Sheet Glass Co., Ltd.
(10.2)** Management Services Agreement, dated as of April 1, 1997, between the
Registrant and Nippon Street Glass Co., Ltd.
(10.3)** Master Cooperation Agreement, dated as of April 1, 1997, between the
Registrant and Nippon Sheet Glass Co., Ltd.
(10.4)** Research and Development Agreement, dated as of April 1, 1997,
between the Registrant and Nippon Sheet Glass Co., Ltd.
(10.5)** Amended and Restated 1996 Employee, Director and Consultant Stock
Option Plan
(10.6)** Tax Sharing Agreement, dated as of April 1, 1993, between the
Registrant and NSG Holding USA, Inc.
(10.7)** Agreement for Line of Credit, dated as of January 15, 1998 to become
effective on May 31, 1998, between the Registrant and NSG Holding
USA, Inc.
(10.8)** Loan Agreement, dated as of August 15, 1991, between the Registrant
and the New Jersey Economic Development Authority
(10.9)** Form of Promissory Note dated as of February 26, 1998, from the
Registrant to certain stockholders of the Registrant
(10.11)* Registrant's Form of Executive Employment Agreement
(23.1)* Independent Auditors' Report and Consent of KPMG Peat Marwick LLP
(23.2)* Consent of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
(included in Exhibit 5.1)
(23.3)* Consent of AUS Consultants
(24.1)** Power of Attorney
(27.1)** Financial Data Schedule
</TABLE>
- --------
* Filed herewith.
** Previously filed.
<PAGE>
EXHIBIT 1.1
2,150,000 SHARES
EPITAXX, INC.
CLASS A COMMON STOCK
UNDERWRITING AGREEMENT
----------------------
____________ ___, 1998
COWEN & COMPANY
CIBC OPPENHEIMER CORP.
DAIWA SECURITIES AMERICA INC.
As Representatives of the several Underwriters
c/o Cowen & Company
Financial Square
New York, New York 10005
Dear Sirs:
1 Introductory. EPITAXX, Inc., a Delaware corporation (the "Company"), an
------------ -------
indirect, wholly-owned subsidiary of Nippon Sheet Glass Co., Ltd. (the
"Parent"), proposes to sell, pursuant to the terms of this Agreement, to the
several underwriters named in Schedule A hereto (the "Underwriters," or, each,
---------- ------------
an "Underwriter"), an aggregate of 2,150,000 shares of Class A Common Stock, par
-----------
value $.01 (the "Common Stock"), of the Company. The aggregate of 2,150,000
------------
shares so proposed to be sold is hereinafter referred to as the "Firm Stock".
----------
The Company also proposes to sell to the Underwriters, upon the terms and
conditions set forth in Section 4, up to an additional 322,500 shares of Common
---------
Stock (the "Optional Stock"). The Firm Stock and the Optional Stock are
--------------
hereinafter collectively referred to as the "Stock". Cowen & Company ("Cowen"),
----- -----
CIBC Oppenheimer Corp. ("Oppenheimer") and Daiwa Securities America Inc.
-----------
("Daiwa") are acting as Representatives of the several Underwriters and in such
-----
capacity are hereinafter referred to as the "Representatives".
---------------
1
<PAGE>
2 Representations and Warranties of the Company and the Parent.
------------------------------------------------------------
(i) The Company and the Parent, jointly and severally, represent and
warrant to, and agree with, the several Underwriters that:
(i) A registration statement on Form S-1 (File No. 333-4484[3]), as
amended by one or more pre-effective amendments thereto, including any
preeffective prospectuses included as part of the registration statement as
originally filed or as part of any amendment, copies of which registration
statement and amendment(s) have heretofore been delivered to the
Representatives, has been carefully prepared by the Company in conformity
with the requirements of the Securities Act of 1933, as amended (the
"Securities Act"), and the rules and regulations (the "Rules and
-------------- ---------
Regulations") of the Securities and Exchange Commission (the "Commission")
----------- ----------
thereunder, and has been filed with the Commission under the Securities Act.
The term "Registration Statement" as used in this Agreement means such
----------------------
registration, including all financial statement schedules and exhibits, as
heretofore amended (or, if not yet effective, in the form in which it shall
become effective) and, if any post-effective amendment thereto is filed,
such registration statement as so amended, together with any information
permitted to be omitted from the registration statement when it becomes
effective pursuant to Rule 430A under the Securities Act and deemed to be
included therein as provided by said Rule 430A. The term "Registration
------------
Statement" as used in this Agreement shall also include any registration
---------
statement relating to the Stock that is filed and declared effective
pursuant to Rule 462(b) under the Securities Act. The term "Prospectus" as
----------
used in this Agreement means the prospectus in the form included in the
Registration Statement, or, (A) if the prospectus included in the
Registration Statement omits information in reliance on Rule 430A under the
Securities Act and such information is included in a prospectus filed with
the Commission pursuant to Rule 424(b) under the Securities Act, the term
"Prospectus" as used in this Agreement means the prospectus in the form
----------
included in the Registration Statement as supplemented by the addition of
the Rule 430A information contained in the prospectus filed with the
Commission pursuant to Rule 424(b) and (B) if prospectuses that meet the
requirements of Section 10(a) of
2
<PAGE>
the Securities Act are delivered pursuant to Rule 434 under the Securities
Act, then (i) the term "Prospectus" as used in this Agreement means the
----------
"prospectus subject to completion" (as such term is defined in Rule 434(g)
--------------------------------
under the Securities Act) as supplemented by (a) the addition of Rule 430A
information or other information contained in the form of prospectus
delivered pursuant to Rule 434(b)(2) under the Securities Act or (b) the
information contained in the term sheet described in Rule 434(b)(3) under
the Securities Act, and (ii) the date of such prospectus shall be deemed to
be the date of the term sheet. The term "Preeffective Prospectus" as used in
-----------------------
this Agreement means the prospectus subject to completion in the form
included in the Registration Statement at the time of the initial filing of
the Registration Statement with the Commission, and as such prospectus shall
have been amended from time to time prior to the date of the Prospectus.
(ii) The Commission has not issued or threatened to issue any order
preventing or suspending the use of any Preeffective Prospectus, and, at its
date of issue, each Preeffective Prospectus conformed in all material
respects with the requirements of the Securities Act and did not include any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading;
and, when the Registration Statement became or becomes effective and at all
times subsequent thereto up to and including the Closing Dates (as defined
below), the Registration Statement and the Prospectus and any amendments or
supplements thereto contained and will contain all material statements and
information required to be included therein by the Securities Act and
conformed and will conform in all material respects to the requirements of
the Securities Act; and neither the Registration Statement nor the
Prospectus, nor any amendment or supplement thereto, included or will
include any untrue statement of a material fact or omitted or will omit to
state any material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading; provided, however, that the foregoing representations,
-------- -------
warranties and agreements shall not apply to information contained in or
omitted from any Preeffective Prospectus or the Registration Statement or
the Prospectus or any such amendment or
3
<PAGE>
supplement thereto in reliance upon, and in conformity with, written
information furnished to the Company by or on behalf of any Underwriter,
directly or through the Representatives, specifically for use in the
preparation thereof; there is no franchise, lease, contract, agreement or
document required to be described in the Registration Statement or
Prospectus or to be filed as an exhibit to the Registration Statement which
is not described therein or filed as required; and all descriptions of any
such franchises, leases, contracts, agreements or documents contained in the
Registration Statement are accurate and fair descriptions of such documents
in all material respects. The Company acknowledges and agrees that the only
information furnished to the Company by or on behalf of any Underwriter
specifically for use in any Preeffective Prospectus, the Registration
Statement, the Prospectus or any amendment or supplement thereto is that
information contained in the last paragraph on the cover page of the
Prospectus, the stabilization legend on the inside front cover of the
Prospectus and the information in the third paragraph, the first sentence of
the seventh paragraph and the eighth paragraph under the caption
"Underwriting" in the Prospectus.
------------
(iii) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, and except as set forth
or contemplated in the Prospectus, neither the Company nor any of its
subsidiaries has incurred any material liability or obligation, direct or
contingent, not in the ordinary course of business or entered into any
transaction not in the ordinary course of business, and there has not been
any material adverse change in the condition (financial or otherwise),
properties, business, management, prospects, net worth or results of
operations of the Company and its subsidiaries taken as a whole or any
change in the capital stock or short-term or long-term debt of the Company
or any of its subsidiaries.
(iv) The financial statements, together with the related notes and
schedules, set forth in the Prospectus and elsewhere in the Registration
Statement fairly present, on the basis stated in the Registration Statement,
the financial position and the results of operations and changes in
financial position of the entities shown thereby at the respective dates and
for the respective periods therein specified. Such financial statements and
related notes and
4
<PAGE>
schedules have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout the periods
involved, except as may be set forth in the Prospectus. The selected and
summary financial and statistical data set forth in the Prospectus and
elsewhere in the Registration Statement fairly present the information set
forth therein and have been compiled on a basis substantially consistent
with the financial statements presented therein.
(v) KPMG Peat Marwick LLP, who has expressed its opinion on the
audited financial statements and schedules included in the Registration
Statement and the Prospectus, are independent public accountants as required
by the Securities Act and the Rules and Regulations.
(vi) The Company and each of its subsidiaries have been duly
organized and are validly existing and in good standing as corporations
under the laws of their respective jurisdictions of organization, with full
power and authority (corporate and other) to own or lease their respective
properties and to conduct their respective businesses as described in the
Prospectus; the Company and each of its subsidiaries are in possession of
and operating in compliance with all material franchises, grants,
authorizations, licenses, permits, easements, consents, certificates and
orders required for the conduct of their respective business as described in
the Prospectus, all of which are valid and in full force and effect; and the
Company and each of its subsidiaries are duly qualified to do business and
in good standing as foreign corporations in all other jurisdictions where
their ownership or leasing of properties or the conduct of their respective
businesses as described in the Prospectus requires such qualification except
where the failure to so qualify would not have a material adverse effect on
the condition (financial or otherwise), properties, business, management,
prospects, net worth or results of operations of the Company and its
subsidiaries taken as a whole. The Company and each of its subsidiaries have
all requisite power and authority, and all necessary consents, approvals,
authorizations, orders, registrations, qualifications, licenses and permits
of and from all public regulatory or governmental agencies and bodies to
own, lease and operate their respective properties and to conduct their
respective businesses as now being conducted and as described in the
Registration Statement and
5
<PAGE>
the Prospectus, and no such consent, approval, authorization, order,
registration, qualification, license or permit contains a materially
burdensome restriction not adequately disclosed in the Registration
Statement and the Prospectus. The Company is the sole stockholder of EPITAXX
FSC Inc., a U.S. Virgin Islands foreign sales corporation ("EPITAXX FSC"),
and owns all of the capital stock of EPITAXX FSC free and clear of all
liens, encumbrances and defects. Other than EPITAXX FSC, the Company does
not own or control, directly or indirectly, any other corporation,
association or other entity.
(vii) The Company's authorized and outstanding capital stock is on the
date hereof, and will be on the Closing Dates, as set forth under the
heading "Capitalization" in the Prospectus; the outstanding shares of
--------------
capital stock conform to the description thereof in the Prospectus, have
been duly authorized and validly issued and are fully paid and
nonassessable, have been issued in compliance with all federal and state
securities laws and were not issued in violation of or subject to any
preemptive rights or similar rights to subscribe for or purchase securities.
Except as disclosed in or contemplated by the Prospectus, the Company does
not have outstanding any options or warrants to purchase, or any preemptive
rights or other rights to subscribe for or to purchase any securities or
obligations convertible into, or any contracts or commitments to issue or
sell shares of its capital stock or any such options, rights, convertible
securities or obligations. The description of the Company's stock option
plans, the options granted or exercised thereunder and any other outstanding
stock options or warrants issued by the Company as set forth in the
Prospectus, accurately and fairly presents the information required to be
shown with respect to such plans, options and warrants.
(viii) The Stock to be issued and sold by the Company to the
Underwriters hereunder has been duly and validly authorized and, when issued
and delivered against payment therefor as provided herein, will be duly and
validly issued, fully paid and nonassessable and free of any preemptive
rights, co-sale rights, registration rights, rights of first refusal or
other similar rights and will conform to the description thereof in the
Prospectus. The Stock has been approved for quotation on the Nasdaq National
Market, subject to official notice of issuance.
6
<PAGE>
(ix) Except as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which the Company or any of its
subsidiaries is a party or to which any property of the Company or any of
its subsidiaries is subject, which, if determined adversely to the Company
or any such subsidiary, might individually or in the aggregate (i) prevent
the Company from performing its obligations under this Agreement, (ii)
suspend the effectiveness of the Registration Statement, (iii) prevent or
suspend the use of the Prospectus in any jurisdiction or (iv) result in a
material adverse change in the condition (financial or otherwise),
properties, business, management, prospects, net worth or results of
operations of the Company or any of its subsidiaries; and to the Company's
and the Parent's knowledge, no such proceedings are threatened or
contemplated against the Company or any of its subsidiaries by governmental
authorities or others. Neither the Company nor any of its subsidiaries is a
party to or subject to the provisions of any injunction, judgment, decree or
order of any court, regulatory body or other governmental agency or body.
Neither the Company nor any of its subsidiaries is a party or otherwise
subject to any legal or governmental proceedings required to be disclosed in
the Registration Statement or Prospectus that is not so disclosed. The
description of any litigation to which the Company or any of its
subsidiaries is a party or otherwise subject as set forth under the heading
"Business -- Legal Proceedings" in the Prospectus is accurate and fair and
-----------------------------
complies with the Rules and Regulations.
(x) The execution, delivery and performance of this Agreement and
the consummation of the transactions herein contemplated will not result in
(A) a breach or violation of any of the terms or provisions of or constitute
a default under (x) any lease, contract, indenture, mortgage, deed of trust,
note agreement or other agreement or instrument to which the Company or any
of its subsidiaries is a party or by which the Company, any of its
subsidiaries or any of their respective properties is or may be bound, (y)
the Restated Certificate of Incorporation, Amended and Restated By-laws or
other organizational documents of the Company or any of its subsidiaries or
(z) any law, order, rule or regulation of any court or governmental agency
or body having jurisdiction over the Company, any of its subsidiaries or any
of their respective properties, or (B) the creation of a lien on any of the
7
<PAGE>
assets or properties of the Company or any of its subsidiaries.
(xi) No consent, approval, authorization or order of, or filing with,
any court or governmental agency or body is required for the consummation by
the Company of the transactions contemplated by this Agreement, except such
as may be required by the National Association of Securities Dealers, Inc.
(the "NASD") or under the Securities Act or the securities or "Blue Sky"
---- --------
laws of any jurisdiction in connection with the purchase and distribution of
the Stock by the Underwriters.
(xii) The Company has the full corporate power and authority to enter
into this Agreement and to perform its obligations hereunder (including to
issue, sell and deliver the Stock), and this Agreement has been duly and
validly authorized, executed and delivered by the Company and is a valid and
binding obligation of the Company, enforceable against the Company in
accordance with its terms, subject to applicable bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and similar laws affecting
creditors' rights and remedies generally and subject to general principles
of equity, and except to the extent that rights to indemnity and
contribution hereunder may be limited by federal or state securities laws or
the public policies underlying such laws.
(xiii) The Company and each of its subsidiaries are in all material
respects in compliance with, and conduct their respective businesses in all
material respects in conformity with, all applicable laws, orders, rules,
regulations, judgments and decrees of any federal, state, local or foreign
court, government or governmental agency or body, and, to the knowledge of
the Company and the Parent, otherwise than as set forth in the Registration
Statement and the Prospectus, no prospective change in any of such laws,
orders, rules, regulations, judgments or decrees has been adopted which,
when made effective, would have a material adverse effect on the operations
of the Company and its subsidiaries, taken as a whole.
(xiv) The Company and each of its subsidiaries have timely filed all
necessary federal, state, local and foreign income, payroll, franchise and
other tax returns and have paid all taxes shown as due thereon, and there is
no
8
<PAGE>
tax deficiency that has been or, to the knowledge of the Company and the
Parent, might be asserted against the Company, any of its subsidiaries or
any of their respective properties or assets that would materially adversely
affect the condition (financial or otherwise), properties, business,
prospects, net worth or results of operations of the Company or any of its
subsidiaries.
(xv) Except as disclosed in the Registration Statement and the
Prospectus, the Company and each of its subsidiaries is in compliance with
all applicable existing federal, state, local and foreign laws and
regulations relating to the protection of human health or the environment or
imposing liability or requiring standards of conduct concerning any
Hazardous Materials ("Environmental Laws"), except for such instances of
------------------
noncompliance which, either singly or in the aggregate, would not have a
material adverse effect on the condition (financial or otherwise),
properties, business, prospects, net worth or results of operations of the
Company or any of its subsidiaries. The term "Hazardous Material" means (i)
------------------
any "hazardous substance" as defined by the Comprehensive Environmental
-------------------
Response, Compensation and Liability Act of 1980, as amended, (ii) any
"hazardous waste" as defined by the Resource Conservation and Recovery Act,
---------------
as amended, (iii) any petroleum or petroleum product, (iv) any
polychlorinated biphenyl and (v) any pollutant or contaminant or hazardous,
dangerous or toxic chemical, material, waste or substance regulated under or
within the meaning of any other Environmental Law.
(xvi) No person or entity has the right to require registration of
shares of Common Stock or other securities of the Company or any of its
subsidiaries because of the filing or effectiveness of the Registration
Statement or otherwise.
(xvii) Neither the Company, the Parent nor any of their subsidiaries
nor any of their respective officers or directors has taken or will take,
directly or indirectly, any action designed or intended to stabilize or
manipulate the price of any security of the Company, or which caused or
resulted in, or which might in the future reasonably be expected to cause or
result in, stabilization or manipulation of the price of any security of the
Company.
9
<PAGE>
(xviii) The Company has provided the Representatives with all financial
statements of the Company since March 31, 1994 to the date hereof that are
available to the officers of the Company, including financial statements for
the [ ]-month periods ended [________, 1997 and ___________, 1998].
(xix) The Company and its subsidiaries own or possess adequate rights
to use all patents, trademarks, trademark registrations, service marks,
service mark registrations, trade names, copyrights, copyright
registrations, licenses, inventions, trade secrets and other intellectual
property or franchise rights described in the Prospectus as being owned or
used by them or any of them or which are necessary for the conduct of their
respective businesses, and, except as described in the Prospectus, the
Company and the Parent are not aware of any claim to the contrary or any
challenge or infringement by any other person with respect to the rights of
the Company and its subsidiaries with respect to the foregoing. Each person
or entity to whom or to which any confidential information related to the
foregoing has been disclosed has entered into a related confidentiality and
nondisclosure agreement with the Company or a subsidiary thereof. The
businesses of the Company and each of its subsidiaries as now and previously
conducted and as proposed to be conducted do not and will not infringe or
conflict with in any material respect the patents, trademarks, trademark
registrations, service marks, service mark registrations, trade names,
copyrights, copyright registrations, licenses, inventions, trade secrets or
other intellectual property or franchise rights of any person. Except as
described in the Prospectus, neither the Company, the Parent nor any of
their subsidiaries has received any notice alleging the infringement by the
Company or any of its subsidiaries of any patent, trademark, trademark
registration, service mark, service mark registration, trade name,
copyright, copyright registration, license, invention, trade secret or other
intellectual property or franchise right of any person.
(xx) Neither the Company nor any of its subsidiaries is in violation
of, or in default in the performance or observation of any material
obligation, agreement, covenant or condition contained in, its Restated
Certificate of Incorporation or Amended and Restated By-laws or any material
lease, contract, indenture, mortgage, deed
10
<PAGE>
of trust, note agreement or other agreement or instrument to which the
Company or any of its subsidiaries is a party or by which the Company or any
of its subsidiaries or any of their respective properties or assets may be
bound; nor has the Company, the Parent or any of their subsidiaries received
any notice of any such violation or default; nor, to the best knowledge of
the Company and the Parent, is any other party to any such agreement or
instrument in violation or breach thereof. All contracts required by Item
601(b)(10) of Regulation S-K under the Securities Act to be filed as
exhibits to the Registration Statement have been so filed. All contracts and
any other agreements to which the Company or any of its subsidiaries is a
party that are described in the Prospectus are valid agreements, enforceable
in accordance with their respective terms, except as enforcement thereof may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium
or other similar laws relating to or affecting creditors' rights generally
or by general equitable principles and neither the Company nor any of its
subsidiaries, nor, to the knowledge of the Company or the Parent, each other
party to any such contract or other agreement, is in default under or in
breach of any such contract or other agreement.
(xxi) Neither the Company nor any of its subsidiaries is involved in
any labor dispute nor is any such dispute threatened. Neither the Company,
the Parent nor any of their subsidiaries is aware that (A) any executive,
key employee or significant group of employees of the Company or any of its
subsidiaries plans to terminate employment with the Company or such
subsidiary or (B) any such executive or key employee is subject to any
noncompete, nondisclosure, confidentiality, employment, consulting or
similar agreement that would be violated by the present or proposed business
activities of the Company or any of its subsidiaries. Neither the Company
nor any of its subsidiaries has or expects to have any liability for any
prohibited transaction or funding deficiency or any complete or partial
withdrawal liability with respect to any pension, profit sharing or other
plan which is subject to the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), to which the Company or any of its subsidiaries
-----
makes or ever has made a contribution and in which any employee of the
Company or any of its subsidiaries is or has ever been a participant. With
respect to such plans, the Company and each of its subsidiaries are in
compliance in
11
<PAGE>
all material respects with all applicable provisions of ERISA.
(xxii) The Company has obtained the written agreements in the form of
Exhibit I hereto from each of its officers and directors and from the
---------
holders of those securities of the Company representing in the aggregate no
less than 100% of the outstanding Common Stock of the Company on an as-
converted basis, which holders include, without limitation, those persons
and entities set forth on Schedule B hereto.
----------
(xxiii) The Company and each of its subsidiaries have, and as of the
Closing Dates will have, good and marketable title to all personal property
owned or proposed to be owned by them which is material to their respective
businesses, in each case free and clear of all liens, encumbrances and
defects, except such as are described in the Prospectus; and any real
property and buildings held under lease by the Company or any of its
subsidiaries are, and will be as of the Closing Dates, held by them under
valid, subsisting and enforceable leases, in each case except as described
in the Prospectus.
(xxiv) The Company and each of its subsidiaries are insured by insurers
of recognized financial responsibility against such losses and risks and in
such amounts as are customary in the businesses in which they are engaged
and propose to engage; and neither the Company nor any of its subsidiaries
has any reason to believe that it will not be able to renew its existing
insurance coverage as and when such coverage expires or to obtain similar
coverage from similar insurers as may be necessary to continue its business
at a cost that would not materially and adversely affect the condition
(financial or otherwise), properties, business, prospects, net worth or
results of operations of the Company or such subsidiary, as the case may be,
except as described in or contemplated by the Prospectus.
(xxv) Except as contemplated by this Agreement, there is no broker,
finder or other party that is entitled to receive from the Company or any of
its subsidiaries any brokerage or finder's fee or other fee or commission as
a result of any of the transactions contemplated by this Agreement.
12
<PAGE>
(xxvi) The Company and each of its subsidiaries maintains a system of
internal accounting controls sufficient to provide reasonable assurances
that (i) transactions are executed in accordance with management's general
or specific authorization; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for assets;
(iii) access to its financial assets is permitted only in accordance with
management's general or specific authorization; and (iv) the recorded
accountability for assets is compared with existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
(xxvii) Except as set forth in the Prospectus, to the knowledge of the
Company and the Parent, neither the Company nor any of its subsidiaries nor
any officer, director, employee or agent of the Company or any of its
subsidiaries has made any payment of funds of the Company or any of its
subsidiaries or received or retained any funds in violation of any law, rule
or regulation, which payment, receipt or retention of funds is of a
character required to be disclosed in the Prospectus.
(xxviii) Neither the Company nor any of its subsidiaries is an
"investment company" or an entity "controlled" by an "investment company" as
------------------ ----------
such terms are defined in the Investment Company Act of 1940, as amended.
(ii) Each certificate signed by any officer of the Company, the Parent or any of
their subsidiaries and delivered pursuant to this Agreement to the Underwriters
or counsel for the Underwriters shall be deemed to be a representation and
warranty by the Company or the Parent, as the case may be, as to the matters
covered thereby.
3 Representations and Warranties of the Parent. The Parent represents and
--------------------------------------------
warrants to, and agrees with, the several Underwriters that:
(i) The Parent has been duly organized and is validly existing and in good
standing as a corporation under the laws of its jurisdiction of organization,
with full power and authority to own or lease its properties and to conduct its
business; the Parent is in possession of and operating in
13
<PAGE>
compliance with all franchises, grants, authorizations, licenses, permits,
easements, consents, certificates and orders required for the conduct of its
business, all of which are valid and in full force and effect, except where the
failure to have any such franchises, grants, authorizations, licenses, permits,
easements, consents, certificates and orders individually and in the aggregate
would not have a material adverse effect on the financial condition of the
Parent; and the Parent is duly qualified to do business and is in good standing
as a foreign corporation in all other jurisdictions where its ownership or
leasing of properties or the conduct of its business requires such
qualification, except where the failure to so qualify would not have a material
adverse effect on the financial condition of the Parent. The Parent has all
requisite power and authority, and all necessary consents, approvals,
authorizations, orders, registrations, qualifications, licenses and permits of
and from all public regulatory or governmental agencies and bodies to own, lease
and operate its properties and conduct its business as now being conducted,
except where failure to have any such consents, approvals, authorizations,
orders, registrations, qualifications, licenses or permits individually and in
the aggregate would not have a material adverse effect on the financial
condition of the Parent.
(ii) The execution, delivery and performance of this Agreement and the
consummation of the transactions herein contemplated will not result in a breach
or violation of any of the terms or provisions of or constitute a default under
any lease, contract, indenture, mortgage, deed of trust, note agreement or other
agreement or instrument to which the Parent is a party or by which it or any of
its properties is or may be bound, the Certificate of Incorporation, the By-
laws, or other organizational documents of the Parent, or any law, order, rule
or regulation of any court or governmental agency or body having jurisdiction
over the Parent or any of its properties or the creation of a lien on any of the
assets or properties of the Parent, except for such liens that individually and
in the aggregate would not have a material adverse effect on the financial
condition of the Parent.
(iii) No consent, approval, authorization or order of any court or governmental
agency or body is required for the consummation by the Parent of the
transactions contemplated by this Agreement, except such as may be required by
the NASD or under the Securities Act or the securities or "Blue Sky" laws of
14
<PAGE>
any jurisdiction in connection with the purchase and distribution of the Common
Stock by the Underwriters.
(iv) The Parent has the full corporate power and authority to enter into this
Agreement and to perform its obligations hereunder, and this Agreement has been
duly and validly authorized, executed and delivered by the Parent and is a valid
and binding obligation of the Parent, enforceable against the Parent in
accordance with its terms, except to the extent that rights to indemnity and
contribution hereunder may be limited by federal or state securities laws or the
public policy underlying such laws.
4 Purchase by, and Sale and Delivery to, Underwriters -- Closing Dates. The
--------------------------------------------------------------------
Company agrees to sell to the Underwriters the Firm Stock, and on the basis of
the representations, warranties, covenants and agreements herein contained, but
subject to the terms and conditions herein set forth, the Underwriters agree,
severally and not jointly, to purchase the Firm Stock from the Company, the
number of shares of Firm Stock to be purchased by each Underwriter being set
forth opposite its name in Schedule A hereto, subject to adjustment in
----------
accordance with Section 13.
----------
The purchase price per share to be paid by the Underwriters to the
Company will be $[___] per share (the "Purchase Price").
--------------
The Company will deliver the Firm Stock to the Representatives for the
respective accounts of the several Underwriters (in the form of definitive
certificates, issued in such names and in such denominations as the
Representatives may direct by notice in writing to the Company given at or prior
to 12:00 Noon, New York Time, on the second full business day preceding the
First Closing Date (as defined below) or, if no such direction is received, in
the names of the respective Underwriters or in such other names as the
Representatives may designate (solely for the purpose of administrative
convenience) and in such denominations as the Representatives may determine), at
the offices of O'Sullivan Graev & Karabell, LLP, 30 Rockefeller Plaza, 41st
Floor, New York, New York 10112, against payment of the aggregate Purchase Price
therefor in same day funds to the Company or its designees. The time and date
of the delivery and closing shall be at 10:00 A.M., New York Time, on
[________________], 1998, in accordance with Rule 15c6-1 of the Exchange Act.
The time and date of such payment and delivery are herein referred to as the
15
<PAGE>
"First Closing Date". The First Closing Date and the location of delivery of,
- -------------------
and the form of payment for, the Firm Stock may be varied by agreement between
the Company and the Representatives. The First Closing Date may be postponed
pursuant to the provisions of Section 13.
----------
The Company shall make the certificates for the Stock available to the
Representatives for examination on behalf of the Underwriters not later than
10:00 A.M., New York Time, on the business day preceding the First Closing Date
at the offices of Cowen & Company, Financial Square, New York, New York 10005.
It is understood that each of Cowen, Oppenheimer and Daiwa,
individually and not as a Representative of the several Underwriters, may (but
shall not be obligated to) make payment to the Company on behalf of any
Underwriter or Underwriters, for the Stock to be purchased by such Underwriter
or Underwriters. Any such payment by Cowen, Oppenheimer or Daiwa shall not
relieve such Underwriter or Underwriters from any of its or their other
obligations hereunder.
The several Underwriters agree to make an initial public offering of
the Firm Stock at $[________] per share as soon after the effectiveness of the
Registration Statement as in their judgment is advisable. The Representatives
shall promptly advise the Company of the making of the initial public offering.
For the purpose of covering any over-allotments in connection with the
distribution and sale of the Firm Stock as contemplated by the Prospectus, the
Company hereby grants to the Underwriters an option to purchase, severally and
not jointly, up to an aggregate of 322,500 shares of Optional Stock. The price
per share to be paid for the Optional Stock shall be the Purchase Price. The
option granted hereby may be exercised as to all or any part of the Optional
Stock at any time, and from time to time, not more than thirty (30) days after
the date the Firm Stock is initially offered to the public. No Optional Stock
shall be sold and delivered unless the Firm Stock previously has been, or
simultaneously is, sold and delivered. The right to purchase the Optional Stock
or any portion thereof may be surrendered and terminated at any time upon notice
by the Underwriters to the Company.
The option granted hereby may be exercised by the Underwriters by
giving written notice from the Representatives to the Company setting forth the
number of shares of Optional Stock
16
<PAGE>
to be purchased by them and the date and time for delivery of and payment for
the Optional Stock. The date and time for delivery of and payment for the
Optional Stock (which may be the First Closing Date, but not earlier) is herein
called the "Option Closing Date" and shall in no event be earlier than two (2)
-------------------
business days nor later than ten (10) business days after written notice is
given. (The Option Closing Date and the First Closing Date are herein called the
"Closing Dates".) Optional Stock shall be purchased for the account of each
-------------
Underwriter in the same proportion as the number of shares of Firm Stock set
forth opposite such Underwriter's name in Schedule A hereto bears to the total
----------
number of shares of Firm Stock (subject to adjustment by the Underwriters to
eliminate odd lots). Upon exercise of the option by the Underwriters, the
Company agrees to sell to the Underwriters the number of shares of Optional
Stock set forth in the written notice of exercise, and the Underwriters agree,
severally and not jointly and subject to the terms and conditions herein set
forth, to purchase the number of such shares determined as aforesaid.
The Company will deliver the Optional Stock to the Underwriters (in
the form of definitive certificates, issued in such names and in such
denominations as the Representatives may direct by notice in writing to the
Company given at or prior to 12:00 Noon, New York Time, on the second full
business day preceding the Option Closing Date or, if no such direction is
received, in the names of the respective Underwriters or in such other names as
the Representatives may designate (solely for the purpose of administrative
convenience) and in such denominations as the Representatives may determine),
against payment of the aggregate Purchase Price therefor by certified or
official bank check or checks in New York Clearing House funds (next day funds),
payable to the order of the Company, all at the offices of O'Sullivan Graev &
Karabell, LLP, 30 Rockefeller Plaza, 41st Floor, New York, New York 10112. The
Option Closing Date and the location of delivery of, and the form of payment
for, the Optional Stock may be varied by agreement between the Company and the
Representatives. The Option Closing Date may be postponed pursuant to the
provisions of Section 13.
----------
5 Covenants and Agreements of the Company. The Company covenants and agrees
---------------------------------------
with the several Underwriters that:
(i) The Company will (A) if the Company and the Representatives have determined
not to proceed pursuant to Rule 430A, use its best efforts to cause the
Registration
17
<PAGE>
Statement to become effective, (B) if the Company and the Representatives have
determined to proceed pursuant to Rule 430A, use its best efforts to comply with
the provisions of and make all requisite filings with the Commission pursuant to
Rule 430A and Rule 424 of the Rules and Regulations and (C) if the Company and
the Representatives have determined to deliver Prospectuses pursuant to Rule 434
of the Rules and Regulations, to use its best efforts to comply with all the
applicable provisions thereof. The Company will advise the Representatives
promptly as to the time at which the Registration Statement becomes effective,
will advise the Representatives promptly of the issuance by the Commission of
any stop order suspending the effectiveness of the Registration Statement or of
the institution of any proceedings for that purpose, and will use its best
efforts to prevent the issuance of any such stop order and to obtain as soon as
possible the lifting thereof, if issued. The Company will advise the
Representatives promptly of the receipt of any comments of the Commission or any
request by the Commission for any amendment of or supplement to the Registration
Statement or the Prospectus or for additional information and will not at any
time file any amendment to the Registration Statement or supplement to the
Prospectus which shall not previously have been submitted to the Representatives
a reasonable time prior to the proposed filing thereof or to which the
Representatives shall reasonably object in writing or which is not in compliance
with the Securities Act and the Rules and Regulations.
(ii) The Company will prepare and file with the Commission, promptly upon the
request of the Representatives, any amendments or supplements to the
Registration Statement or the Prospectus which in the opinion of the
Representatives may be necessary to enable the several Underwriters to continue
the distribution of the Stock and will use its best efforts to cause the same to
become effective as promptly as possible.
(iii) If at any time after the effective date of the Registration Statement when
a prospectus relating to the Stock is required to be delivered under the
Securities Act any event relating to or affecting the Company occurs as a result
of which the Prospectus or any other prospectus as then in effect would include
an untrue statement of a material fact, or omit to state any material fact
necessary to make the statements therein, in light of the
18
<PAGE>
circumstances under which they were made, not misleading, or if it is necessary
at any time to amend the Prospectus to comply with the Securities Act, the
Company will promptly notify the Representatives thereof and will prepare an
amended or supplemented prospectus which will correct such statement or
omission; and in case any Underwriter is required to deliver a prospectus
relating to the Stock nine (9) months or more after the effective date of the
Registration Statement, the Company upon the request of the Representatives and
at the expense of such Underwriter will prepare promptly such prospectus or
prospectuses as may be necessary to permit compliance with the requirements of
Section 10(a)(3) of the Securities Act.
(iv) The Company will deliver to the Representatives, at or before the Closing
Dates, signed copies of the Registration Statement, as originally filed with the
Commission, and all amendments thereto including all financial statements and
exhibits thereto, and will deliver to the Representatives such number of copies
of the Registration Statement, including such financial statements but without
exhibits, and all amendments thereto, as the Representatives may reasonably
request. The Company will deliver or mail to or upon the order of the
Representatives, from time to time until the effective date of the Registration
Statement, as many copies of the Preeffective Prospectus as the Representatives
may reasonably request. The Company will deliver or mail to or upon the order of
the Representatives on the date of the initial public offering, and thereafter
from time to time during the period when delivery of a prospectus relating to
the Stock is required under the Securities Act, as many copies of the
Prospectus, in final form or as thereafter amended or supplemented as the
Representatives may reasonably request; provided, however, that the expense of
-------- -------
the preparation and delivery of any prospectus required for use nine (9) months
or more after the effective date of the Registration Statement shall be borne by
the Underwriters required to deliver such prospectus.
(v) The Company will make generally available to its stockholders as soon as
practicable, but not later than fifteen (15) months after the effective date of
the Registration Statement, an earnings statement which will be in reasonable
detail (but which need not be audited) and which will comply with Section 11(a)
of the Securities Act,
19
<PAGE>
covering a period of at least twelve (12) months beginning after the "effective
---------
date" (as defined in Rule 158 under the Securities Act) of the Registration
- ----
Statement.
(vi) The Company will cooperate with the Representatives to enable the Stock to
be registered or qualified for offering and sale by the Underwriters and by
dealers under the securities laws of such jurisdictions as the Representatives
may designate and at the request of the Representatives will make such
applications and furnish such consents to service of process or other documents
as may be required of it as the issuer of the Stock for that purpose; provided,
--------
however, that the Company shall not be required to qualify to do business or to
- -------
file a general consent (other than that arising out of the offering or sale of
the Stock) to service of process in any such jurisdiction where it is not now so
subject. The Company will, from time to time, prepare and file such statements
and reports as are or may be required of it as the issuer of the Stock, to
continue such qualifications in effect for so long a period as the
Representatives may reasonably request for the distribution of the Stock. The
Company will advise the Representatives promptly after the Company becomes aware
of the suspension of the qualifications or registration of (or any such
exception relating to) the Common Stock of the Company for offering, sale or
trading in any jurisdiction or of any initiation or threat of any proceeding for
any such purpose, and in the event of the issuance of any orders suspending such
qualifications, registration or exception, the Company will, with the
cooperation of the Representatives, use its best efforts to obtain the
withdrawal thereof.
(vii) The Company will furnish to its stockholders annual reports containing
financial statements certified by independent public accountants and with
quarterly summary financial information in reasonable detail which may be
unaudited. During the period of five (5) years from the date hereof, the Company
will deliver to the Representatives and, upon request, to each of the other
Underwriters, (A) as soon as practicable after the end of each fiscal year,
copies of the Annual Report of the Company containing the balance sheet of the
Company as of the close of such fiscal year and statements of income,
stockholder's equity and cash flows for the year then ended and the opinion
thereon of the Company's independent public accountants; (B) as soon as
practicable after the filing
20
<PAGE>
thereof, copies of each proxy statement, Annual Report on Form 10-K, Quarterly
Report on Form 10-Q, Report on Form 8-K or other report or financial statements
furnished to or filed with the Commission, the NASD, the Nasdaq Stock Market or
any securities exchange; and (C) as soon as available, copies of any report or
communication (financial or otherwise) of the Company mailed generally to
holders of its Common Stock and (D) from time to time such other information
concerning the Company as the Representatives may reasonably request. So long as
the Company has active subsidiaries, such financial statements will be on a
consolidated basis to the extent the accounts of the Company and its
subsidiaries are consolidated in reports furnished to its stockholders
generally. Separate financial statements shall be furnished for all subsidiaries
whose accounts are not consolidated but which at the time are significant
subsidiaries as defined in the Rules and Regulations.
(viii) The Company will use its best efforts to list, subject to official notice
of issuance, and to maintain the listing of, the Stock on the Nasdaq National
Market.
(ix) The Company will maintain a transfer agent and registrar for its Common
Stock.
(x) Prior to filing its quarterly statements on Form 10-Q, the Company will have
its independent auditors perform a limited quarterly review of its quarterly
numbers.
(xi) Without the prior written consent of Cowen, the Company will not offer,
sell, assign, transfer, encumber, pledge, contract to sell, grant an option to
purchase or otherwise dispose of any shares of Common Stock, any options or
warrants to purchase any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for shares of Common Stock during the 180
days following the date on which the Firm Stock is initially offered to the
public, other than (A) shares of Common Stock to be sold by the Company
hereunder, (B) shares of Common Stock issuable upon the conversion of any of the
securities of the Company which are outstanding on the date hereof and described
in the Prospectus, (C) options issued by the Company under the Company's
presently authorized stock
21
<PAGE>
option plans and (D) shares of Common Stock issuable under the Company's
presently outstanding stock options.
(xii) The Company will apply the net proceeds from the sale of the Stock as set
forth in the description under "Use of Proceeds" in the Prospectus, which
---------------
description complies in all respects with the requirements of Item 504 of
Regulation S-K.
(xiii) The Company will supply the Representatives with copies of all
correspondence to and from, and all documents issued to and by, the Commission
in connection with the registration of the Stock under the Securities Act.
(xiv) Prior to each Closing Date, the Company will furnish to the
Representatives, as soon as they have been prepared, as many copies as the
Representatives may reasonably request of any unaudited interim financial
statements of the Company for any periods subsequent to the periods covered by
the financial statements appearing in the Registration Statement and the
Prospectus.
(xv) Prior to each Closing Date, the Company will issue no press release or
other communication, directly or indirectly, and hold no press conference, with
respect to the Company, the financial condition, results of operation, business,
prospects, assets or liabilities of the Company, or the offering of the Stock,
without the prior consent of Cowen. For a period of twelve (12) months following
the later of the Closing Dates, the Company will provide to the Representatives
copies of each press release or other public communication with respect to the
financial condition, results of operations, business, prospects, assets or
liabilities of the Company.
6 Payment of Expenses.
-------------------
The Company will pay (directly or by reimbursement) all costs, fees
and expenses incurred in connection with or incident to the performance of the
obligations of the Company and the Parent under this Agreement and in connection
with the transactions contemplated hereby, including but not limited to (i) all
expenses and taxes incident to the issuance and delivery of the Stock to the
Representatives; (ii) all expenses incident to the registration of the Stock
under the
22
<PAGE>
Securities Act; (iii) the costs of preparing stock certificates (including
printing and engraving costs); (iv) all fees and expenses of the registrar and
transfer agent of the Stock; (v) all necessary issue, transfer and other stamp
taxes in connection with the issuance and sale of the Stock to the Underwriters;
(vi) all fees and expenses of the Company's and the Parent's counsel and
independent accountants; (vii) all costs and expenses incurred in connection
with the preparation, printing, filing, shipping and distribution of the
Registration Statement, each Preeffective Prospectus and the Prospectus
(including all exhibits and financial statements therein) and all amendments and
supplements provided for herein, the Master Agreement Among Underwriters, the
Selected Dealers' Agreement, the Underwriters' Questionnaire, the Blue Sky
memoranda and this Agreement; (viii) all filing fees, attorneys' fees and
expenses incurred by the Company, the Parent or the Underwriters in connection
with exemptions from the qualifying or registering (or obtaining qualification
or registration) of all or any part of the Stock for offer and sale and
determination of its eligibility for investment under the Blue Sky or other
securities laws of such jurisdictions as the Representatives may designate; (ix)
all fees and expenses paid or incurred in connection with filings made with the
NASD; and (x) all other costs and expenses incident to the performance of the
Company's and the Parent's obligations hereunder which are not otherwise
specifically provided for in this Section 6.
---------
7 Indemnification and Contribution.
--------------------------------
(i) The Company and the Parent, jointly and severally, agree to indemnify
and hold harmless each Underwriter and each person, if any, who controls such
Underwriter within the meaning of the Securities Act and the respective
officers, directors, partners, employees, representatives and agents of such
Underwriter (collectively, the "Underwriter Indemnified Parties" and, each, an
-------------------------------
"Underwriter Indemnified Party"), against any losses, claims, damages,
- ------------------------------
liabilities or expenses (including the cost of investigating and defending
against any claims therefor and counsel fees incurred in connection therewith),
joint or several, which may be based upon the Securities Act, or any other
statute or at common law, on the ground or alleged ground that any Preeffective
Prospectus, the Registration Statement or the Prospectus (or any Preeffective
Prospectus, the Registration Statement or the Prospectus as from time to time
amended or supplemented) includes or allegedly includes an untrue statement of a
material fact or omits to state a material fact
23
<PAGE>
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading, unless such statement or omission was made in reliance upon, and in
------
conformity with, written information furnished to the Company by any
Underwriter, directly or through the Representatives, specifically for use in
the preparation thereof. The Company and the Parent will be entitled to
participate at their own expense in the defense or, if they so elect, to assume
the defense of any suit brought to enforce any such liability, and if the
Company and the Parent elect to assume the defense, such defense shall be
conducted by counsel chosen by them. In the event the Company and the Parent
elect to assume the defense of any such suit and retain such counsel, any
Underwriter Indemnified Parties, defendant or defendants in the suit, may retain
additional counsel but shall bear the fees and expenses of such counsel unless
(i) the Company and the Parent shall have specifically authorized the retaining
of such counsel or (ii) the parties to such suit include any such Underwriter
Indemnified Parties and the Company or the Parent and such Underwriter
Indemnified Parties have been advised by counsel to the Underwriters that one or
more legal defenses may be available to it or them which may not be available to
the Company or the Parent, in which case the Company and the Parent shall not be
entitled to assume the defense of such suit on behalf of such Underwriter
Indemnified Party or Underwriter Indemnified Parties notwithstanding the
Company's and the Parent's obligations to bear the fees and expenses of such
counsel. In no event shall the Company and the Parent be liable for fees and
expenses of more than one counsel (in addition to any local counsel) separate
from their own counsel for all Underwriter Indemnified Parties in connection
with any one action or separate but similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances unless
------
the Company and the Parent, on the one hand, and such Underwriter Indemnified
Parties, on the other hand, have been advised by counsel to the Underwriter
Indemnified Parties that one or more factual or legal defenses may be available
to one or more of the Underwriter Indemnified Parties which may not be available
to all of the Underwriter Indemnified Parties. The Company and the Parent shall
not be liable to indemnify any person for any settlement of any such claim
effected without the consent of the Company and the Parent, respectively, which
consent shall not be unreasonably withheld. This indemnity agreement is not
exclusive and will be in addition to any liability which the Company or the
Parent might otherwise have and shall not limit any rights or remedies which may
24
<PAGE>
otherwise be available at law or in equity to each Underwriter Indemnified
Party.
(ii) Each Underwriter severally agrees to indemnify and hold harmless the
Company, each of its directors, each of its officers who have signed the
Registration Statement and each person, if any, who controls the Company within
the meaning of the Securities Act (collectively, the "Company Indemnified
-------------------
Parties") and the Parent and each person, if any, who controls the Parent
- -------
within the meaning of the Securities Act (collectively, the "Parent Indemnified
Parties"), against any losses, claims, damages, liabilities or expenses
(including, unless the Underwriter or Underwriters elect to assume the defense,
the reasonable cost of investigating and defending against any claims therefor
and reasonable counsel fees incurred in connection therewith), joint or several,
which arise out of or are based in whole or in part upon the Securities Act, the
Exchange Act or any other federal, state, local or foreign statute or
regulation, or at common law, on the ground or alleged ground that any
Preeffective Prospectus, the Registration Statement or the Prospectus (or any
Preeffective Prospectus, the Registration Statement or the Prospectus, as from
time to time amended and supplemented) includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
in which they were made, not misleading, but only insofar as any such statement
or omission was made in reliance upon, and in conformity with, written
information furnished to the Company by such Underwriter, directly or through
the Representatives, specifically for use in the preparation thereof. Such
Underwriter shall be entitled to participate at its own expense in the defense,
or, if it so elects, to assume the defense of any suit brought to enforce any
such liability, and, if such Underwriter elects to assume the defense, such
defense shall be conducted by counsel chosen by it. In the event that any
Underwriter elects to assume the defense of any such suit and retain such
counsel, the Company Indemnified Parties, the Parent Indemnified Parties and any
other Underwriter or Underwriters or controlling person or persons, defendant or
defendants in the suit, shall bear the fees and expenses of any additional
counsel retained by them, respectively. In no event shall the Underwriters be
liable for fees and expenses of more than one counsel (in addition to any local
counsel), separate from its own counsel, for all Company Indemnified Parties and
Parent Indemnified Parties in connection with any one action or separate but
similar or related actions in the same jurisdiction
25
<PAGE>
arising out of the same general allegations or circumstances unless the
------
Underwriters and such Company Indemnified Parties and Parent Indemnified Parties
have been advised by counsel to the Company Indemnified Parties and Parent
Indemnified Parties that one or more factual or legal defenses may be available
to one or more of the Company Indemnified Parties or Parent Indemnified Parties
which may not be available to all of the Company Indemnified Parties and Parent
Indemnified Parties. The Underwriter against whom indemnity may be sought shall
not be liable to indemnify any person for any settlement of any such claim
effected without such Underwriter's consent, which consent shall not be
unreasonably withheld. This indemnity agreement is not exclusive and will be in
addition to any liability which such Underwriter might otherwise have and shall
not limit any rights or remedies which may otherwise be available at law or in
equity to any Company Indemnified Party or Parent Indemnified Parties.
(iii) If the indemnification provided for in this Section 7 is unavailable or
---------
insufficient to hold harmless an indemnified party under Section 7(a) or Section
------------ -------
7(b) above in respect of any losses, claims, damages, liabilities or expenses
- ----
(or actions in respect thereof) referred to herein, then each indemnifying party
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages, liabilities or expenses (or actions in
respect thereof) in such proportion as is appropriate to reflect the relative
benefits received by the Company and the Parent on the one hand and the
Underwriters on the other from the offering of the Stock. If, however, the
allocation provided by the immediately preceding sentence is not permitted by
applicable law, then each indemnifying party shall contribute to such amount
paid or payable by such indemnified party in such proportion as is appropriate
to reflect not only such relative benefits but also the relative fault of the
Company and the Parent on the one hand and the Underwriters on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages, liabilities or expenses (or actions in respect thereof), as
well as any other relevant equitable considerations. The relative benefits
received by the Company and the Parent on the one hand and the Underwriters on
the other shall be deemed to be in the same proportion as the total net proceeds
from the offering (before deducting expenses) received by the Company bear to
the total underwriting discounts and commissions received by the Underwriters,
in each case as set forth in the table on the cover page of the Prospectus. The
relative fault shall be determined by reference to, among other things, whether
the
26
<PAGE>
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by either of
the Company, the Parent or the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company, the Parent and the Underwriters agree that
it would not be just and equitable if contribution were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above. The amount paid or payable by an
indemnified party as a result of the losses, claims, damages, liabilities or
expenses (or actions in respect thereof) referred to above shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating, defending, settling or compromising any
such claim. Notwithstanding the provisions of this Section 7(c), no Underwriter
------------
shall be required to contribute any amount in excess of the amount by which the
total price at which the shares of the Stock underwritten by it and distributed
to the public were offered to the public exceeds the amount of any damages which
such Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. The Underwriters'
obligations to contribute are several in proportion to their respective
underwriting obligations and not joint. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
(iv) Each party indemnified under the provisions of Section 7(a) or Section
------------ -------
7(b) agrees that, upon the service of a summons or other initial legal process
- ---
upon it in any action or suit instituted against it or upon its receipt of
written notification of the commencement of any investigation or inquiry of, or
proceedings against, it in respect of which indemnity may be sought on account
of any indemnity agreement contained in such sections, it will promptly give
written notice (herein called the "Notice") of such service or notification to
------
the party or parties from whom indemnification may be sought hereunder. No
indemnification provided for in such sections shall be available to any party
who shall fail so to give the Notice if the party to whom such Notice was not
given was unaware of the action, suit, investigation, inquiry or proceedings to
which the Notice would have related to the extent such indemnifying party was
materially prejudiced by the failure to give the Notice, but the omission to
27
<PAGE>
notify such indemnifying party or parties of any such service or notification
shall not relieve such indemnifying party or parties from any liability which it
or they may have to the indemnified party for contribution or otherwise than on
account of its indemnity agreement contained in Section 7(a) or Section 7(b).
------------ ------------
(v) In addition to their other obligations under Section 7(a), the Company
------------
and the Parent, jointly and severally, agree that, as an interim measure during
the pendency of any claim, action, investigation, inquiry or other proceeding
arising out of or based upon (i) any statement or omission or any alleged
statement or omission or (ii) any breach or inaccuracy in their representations
and warranties, they will reimburse each Underwriter on a quarterly basis for
all legal or other expenses incurred in connection with investigating or
defending any such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of the Company's and the Parent's obligation to reimburse each
Underwriter for such expenses and the possibility that such payments might later
be held to have been improper by a court of competent jurisdiction. To the
extent that any such interim reimbursement payment is so held to have been
improper, each Underwriter shall promptly return it to the Company or the
Parent, as the case may be, together with interest, compounded daily, determined
on the basis of the prime rate (or other commercial lending rate for borrowers
of the highest credit standing) announced from time to time by Citibank, N.A.,
New York, New York (the "Prime Rate"). Any such interim reimbursement payments
----------
which are not made to an Underwriter within 30 days of a written request for
reimbursement shall bear interest at the Prime Rate from the date of such
request. This expense reimbursement agreement will be in addition to any other
liability which the Company and the Parent may otherwise have.
(vi) In addition to its other obligations under Section 7(b), each
------------
Underwriter severally agrees that, as an interim measure during the pendency of
any claim, action, investigation, inquiry or other proceeding arising out of or
based upon any statement or omission, or any alleged statement or omission,
described in Section 7(b) which relates to information furnished by such
------------
Underwriter to the Company and the Parent hereunder, it will reimburse the
Company (and, to the extent applicable, each officer, director or controlling
person) on a quarterly basis for all legal or other expenses incurred in
connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding,
28
<PAGE>
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of the Underwriters' obligation to reimburse the Company and the
Parent (and, to the extent applicable, each officer, director or controlling
person) for such expenses and the possibility that such payments might later be
held to have been improper by a court of competent jurisdiction. To the extent
that any such interim reimbursement payment is so held to have been improper,
the Company and the Parent (and, to the extent applicable, each officer,
director or controlling person) shall promptly return it to the Underwriter
together with interest, compounded daily, determined on the basis of the Prime
Rate. Any such interim reimbursement payments which are not made to the Company
and the Parent within thirty (30) days of a written request for reimbursement
shall bear interest at the Prime Rate from the date of such request. This
indemnity agreement will be in addition to any liability which such Underwriter
may otherwise have.
8 Survival of Indemnities, Representations, Warranties, etc. The respective
----------------------------------------------------------
indemnities, covenants, agreements, representations, warranties and other
statements of the Company, the Parent and the several Underwriters, as set forth
in this Agreement or made by them respectively pursuant to this Agreement, shall
remain in full force and effect, regardless of any investigation made by or on
behalf of any Underwriter, the Company, the Parent, any of their respective
officers or directors or any controlling person, and shall survive delivery of
and payment for the Stock.
9 Conditions of Underwriters' Obligations. The respective obligations of
---------------------------------------
the several Underwriters hereunder shall be subject to the accuracy, at and
(except as otherwise stated herein) as of the date hereof and at and as of each
Closing Date, of the representations and warranties made herein by the Company
and the Parent, to compliance at and as of each Closing Date by the Company and
the Parent with their respective covenants and agreements herein contained and
the other provisions herein to be satisfied at or prior to each Closing Date,
and to the following additional conditions:
(a) The Registration Statement shall have become effective and no stop
order suspending the effectiveness thereof shall have been issued and no
proceedings for that purpose shall have been initiated or, to the knowledge
of the Company, the Parent or the
29
<PAGE>
Representatives, shall be threatened by the Commission, and any request for
additional information on the part of the Commission (to be included in the
Registration Statement or the Prospectus or otherwise) shall have been
complied with to the reasonable satisfaction of the Representatives. Any
filings of the Prospectus, or any supplement thereto, required pursuant to
Rule 424(b) or Rule 434 of the Rules and Regulations, shall have been made in
the manner and within the time period required by Rule 424(b) and Rule 434 of
the Rules and Regulations, as the case may be.
(b) The Representatives shall have been satisfied that there shall not
have occurred any change, on a consolidated basis, prior to the applicable
Closing Date in the condition (financial or otherwise), properties, business,
management, prospects, net worth or results of operations of the Company and
its subsidiaries considered as a whole, or any change in the capital stock,
short-term or long-term debt of the Company and its subsidiaries considered
as a whole, such that (i) the Registration Statement or the Prospectus, or
any amendment or supplement thereto, contains an untrue statement of fact
which, in the opinion of the Representatives, is material, or omits to state
a fact which, in the opinion of the Representatives, is required to be stated
therein or is necessary to make the statements therein not misleading, or
(ii) it is impracticable in the reasonable judgment of the Representatives to
proceed with the public offering or purchase the Stock as contemplated
hereby.
(c) The Representatives shall be satisfied that no legal or governmental
action, suit or proceeding affecting the Company or any of its subsidiaries
which is material and adverse to the Company and its subsidiaries considered
as a whole, or which affects or may affect the Company's ability to perform
its obligations hereunder, shall have been instituted or threatened and there
shall have occurred no material adverse development in any existing such
action, suit or proceeding.
(d) At the time of execution of this Agreement, the Representatives shall
have received from KPMG Peat
30
<PAGE>
Marwick LLP, independent certified public accountants, a letter, dated the
date hereof, in form and substance satisfactory to the Underwriters.
(e) The Representatives shall have received, prior to the applicable
Closing Date, from KPMG Peat Marwick LLP, independent certified public
accountants, a letter, dated as of the applicable Closing Date, to the effect
that such accountants reaffirm, as of such Closing Date, and as though made
on such Closing Date, the statements made in the letter furnished by such
accountants pursuant to Section 9(d).
------------
(f) Prior to each Closing Date, the Representatives shall have received
from Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., counsel for the
Company, an opinion, dated as of such Closing Date, in form and substance
reasonably satisfactory to the Representatives to the effect set forth in
Exhibit I hereto, together with the opinion of ______, Japanese counsel for
---------
the Parent, contemplated thereby and attached thereto.
(g) Prior to the First Closing Date, the Representatives shall have
received from O'Sullivan Graev & Karabell, LLP, counsel for the Underwriters,
an opinion dated as of the First Closing Date in form and substance
reasonably satisfactory to the Representatives.
(h) Prior to each Closing Date, the Representatives shall have received
certificates, dated as of such Closing Date, of the chairman or chief
executive officer and the chief financial or accounting officer of each of
the Company and the Parent, to the effect that:
(i) no stop order suspending the effectiveness of the Registration
Statement has been issued, and, to the certifying party's knowledge, no
proceedings for that purpose have been instituted or are pending or
contemplated under the Securities Act;
(ii) neither any Preeffective Prospectus, as of its date, nor the
Registration Statement nor the
31
<PAGE>
Prospectus, nor any amendment or supplement thereto, as of the time when
the Registration Statement became effective and at all times subsequent
thereto up to the delivery of such certificate, included any untrue
statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading;
(iii) the representations and warranties of the Company and the
Parent herein are true and correct at and as of the Closing Date in
connection with which said certificate is being delivered, and the Company
and the Parent has complied with all of its covenants herein and performed
or satisfied all of the conditions on their part to be performed or
satisfied at or prior to such Closing Date; and
(iv) since the respective dates as of which information is given
in the Registration Statement and the Prospectus, and except as disclosed
in or contemplated by the Prospectus, (i) there has not been any material
adverse change or a development involving a material adverse change in the
condition (financial or otherwise), properties, business, management,
prospects, net worth or results of operations of the Company or any of its
subsidiaries; (ii) the business and operations conducted by the Company
and each of its subsidiaries have not sustained a loss by strike, fire,
flood, accident or other calamity (whether or not insured) of such a
character as to interfere materially with the conduct of the business and
operations of the Company or such subsidiary, as the case may be; (iii) no
legal or governmental action, suit or proceeding is pending or, to the
knowledge of the Company or the Parent, threatened against the Company or
any of its subsidiaries which is material to the Company or any of its
subsidiaries, whether or not arising from transactions in the ordinary
course of business, or which may materially and adversely affect the
transactions contemplated by this Agreement; (iv) neither the Company nor
any of its subsidiaries has incurred any liability or obligation, direct,
contingent or indirect, or
32
<PAGE>
entered into any transaction, not in the ordinary course of business; (v)
the Company has not made any change in its capital stock (except pursuant
to its stock option plans or outstanding stock options and warrants), made
any material change in its short-term or funded debt or repurchased or
otherwise acquired any of the Company's capital stock; and (vi) the
Company has not declared or paid any dividend, or made any other
distribution, upon its outstanding capital stock on or prior to the
applicable Closing Date.
(i) The Representatives shall have received the written agreements of
the employees, officers and directors of the Company and the persons and
entities set forth in Schedule B hereto, in each case in the form of Exhibit
---------- -------
II hereto, and such agreements shall be in full force and effect.
--
All opinions, certificates, letters and other documents will be in compliance
with the provisions hereunder only if they are in form and substance reasonably
satisfactory to the Representatives. The Company and the Parent will furnish to
the Representatives conformed copies of such opinions, certificates, letters and
other documents as the Representatives shall reasonably request. If any of the
conditions hereinabove provided for in this Section 9 shall not have been
---------
satisfied when and as required by this Agreement, this Agreement may be
terminated by the Representatives by notifying the Company and the Parent of
such termination in writing or by telegram at or prior to the Closing Dates, but
the Representatives shall be entitled to waive any of such conditions.
10 Effective Date. This Agreement shall become effective immediately as to
--------------
Section 6, Section 7, Section 8, Section 10, Section 12, Section 14, Section 15,
- --------- --------- --------- ---------- ---------- ---------- ----------
Section 16, Section 17, Section 18 and Section 19 and, as to all other
- ---------- ---------- ---------- ----------
provisions, at 11:00 a.m. New York Time on the first full business day following
the effectiveness of the Registration Statement or at such earlier time after
the Registration Statement becomes effective as the Representatives may
determine on and by notice to the Company or by release of any of the Stock for
sale to the public. For the purposes of this Section 10, the Stock shall be
----------
deemed to have been so released upon the release for publication of any
newspaper advertisement relating to the Stock or upon the release by the
Representatives of telegrams (i)
33
<PAGE>
advising Underwriters that the shares of Stock are released for public offering
or (ii) offering the Stock for sale to securities dealers, whichever may occur
first.
11 Termination. This Agreement (except for the provisions of Section 6) may
----------- ---------
be terminated by the Company at any time before it becomes effective in
accordance with Section 10 by notice to the Representatives and may be
----------
terminated by the Representatives at any time before it becomes effective in
accordance with Section 10 by notice to the Company. In the event of any
termination of this Agreement under this or any other provision of this
Agreement, there shall be no liability of any party to this Agreement to any
other party, other than as provided in Section 6, Section 7 and Section 12 and
--------- --------- ----------
other than as provided in Section 13 as to the liability of defaulting
----------
Underwriters.
This Agreement may be terminated after it becomes effective by the
Representatives by notice to the Company (i) if at or prior to the First Closing
Date or the Option Closing Date trading in securities on the New York Stock
Exchange or the American Stock Exchange or the Nasdaq National Market shall have
been suspended or minimum or maximum prices shall have been established on any
such exchange or market, or a banking moratorium shall have been declared by New
York or United States authorities; (ii) trading of any securities of the Company
shall have been suspended on any exchange or in any over-the-counter market;
(iii) if at or prior to the First Closing Date or the Option Closing Date there
shall have been (A) an outbreak or escalation of hostilities between the United
States and any foreign power or of any other insurrection or armed conflict
involving the United States or (B) any change in financial markets or any
calamity or crisis which, in the judgment of the Representatives, makes it
impractical or inadvisable to offer or sell the Firm Stock or Optional Stock, as
applicable, on the terms contemplated by the Prospectus; (iv) if there shall
have been any development or prospective development involving particularly the
business or properties or securities of the Company or the transactions
contemplated by this Agreement, which, in the judgment of the Representatives,
makes it impracticable or inadvisable to offer or deliver the Firm Stock or the
Optional Stock, as applicable, on the terms contemplated by the Prospectus; (v)
if there shall be any litigation or proceeding, pending or threatened, which, in
the judgment of the Representatives, makes it impracticable or inadvisable to
offer or deliver the Firm Stock or Optional Stock, as applicable, on
34
<PAGE>
the terms contemplated by the Prospectus; or (vi) if there shall have occurred
any of the events specified in the immediately preceding clauses (i) through (v)
together with any other such event that makes it, in the judgment of the
Representatives, impractical or inadvisable to offer or deliver the Firm Stock
or Optional Stock, as applicable on the terms contemplated by the Prospectus.
12 Reimbursement of Underwriters. Notwithstanding any other provisions
-----------------------------
hereof, if this Agreement shall not become effective by reason of any election
of the Company pursuant to the first paragraph of Section 11 or shall be
----------
terminated by the Representatives under Section 9 or Section 11, the Company
--------- ----------
will bear and pay the expenses specified in Section 6 and, in addition to its
---------
obligations pursuant to Section 7, the Company will reimburse the reasonable
---------
out-of-pocket expenses of the several Underwriters (including reasonable fees
and disbursements of counsel for the Underwriters) incurred in connection with
this Agreement and the proposed purchase of the Stock, and promptly upon demand
the Company will pay such amounts to the Representatives.
13 Substitution of Underwriters. If any Underwriter or Underwriters shall
----------------------------
default in its or their obligations to purchase shares of Stock hereunder and
the aggregate number of shares which such defaulting Underwriter or Underwriters
agreed but failed to purchase does not exceed ten percent (10%) of the total
number of shares underwritten, the other Underwriters shall be obligated
severally, in proportion to their respective commitments hereunder, to purchase
the shares which such defaulting Underwriter or Underwriters agreed but failed
to purchase. If any Underwriter or Underwriters shall so default and the
aggregate number of shares with respect to which such default or defaults occur
is more than ten percent (10%) of the total number of shares underwritten and
arrangements satisfactory to the Representatives and the Company for the
purchase of such shares by other persons are not made within forty-eight (48)
hours after such default, this Agreement shall terminate without liability on
the part of any non-defaulting Underwriter or the Company for the purchase or
sale of any Stock under this Agreement.
If the remaining Underwriters or substituted Underwriters are required
hereby or agree to take up all or part of the shares of Stock of a defaulting
Underwriter or
35
<PAGE>
Underwriters as provided in this Section 13, (i) the Company and the Parent
----------
shall have the right to postpone the Closing Dates for a period of not more than
five (5) full business days in order that the Company and the Parent may effect
whatever changes may thereby be made necessary in the Registration Statement or
the Prospectus, or in any other documents or arrangements, and the Company
agrees promptly to file any amendments to the Registration Statement or
supplements to the Prospectus which may thereby be made necessary, and (ii) the
respective numbers of shares to be purchased by the remaining Underwriters or
substituted Underwriters shall be taken as the basis of their underwriting
obligation for all purposes of this Agreement. Nothing herein contained shall
relieve any defaulting Underwriter of its liability to the Company, the Parent
or the other Underwriters for damages occasioned by its default hereunder. Any
termination of this Agreement pursuant to this Section 13 shall be without
----------
liability on the part of any non-defaulting Underwriter, the Parent or the
Company, except for expenses to be paid or reimbursed pursuant to Section 6 and
---------
except for the provisions of Section 7.
---------
14 Notices. All communications hereunder shall be in writing and, if sent to
-------
the Underwriters shall be mailed, delivered or telegraphed and confirmed to the
Representatives c/o Cowen & Company at Financial Square, New York, New York
10005 except that notices given to an Underwriter pursuant to Section 7 shall be
---------
sent to such Underwriter at the address furnished by the Representatives or, if
sent to the Company or the Parent, shall be mailed, delivered or telegraphed and
confirmed to EPITAXX, Inc. at 7 Graphics Drive, West Trenton, New Jersey 08628,
Attention: Noboru Hiraguri.
15 Successors. This Agreement shall inure to the benefit of and be binding
----------
upon the several Underwriters, the Company, the Parent and their respective
successors and legal representatives. Nothing expressed or mentioned in this
Agreement is intended or shall be construed to give any person other than the
persons mentioned in the preceding sentence any legal or equitable right, remedy
or claim under or in respect of this Agreement, or any provisions herein
contained, this Agreement and all conditions and provisions hereof being
intended to be and being for the sole and exclusive benefit of such persons and
for the benefit of no other person; except that the representations, warranties,
covenants, agreements and indemnities of the Company and the Parent contained in
this
36
<PAGE>
Agreement shall also be for the benefit of the person or persons, if any, who
control any Underwriter or Underwriters within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act, and the indemnities of the
several Underwriters shall also be for the benefit of each director of the
Company, each of its officers who has signed the Registration Statement and the
person or persons, if any, who control the Company or the Parent within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act.
16 Jurisdiction, Venue. Any suit, action or proceeding, whether at law or in
-------------------
equity, including any declaratory judgment or similar suit or action, instituted
by or against the Company or the Parent arising out of or relating in any way to
this Agreement may be brought and enforced in the courts of the State of New
York or of the United States for the Southern District of New York, and each of
the Company and the Parent irrevocably consents and submits to the jurisdiction
of each such court in respect of any suit, action or proceeding. Each of the
Company and the Parent further irrevocably consents to the service of process in
any such suit, action or proceeding by the mailing of copies thereof by
registered or certified mail, postage prepaid, return receipt requested, to the
Company and the Parent or to its agent at its address as set forth in Section
-------
14. The Parent hereby irrevocably appoints the Company as its agent for
accepting any service of process within the State of New York. Furthermore,
each of the Company and the Parent hereby waives any objection that it may now
or hereafter have to the laying of venue of any such action or proceeding
arising under or relating to this Agreement in any court located in the county
of New York, State of New York, and hereby further waives any claim that a court
located in the County of New York, State of New York is not a convenient forum
for any such action or proceeding.
17 Applicable Law. This Agreement shall be governed by and construed in
--------------
accordance with the laws of the State of New York with regard to conflict of
laws principles.
18 Authority of the Representatives. In connection with this Agreement, the
--------------------------------
Representatives will act for and on behalf of the several Underwriters, and any
action taken under this Agreement by any Representative in such capacity will be
binding on all of the Underwriters.
37
<PAGE>
19 Partial Unenforceability. The invalidity or unenforceability of any
------------------------
Section, subsection or provision of this Agreement shall not affect the validity
or enforceability of any other Section, subsection or provision hereof. If any
Section, subsection or provision of this Agreement is for any reason determined
to be invalid or unenforceable, there shall be deemed to be made such minor
changes (and only such minor changes) as are necessary to make it valid and
enforceable.
20 General. This Agreement constitutes the entire agreement of the parties
-------
to this Agreement and supersedes all prior written or oral and all
contemporaneous oral agreements, understandings and negotiations with respect to
the subject matter hereof.
In this Agreement, the masculine, feminine and neuter genders and the
singular and the plural include one another. The Section headings in this
Agreement are for the convenience of the parties only and will not affect the
construction or interpretation of this Agreement. This Agreement may be amended
or modified, and the observance of any term of this Agreement may be waived,
only by a writing signed by the Company, the Parent and the Representatives.
21 Counterparts. This Agreement may be signed in two (2) or more
------------
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
* * * * *
38
<PAGE>
If the foregoing correctly sets forth our understanding, please
indicate your acceptance thereof in the space provided below for that purpose,
whereupon this letter and your acceptance shall constitute a binding agreement
among us.
Very truly yours,
EPITAXX, INC.
By:____________________________
Noboru Hiraguri
Chief Executive Officer and
Vice Chairman
NIPPON SHEET GLASS CO., LTD.
By:____________________________
Name:
Title:
Accepted and delivered in New
York, New York as of the date
first above written:
COWEN & COMPANY
CIBC OPPENHEIMER CORP.
DAIWA SECURITIES AMERICA INC.,
Acting on their own behalf
and as Representatives of the several
Underwriters referred to in the
foregoing Agreement.
By: Cowen & Company
By:______________________________
Title: Managing Director
39
<PAGE>
SCHEDULE A
Number
of Shares
of Firm Stock
to be
Name Purchased
---- ---------
Cowen & Company
CIBC Oppenheimer
Daiwa Securities America Inc.
____ _____
-------------
Total 2,150,000
40
<PAGE>
SCHEDULE B
----------
41
<PAGE>
EXHIBIT I
42
<PAGE>
EXHIBIT II
43
<PAGE>
Exhibit 4.2
EPITAXX
OPTOELECTRONIC DEVICES
FULLY PAID AND NONASSESSABLE SHARES OF THE CLASS A COMMON STOCK, PAR VALUE
$.01 PER SHARE, OF
EPITAXX, Inc. transferable upon the books of the Corporation in person or by
attorney upon surrender of this Certificate properly endorsed or assigned. This
Certificate and the shares represented hereby are subject to the laws of the
State of Delaware and to the provisions of the Certificate of Incorporation and
By-Laws of the Corporation as from time to time amended. This Certificate is not
valid unless countersigned and registered by the Transfer Agent and Registrar.
Witness the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
- ----------------------------------- -----------------------------------
Noboru Hiraguri, Chief Executive James D. Coleman, Treasurer and
Officer and Vice Chairman of Secretary
the Board
<PAGE>
THE CORPORATION IS AUTHORIZED TO ISSUE MORE THAN ONE CLASS OR SERIES OF STOCK.
THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO REQUESTS
A STATEMENT OF THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE,
PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR
SERIES THEREOF AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH
PREFERENCES AND/OR RIGHTS. SUCH REQUEST MAY BE MADE TO THE CORPORATION OR TO
ITS TRANSFER AGENT AND REGISTRAR.
THE TRANSFERABILITY AND THE AUTOMATIC CONVERSION OF CLASS B COMMON STOCK INTO
CLASS A COMMON STOCK IN CERTAIN CIRCUMSTANCES IS SUBJECT TO THE PROVISIONS
CONTAINED IN ARTICLE FOURTH OF THE CORPORATION'S RESTATED CERTIFICATE OF
INCORPORATION.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT - .......Custodian.........
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of under Uniform Gifts to
survivorship and not as tenants Minors Act...............
in common (State)
Additional abbreviations may also be used though not in the above list.
For value received, ________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF
ASSIGNEE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
_________________________________________________________________________Shares
of the Stock represented by the written Certificate and do hereby irrevocably
constitute and appoint________________________________________________________
- -------------------------------------------------------------------------------
Attorney to transfer the said stock on the books of the within named Corporation
with full power of substitution in the premises.
Dated,
-----------------------
-------------------------------
Signature
NOTICE: THE SIGNATURE TO THE ASSIGNMENT
MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER.
Signature(s) Guaranteed:
- ---------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM). PURSUANT TO
S.E.C. RULE 17AD-15.
<PAGE>
EXHIBIT 5.1
MINTZ LEVIN One Financial Center
COHN FERRIS Boston, Massachusetts 02111
GLOVSKY AND 617 542 6000
POPEO PC 617 542 2241 fax
Boston Washington 701 Pennsylvania Avenue, N.W.
Washington, D.C. 20004
202 434 7300
202 434 7400 fax
Home Page: www.mintz.com
February 27, 1998
Epitaxx, Inc.
7 Graphics Drive
West Trenton, NJ 08628
Ladies and Gentlemen:
You have requested our opinion with respect to certain matters in
connection with the filing by Epitaxx, Inc. (the "Company") of a Registration
Statement on Form S-1 (Reg. No. 333-44843) (the "Registration Statement") with
the Securities and Exchange Commission covering the offering of up to 2,472,500
shares of the Company's Class A Common Stock, $.01 par value (the "Shares").
In connection with this opinion, we have examined the Registration
Statement and related Prospectus, your Restated Certificate of Incorporation and
Bylaws, as amended, and such other documents, records, certificates, memoranda
and other instruments as we deem necessary as a basis for this opinion. We have
assumed the genuineness and authenticity of all documents submitted to us as
originals, the conformity to originals of all documents submitted to us as
copies thereof, and the due execution and delivery of all documents where due
execution and delivery are a prerequisite to the effectiveness thereof.
On the basis of the foregoing, and in reliance thereon, we are of the
opinion that the Shares, when sold and issued in accordance with the
Registration Statement and related Prospectus, will be validly issued, fully
paid, and nonassessable.
We consent to the filing of this opinion as an exhibit to the Registration
Statement.
Very truly yours,
/s/ Mintz, Levin, Cohn, Ferris Glovsky and Popeo, P.C.
MINTZ, LEVIN, COHN, FERRIS,
GLOVSKY AND POPEO, P.C.
<PAGE>
EXHIBIT 10.11
EXECUTIVE EMPLOYMENT AGREEMENT
------------------------------
THIS AGREEMENT is made on ____________ __, ____and dated effective as
of the ____ day of ________, ____ by and between EPITAXX, INC., a Delaware
corporation with its principal office at 7 Graphics Drive, West Trenton, New
Jersey 08628 (the "Corporation"), and ______________________, residing at
________________________________________
(the "Executive")
W I T N E S S E T H:
--------------------
WHEREAS, the Corporation desires to employ the Executive under the
terms and conditions set forth herein; and
WHEREAS, the Executive desires to serve the Corporation in an
executive capacity under the terms and conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth herein and intending to be legally bound hereby, the
parties agree as follows:
1. TERM OF EMPLOYMENT. The Corporation employs the Executive and the
------------------
Executive accepts employment with the Corporation for a period beginning on the
effective date and ending ________ __, ____, subject to earlier termination as
stipulated under Section 7. Thereafter, the term of this Agreement will
automatically renew for three year periods unless written notice is provided as
stipulated under Section 7, Termination.
2. POSITION AND DUTIES. The Executive shall serve as the
-------------------
_________________________ of the Corporation, reporting to the
______________________ of the Corporation. The Executive shall have such powers
and duties as may from time to time be prescribed by the ___________, provided
that such duties are consistent with the Executive's position as
_________________________________ of Epitaxx, Inc.
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3. ENGAGEMENT IN OTHER EMPLOYMENT. The Executive shall devote full
business time, ability and attention to the business of the Corporation during
the term of this Agreement. The Executive shall notify the Board of Directors of
the Corporation in writing before the Executive engages in any other business or
commercial activities, duties or pursuits, including, but not limited to,
directorships of other companies. The Executive will disclose details of the
activity as the Chairman reasonably requires. Under no circumstances may the
Executive engage in any business or commercial activities, duties or pursuits
which compete with the business or commercial activities of the Corporation, nor
may the Executive serve as a director or officer or in any other capacity in a
company which competes with the Corporation.
4. COMPENSATION.
------------
(a) ANNUAL DIRECT SALARY. As compensation for the services
--------------------
rendered the Corporation under this Agreement, the Executive shall be entitled
to receive from the Corporation an annual direct salary of not less than
$________ per year (the "Annual Direct Salary") payable in substantially equal
monthly installments (or such other more frequent intervals as may be determined
by the Board of Directors of the Corporation as payroll policy for senior
executive officers) prorated for any partial employment period. The Annual
Direct Salary shall be reviewed for possible adjustment by the Board of
Directors on each anniversary of this Agreement taking into account: (a) the
prevailing market value of the position; (b) the general effects of inflation
over the prior year; and (c) the current financial status of the Corporation.
(b) ANNUAL CASH BONUS. The Executive shall be entitled to
-----------------
participate in the Corporation's Management Incentive Compensation Plan (MICP),
which each year specifies certain performance criteria and goals used in the
determination of the Executive's
2
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incentive payments. The Chairman (or his designee) will discuss the criteria,
their relative importance and performance expectations with the Executive before
the MICP is finalized by the Board of Directors of the Corporation for each
fiscal year of the Corporation. The Board's determinations with respect to all
aspects of the MICP and the amount of the incentive payments thereunder, if any,
shall be final and binding on the Executive. If the Executive's Annual Direct
Salary is changed during (rather than at the beginning of) a fiscal year of the
Corporation, and if the Executive's Annual Direct Salary is one of the variables
in the formula for determining his Annual Cash Bonus, then the Executive's
Annual Direct Salary for purposes of the Annual Cash Bonus formula will be
determined by proration of the Executive's Annual Direct Salaries. In the event
of the termination of the Executive's employment hereunder, the Executive's
annual cash bonus shall be prorated based upon the partial employment year ended
on the date of termination and as determined in the discretion of the Board of
Directors; provided, however, that, if such termination date is after _________
__, ____, then the Executive's annual cash bonus shall be prorated based upon a
partial employment year ended on _________ __, ____ and as determined in the
discretion of the Board of Directors.
(c) 1996 INCENTIVE STOCK OPTION. The Executive has been granted,
---------------------------
pursuant to the Corporation's 1996 Employee, Stock Option plan (the "Plan") and
an Incentive Stock Option Agreement entered into by the Corporation and the
Executive (the "Option Agreement"), an incentive stock option to purchase up to
_______ shares of the Corporation's common stock at a price of $____ per share.
Said incentive stock option shall not be transferable except to the limited
extent provided in the Plan and the Option Agreement, and shall be exercised by
the Executive, if at all, not sooner than _________ __, ____ and not later than
_________ __, ____ as provided in the said Plan and Option Agreement. Payment
for the
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shares shall be due as provided in the said Plan and Option Agreement at the
time the incentive stock option is exercised.
(d) RESTRICTED STOCK AWARD. The Executive has been awarded a
----------------------
bonus, subject to the terms of a Restricted Stock Agreement between the
Corporation and the Executive dated _________ __, ____, in the form of _____
shares of restricted common stock of the Corporation which shall be currently
issued to the Executive by the Corporation subject to his remaining employed by
the Corporation until its current efforts to raise additional capital through an
initial public offering of its common stock are successfully concluded and for
at least six months thereafter. The Corporation shall make available to the
Executive a loan in an amount equal the sum of the Executive's estimated federal
and state income taxes payable in respect of this grant. The principal balance
of the said loan from time to time shall bear interest at prevailing rates until
repaid and shall be due and payable in full not later than six months after the
Corporation has successfully concluded the aforementioned initial public
offering. The loan shall be secured by a pledge to the Corporation of the shares
of stock awarded to the Executive hereunder, and the Corporation shall all
certificates evidencing ownership of the pledged shares of stock until the loan
is fully repaid.
5. FRINGE BENEFITS AND PERQUISITES. The Executive shall be entitled
-------------------------------
to participate in or receive benefits under all Corporate employment benefit
plans including but not limited to any existing life insurance, disability plan,
401(k) plan, medical or health-and-accident plan or arrangement made available
by the Corporation to its executives and key management employees, subject to
and on a basis consistent with terms, conditions and overall administration of
such plans and arrangements. The Corporation shall, at its sole cost and expense
(other than gasoline costs), provide the Executive with the use of a company car
having
4
<PAGE>
a monthly lease value based upon a three-year term of not more than $________
(or equivalent monthly cost amortization value in the case of a company-owned
vehicle).
6. RESTRICTIVE COVENANTS.
---------------------
(a) UNAUTHORIZED DISCLOSURE. During the period of his employment
-----------------------
hereunder, or at any later time, the Executive shall not, without the written
consent of the Chairman or pursuant to a court order, knowingly disclose to any
person, other than an employee of the Corporation or a person to whom disclosure
is reasonably necessary or appropriate in connection with the performance by the
Executive of his duties as an executive of the Corporation, any material
confidential information obtained by him while in the employ of the Corporation
with respect to any trade secret or confidential or proprietary information
relating to the activities and business of the Corporation including but not
limited to the Corporation's services, products, pricing, improvements,
formulas, designs or styles, drawings processes, customers, suppliers, methods
of distribution or any business practices; provided, however, that confidential
information shall not include any information known generally to the public
(other than as a result of unauthorized disclosure by the Executive) or any
information of a type not otherwise considered confidential by persons engaged
in the same business or a business similar to that conducted by the Corporation.
It is expressly understood and agreed that all improvements,
inventions, discoveries, formulae, processes or know-how that are in the scope
of the Corporation's business and are generated or conceived during the term of
this Employment Agreement, whether generated or conceived during the Executive's
working hours or otherwise, shall be the sole and exclusive property of the
Company, and the Executive will, whenever requested by the Corporation (either
during this Employment Agreement or thereafter), at the Corporation's
5
<PAGE>
expense, execute and assign any and all applications, assignments and/or other
instruments and do all things which the Corporation may deem necessary or
appropriate in order to obtain, maintain, enforce and defend letters patent or
copyrights or trademarks of the United States or of foreign countries for said
inventions, discoveries, formulae, processes or know-how or in order to assign
and convey or otherwise make available to the Corporation the sole and exclusive
right, title, and interest in any to said inventions, discoveries, formulae,
processes, know-how applications, patents or copyrights or trademarks.
(b) NON-COMPETITION AGREEMENT. The Executive covenants and agrees
-------------------------
as follows: the Executive shall not directly or indirectly enter into or engage
generally in direct or indirect competition with the Corporation in any business
or activity that is substantially the same as or competitive with any business
or activity now conducted by the Corporation, either as an individual on his own
or as a partner or joint venturer, or as a director, officer, shareholder
(except as an incidental shareholder), employee or agent for any person, during
the term of this agreement and for a period of one year after the date of
termination of his employment, whether termination is voluntary or for Cause
pursuant to Section 7 of this Agreement, except where the termination occurs
within 24 months following a Change of Control for any of the circumstances or
reasons specified in paragraph 8 (e). The existence of any material claim or
cause of action of the Executive against the Corporation, whether predicated on
this Agreement or otherwise, shall not constitute a defense to the enforcement
by the Corporation of this covenant. The Executive agrees that any breach of the
restrictions set forth in this paragraph will result in immediate and
irreparable injury to the Corporation for which it shall have no adequate remedy
at law and the Corporation shall be entitled to injunctive relief in order to
enforce the provisions hereof. In the event the restrictive covenants contained
in
6
<PAGE>
this paragraph shall be determined by any court of competent jurisdiction to
be unenforceable in whole or in part by reason of their imposing too long a
restriction and/or encompassing too broad an area of business, then and in that
event, the provisions of this paragraph shall be deemed reformed in such a
fashion that the restrictions hereunder shall be reduced to the maximum period
of time and/or area of business as the court shall deem enforceable.
(c) RETURN OF MATERIALS. Upon termination of employment with the
-------------------
Corporation, the Executive shall promptly deliver to the Corporation all
correspondence, manuals, letters, notes, notebooks, reports and any other
documents or tangible items containing or constituting confidential information
about the business of the Corporation.
(d) NONSOLICITATION OF EMPLOYEES. The Executive agrees not to
----------------------------
entice or solicit, directly or indirectly, any other employee of the Corporation
to leave the employ of the Corporation to work for or with the Executive, or any
entity with which the Executive affiliates, for a period of one year following
the Executive's termination of employment from the Corporation. The Executive
agrees that any breach of the restrictions set forth in this paragraph will
result in immediate and irreparable injury to the Corporation for which it shall
have no adequate remedy at law and the Corporation shall be entitled to
injunctive relief in order to enforce provisions hereof. Upon obtaining such
injunction, the Corporation may pursue reimbursement from the Executive and/or
the Executive's employer of costs incurred in securing a qualified replacement
for the employee enticed away from the Corporation by the Executive. Further,
the Corporation may seek reimbursement from the Executive of severance payments
made to the Executive by the Corporation following termination of employment
with the Corporation.
7
<PAGE>
7. TERMINATION.
-----------
(a) The Executive's employment hereunder shall terminate upon his
retirement or death.
(b) If the Executive becomes permanently disabled (as certified by
the Corporation's group LTD carrier and the Executive's supplemental LTD
carrier, if such supplemental policy is in effect, or in the event these
organizations cannot agree, they shall designate a licensed physician whose
decision shall be binding upon the parties) because of sickness, physical or
mental disability, or any other reason, and is unable to perform or complete his
duties under this Agreement for a period of 180 consecutive days (or time equal
to the elimination period), the Corporation shall have the option to terminate
this Agreement by giving written notice of termination to the Executive. Such
termination shall be without prejudice to any right the Executive has under the
disability insurance program maintained by the Corporation.
(c) The Corporation may terminate the Executive's employment
hereunder for Cause. The term "cause" as used in this Employment Agreement,
shall include the neglect (after receipt of notice of such neglect on at least
one prior occasion) by the Executive of the Executive's duties, obligations, and
responsibilities under this Employment Agreement, the Executive's continued and
willful disobedience of proper orders and directives of the Chairman or the
Board of Directors of the Corporation, the Executive being convicted of fraud or
felony related to the business of the Corporation, the Executive's being
frequently under the influence of alcoholic beverages or drugs to such extent
that the Executive is unable to perform the Executive's duties for the
Corporation (other then temporary inability to do so as a result of the
8
<PAGE>
taking of drugs or medicine prescribed by a physician), or the violation by the
Executive of any of the restrictive covenants of this Employment Agreement.
(d) The Corporation may choose not to renew the Executive's
Employment Agreement, without cause or reason. In order to elect not to renew
the Executive's Employment Agreement, the Corporation must provide the Executive
with written notice of nonrenewal at least one hundred eighty (180) days prior
to the expiration date of the current Agreement.
(e) The Executive may terminate his employment for Good Reason.
The term "Good Reason" shall mean (i) a reduction in the Executive's rate of
compensation as provided in Section 4 hereof, a reduction in total cash
compensation opportunities or benefits (except any reductions in compensation or
benefits which may be applied broadly among all executives because of adverse
financial conditions for the Corporation), or (ii) the Corporation's failure to
remedy a breach of this Agreement within 30 days following written notice from
the Executive, or (iii) any Change of Control (as defined herein) for
circumstances described in Section 8 of this Agreement.
(f) The Executive may terminate his employment with the
Corporation for any reason with sixty (60) days written notice to the
Corporation.
8. PAYMENTS UPON TERMINATION.
-------------------------
(a) If the Executive's employment shall be terminated because of
retirement, death, disability or for Cause, the Corporation shall pay the
Executive his full Annual Direct Salary through the date of termination at the
rate in effect at the time of termination and any other amounts owing to
Executive at the date of termination, and the Corporation shall have no further
obligations to the Executive under this Agreement. Should termination occur
because
9
<PAGE>
of retirement, death or disability, the Corporation may elect to pay the
Executive, or his estate, at the end of the fiscal year of the Corporation in
which the termination occurred a prorated award under the Corporation's annual
incentive pay plan. Additionally, the Corporation may elect to accelerate
vesting of any other incentive award interests to provide a full or prorated
compensation opportunity for the retired or disabled Executive or the deceased
Executive's estate.
(b) If the Executive's employment is terminated by the Corporation
(other than pursuant to paragraphs 7(a) or 7(b) or 7(c) hereof), then the
Corporation shall pay the Executive his full Annual Direct Salary from the date
of notice of termination for a total of twelve (12) months. In such event, the
Corporation shall also maintain in full force and effect, for the continued
benefit of the Executive for the full salary continuation period, all employee
benefit plans and programs to which the Executive was entitled prior to the date
of termination if the Executive's continued participation is possible under the
general terms and provisions of such plans and programs. In the event that the
Executive's participation in any such plan or program is barred, the Executive
shall be entitled to receive an amount equal to the annual contribution,
payments, credits or allocations made by the Corporation to him, to his account
or on his behalf under such plans and programs from which his continued
participation is barred except that if Executive's participation in any health,
medical, life insurance, or disability plan or program is. barred, the
Corporation shall obtain and pay for, on Executive's behalf, individual
insurance plans, policies or programs which provide to Executive health,
medical, life and disability insurance coverage which is equivalent to the
insurance coverage to which Executive was entitled prior to the date of
termination.
10
<PAGE>
(c) Should the Executive initiate termination of employment
because of a reduction in compensation rate, compensation opportunity or
benefits, as described in 7(e) above, the Executive will receive severance pay
based on his highest Annual Direct Salary, and full benefits continuation for a
period of twelve (12) months following termination.
(d) If the Corporation elects not to renew the Executive's
Employment Agreement, it may, at its option, release the Executive from the non-
competition agreement at the end of the employment term. If the Corporation
chooses to enforce the non-competition agreement, it will continue salary
payments to the Executive for a period of up to twelve (12) months provided that
the Executive does not actively compete with the Corporation, as defined in
paragraph 6(b).
At the conclusion of this non-competition period, the Executive will
be deemed by the Corporation as having satisfied his obligation not to compete
with the Corporation.
After notice of non-renewal, the Executive will be given reasonable
time off with pay to pursue other employment opportunities. Such time off will
be scheduled in advance with the Executive's immediate supervisor.
(e) If, within twenty-four (24) months following a Change of
Control (as defined herein), the Corporation eliminates Executive's position and
fails to offer the Executive a comparable position within thirty (30) days, or
the Executive terminates employment due to a lessening of job responsibilities
or an unacceptable relocation (defined as more than 35 miles from the
Executive's prior work site) or for any reason during the thirty day period
following the first anniversary of the Change of Control, then the Corporation
shall make a lump-sum payment to the Executive equal to two times the sum of his
highest Annual Direct
11
<PAGE>
Salary and an amount equal to the highest annual bonus award received within the
three years preceding the year in which termination occurs. The Corporation will
also maintain benefit coverages for the Executive as specified in paragraph 8(b)
above for a period of twenty-four (24) months. All deferred incentive awards,
and performance share awards made to the Executive will become fully vested.
Further, the Corporation will provide to the Executive out placement and career
counseling services as may be requested by the Executive; such service costs not
to exceed 15% of the Executive's Annual Direct Salary.
(f) Should the Executive voluntarily terminate employment during
the course of this Agreement for reasons other than the Good Reasons defined in
paragraph 7(e), the Corporation may, at its discretion, choose to continue
salary payments to the Executive for a period of up to twelve (12) months
provided that the Executive does not actively compete with the Corporation, as
defined in paragraph 6 (b).
At the conclusion of this severance period, the Executive will be
deemed by the Corporation as having satisfied his obligation not to compete with
the Corporation.
10. DAMAGES FOR BREACH OF CONTRACT In the event of a breach of this
------------------------------
Agreement by either the Corporation or Executive resulting in damages to either
party, that party may recover from the party breaching the Agreement any and all
damages that may be sustained.
11. DEFINITION OF CHANGE OF CONTROL. For purposes of this Agreement,
-------------------------------
the term "Change of Control" shall mean:
(a) the acquisition of the beneficial ownership of a majority of
the Corporation's voting securities or all or substantially all of the assets of
the Corporation by a single person or unaffiliated entity or a group of
unaffiliated persons or entities, or
12
<PAGE>
(b) the merger, consolidation or combination of the Corporation
with an unaffiliated corporation in which the directors of the Corporation,
immediately prior to such merger, consolidation or combination constitute less
than a majority of the Board of Directors of the surviving, new or combined
entity.
12. DEFINITION OF DATE OF CHANGE OF CONTROL. For purposes of this
---------------------------------------
Agreement, the date of Change of Control shall mean:
(a) the first date on which a single person and/or entity, or
group of affiliated persons and/or entities, acquire the beneficial ownership of
a majority of the Corporation's voting securities, or
(b) the date of the transfer of all or substantially all of the
Corporation's assets, or
(c) the date on which a merger, consolidation or combination is
consummated, as applicable.
13. NOTICE. For the purposes of this Agreement, notices and all
------
other communications provided for in the Agreement shall be in writing and shall
be deemed to have been duly given when delivered or mailed by United States
certified mail, return receipt requested, postage prepaid, addressed as follows:
If to the Executive:
---------------------
----------------------
----------------------
If to the Corporation: EPITAXX, Inc.
7 Graphics Drive
West Trenton, NJ 08628
Chairman of the Board
Attn:
13
<PAGE>
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.
14. SUCCESSORS. This Agreement shall inure to the benefit of and be
----------
binding upon the Executive, the Corporation any successor to the Corporation.
15. ENFORCEMENT OF SEPARATE PROVISIONS. Should provisions of this
----------------------------------
Agreement be ruled unenforceable for any reasons, the remaining provisions of
this Agreement shall be unaffected thereby and shall remain in full force and
effect.
16. AMENDMENT. This Agreement may be amended or canceled only by
---------
mutual agreement of the parties in writing without the consent of any other
person and so long as the Executive lives, no person other than the parties
hereto, shall and have any rights under or interest in this Agreement or the
subject matter hereof.
17. ARBITRATION. In the event that any disagreement or dispute shall
-----------
arise between the parties concerning this Agreement, the issue(s) will be
submitted to binding arbitration in the County of Mercer, State of New Jersey
pursuant to the Commercial Rules then existing of the American Arbitration
Association. Any award entered shall be final and binding upon the parties
hereto and judgment upon the award may be entered in any court having
jurisdiction thereof. Attorneys' fees and administrative court costs associated
with such action shall be paid by the Corporation if the Corporation is found to
be at fault.
During the period of the dispute and until the arbitrator's ruling is
received by both parties, the Corporation will continue to pay the Executive at
his Annual Direct Salary rate.
18. PAYMENT OF MONEY DUE DECEASED EXECUTIVE. If the Executive dies
---------------------------------------
prior to the expiration of the term of employment, any monies that may be due
14
<PAGE>
him from the Corporation under this Agreement as of the date of death shall be
paid to the executor, administrator, or other personal representative of the
Executive's estate.
19. LAW GOVERNING. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of New Jersey.
20. ENTIRE AGREEMENT. Except as otherwise expressly herein provided,
----------------
this Agreement supersedes any and all agreements, either oral or in writing,
between the parties with respect to the employment of the Executive by the
Corporation and contains all the covenants and agreements between the parties
with respect to the same.
IN WITNESS WHEREOF, the parties hereto have executed this Executive
Employment Agreement effective as of the date first hereinabove written.
ATTEST: EPITAXX, INC.
------------------
By:
- ------------------------- ----------------------
WITNESS:
(L.S.)
- ------------------------- -------------------------
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EXHIBIT 23.1
INDEPENDENT AUDITORS' REPORT AND CONSENT
The Board of Directors and Stockholders
EPITAXX, Inc.:
The audits referred to in our report dated January 19, 1998, except for note
3, which is as of February 3, 1998, included the related financial statement
schedule on Valuation and Qualifying Accounts for each of the years in the
three-year period ended March 31, 1997 and the nine-month period ended
December 31, 1997, included in the registration statement. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audits. In our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
We consent to the use of our reports included herein and to the references to
our firm under the headings "Selected Financial Data" and "Experts" in the
prospectus.
/s/ KPMG Peat Marwick LLP
Short Hills, New Jersey
February 27, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF AUS CONSULTANTS
We consent to the following references to our firm in the Registration
Statement on Form S-1 and related Prospectus of EPITAXX, Inc.: (i) in footnote
(3) to the table entitled "Option Grants During Last Fiscal Year," (ii) under
the caption "Experts" and (iii) in Note (8) to the Notes to Consolidated
Financial Statements.
/s/ David Weiler, Vice President
AUS Consultants
Moorestown, New Jersey
February 26, 1998
