As filed with the Securities and Exchange Commission on December __, 1996
Registration No. 333-_____________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
______________
EMCORE CORPORATION
(Exact name of Registrant as specified in its charter)
________________________
<TABLE>
<S> <C> <C>
New Jersey 3670 22-2746503
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
394 Elizabeth Avenue, Somerset, New Jersey 08873
(908) 271-9090
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
_____________________
Thomas G. Werthan
EMCORE Corporation
394 Elizabeth Avenue
Somerset, New Jersey 08873
(908) 271-9090
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Ellen B. Corenswet, Esq.
Kevin Keogh, Esq. Babak Yaghmaie, Esq.
White & Case Brobeck, Phleger & Harrison LLP
<PAGE>
1155 Avenue of the Americas 1633 Broadway
New York, New York 10036 New York, New York 10019
(212) 819-8200 (212) 581-1600
Approximate date of commencement of proposed sale to the public: as soon
as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. ___
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act of 1933 registration statement
number of the earlier effective registration statement for the same
offering. ___
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act of 1933 registration statement number of the earlier
effective registration statement for the same offering. ___
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. ___
<TABLE>
CALCULATION OF REGISTRATION FEE
<CAPTION>
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE (1) REGISTRATION FEE
<S> <C> <C>
Common Stock, no par value $ 30,000,000 $ 9,090.91
</TABLE>
(1) Estimated solely for the purpose of computing the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
<PAGE>
[ART]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL
MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
This Prospectus contains certain statements of a forward-looking
nature relating to future events, such as developments of processes and
commencement of production, or the future financial performance of the
Company. Prospective investors are cautioned that such statements are only
projections and that actual events or results may differ materially. In
evaluating such statements, prospective investors should specifically
consider the various factors identified in this Prospectus, including the
matters set forth under the heading "Risk Factors" which could cause actual
results to differ materially from those indicated by such forward-looking
statements.
<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 state.
Prospectus SUBJECT TO COMPLETION, DATED _________ __, 1997
________, 1997
SHARES
[EMCORE LOGO]
EMCORE CORPORATION
COMMON STOCK
All the ____________ shares of Common Stock offered hereby (the
"Offering") are being issued and sold by EMCORE Corporation ("EMCORE" or
the "Company").
Prior to the Offering, there has been no public market for the Common
Stock of the Company. It is currently anticipated that the initial public
offering price will be between $____ and $____ per share. See "Underwrit-
ing" for a discussion of the factors considered in determining the initial
public offering price.
The Company has applied for quotation of the Common Stock on the
Nasdaq National Market under the symbol "EMKR."
SEE "RISK FACTORS" BEGINNING ON PAGE 4 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
Price Underwriting Proceeds
to the Discounts and to the
Public Commissions(1) Company(2)
<S> <C> <C> <C>
Per Share . . . . . . . . . . . . $_______ $_______ $_______
Total (3) . . . . . . . . . . . . $_______ $_______ $_______
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
<PAGE>
(2) Before deducting expenses estimated at ____________ which will be paid
by the Company.
(3) The Company has granted the several Underwriters an option,
exercisable within 30 days of the date hereof, to purchase up to ________
additional shares of Common Stock solely to cover over-allotments, if any.
If such option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to the Company will be
__________, __________ and __________. See "Underwriting."
The shares of Common Stock are being offered by the several
Underwriters when, as and if delivered to and accepted by the Underwriters
and subject to various prior conditions, including their right to reject
orders in whole or in part. It is expected that delivery of the share
certificates will be made in New York, New York on or about __________,
1997.
DONALDSON, LUFKIN & JENRETTE NEEDHAM & COMPANY, INC.
SECURITIES CORPORATION
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more
detailed information, including "Risk Factors" and the Financial Statements
and Notes thereto, appearing elsewhere in this Prospectus. Except as
otherwise indicated, (a) all references to fiscal years of the Company in
this Prospectus refer to fiscal years ended on September 30 and (b) all
information in this Prospectus assumes no exercise of the Underwriters'
over-allotment option.
THE COMPANY
EMCORE, founded in 1984, is a leading designer and developer of
compound semiconductor materials, such as gallium arsenide, and process
technology and a leading manufacturer of production systems used to
fabricate compound semiconductor wafers. The Company provides its
customers, both in the U.S. and internationally, with materials science
expertise, process technology and compound semiconductor production systems
that enable the manufacture of commercial volumes of high performance
electronic and optoelectronic devices. In 1996, in response to the growing
need of its customers to cost effectively get to market faster with high
volumes of new and improved high-performance products, the Company expanded
its product offerings to include the design and production of wafers and
package-ready devices. The Company believes that it is the only company
that offers such a broad range of products and services to the compound
semiconductor industry.
Recent advances in information technologies have created a growing
need for power-efficient, high- performance electronic systems that operate
at very high frequencies, have increased storage, computational and display
capabilities, and can be produced cost-effectively in commercial volumes.
In the past, electronic systems manufacturers relied on advances in silicon
semiconductor technology to meet many of these demands. However, the
newest generation of high-performance electronic and optoelectronic
applications require certain performance and functions which are generally
not achievable using silicon-based components.
Compound semiconductors have emerged as an enabling technology to
meet the complex requirements of today's advanced information systems.
Compound semiconductor devices operate at much higher speeds than silicon
devices with lower power consumption and less noise and distortion. In
addition, unlike silicon-based devices, compound semiconductor devices have
optoelectronic capabilities that enable them to emit and detect light. As
a result, electronics manufacturers are increasingly integrating compound
semiconductor devices into their products in order to achieve higher
performance in a wide variety of applications, including wireless
communica-tions, telecommunications, computers, and consumer and automotive
electronics.
Historically, developers of compound semiconductor devices have met
capacity needs with in-house systems and technologies. However, the
requirements for the production of commercial volumes of high-performance
compound semiconductor devices have often exceeded the capabilities of such
in-house solutions. The Company believes that wafers fabricated using
metal organic chemical vapor deposition ("MOCVD") possess better uniform-
ity, as well as better optical and electronic properties, than wafers
fabricated by traditional methods. The Company believes that its pro-
prietary TurboDisc(TM) MOCVD system provides a low cost of ownership and is
the critical enabling process step in the volume manufacture of high-
performance electronic and optoelectronic devices.
The Company's objective is to capitalize on its position as a
leading developer of MOCVD process technology and production systems to
<PAGE>
become a leading supplier of wafers and package-ready devices. In
addition, the Company seeks to form strategic alliances with customers in
order to obtain long-term development and high volume production contracts.
The Company currently has a strategic relationship with General Motors
Corporation ("General Motors") to develop and enhance the device structure
and production process and to manufacture magneto-resistive ("MR") sensor
products for use in automotive applications. In addition, the Company has
been integrally involved in the development of solar cell technologies for
telecommunications satellites and transmitter and display technologies for
wireless communications applications.
The Company works closely with its customers in designing and
developing materials processes to be used in production systems for its
customers' end-use applications. The Company has sold more than 160
systems worldwide to many leading electronics manufacturers, including:
Spectrolab Inc. (a subsidiary of Hughes Electronics Company, "Hughes-
Spectrolab"), General Motors, Hewlett Packard Co., Lucent Technologies,
Inc., Motorola, Inc., Rockwell International Corp., Samsung Co., Siemens
AG, L.M. Ericsson AB, Texas Instruments Incorporated and thirteen of the
largest electronics manufacturers in Japan. The Company's products are
used by these customers to manufacture a variety of end-use products,
including: cellular telephones, pagers, personal communication service
("PCS") handsets, direct broadcast satellite ("DBS") systems, CD-ROMs,
digital versatile disks ("DVDs"), flat-panel displays and electronic
automotive components.
<PAGE>
THE OFFERING
Common Stock offered
by the Company . . . . . . . . ____________________
Common Stock to be outstanding
after the Offering . . . . . . _________________ (1)
Use of Proceeds . . . . . . . . To repay outstanding debt, expand
manufacturing facilities and for other
general corporate purposes. See "Use
of Proceeds."
Proposed Nasdaq National
Market symbol . . . . . . . . . EMKR
<TABLE>
SUMMARY FINANCIAL DATA
<CAPTION>
YEARS ENDED SEPTEMBER 30,
1992 1993 1994 1995 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Total revenues . . . . . . . . . . $10,022 $8,180 $9,038 $18,137 $27,779
Gross profit . . . . . . . . . . . 7,043 4,772 3,825 8,210 9,172
Operating (loss) income . . . . . (907) (465) 116 1,906 (2,753)
Net (loss) income . . . . . . . . . (958) (607) (170) 1,516 (3,176)
Net (loss) income per share . . . . $ $ $ $ $
Shares used in computing net
(loss) income per share . . . . . .
</TABLE>
<TABLE>
AS OF SEPTEMBER 30, 1996
ACTUAL AS ADJUSTED(2)(3)
(IN THOUSANDS)
BALANCE SHEET DATA:
<S> <C> <C>
Working capital . . . . . . . . . $1,151 $_______
Total assets . . . . . . . . . . 20,434 _______
Long-term debt, net . . . . . . . 8,365 _______
Shareholders' equity . . . . . . 1,103 _______
</TABLE>
__________________________
(1) Excludes: (i) 2,200,000 shares of Common Stock reserved for issuance
under the Company's 1995 Incentive and Non-Statutory Stock Option
Plan, as amended, of which ____________ shares were subject to
<PAGE>
outstanding options at exercise prices varying from $0.89 per share to
$3.00 per share, (ii) warrants to purchase 30,949 shares of Common
Stock at an exercise price of $5.00 per share exercisable until July
24, 1997, (iii) warrants to purchase 7,924,667 shares of Common Stock
at an exercise price of $1.20 per share, exercisable until May 1, 2001
and (iv) warrants to purchase 4,166,666 shares of Common Stock at an
exercise price of $3.00 per share, exercisable until September 1,
2001. See "Management - Stock Option Plan," "Description of Capital
Stock - Warrants" and Note 12 of the Notes to Financial Statements.
(2) Subsequent to September 30, 1996, the Company established a $10.0
million demand note facility. As of December 20, 1996, the Company
had drawn down approximately $2 million from this facility. The
Company intends to use part of the net proceeds of the Offering to pay
down the balance outstanding under this facility. See "Use of
Proceeds".
(3) The unaudited as adjusted amounts reflect the sale by the Company of
______________ shares of Common Stock offered hereby after deducting
underwriting discounts and commissions and estimated offering expenses
payable by the Company and the application of the estimated net
proceeds thereof. See "Use of Proceeds."
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered by this Prospectus
involves a high degree of risk. In addition to the other matters described
in this Prospectus, prospective investors should carefully consider the
following factors before making a decision to purchase the Common Stock
offered hereby. This Prospectus contains certain statements of a forward-
looking nature relating to future events or the future financial
performance of the Company. Prospective investors are cautioned that such
statements are only predictions and that actual events or results may
differ materially. In evaluating such statements, prospective investors
should specifically consider the various factors identified in this
Prospectus, including the matters set forth hereunder, which could cause
actual results to differ materially from those indicated by such forward-
looking statements.
Expansion of Business. The Company has recently experienced a
significant increase in the demand for its compound semiconductor
production systems. There can be no assurance that the market for compound
semiconductor production systems will continue to grow or that the Company
will be able to continue to develop compound semiconductor systems for the
market or that it will be able to meet market demands or maintain and
expand its customer base for such products. A failure to do so would have
a material adverse effect on the Company's business, financial condition
and results of operations. The Company has also recently expanded its
operations to include the production of compound semiconductor wafers and
package-ready devices. The Company's expansion into the production of such
new products involves substantial capital expenditures and a significant
risk that management will be unsuccessful. The Company presently
anticipates utilizing a significant portion of the net proceeds of the
Offering for such expenditures. The development, production and sale of
compound semiconductor wafers and package-ready devices entail yield,
process and capacity-related risks that differ from those associated with
the development, production and sale of the Company's compound
semiconductor production systems. The markets for compound semiconductor
wafers and package-ready devices are in a relatively early stage of
development. There can be no assurance that these markets will continue to
grow or that the Company will be successful in developing or marketing such
products. The Company's failure to successfully develop or market such
products could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Use of Proceeds,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business - Products."
Management of Growth. The Company has recently experienced a period of
rapid growth, has added new personnel and intends to continue to expand.
For example, the number of the Company's employees has increased from 95 as
of September 30, 1995 to 185 as of September 30, 1996. Because of the
level of scientific and management expertise necessary to support such
growth, the Company must recruit and retain highly qualified and well-
trained technical and management personnel. There may be only a limited
number of persons with the requisite skills to serve in these positions,
and it may become increasingly difficult for the Company to hire such
personnel over time. The Company's expansion may also significantly strain
management, financial, sales and marketing and other personnel and systems.
In order to effectively manage its growth, the Company must continue to
enhance its systems and controls and successfully expand, train and manage
its employee base. There can be no assurance that the Company will be able
to manage this expansion effectively or will be able to recruit, train and
retain sufficient technical and managerial personnel. Any failure to
manage the Company's growth properly could have a material adverse effect
on the Company's business, financial condition and results of operations.
<PAGE>
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Need to Increase Manufacturing Capacity. The Company currently
anticipates increasing its manufacturing capacity to meet the demand for
its compound semiconductor production systems and wafers and package-ready
devices by expanding its existing production facilities for its new product
offerings and instituting a third shift at its facilities. This increase
will require substantial capital expenditures. The Company presently
anticipates utilizing a significant portion of the net proceeds of the
Offering for such expenditures. There can be no assurance that the Company
will be successful in increasing its manufacturing capacity in time to meet
the demand for its production systems or wafers and package-ready devices.
In addition, the Company's success is in large part dependent on its
ability to manufacture its products, particularly its wafers and package-
ready devices, in high volumes and on a timely basis. In addition,
commercial production of the Company's wafers and package-ready devices
requires the achievement of adequate competitive yield levels. The failure
of the Company to increase its manufacturing capacity, or to manufacture
its products in high volumes, in a timely manner, or at sufficient yield
levels, would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Use of Proceeds" and
"Business - Manufacturing."
History of Operating Losses; Uncertainty of Profitability. Although
the Company has been in operation since 1984, it has recently been
profitable only in the six quarters ended September 30, 1995 and had
accumulated deficit of $18.1 million at September 30, 1996. In fiscal
1996, the Company incurred a consolidated net loss of $3.2 million, which
primarily resulted from significant initial operating expenses related to
the Company's expansion to include the production of compound semiconductor
wafers and package-ready devices. The Company has increased its expense
levels to support anticipated growth in demand for each of its compound
semiconductor production systems, wafer and package-ready device product
offerings, including the hiring of additional manufacturing, research,
engineering, sales, and administrative personnel and has also increased its
investments in inventory and capital equipment. As a result, the Company
is dependent upon increasing revenues and profit margins to achieve profit-
ability. If the Company's sales and profit margins do not increase to
support the higher levels of operating expenses, the Company's business,
financial condition and results of operations would be materially adversely
affected. There can be no assurance that the Company will ever again
achieve profitability. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Financial Statements
and the Notes thereto.
Fluctuations in Operating Results. Historically, the Company has
derived substantially all of its revenues from the sale of compound
semiconductor production systems which typically have list prices ranging
from approximately $350,000 to $2.5 million per system. At the Company's
current revenue level, each shipment of a compound semiconductor production
system or failure to make a shipment can have a material effect on the
Company's quarterly or annual results of operations. A cancellation,
rescheduling or delay in a system shipment near the end of a particular
quarter could cause net revenues in that quarter to fall significantly
below the Company's expectations and could materially adversely affect the
Company's operating results for such quarter. While to date the Company
has not experienced significant warranty claims relating to its production
systems, the Company's policy is to maintain positive relationships with
its customers by responding promptly and effectively to such claims. Since
the occurrence of warranty claims is unpredictable, the Company's prompt
action in response to such claims could cause the Company's operating
results to fluctuate unexpectedly. While the Company maintains reserves
<PAGE>
against warranty claims, an unexpectedly high level of warranty claims in a
particular quarter could have a material adverse effect on the Company's
business, financial condition and results of operation for that quarter.
Although, to date, the Company has not derived significant revenues from
its wafer and package-ready device products, the Company anticipates that
in the future any revenues derived from these activities will be subject to
similar risks. Other factors which may lead to fluctuations in the
Company's quarterly and annual operating results include: market
acceptance of the Company's and its customers' products; the number of
compound semiconductor production systems, wafers or package-ready devices
being manufactured during any particular period; the mix of sales by
product and by distribution channel; the timing of announcement and
introduction of new compound semiconductor production systems, wafers or
package-ready devices by the Company and its competitors; a downturn in the
market for products incorporating compound semiconductors; variations in
the configuration of production systems; changes in the design or process
conditions for the production of wafers or package-ready devices; product
discounts and changes in pricing; delays in deliveries from suppliers;
delays in orders due to customers' financial difficulties; and volatility
in the compound semiconductor industries and the markets served by the
Company's customers. In addition, customers may face competing capital
budget considerations, thus making the timing of customer orders uneven and
difficult to predict. Many of the factors listed above are beyond the
control of the Company. There can be no assurance that the Company will be
able to achieve a rate of growth or level of revenues in any future period
commensurate with its level of expenses. The impact of these and other
factors on the Company's operating results in any future period cannot be
forecast with any degree of certainty. It is likely that, in some future
quarter or quarters, the Company's operating results may be below the
expectations of analysts and investors. In such event, the price of the
Company's Common Stock would likely be materially adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Customer Concentration. A small number of customers have historically
accounted for a substantial portion of the Company's revenues, and the
Company expects a significant portion of its future sales to remain
concentrated within a limited number of customers. Sales of the Company's
production systems to Hughes-Spectrolab, accounted for approximately 28.9%
and 23.6% of the Company's revenues in fiscal 1995 and 1996, respectively.
Hughes-Spectrolab is currently the Company's largest purchaser of compound
semiconductor production systems. General Motors is currently the
Company's sole customer for package-ready devices. Currently, the Company
is only deriving revenues from the fabrication of its wafers for use in
connection with the package-ready devices being sold to General Motors.
There can be no assurance that the Company will succeed in marketing its
wafers and package-ready devices to any customer other than General Motors.
Failure by the Company to provide wafers and package-ready devices for
customers other than General Motors would have a material adverse effect on
the Company's business, financial condition and results of operations. In
addition, the loss of, or a significant reduction of orders from, Hughes-
Spectrolab or General Motors would have a material adverse effect on the
Company's business, financial condition and results of operations. There
can be no assurance that the Company will be able to retain these or other
major customers or that such customers will not cancel, delay or reschedule
orders. Any reduction or delay in orders from any of the Company's
significant customers, including reductions or delays due to market,
economic, or competitive conditions in compound semiconductor-related
industries, or the loss of any such customers, would have a material
adverse effect upon the Company's business, financial condition and results
of operations. See "Business - Customers."
Lengthy Sales and Qualification Cycles. Sales of the Company's
<PAGE>
compound semiconductor production systems depend, in significant part, upon
the decision of a prospective customer to increase its manufacturing
capacity, which typically involves a significant capital commitment by the
customer. The amount of time from the initial contact with the customer to
the customer's placement of an order is typically two to nine months or
longer. The Company often experiences delays in obtaining system sales
orders while customers evaluate and receive approvals for the purchase of
compound semiconductor production systems. Such delays may include the
time necessary to plan, design or complete a new or expanded compound
semiconductor fabrication facility. Due to these factors, the Company's
compound semiconductor systems typically have a lengthy sales cycle during
which the Company may expend substantial funds and sales, marketing and
management effort. There can be no assurance that any of these expen-
ditures or efforts on the part of the Company will result in sales.
Although the Company has a limited operating history for wafer and package-
ready device fabrication, the Company anticipates that such products will
have similarly lengthy sales cycles and will therefore be subject to risks
substantially similar to those inherent in the lengthy sales cycles for
compound semiconductor systems. In addition, the sales cycle for wafers
and package-ready devices also includes a period of two to six months
during which the Company develops the formula of materials necessary to
meet the customer's specifications and qualifies the materials which may
also require the delivery of samples. There can be no assurance that the
Company will successfully develop an appropriate product in accordance with
customer specifications. See "Business - Products" and "Business -
Competition."
Reliance on Trade Secrets; No Assurance of Continued Intellectual
Property Protections. The Company's success and competitive position both
for sales of production systems and for wafers and package-ready devices
depend on its ability to maintain trade secrets, patents and other
intellectual property protections. Trade secrets are routinely employed in
the Company's manufacturing processes. A "trade secret" includes
information that has value to the extent it is not generally known, not
readily ascertainable by others through legitimate means, and protected in
a way that maintains its secrecy. In order to protect its trade secrets,
the Company takes certain measures to ensure their secrecy, such as
executing non-disclosure agreements with its employees, customers and sup-
pliers. Reliance on trade secrets is only an effective business practice
insofar as (i) trade secrets remain undisclosed and (ii) proprietary
product or process is not reverse engineered or independently developed.
The Company's inability to maintain its trade secrets relating to the
systems production technology and operation could have a material adverse
effect on the ability of the Company to sell its production systems. There
can be no assurance that these trade secrets will remain undisclosed, that
the Company's non-disclosure agreements will not be breached, that there
will be adequate remedies for any such breach, or that the Company's
production systems, process and operations will not be reverse engineered
or independently developed. There can be no assurance that the steps taken
by the Company will prevent misappropriation of its technology. Sales of
the Company's wafers and package-ready devices depends heavily on the
Company's trade secrets related to its MOCVD technology and processes.
Failure to maintain trade secrets in this area would have a material
adverse effect on the sales of the Company's wafer and package-ready
devices. Although the Company holds six U.S. patents, these patents do not
claim any material aspect of the current or planned commercial versions of
the Company's systems or devices. The Company is actively pursuing patents
on its recent inventions, but there can be no assurance that patents will
be issued from any pending applications, or that the claims in any existing
or future patents issued or licensed to the Company will not be challenged,
invalidated or circumvented, or that any of the Company's pending or future
patent applications will result in an issued patent with the scope of the
claims sought by the Company, if at all. The Company has been granted a
<PAGE>
nonexclusive license (the "Rockwell License") under U.S. patent number
4,368,098 (the "Rockwell Patent") issued on January 11, 1983 to Rockwell
International Corporation ("Rockwell") in connection with sales of its
MOCVD production systems and recently had begun discussions with Rockwell
in order to obtain further licenses under the Rockwell Patent in connection
with the manufacture and sale of certain wafers and devices. On November
15, 1996, the Rockwell Patent was declared invalid by the U.S. Court of
Federal Claims. The Company believes that Rockwell will appeal this
decision. There can be no assurance that the decision of the U.S. Court of
Federal Claims relating to the Rockwell Patent will be upheld. In the
event that the foregoing decision is reversed, the Company may be liable to
Rockwell for royalty payments, as well as other amounts which the Company
may ultimately be deemed to owe Rockwell in connection with the sales of
its systems and wafers and devices. Moreover, the Company may need to
obtain a license from Rockwell under the Rockwell Patent in connection with
the manufacture and sale of certain wafers and devices. There can be no
assurance that the Rockwell License can be maintained or that licenses for
wafers and devices made with the Company's MOCVD production systems can be
obtained or maintained on commercially reasonable terms, if at all.
Moreover, the defense and prosecution of infringement claims can be
expensive and time consuming, regardless of outcome, and can result in the
diversion of substantial resources of the Company. The Company has not
been notified and is not aware of, any third parties that are infringing
its intellectual property right, or that the Company is infringing
intellectual property rights of third parties, but there can be no
assurance that the Company will not face such claims or infringements in
the future. There can be no assurance that the Company will be successful
in any resulting litigation or obtain a license on commercially reasonable
terms, if at all, or will not be prevented from engaging in certain
activities. Defense and prosecution of infringement claims can be
expensive and time consuming, regardless of outcome, and can result in the
diversion of substantial financial, management and other resources of the
Company. In addition, the laws of certain other countries may not protect
the Company's intellectual property to the same extent as the laws of the
United States. See "Business - Intellectual Property."
Dependence on Limited Product Offerings. To date, substantially all of
the Company's revenues have resulted from sales of its TurboDisc(TM)
systems. The Company anticipates that a significant portion of its
revenues in fiscal 1997 will be derived from the sale of these systems.
The Company has recently developed the capacity to produce compound
semiconductor wafers and package-ready devices. The Company's future
success depends on its ability to develop and introduce in a timely manner
new products, including improvements to its existing products, which
compete effectively on the basis of price and performance and which
adequately address customer requirements. The success of new product
introductions is dependent upon several factors, including timely
completion of new product designs, achievement of acceptable yields and
market acceptance. No assurance can be given that the Company's product
and process development efforts will be successful or that its new products
will achieve market acceptance. To the extent that such new product
introductions do not occur in a timely manner or the Company's or its
customers' products do not achieve market acceptance, the Company's
business, financial condition and results of operations would be materially
adversely affected. See "Business - Products."
Manufacturing Risks. The manufacture of systems, wafers and package-
ready devices are each subject to significant risks. The manufacture of
systems is a highly complex and precise process. The Company increasingly
outsources the fabrication of certain components and sub-assemblies of the
systems it manufactures. Any impairment in the supply of these components
or sub-assemblies would have a material adverse effect on revenues derived
from sales of the Company's systems. In addition, any reduction in the
<PAGE>
precision of these components will result in sub-standard end products and
would cause delays and interruptions in the production cycle. To the
extent the Company experiences shipment delays for its systems or wafers or
package-ready devices, the Company's operating results would be materially
adversely affected. The Company relies exclusively on its own production
capabilities for manufacturing wafers and package-ready devices, and such
operations are subject to additional manufacturing risks. Minute
impurities, difficulties in the production process, defects in the
epitaxial growth of the package-ready devices' constituent compounds, wafer
breakage or other factors can cause a substantial percentage of wafers and
package-ready devices to be rejected or numerous package-ready devices on
each wafer to be nonfunctional. Such factors may result in lower than
expected production yields, which would delay product shipments and
materially adversely affect the Company's operating results. There can be
no assurance that the Company will be able to maintain acceptable
production yields in the future. Because the majority of the Company's
costs of manufacture are relatively fixed, the number of shippable package-
ready devices per wafer for a given product is critical to the Company's
operating results. Additionally, because the Company manufactures all of
its products at its facility in Somerset, New Jersey, and such components,
products and systems are not readily available from other sources, any
interruption in manufacturing resulting from fire, natural disaster, equip-
ment failures or otherwise would have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business - Manufacturing."
Reliance on International Sales; Reliance on Single Distributor. Sales
to customers located outside the United States accounted for approximately
58.6%, 36.0% and 42.5% of the Company's revenues in fiscal 1994, 1995 and
1996, respectively. The Company believes that such international sales
will continue to account for a significant percentage of the Company's
revenues. In particular, to market and service its systems in seven Asian
countries, the Company relies on a single marketing, distribution and
service provider, Hakuto & Co., Ltd. ("Hakuto"). A substantial portion of
the Company's sales of systems in Asia is to Hakuto. The Company's
agreement with Hakuto has an initial term of seven years but allows for
earlier termination upon 60 days notice. Furthermore, the agreement is
presently under renegotiation. While the Company believes its relationship
with Hakuto is currently good, there can be no assurance that Hakuto will
continue to adequately and effectively market and service the Company's
systems. Termination of the Company's relationship with Hakuto would
result in significant delays or interruption in the Company's marketing and
service programs in Asia and would have a material adverse effect on the
Company's business, financial condition and results of operations. The
Company competes with its competitors for relationships with reliable
international distributors. There can be no assurance that international
distributors, including Hakuto, will not market products in competition
with the Company's in the future or will not otherwise reduce or
discontinue their relationships with or support of the Company and its
products, or that the Company will be able to attract and retain qualified
international distributors in the future. The inability of the Company to
obtain qualified new international distributors could have a material
adverse effect on the Company's business, financial condition and results
of operations. In general, the Company's international sales are subject
to risks different from domestic U.S. sales, including U.S. and
international regulatory requirements and policy changes, U.S. and
international export controls, political and economic instability,
increased installation costs, difficulties in accounts receivable
collection, exchange rates affecting end-market purchasers, tariffs and
other barriers, extended payment terms, difficulty in staffing and managing
international operations, dependence on and difficulties in managing inter-
national distributors or representatives and potentially adverse tax
consequences. In particular, exports of the Company's products to certain
<PAGE>
destinations, such as the People's Republic of China, Malaysia and Taiwan,
may require pre-shipment authorization from U.S. export control authorities
including the U.S. Departments of Commerce and State. Authorization may be
conditioned on end-use restrictions. While the Company has received
authorizations via license for exports to such destinations, in certain
circumstances, it has been denied authorization in other circumstances,
particularly with respect to the People's Republic of China, and there is
no assurance that such authorization will be granted in the future.
Failure to receive such authorizations could have a material adverse effect
on the Company's business, financial condition and results of operations.
Furthermore, although the Company seeks to meet technical standards
established by non-U.S. regulatory bodies, there can be no assurance that
the Company will be able to comply with such standards in the future. In
addition, the laws of certain countries may not protect the Company's trade
secrets and intellectual property to the same extent as the laws of the
United States. See "Business - Sales and Marketing."
Dependence on Key Suppliers. The Company does not maintain any long-
term supply agreements with any of its suppliers, and the majority of the
critical components and sub-assemblies included in the Company's production
systems, as well as certain raw materials required for the fabrication of
the Company's wafers and package-ready devices, are obtained from sole
source suppliers or a limited number of suppliers. The manufacture of
certain components and sub-assemblies and raw materials is very complex and
requires long lead times. The Company's systems cannot be produced without
certain sole-sourced, critical components. In addition, the production of
the Company's wafers and package-ready devices is inherently dependent on
an adequate source of raw materials. Alternative suppliers for many of
these components and materials may not be readily available. In addition,
the Company intends to rely to an increasing degree on outside suppliers
because of their specialized expertise. The Company's reliance on a
limited group of suppliers, and particularly on sole source suppliers,
involves several risks, including the potential inability to obtain an
adequate supply of components and materials, and reduced control over
pricing and delivery time. To date, the Company has generally been able to
obtain components and materials when needed or on a timely basis, although
it has experienced occasional delays. There can be no assurance that
delays or shortages caused by suppliers will not occur in the future. Any
inability to obtain adequate, timely deliveries of sub-assemblies and
components and materials could prevent the Company from meeting scheduled
shipment dates, which could damage relationships with current and
prospective customers and may materially adversely affect the Company's
business, financial condition and results of operations. See "Business -
Manufacturing."
Rapid Technological Change; Reliance Upon Continued Product
Development. The markets in which the Company and its customers compete
are characterized by rapid technological change, evolving industry
standards and continuous improvements in products and services. Due to
continual changes in these markets, the Company believes that its future
success will depend upon its ability to continually improve its production
systems and processes, wafers and package-ready devices and to develop new
technologies that compete effectively on the basis of price and performance
and adequately address customer requirements. There can be no assurance
that the Company's research and development staff will develop new products
in time or with sufficient performance characteristics to meet the demands
of the market. The Company's production systems must remain competitive on
the basis of cost of ownership, process performance and capital
productivity. Because it is generally not possible to predict the time
required and costs involved in reaching certain research, development and
engineering objectives, actual development costs could exceed budgeted
amounts and estimated product development schedules could require
extension. Any delay or inability to overcome such difficulties would
<PAGE>
materially adversely affect the Company's business, financial condition and
results of operations. Additionally, if new products or enhancements
experience reliability or quality problems, the Company could encounter a
number of difficulties, including reduced orders, higher manufacturing
costs, delays in collection of accounts receivable and additional service
and warranty expenses, all of which could materially adversely affect the
Company's business, financial condition and results of operations. See
"Business - Products."
Acceptance by Customers of New Compound Semiconductor Technology. The
Company's systems utilize MOCVD technologies for the production of compound
semiconductor wafers and package-ready devices. These same technologies
are used in the Company's manufacture of wafers and package-ready devices.
MOCVD technology differs significantly from the technological approaches
used by others for each of these products. The semiconductor industry is
especially resistant to the introduction of changes in process or approach
in a manufacturing cycle which is quite long, consists of many separate
process events and suffers from limited control measurement points during
the overall fabrication process. Accordingly, the Company's customers may
resist changing systems or accepting any new technological approach.
Additionally, while the Company believes that compound semiconductor wafers
and package-ready devices substantially enhance the performance of silicon-
based electronics, the use of compound semiconductor wafers and package-
ready devices increases the cost of electronic end products and, therefore,
limits the feasibility of commercial applications of such products. The
Company is seeking to persuade certain potential customers to incorporate
compound semiconductor-based package-ready devices for many of their high
performance applications. Because a substantial investment is required by
semiconductor manufacturers to install and integrate capital equipment into
a production line, these manufacturers may tend to choose compound
semiconductor equipment suppliers based on past relationships, product
compatibility and proven operating performance. The Company's wafer and
package-ready device customers may be reluctant to re-tool their equipment
and production systems to accept these new technologies, may be reluctant
to rely upon a smaller supplier such as the Company for package-ready
devices, and may be reluctant to pay higher device costs. There can be no
assurance that the Company's MOCVD-based products will achieve broad market
acceptance. See "Business - Compound Semiconductor Process Technology,"
"Business - Products" and "Business - Customers."
Competition. The Company faces substantial competition from both
established competitors and potential new entrants. The Company believes
that the primary competitive factors in the markets in which the Company's
products compete are yield, throughput, capital and direct costs, system
performance, size of installed base, breadth of product line and customer
satisfaction, as well as customer commitment to competing technologies.
The Company's principal competitors in the market for MOCVD systems include
Aixtron GmbH, Nippon Sanso K.K. and Thomas Swann Ltd. The Company's
principal competitors of wafers and package-ready devices include Epitaxial
Products International, Kopin Corp. and Q.E.D. The Company also faces
competition from manufacturers that produce wafers and package-ready
devices for their own use. The Company may experience competition from
corporations that have been in business longer than the Company and have
broader product lines, more experience with high volume manufacturing,
broader name recognition, substantially larger installed bases, alternative
technologies which may be better established than the Company's and
significantly greater financial, technical and marketing resources than the
Company. There can be no assurance that the Company will successfully
compete with these competitors in the future or that the Company's
competitors will not develop enhancements to or future generations of
competitive products that will offer price and performance features that
are superior to those of the Company. The Company believes that in order
to remain competitive, it must invest significant financial resources in
<PAGE>
developing new product features and enhancements and in maintaining cus-
tomer satisfaction worldwide. In marketing its products, the Company may
face competition from suppliers employing new technologies in order to
extend the capabilities of competitive products beyond their current limits
or increase their productivity. In addition, increased competitive
pressure could lead to intensified price-based competition, resulting in
lower prices and margins, which would materially adversely affect the
Company's business, financial condition and results of operations. See
"Business - Competition."
Continued Existence of and Benefits to Control Group. Upon completion
of the Offering, Jesup & Lamont Merchant Partners, L.L.C. ("JLMP"), the
Company's majority shareholder, will beneficially own approximately 71.5%
of the Common Stock. JLMP, together with the Company's directors and
officers, will beneficially own approximately 77.0% of the Common Stock.
Accordingly, the Company's majority shareholder and management will
continue to hold sufficient voting power to enable it to maintain control
of the business and affairs of the Company for the foreseeable future.
Such concentration of ownership may also have the effect of delaying,
deferring or preventing a change in control of the Company. Reuben F.
Richards, Jr., the Company's President, Chief Executive Officer and a
director, Thomas J. Russell, the Chairman of the Company's Board of
Directors, Howard R. Curd and Howard F. Curd, each a director of the
Company, are four of the five members of JLMP. JLMP has guaranteed the
Company's demand note facility. Thomas J. Russell has provided collateral
for that guarantee. The Company expects to use up to $10.0 million of the
net proceeds from the Offering to repay the borrowings under the demand
note facility. See "Use of Proceeds," "Principal Shareholders" and
"Certain Transactions."
Dependence on Key Employees. The future success of the Company is
dependent, in part, on its ability to attract and retain certain key
personnel, including materials scientists and operations and finance
personnel. The Company anticipates that it will need to hire additional
skilled personnel to expand all areas of its business to continue to grow.
The competition for such employees is extremely intense. There can be no
assurance that the Company will be able to retain its existing personnel or
attract additional qualified employees in the future, failure of which
would have a material adverse effect on the Company's business, financial
condition and results of operations.
Environmental Regulation. The Company is subject to federal, state and
local laws and regulations concerning the use, storage, handling,
generation, treatment, emission, release, discharge and disposal of certain
materials used in its research and development and production operations,
as well as laws and regulations concerning environmental remediation and
employee health and safety. The Company has retained an environmental
consultant to advise it in complying with applicable environmental and
health and safety laws and regulations, and believes that it is currently,
and in the past has been, in substantial compliance with all such laws and
regulations. The Company also believes that the costs of complying with
existing environmental and health and safety laws and regulations are not
likely to have a material adverse effect on its business, financial
position or results of operations. There can be no assurance, however,
that future changes in such laws and regulations will not result in
expenditures or liabilities, or in restrictions on the Company's operation,
that could have such an effect. The production of wafers and package-ready
devices involves the use of certain hazardous raw materials, including, but
not limited to, ammonia, phosphine and arsenic. The Company's expansion to
offer wafers and package-ready devices will require the increased usage and
maintenance of these materials on the Company's premises. While the
Company believes it currently has and will continue to have in place
sufficient control systems for the safe use and maintenance of these raw
<PAGE>
materials, there can be no assurance that the Company's control systems
will be successful in preventing a release of these materials or other
adverse environmental conditions, which could cause a substantial
interruption in the Company's operations. Such an interruption could have
a material adverse effect on the Company's business, financial condition
and results of operation. See "Business - Environmental Regulations."
Absence of Public Market; Possible Volatility of Stock Price. There
has been no prior public market for the Company's Common Stock.
Consequently, the initial public offering price has been determined by
negotiations between the Company and Donaldson, Lufkin & Jenrette
Securities Corporation and Needham & Company, Inc., as representatives of
the underwriters. See "Underwriting." There can be no assurance that an
active public market for the Common Stock will develop or be sustained
after the Offering or that the market price of the Common Stock will not
decline below the initial public offering price. The Company believes that
a variety of factors could cause the price of the Company's Common Stock to
fluctuate, perhaps substantially, including: announcements of developments
related to the Company's business; quarterly fluctuations in the Company's
actual or anticipated operating results and order levels; general
conditions in the compound semiconductor and related industries or the
worldwide economy; announcements of technological innovations; new products
or product enhancements by the Company or its competitors; developments in
patents or other intellectual property rights and litigation; and develop-
ments in the Company's relationships with its customers, distributors and
suppliers. In addition, in recent years the stock market in general, and
the market for shares of small capitalization and semiconductor industry-
related stocks in particular, have experienced extreme price fluctuations
which have often been unrelated to the operating performance of affected
companies. Any such fluctuations in the future could adversely affect the
market price of the Company's Common Stock.
Future Capital Needs; Uncertainty of Additional Funding. The Company
currently anticipates that its available cash resources combined with the
net proceeds of the Offering will be adequate to fund the Company's
operations through fiscal 1997. However, the Company believes that it may
require substantial additional capital. As a result, the Company may need
to raise additional funds through public or private financings. No
assurance can be given that additional financing will be available or that,
if available, it will be available on terms favorable to the Company or its
shareholders. If additional funds are raised through the issuance of
equity securities, the percentage ownership of then current shareholders of
the Company will be reduced and such equity securities may have rights,
preferences or privileges senior to those of the holders of the Company's
Common Stock. If adequate funds are not available to satisfy either short
or long-term capital requirements, the Company may be required to limit its
operations significantly. The Company's capital requirements will depend
on many factors, including, but not limited to, the rate at which
the Company develops and introduces its products, the market acceptance and
competitive position of such products, the levels of promotion and
advertising required to launch and market such products and attain a com-
petitive position in the marketplace, and the response of competitors to
the products based on the Company's technologies. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
Effect of Certain Anti-Takeover Provisions. The Company's Amended and
Restated Certificate of Incorporation (the "Certificate of Incorporation")
and the New Jersey Business Corporation Act contain certain provisions that
could delay or impede the removal of incumbent directors and would make
more difficult a merger, tender offer or proxy contest involving the
Company, even if such a transaction were beneficial to the interests of the
shareholders, or could discourage a third party from attempting to acquire
<PAGE>
control of the Company. The Company has authorized 20,000,000 shares of
Preferred Stock, which the Company could issue without further shareholder
approval and upon such terms and conditions, and having such rights,
privileges and preferences, as the Board of Directors may determine. The
Company has no current plans to issue any Preferred Stock. The Company is
also subject to the New Jersey Shareholders Protection Act (the "Protection
Act"), which prohibits certain New Jersey corporations from engaging in
business combinations (including mergers, consolidations, significant asset
dispositions and certain stock issuances) with any Interested Shareholder
(defined to include, among others, any person that becomes a beneficial
owner of 10% or more off the affected corporation's voting power) for five
years after such person becomes an Interested Shareholder, unless the
business combination is approved by the Board of Directors prior to the
date the shareholder became an Interested Shareholder. In addition, the
Protection Act prohibits any business combination at any time with an
Interested Shareholder other than a transaction that (i) is approved by the
Board of Directors prior to the date the Interested Shareholder became an
Interested Shareholder, or (ii) is approved by the affirmative vote of the
holders of two-thirds of the voting stock not beneficially owned by the
Interested Shareholder, or (iii) satisfies certain "fair price" and related
criteria. These provisions could have the effect of delaying, deferring or
preventing a change in control of the Company and adversely affect the
voting and other rights of holders of Common Stock. Further, the Company's
Certificate of Incorporation and Amended and Restated By-Laws include
provisions to reduce the personal liability of the Company's directors for
monetary damages resulting from breaches of their fiduciary duty and to
permit the Company to indemnify its directors and officers to the fullest
extent permitted by New Jersey law. See "Description of Capital Stock."
Dilution and Benefit to Existing Shareholders. Purchasers of the
Common Stock will experience immediate and substantial dilution in net
tangible book value per share of Common Stock from the initial public
offering price per share of Common Stock. See "Dilution."
Shares Eligible for Future Sale. Sales of the Company's Common Stock
in the public market after this Offering could adversely affect the market
price of the Company's Common Stock. See "Shares Eligible for Future
Sale."
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the ________ shares of
Common Stock being offered hereby are estimated to be $______________
($_________ if the Underwriters' over-allotment option is exercised in
full), after deducting the underwriting discounts and commissions and
estimated offering expenses.
Of the net proceeds, approximately $_________ will be used to repay the
entire principal amount outstanding under the Company's demand note
facility with First Union National Bank, which was used for capital
expenditures in connection with the build-out of the Company's
manufacturing facility. The demand note facility bears interest at a rate
equal to the six month LIBOR plus 75 basis points. The approximately
$_________ of remaining net proceeds are expected to be used for capital
expenditures to expand the Company's manufacturing facility, and for
general corporate purposes including working capital. The Company may also
use a portion of the net proceeds to fund acquisitions of complementary
businesses, products or technologies. Although the Company periodically
reviews potential acquisition opportunities, there are no current
agreements with respect to any such transactions. Pending such uses, the
net proceeds of the Offering will be invested in short-term, investment-
grade, income producing investments.
The Company believes that the remaining net proceeds from the Offering
and the funds available under its demand note facility will be sufficient
to fund the Company's anticipated facility expansion, and to provide the
Company with adequate working capital at least through fiscal 1997.
However, there can be no assurance that events in the future will not
require the Company to seek additional capital sooner or, if so required,
that adequate capital will be available on terms acceptable to the Company.
DIVIDEND POLICY
The Company has never declared or paid dividends on its Common Stock
since its formation. The Company currently does not intend to pay
dividends in the foreseeable future so that it may reinvest its earnings in
the development of its business. The payment of dividends, if any, in the
future will be at the discretion of the Board of Directors.
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1996, and the capitalization of the Company as adjusted to
give effect to the sale by the Company of ___ shares of Common Stock being
offered hereby and the application of the estimated net proceeds therefrom.
This table should be read in conjunction with the Company's Financial
Statements and Notes thereto and "Selected Financial Data" included
elsewhere in this Prospectus.
<TABLE>
AS OF SEPTEMBER 30, 1996
ACTUAL AS ADJUSTED
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
<S> <C> <C>
Demand Notes(1) . . . . . . . . . . . . . $ -- $ --
Long-term debt, net . . . . . . . . . . . $8,365 $ --
Shareholders' equity
Preferred Stock: 20,000,000
shares authorized; none issued
or outstanding . . . . . . . . . . . -- --
Common Stock 80,000,000 shares
authorized; 10,181,168 shares
issued and outstanding;______
shares issued and outstanding;
as adjusted(2) . . . . . . . . . . . 19,408 _______
Notes receivable from stock sales . (146) (________)
Accumulated deficit . . . . . . . . (18,158) (________)
Total shareholders' equity . . . . . 1,103 _________
Total capitalization . . . . . . . . $9,468 $_________
</TABLE>
____________________________
(1) Subsequent to September 30, 1996, the Company established a $10.0
million demand note facility. As of December 20, 1996, the Company
had drawn down approximately $2 million from this facility. The
Company intends to use part of the net proceeds of the Offering to pay
down the balance outstanding under this facility.
(2) Excludes: (i) 2,200,000 shares of Common Stock reserved for issuance
under the Company's 1995 Incentive and Non-Statutory Stock Option Plan
as amended, of which 1,154,000 shares were subject to outstanding
options at exercise prices varying from $0.89 per share to $3.00 per
share, (ii) warrants to purchase 30,949 shares of Common Stock at an
exercise price of $5.00 per share exercisable until July 24, 1997,
(iii) warrants to purchase 7,924,667 shares of Common Stock at an
exercise price of $1.20 per share, exercisable until May 1, 2001 and
(iv) warrants to purchase 833,333 shares of Common Stock at an
exercise price of $3.00 per share, exercisable until September 1,
2001.
<PAGE>
DILUTION
The net tangible book value (deficiency) of the Company as of
September 30, 1996 was $_________ or approximately $____ per share. Net
tangible book value (deficiency) per share represents the amount of the
Company's shareholders' equity (net capital deficiency), less intangible
assets (_______ at September 30, 1996), divided by 10,181,168 shares of
Common Stock outstanding. Net tangible book value dilution per share
represents the difference between the amount per share paid by purchasers
of shares of Common Stock in the Offering made hereby and the pro forma net
tangible book value per share of Common Stock immediately after completion
of the Offering. After giving effect to the sale by the Company of
_________ shares of Common Stock offered hereby and the application of the
estimated net proceeds therefrom, the pro forma net tangible book value of
the Company as of September 30, 1996 would have been $__________ or
approximately $____ per share. This represents an immediate increase in
net tangible book value of $____ per share to existing shareholders and an
immediate dilution in net tangible book value of $_____ per share to the
purchasers of Common Stock in the Offering, as illustrated in the following
table:
<TABLE>
<S> <C>
Initial public offering price per share . . . . . . . . . . . . . . . . . . . .
$______
Net tangible book value (deficiency)
per share as of September 30, 1996 . . . . . . . . . . . . . . . . . $______
Increase in net tangible book value per
share attributable to new investors . . . . . . . . . . . . . . . . . . ______
Net tangible book value per share after Offering . . . . . . . . . . . . . . . .
______
Dilution per share to new investors . . . . . . . . . . . . . . . . . . . . . .
$______
</TABLE>
The foregoing table assumes no exercise of any outstanding stock
options or warrants.
The following table sets forth, on a pro forma basis as of September
30, 1996, the difference between the existing shareholders and the
purchasers of shares in the Offering with respect to the number of shares
purchased from the Company, the total consideration paid and the average
price per share paid:
<TABLE>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
<S> <C> <C> <C> <C> <C>
Existing shareholders . . _______ ______% $______ ______% $_______
New investors . . . . . . _______ ______ ______ ______ ______
Total . . . . . 100.0% $ 100.0%
</TABLE>
At September 30, 1996, there were outstanding stock options to
purchase 1,154,000 shares of Common Stock at a weighted average exercise
price of $______ per share and, warrants to purchase 30,949 shares of
Common Stock at $5.00 per share, warrants to purchase 7,924,667 shares at
$1.20 per share and warrants to purchase 833,333 shares at $3.00 per share.
To the extent that these options or warrants are exercised, there will be
<PAGE>
further dilution in the aggregate to new investors.
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data of the Company is qualified by
reference to and should be read in conjunction with the Financial State-
ments and the Notes thereto, and Management's Discussion and Analysis of
Financial Condition and Results of Operations included elsewhere in this
Prospectus. The financial data included in this table have been selected
by the Company and have been derived from the Company's financial
statements. The Statement of Income Data set forth below with respect to
fiscal 1996, 1995 and 1994 and the Balance Sheet Data as of September 30,
1996 and 1995, are derived from the audited financial statements included
elsewhere in this Prospectus which financial statements have been audited
by Coopers & Lybrand L.L.P., whose report with respect thereto appears
elsewhere in this Prospectus. The Statement of Income Data for fiscal 1993
and 1992 and the Balance Sheet Data as of September 30, 1994, 1993 and 1992
are derived from audited financial statements not included herein.
<TABLE>
YEARS ENDED SEPTEMBER 30,
1992 1993 1994 1995 1996
(In thousands, except per share data)
STATEMENT OF INCOME DATA:
<S> <C> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . $10,022 $8,180 $9,038 $18,137 $27,779
Cost of sales . . . . . . . . . . . 7,043 4,772 5,213 9,927 18,607
Gross profit . . . . . . . . . . . . 2,979 3,408 3,825 8,210 9,172
Operating expenses:
Selling, general and administrative . 2,977 2,849 2,645 4,452 6,524
Research and development . . . . . . 909 1,024 1,064 1,852 5,401
Total operating expenses . . . . . 3,886 3,873 3,709 6,304 11,925
Operating (loss) income . . . . . (907) (465) 116 1,906 (2,753)
Interest expenses, net . . . . . . . . 283 242 286 255 423
Other expense (income) . . . . . . . . (226) (100) -- 10 --
(Loss) income before income taxes (964) (607) (170) 1,641 (3,176)
Provision for income taxes . . . . . . (6) -- -- 125 --
Net (loss) income . . . . . . . . . . ($958) ($607) ($170) $1,516 ($3,176)
Net (loss) income per share . . . . . .
Shares used in computing net (loss)
income per share . . . . . . . . . .
AS OF SEPTEMBER 30,
1992 1993 1994 1995 1996
(In thousands)
BALANCE SHEET DATA:
Working capital . . . . . . . . . . . . $492 $840 $1,041 $2,208 $1,151
Total assets . . . . . . . . . . . . 4,233 3,171 5,415 10,143 20,434
Long-term debt . . . . . . . . . . . . 1,944 2,000 3,000 3,000 8,365
Shareholders' (deficit) equity . . . . (56) 12 (96) 1,509 1,103
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
EMCORE is a leading designer and developer of compound semiconductor
materials and process technology and a leading manufacturer of production
systems used to fabricate compound semiconductor wafers. Compound
semiconductors are used in a broad range of applications in wireless
communications, telecommunications, computers, and consumer and automotive
electronics. EMCORE believes that its proprietary TurboDiscTM deposition
technology is the critical enabling process step in the cost effective,
high volume manufacture of high performance electronic and optoelectronic
devices. The Company was founded in 1984 to engage in advanced materials
science research and development and to develop and manufacture a viable
production platform for the processing of compound semiconductor materials.
In 1986, the Company shipped its first TurboDiscTM system and by 1990, had
sold systems in the United States, Asia and Europe.
To date, the Company has sold over 160 systems worldwide. From fiscal
1986 until fiscal 1993, the Company's systems revenues consisted
principally of sales of research and development systems and small pilot
production systems. Beginning in fiscal 1994, due to the increased market
demand for compound semiconductor devices, the Company's systems revenues
have principally consisted of the sale of larger production platforms.
Historically, the Company's revenues have consisted primarily of the sales
of MOCVD systems and components, government-sponsored research contracts
and service contracts. The Company's systems sales contracts typically
require partial advance payments during the design and production phases of
the systems manufacturing process. Such advance payments have historically
represented a significant funding source to the Company.
Prior to fiscal 1996, the Company was profitable for six consecutive
quarters. In fiscal 1996, the Company expanded its product offerings to
include wafers and package-ready devices and incurred a consolidated net
loss of $3.2 million, which primarily resulted from significant initial
operating expenses related to the Company's expansion. The Company has
increased its expense levels to support anticipated growth in demand for
each of its compound semiconductor production systems, wafer and package-
ready device product offerings, including the hiring of additional
manufacturing, research, engineering, sales and administrative personnel
and has also increased its investments in inventory and capital equipment.
As a result, the Company is dependent upon increasing revenues and profit
margins to achieve profitability. If the Company's sales and profit
margins do not increase to support the higher levels of operating expenses,
the Company's business, financial condition and results of operations would
be materially adversely affected. The Company currently anticipates to
continue to expand its manufacturing capacity for the production of wafers
and package-ready devices, which entails substantial additional capital
expenditures. The Company currently anticipates expending a substantial
portion of the net proceeds of the Offering for this purpose. The Company
expects to incur substantial losses in the first quarter of fiscal 1997.
In the future, the Company expects to derive significant revenues from
sales of wafers and package-ready devices. However, the Company's ability
to derive any such revenues is subject to certain risks and uncertainties,
including yield, process and capacity related risks and risks associated
with the market acceptance of such products. There can be no assurance
that the Company will be successful in developing or marketing such wafers
and package-ready devices. The Company's failure to develop or market such
products would have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company sells its production systems worldwide and has generated a
<PAGE>
significant portion of its sales to customers outside the United States.
In fiscal 1994, 1995 and 1996, international sales constituted 58.6%, 36.0%
and 42.5%, respectively, of revenues. The Company has made international
sales in Belgium, France, Germany, Italy, Japan, Korea, the People's
Republic of China, Taiwan, Sweden and the United Kingdom. The majority of
the Company's international sales have been made to customers in Asia,
particularly in Japan. The Company anticipates that international sales
will continue to account for a significant portion of revenues. However,
the Company's international sales are subject to certain risks and
uncertainties, including international regulatory requirements and policy
changes, export controls, tariffs and other barriers, and dependence on and
difficulties in managing international distributors. There can be no
assurance that the Company will continue to derive significant revenues
from international sales.
As of September 30, 1996, the Company had an order backlog of
approximately $25.7 million, consisting of $22.5 million of production
systems, $1.1 million of research contracts and $2.1 million of package-
ready devices, compared to a backlog of $11.9 million as of September 30,
1995, consisting of $10.0 million of production systems and $1.9 million of
research contracts. This increase in backlog was a result of the increased
market acceptance of the Company's production systems and multiple unit
orders for such systems and the introduction of the Company's package-ready
device products. The Company includes in backlog only customer purchase
orders that have been accepted by the Company and for which shipment dates
have been assigned within the twelve months to follow and research
contracts that are in process or awarded. The Company receives partial
advance payments or irrevocable letters of credit on most production system
orders and has never experienced a purchase order cancellation.
The Company recognizes systems and components, wafers and package-
ready device revenue upon shipment. The Company incurs certain
installation and warranty costs subsequent to system shipment which are
estimated and accrued at the time the sale is recognized. The Company
reserves for estimated returns and allowances at the time of shipment. For
research contracts with the U.S. government and commercial enterprises,
with durations greater than six months, the Company recognizes revenue to
the extent of costs incurred plus a pro rata portion of estimated gross
profit as stipulated in such contracts, based on contract performance. The
Company's research contracts require the development or the evaluation of
new material applications and have a duration of six to thirty-six months.
Contracts with a duration of six months or less are accounted for on the
completed contract method. A contract is considered complete when all
costs have been incurred and the research reporting requirements to the
customer have been met.
RESULTS OF OPERATIONS
The following table sets forth the Statement of Operations data of the
Company expressed as a percentage of total revenues for the periods
indicated.
<TABLE>
YEARS ENDED SEPTEMBER 30,
1994 1995 1996
<S> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . 100.00% 100.00% 100.00%
Cost of sales . . . . . . . . . . . . . . . . . . 57.7 54.7 67.0
<PAGE>
Gross profit . . . . . . . . . . . . . . 42.3 45.3 33.0
Operating expenses:
Selling, general
and administrative . . . . . . . . . . . 29.2 24.5 23.5
Research and development . . . . . . . . 11.8 10.2 19.4
Operating income (loss) . . . . . . . . . 1.3 10.5 (9.9)
Interest expense, net . . . . . . . . . . . . . . 3.2 1.4 1.5
Other expense (income) . . . . . . . . . . . . . - 0.1 -
Income (loss) before income taxes . . . . (1.9) 9.0 (11.4)
Provision for income taxes . . . . . . . . . . . - 0.6 -
Net income (loss) . . . . . . . . . . . . (1.9)% 8.4% (11.4)%
</TABLE>
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30, 1995 AND 1996
Revenues. Revenues increased 53.6% from $18.1 million in fiscal 1995 to
$27.8 million in fiscal 1996. This increase was primarily due to greater
sales of the Company's compound semiconductor production systems resulting
from broader acceptance of these products, coupled with an increased market
demand for compound semiconductor devices, and to a lesser extent,
increased service revenues, which include parts and service contracts,
resulting from the Company's growing installed base. In addition, in fiscal
1996, the Company increased research contract revenues resulting from an
arrangement with General Motors to develop and enhance certain magneto-
resistive package-ready devices which generated approximately $1.6 million
in revenue. Revenues derived from international sales increased 81.5% from
$6.5 million in fiscal 1995 to $11.8 million in fiscal 1996. This increase
was primarily due to an increased demand for the Company's production
systems.
Cost of Sales/Gross Profit. The Company's cost of sales includes direct
material and labor costs, manufacturing and service overhead, and
installation and warranty costs. Cost of sales increased 87.9% from $9.9
million in fiscal 1995 to $18.6 million in fiscal 1996. Gross profit
decreased from 45.3% of revenues in fiscal 1995 to 33.0% of revenues in
fiscal 1996. This decrease was principally attributable to (i) the sale of
three systems at a loss for strategic reasons, (ii) competitive pricing
conditions prevailing generally in the market and a resulting decrease in
the average selling price of the Company's production systems, (iii) costs
associated with system enhancements and (iv) an increase in the Company's
cost of obtaining certain components. The Company believes that the three
sales made for strategic reasons resulted in an approximately 4% decline in
gross profit in fiscal 1996.
Selling, General and Administrative. Selling, general and administrative
expenses increased 44.4% from $4.5 million in fiscal 1995 to $6.5 million
in fiscal 1996. This increase was primarily due to increased marketing
expenses associated with the Company's higher level of production systems
sales and the hiring of additional personnel to support the Company's
expanded activities. As a percentage of revenues, selling, general and
administrative expenses decreased from 24.5% in fiscal 1995 to 23.5% in
fiscal 1996.
Research and Development. Research and development expenses include the
costs of internally-funded research and development projects, as well as
<PAGE>
materials prototype product support expenses, which primarily include
employee and material costs, depreciation of capital equipment, and other
engineering-related costs. Research and development expenses increased
184.2% from $1.9 million in fiscal 1995 to $5.4 million in fiscal 1996.
This increase was primarily due to the Company's increased research and
development activities relating to the initiation of its wafer and package-
ready device product lines. As a percentage of revenues, research and
development expenses increased from 10.2% in fiscal 1995 to 19.4% in fiscal
1996.
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30, 1994 AND 1995
Revenues. Revenues increased 101.1% from $9.0 million in fiscal 1994 to
$18.1 million in fiscal 1995. This increase was primarily due to increased
sales of the Company's production systems, and to a lesser extent an
increase in service revenues. Revenues derived from international sales
increased 22.6% from $5.3 million in fiscal 1994 to $6.5 million in fiscal
1995. This increase was primarily due to broader acceptance of the
Company's production systems.
Cost of Sales/Gross Profit. Cost of sales increased 90.4% from $5.2
million in fiscal 1994 to $9.9 million in fiscal 1995. Gross profit
increased from 42.3% of revenues in fiscal 1994 to 45.3% of revenues in
fiscal 1995. This increase was due to favorable product mix consisting of
a higher proportion of larger production systems with higher gross profit.
Selling, General and Administrative. Selling, general and administrative
expenses increased 73.1% from $2.6 million in fiscal 1994 to $4.5 million
in fiscal 1995. The increase was primarily due to increased marketing
expenses, including customer samples, associated with the Company's higher
level of systems sales and the hiring of additional personnel to support
the Company's expanded activities. As a percentage of revenues, selling,
general and administrative expenses decreased from 29.2% in fiscal 1994 to
24.5% in fiscal 1995 due to the growth in the Company's revenues.
Research and Development. Research and development expenses increased
72.7% from $1.1 million in fiscal 1994 to $1.9 million in fiscal 1995.
This increase was primarily due to increased research and development
activities relating to the development of new production systems for the
processing of gallium nitride used in the manufacture of blue high
brightness light emitting diodes ("HB LEDs"). As a percentage of
revenues, research and development expenses decreased from 11.8% in fiscal
1994 to 10.2% in fiscal 1995.
QUARTERLY RESULTS OF OPERATIONS
The following tables present the Company's unaudited results of
operations expressed in dollars and as a percentage of revenues for the
eight most recently ended fiscal quarters. The Company believes that all
necessary adjustments, consisting only of normal recurring adjustments,
have been included in the amounts below to present fairly the selected
quarterly information when read in conjunction with the Financial
Statements and Notes thereto, included herein. The Company's results from
operations may vary substantially from quarter to quarter. Accordingly,
the operating results for a quarter are not necessarily indicative of
results for any subsequent quarter or for the full year.
<TABLE>
QUARTERS ENDED
FISCAL 1995 FISCAL 1996
<PAGE>
DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues . . . . . . . . . $3,394 $3,836 $4,875 $6,032 $4,255 $6,014 $7,727 $9,783
Cost of sales . . . . . . . 1,901 2,154 2,599 3,273 2,782 4,041 5,495 6,289
Gross profit . . . . . . 1,493 1,682 2,276 2,759 1,473 1,973 2,232 3,494
Operating expenses:
Selling, general and
administrative . . . . . 864 967 1,303 1,318 1,511 1,545 1,900 1,568
Research and development 332 349 375 796 790 1,196 1,710 1,705
Total operating expenses 1,196 1,316 1,678 2,114 2,301 2,741 3,610 3,273
Operating income (loss) 297 366 598 645 (828) (768) (1,378) 221
Interest expense, net . . . 63 77 62 63 55 55 104 209
Income before income 234 289 536 582 (883) (823) (1,482) 12
taxes . . . . . . . . .
Provision for income
32 31 31 31 - - - -
taxes . . . . . . . . .
Net income (loss) . . . $202 $258 $505 $551 ($883) ($823) ($1,482) $12
AS A PERCENTAGE OF REVENUES
Revenues . . . . . . . . 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales . . . . . 56.0 56.2 53.3 54.3 65.4 67.2 71.1 64.3
Gross profit . . . . . 44.0 43.8 46.7 45.7 34.6 32.8 28.9 35.7
Operating expenses:
Selling, general and
administrative . . . . . 25.4 25.2 26.7 21.9 35.5 25.7 24.6 16.0
Research and development 9.8 9.1 7.7 13.2 18.6 19.9 22.1 17.4
Total operating expenses 35.2 34.3 34.4 35.1 54.1 45.6 46.7 33.4
Operating income (loss) 8.8 9.5 12.3 10.7 (19.5) (12.8) (17.8) 2.2
Interest expense, net . . . 1.9 2.0 1.3 1.0 1.3 0.9 1.3 2.1
Income before income
6.9 7.5 11.0 9.6 (20.8) (13.7) (19.2) 0.1
taxes . . . . . . . . .
Provision for income 0.9 0.8 0.6 0.5 - - - -
taxes . . . . . . . . .
Net income (loss) . . . 6.0% 6.7% 10.4% 9.1% (20.8)% (13.7)% (19.2)% 0.1%
</TABLE>
The Company has experienced a significant increase in demand for its
products as a result of greater demand for compound semiconductor systems,
materials and devices. Accordingly, during the two-year period ended
September 30, 1996, the Company's quarterly revenues have increased by an
average of 50.7% over the corresponding quarterly revenues for the
immediately preceding fiscal year.
Historically, the Company has experienced less demand for its products
during the spring and summer, resulting in lower revenues during the
Company's first fiscal quarter. However, the Company's backlog has
continually increased during the two-year period ended September 30, 1996.
<PAGE>
The cost of sales remained relatively constant as a percentage of
revenues during fiscal 1995. Gross profit ranged from a high of 46.7% to a
low of 43.8%. The Company experienced a decline in gross profit throughout
fiscal 1996. Gross profit ranged from a high of 35.7% to a low of 28.9%.
This decline was principally attributable to (i) the sale of three systems
at a loss for strategic reasons, (ii) competitive pricing conditions
prevailing generally in the market and a resulting decrease in the average
selling price of the Company's production systems, (iii) costs associated
with system enhancements and (iv) an increase in the Company's cost of
obtaining certain components.
Operating expenses have generally increased in absolute dollars over
the quarters shown as the Company has increased staffing in research and
development, sales and marketing and general and administrative functions.
This increase was due to activities relating to the development of new
systems for the processing of gallium nitride used in the manufacture of
blue LEDs, the development of the Company's volume production systems and
the initiation of the Company's wafer and package-ready device products.
Selling, general and administrative expenses have increased as a result of
increased marketing and sales related activities, including the hiring of
additional personnel, commissions and customer samples, with the exception
of the quarter ended September 30, 1996, during which selling, general and
administrative expenses decreased as a result of a reduction in the
production of sales samples. As a percentage of total revenues, operating
expenses in fiscal 1995 have generally increased ranging from a low of
34.3% to a high of 35.2%. In fiscal 1996, operating expenses as a
percentage of total revenues fluctuated from a low of 33.4% to a high of
54.1%.
The Company has experienced and expects to continue to experience
significant fluctuations in its quarterly results. Factors which have had
an influence on and may continue to influence the Company's operating
results in a particular quarter include the timing of receipt of orders,
cancellation, rescheduling or delay in product shipment or supply
deliveries, product mix, competitive pricing pressures, the Company's
ability to design, manufacture and ship products on a cost effective and
timely basis, including the ability of the Company to achieve and maintain
acceptable production yields for its wafers and package-ready devices, and
the announcement and introduction of new products by the Company and by its
competitors. The timing of sales of the Company's larger, volume
production systems may cause substantial fluctuations in quarterly
operating results due to the substantially higher per unit price of these
products relative to the Company's other products. There can be no
assurance that the compound semiconductor industry will not experience
downturns or slowdowns, which may materially and adversely affect the
Company's business, financial condition and results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has funded its operations through the
private sale of equity securities, issuance of subordinated debt, capital
equipment leases, bank and other third party borrowings, as well as advance
payments by customers, and more recently cash flow generated from
operations. As of September 30, 1996, the Company had $1.4 million in
cash, working capital of $1.2 million and subordinated debt with a carrying
value of $8.4 million.
Net cash provided from operations was $573,000 and $3.1 million during
fiscal 1994 and fiscal 1995, respectively. The cash provided in fiscal
1994 and 1995 was the result of improved operating performance, as
evidenced by profitable operations in fiscal 1995. Net cash used in
operating activities was $1.9 million in fiscal 1996 and was primarily
attributable to the loss from operations, an increase in inventories and
<PAGE>
receivables offset, in part by increases in current liabilities
particularly advance billings and accounts payable.
Net cash used for investing activities was $1.2 million, $1.3 million
and $7.1 million in fiscal 1994, 1995 and 1996, respectively. These
expenditures included the manufacture or purchase of capital equipment
including TurboDiscTM production systems, and the purchases of
characterization and test equipment, computer equipment, research and
development tools, and, particularly during fiscal 1996, tenant
improvements in the Company's facility, including construction and
refurbishment of two clean rooms. The Company anticipates making
additional capital expenditures primarily for manufacturing expansion and
improvements including additional cleanroom space, TurboDiscTM production
systems, research and development tools and office equipment, including
computers and furniture and fixtures. The Company estimates its capital
needs will be approximately $13 million in fiscal 1997.
The Company's financing activities provided net cash of approximately
$967,000, $90,000 and $8.0 million in fiscal 1994, 1995 and 1996,
respectively. In fiscal 1994, financing cash proceeds were primarily
derived from the issuance of $1.0 million of 7.5% Notes to Hakuto. In
fiscal 1995, cash proceeds were generated from the sale of equity
securities to senior management. During fiscal 1996, the Company raised
$11.0 million from the issuance of 6% Subordinated Notes due 2001. Of this
amount, $3.0 million was used to repay the outstanding 7.5% Notes held by
Hakuto.
On October 25, 1996, the Company entered into a $10.0 million demand
note facility with First Union National Bank. The facility bears interest
at the rate of the six-month LIBOR plus 75 basis points and is due and
payable on demand. The facility has been guaranteed by JLMP, the Company's
majority shareholder. Collateral for the facility, in the form of a
custodial account containing marketable equity securities, has been
provided by Thomas J. Russell, the Chairman of the Company's Board of
Directors and Chairman of JLMP. The Company anticipates using the
borrowing under the demand note facility to finance a portion of its
capital expenditure requirements in fiscal 1997.
The Company believes that its cash on hand, the receipt of customer
deposits and the net proceeds from the Offering will be sufficient to repay
the borrowings under the demand note facility, and to provide adequate
working capital at least through fiscal 1997. However, there can be no
assurance that events in the future will not require the Company to seek
additional capital sooner or, if so required, that adequate capital will be
available on terms acceptable to the Company. The Company is presently in
discussions with certain lenders to put in place a revolving credit
facility in place of the demand note facility.
The Company's net operating loss tax carryforwards and research
credits are subject to annual limitations under Sections 382 and 383 of the
Internal Revenue Code due to a change in ownership.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of" ("SFAS 121"). This pronouncement establishes accounting
standards for when impairment losses relating to long-lived assets,
identifiable intangibles and goodwill related to those assets should be
recognized and how the losses should be measured. The Company plans to
implement SFAS 121 in fiscal 1997. The adoption of SFAS 121 is not
expected to have an impact on the Company's financial position or results
<PAGE>
of operations, since the Company's current policy is to monitor assets for
impairment and record any necessary write-downs.
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123 "Accounting for Stock Based Compensation" ("SFAS 123").
The provisions of SFAS 123 set forth the method of accounting for stock
based compensation based on the fair value of stock options and similar
instruments, but do not require the adoption of this preferred method.
SFAS 123 also requires the disclosure of additional information about stock
compensation plans, even if the preferred method of accounting is not
adopted. The Company plans to implement SFAS 123 in fiscal 1997. The
Company does not intend to change its method of accounting for stock based
compensation to the method under SFAS 123, but instead will continue to
apply the provisions of Statement of Financial Accounting Standards No. 25
"Accounting for Stock Issued to Employees." However, the Company will
disclose the pro forma effect of SFAS 123 on its net income and earnings
per share.
<PAGE>
BUSINESS
COMPANY OVERVIEW
EMCORE is a leading designer and developer of compound semiconductor
materials and process technology and a leading manufacturer of production
systems used to fabricate compound semiconductor wafers. Compound
semiconductors are used in a broad range of applications in wireless
communications, telecommunications, computers, and consumer and automotive
electronics. EMCORE believes that its proprietary TurboDiscTM deposition
technology is the critical enabling process step in the cost-effective,
volume manufacture of high performance electronic and optoelectronic
devices. The Company has recently capitalized on its technology base by
expanding into the design and production of compound semiconductor wafers
and package-ready devices. The Company offers its customers a complete,
vertically-integrated solution for the design, development and production
of compound semiconductor wafers and devices. EMCORE's production systems
and process technology have been purchased by, among others: Hughes-
Spectrolab, General Motors, Hewlett Packard Co., Lucent Technologies, Inc.,
Motorola, Inc., Rockwell, Samsung Co., Siemens AG, L.M. Ericsson AB, Texas
Instruments Incorporated, Thomson CSF and thirteen of the largest
electronics manufacturers in Japan.
INDUSTRY OVERVIEW
Recent advances in information technologies have created a growing
need for power efficient, high performance electronic systems that operate
at very high frequencies, have increased storage capacity and computational
and display capabilities, and can be produced cost-effectively in
commercial volumes. In the past, electronic systems manufacturers have
relied on advances in silicon semiconductor technology to meet many of
these demands. However, the newest generation of high-performance
electronic and optoelectronic applications require certain functions which
are generally not achievable using silicon-based components. To address
these market demands, electronic system manufacturers are increasingly
incorporating new electronic and optoelectronic devices into their products
in order to improve performance or enable new applications.
Compound semiconductors have emerged as an enabling technology to meet
the complex requirements of today's advanced information systems. Compound
semiconductor devices can be used to perform individual functions as
discrete devices, such as HB LEDs, lasers and solar cells, or can be
combined into integrated circuits, such as transmitters, receivers and
alpha-numeric displays. Compound semiconductor materials have unique
physical properties that allow electrons to move at least four times faster
than through silicon-based devices. This higher electron mobility enables
a compound semiconductor device to operate at much higher speeds than
silicon devices with lower power consumption and less noise and distortion.
In addition, unlike silicon-based devices, compound semiconductor devices
have optoelectronic capabilities that enable them to emit and detect light.
As a result, electronics manufacturers are increasingly integrating
compound semiconductor devices into their products in order to achieve
higher performance in a wide variety of applications, including wireless
communications, telecommunications, computers, and consumer and automotive
electronics.
Wireless Communications. Compound semiconductor devices have multiple
applications in wireless communication products, including cellular
telephones, pagers, PCS handsets, DBS systems and global positioning
systems ("GPS"). Compound semiconductor devices are used in high frequency
transmitters, receivers and power amplifiers to increase capacity, improve
signal to noise performance and lower power consumption, which in turn
reduces network congestion, increases roaming range and extends battery
<PAGE>
life. In addition, HB LEDs are used in electronic displays on these
products in order to reduce size, weight and power consumption and to
improve display visibility. In satellite communications, compound
semiconductor devices are used in ultra-high frequency satellite up-
converters and down-converters to cost-effectively deliver information to
fixed and mobile users over wide geographic areas. In addition, compound
semiconductor solar cells are used to power these satellites because they
are more tolerant to radiation levels in space and have higher power-to-
weight ratios than silicon-based solar cells, thereby increasing satellite
life and payload capacity.
Telecommunications. To accommodate the exponential growth in voice,
data and video traffic and the increased demand for higher transmission
rates, telecommunications companies and Internet service providers are
relying on fiber optic networks utilizing high speed switching
technologies. Compound semiconductor components such as lasers and HB
LEDs, coupled with optical detectors, are used within these networks to
enable high speed data transmission, increase overall network capacity and
reduce equipment costs.
Computers. Computer manufacturers are increasingly seeking to achieve
higher clock speeds than the architecture prevalent in today's advanced
multimedia computer systems. Higher processing speeds necessitate the use
of larger cache memory to enable higher transmission rates. Computer
manufacturers are increasingly utilizing compound semiconductor devices to
achieve these results. In addition, today's advanced multimedia
applications require increased data storage capacity, which is commonly
addressed by the use of CD ROMs. To achieve these higher storage
capabilities, computer manufacturers are increasingly utilizing compound
semiconductor lasers and optical detectors. As a result of the migration
of multimedia applications into consumer products, computer manufacturers
are also incorporating compound semiconductor infrared emitters and optical
detectors into their products to replace bulky wires and cables.
Consumer Electronics. Consumer electronics manufacturers are using
compound semiconductor devices to improve the performance of many existing
products and to develop new applications. For example, next generation
compact disc players are utilizing shorter wavelength compound
semiconductor lasers to read and record information on high density DVDs
which store at least four times more information than a conventional
compact disc. In addition, compound semiconductor devices are increasingly
being used in advanced display technologies. Ultra-thin LED flat panel
displays are being used in a variety of applications, including point-of-
purchase displays and outdoor advertising with live-action billboards, and
are being developed for use in laptop computers and flat panel television
screens.
Automotive Electronics. Compound semiconductor devices are
increasingly being used by automotive manufacturers to improve vehicle
performance while reducing weight and costs through lower power
consumption. These devices are utilized in a wide variety of applications,
including dashboard displays, indicator lights, engine sensors, anti-lock
braking systems and other electronic systems. In addition, the Company
believes that the use of electronic components within automobiles is likely
to increase as manufacturers design vehicles to comply with state and
federal environmental and safety regulations. Automotive production cycles
generally last three to five years, providing a relatively predictable
source of demand for compound semiconductor devices once an electronic
component is designed into a specific vehicle model.
The high performance characteristics of compound semiconductors,
combined with the requirements of advanced information systems, have led to
the widespread deployment of compound semiconductor devices within a broad
<PAGE>
range of electronic systems. The Company believes that the following
factors have resulted in an increased demand for compound semiconductor
production systems, wafers and devices which enable electronic systems
manufacturers to reach the market faster with high volumes of high-
performance products and applications:
- Launch of new wireless services such as PCS and wireless high
speed data systems;
- Rapid build-out of satellite communications systems;
- Widespread deployment of fiber optic networks and the increasing
use of optical systems within these networks;
- Increasing use of infrared emitters and optical detectors in
computer systems to replace bulky interconnect wires and cables;
- Emergence of advanced consumer electronics applications, such as
DVDs and flat panel displays; and
- Increasing use of high performance electronic devices in
automobiles.
<PAGE>
COMPOUND SEMICONDUCTOR PROCESS TECHNOLOGY
Compound semiconductors are composed of two or more elements and
usually consist of a metal such as gallium, aluminum or indium and a non-
metal such as arsenic, phosphorous or nitrogen. The resulting compounds
include gallium arsenide, indium phosphide, gallium nitride, indium
antimonide and indium aluminum phosphide. The performance characteristics
of compound semiconductors are uniquely dependent on the composition of
these compounds. For example, the electrical and optical properties of
gallium arsenide are substantially changed by adding aluminum as a third
element. Many of the unique properties of compound semiconductor devices
are achieved by the layering of different compound semiconductor materials
in the same device. For example, infrared compound semiconductor lasers
and HB LEDs are fabricated by depositing ultrathin layers of gallium
arsenide between layers of gallium aluminum arsenide. This layered
structure creates an optimal configuration to permit the conversion of
electricity into light.
Accordingly, the composition and properties of each layer and the
control of the layering process, or epitaxy, are fundamental to the
performance of advanced electronic and optoelectronic compound
semiconductor devices. The variation of thickness and composition of layers
determines the intensity and color of the light emitted or detected and the
efficiency of power conversion. The ability to vary the intensity, color
and efficiency of light generation and detection uniquely enables compound
semiconductor devices to be used in a broad range of advanced information
systems.
Compound semiconductor device manufacturers have predominantly used
three methods to deposit compound materials: molecular beam epitaxy, vapor
phase epitaxy and liquid phase epitaxy. The Company believes that these
traditional methods are subject to a number of inherent chemical process or
volume production limitations. While these methods are successfully used
for a variety of applications, they are not easily scaled up to high volume
commercial production of complex materials, such as those used for
optoelectronic devices.
A fourth method, metal organic chemical vapor deposition overcomes
these limitations. Using MOCVD, a number of elements can be easily
combined into a broad range of compounds. Currently, MOCVD technology is
being used to manufacture a number of devices, including, among others high
efficiency solar cells, HB LEDs, heterojunction bipolar transistors
("HBTs"), vertical cavity surface emitting lasers ("VCSELs") and MR
sensors. The Company believes that compound semiconductor wafers
fabricated using MOCVD possess better uniformity, as well as better optical
and electronic properties, than wafers manufactured by more traditional
methods. The Company believes that MOCVD has gained broad acceptance as
the preferred methodology for the production of complex device structures
in commercial volumes.
Historically, developers of compound semiconductor devices have met
research, pilot production and capacity needs with in-house systems and
technologies. However, the requirements for the production of commercial
volumes of high-performance compound semiconductor devices have often
exceeded the capabilities of such in-house solutions. Simultaneously, the
growth of new applications for discrete compound semiconductor devices has
challenged manufacturers to develop processes for new applications while
simultaneously meeting demand for existing products. In response to these
growing demands for higher volumes of higher performance devices,
manufacturers are increasingly turning to outside vendors to meet their
needs for compound semiconductor wafers and devices.
THE EMCORE SOLUTION
<PAGE>
EMCORE provides its customers with materials science expertise,
process technology and MOCVD production systems that enable the manufacture
of commercial volumes of high-performance compound semiconductor wafers and
devices. EMCORE believes that its proprietary TurboDiscTM deposition
technology provides the most cost-effective production systems for the
commercial volume manufacture of high-performance compound semiconductor
wafers and devices. EMCORE is capitalizing on its technology base to
address the critical need of electronics manufacturers to cost-effectively
get to market faster with high volumes of new and improved high-performance
products. EMCORE offers its customers a vertically integrated product line
which includes device design, materials and process development, MOCVD
production systems, epitaxial wafers and package-ready devices. EMCORE
believes that it is the only company that offers such a broad range of
products and services to the compound semiconductor market. The Company
believes that its knowledge base and materials science expertise uniquely
position the Company to become a valuable source for a broad array of
solutions for the compound semiconductor industry.
[graphic depicting flowchart of registrant's expertise and
registrant's products, indicating the ultimate end markets for
those products]
STRATEGY
The Company has become a leading developer of MOCVD process technology
and production systems through twelve years of close collaboration with its
customers. The Company's objective is to capitalize on this position to
become a leading supplier of epitaxial wafers and package-ready devices.
The key elements of the Company's strategy include:
Provide Complete Compound Semiconductor Solutions. The Company's
vertically-integrated product offerings allow it to provide complete
compound semiconductor solutions to a broad range of electronics
manufacturers in order to meet their diverse technology requirements. The
Company plans to capitalize on the growing need of electronics
manufacturers to reach the market faster and more cost-efficiently with
high volumes of end products. The Company assists its customers with
device design, process development and optimal configuration of production
systems. Moreover, the Company can also serve its customers as a reliable
source for high volume production of wafers or package-ready devices.
Through its materials science expertise, process technology and commercial
production systems, the Company intends to become an integral part of its
customers' compound semiconductor product life cycle.
Form Strategic Relationships with Customers. By developing enabling
technologies, the Company seeks to form strategic alliances with its
customers in order to obtain long-term development and high volume
production contracts. For example, the Company currently has a strategic
relationship with General Motors under which it has developed and enhanced
the device structure and production process for, and is manufacturing, MR
sensor products for use in General Motors' automotive applications. In
addition, the Company has been integrally involved with a large
telecommunication concern in connection with the development of solar cell
technologies for satellites. Throughout its association with this
customer, the Company has successfully customized its production systems to
meet the customer's special high-performance device requirements. The
Company intends to actively seek similar strategic relationships with other
key customers in order to further expand its technological and production
base.
Expand Technology Leadership. The Company has developed and
optimized its compound semiconductor processes and has developed higher
<PAGE>
performance production systems through substantial investments in research
and development. The Company works closely with its customers to identify
specific performance criteria in its production systems, wafers and
package-ready devices. The Company intends to continue to expend
substantial resources in research and development in order to enhance the
performance of its production systems and to further expand its process and
materials science expertise, including the development of new low cost,
high volume wafers and package-ready devices for its customers. The
Company employs 15 persons holding Ph.Ds in materials science, 9 of whom
work in research and development.
PRODUCTS
Production Systems and Materials Processes. The Company is the
leading supplier of MOCVD compound semiconductor production systems, and,
in 1995, had a 38% share of this market, according to VLSI Research which
regularly publishes research on this market. The Company has shipped more
than 160 systems to date and believes that its TurboDiscTM systems offer
significant cost of ownership advantages over competing systems. The
Company believes that its MOCVD production systems, produce materials with
superior uniformity of thickness, electrical properties and material
composition. Each system is designed for the customer's particular
applications and can be customized for the customer's throughput, wafer
size and process chemistry requirements.
The Company's proprietary TurboDiscTM technology utilizes a unique
high speed rotating disk in a stainless steel growth chamber with
integrated vacuum-compatible loading chambers. To produce an epitaxial
wafer, a bare substrate, such as gallium arsenide, indium phosphide or
germanium, is placed on a wafer carrier in the TurboDiscTM growth chamber
and subjected to high temperatures. Based on a predetermined formula,
metal organic gases are released into the growth chamber. These gases
decompose on the hot, rapidly spinning wafer. Semiconductor materials then
become deposited on the substrate in a highly uniform manner. The
resulting epitaxial wafer thus carries one or more ultra-thin layers of
compound semiconductor material such as gallium arsenide, gallium nitride,
or indium aluminum phosphide. The TurboDiscTM technology not only ensures
uniformity of deposition across the wafer, but also offers flexibility for
diverse applications with improved material results and increased
production rates. The unique precision control of reactant gas flow in the
TurboDiscTM technology platform allows users to scale easily from research
to commercial volumes with substantially reduced time and effort. Wafers
from 2 inches to 14 inches in diameter can be prepared using the same
platform technology.
Upon removal from the growth chamber, the epitaxial wafer is then
transferred to a device processing facility for various steps such as
photolithography, etching, masking, metallization and dicing. Upon
completion of these steps, the package-ready devices are then sent to the
customer's facility for the attachment of leads and encapsulation in resin
prior to the ultimate inclusion in the customer's product. The production
of such compound semiconductor devices is substantially less complex than
that of silicon integrated circuits.
[schematic diagram of production system fabricated and sold by
the registrant]
Wafers are loaded on a multiple wafer holder into the growth
chamber, where they are subjected to high-temperature vacuum
conditions and spun at high speeds. Gases are then introduced
into the vacuum growth chamber, and semiconductor materials
become deposited onto the substrate in a highly uniform manner.
<PAGE>
Compound semiconductor manufacturers, much like their counterparts in
the silicon semiconductor industry, place great pressure on process
equipment suppliers to decrease the cost of ownership of production
systems. Cost of ownership is determined by yield, throughput, direct
costs and capital. Yield is primarily determined by material uniformity,
which is a function of the precision of the physical and chemical processes
by which atomic layers are deposited. Throughput, the volume of wafers
produced per unit of time, includes both the time required for a process
cycle and the handling time between process steps. Direct costs include
consumables used in manufacturing and processing and the clean room space
required for the equipment. Capital costs include the cost of acquisition
and installation of the process equipment. The Company believes that the
high throughput capabilities of its TurboDiscTM systems make possible the
lowest cost of ownership for the manufacture of compound semiconductor
materials as well as superior reproducibility of thickness, composition,
electrical profiles and layer accuracy required for electronic and
optoelectronic devices. The Company's production systems also achieve a
high degree of reliability with an average time available for production,
based on customer data, of approximately 95%.
<PAGE>
The Company offers the following family of systems:
Model List Price Application
Explorer $350,000-450,000 Research
Discovery $600,000-1,100,000 Development/Pilot
Production
Enterprise $1,300,000-2,500,000Volume Production
Wafer and Device Fabrication. Since its inception, the Company has
worked closely with its customers in designing and developing materials
processes to be used in production systems for its customers' end use
applications. When a customer orders a production system, the customer
provides the Company with performance criteria. The Company then
determines the chemistry and process to meet these requirements and
manufactures and configures the production system to produce the materials
needed by the customer. The Company has recently begun to leverage its
process and materials science knowledge base to manufacture wafers and
package-ready devices in its own facilities. The Company's expansion into
wafer and package-ready device production has been spurred almost entirely
by requests from customers whose epitaxial wafer needs exceed their
available production capabilities.
The Company fabricates package-ready devices on four-inch diameter
wafers at its facility in Somerset, New Jersey with a combined clean room
area totalling 3,500 square feet. The Company currently anticipates
utilizing a significant portion of the net proceeds of the Offering to
expand and equip this facility. Production capacity is currently 3,000
wafers per year. The Company is expanding this facility to approximately
7,500 square feet.
The Company is working with its customers to design, engineer and
manufacture commercial quantities of package-ready compound semiconductor
devices and materials such as MR sensors, HBTs, HEMTs, FETs, HB LEDs, solar
cells and other electronic and optoelectronic devices. An example of the
Company's close collaboration with its customers is the Company's ongoing
relationship with General Motors. In 1985, General Motors was the
Company's first customer for compound semiconductor MOCVD production
systems. Over the last twelve years, General Motors has frequently
consulted the Company for assistance in developing its materials process
solutions. In 1995, General Motors asked the Company to determine if it
could develop the capability to manufacture high-performance position
sensors for use in a variety of automotive applications. Following a close
working collaboration, General Motors asked the Company to assess and
develop a plan to manufacture commercial volumes of an indium antimonide
device that can operate at automotive temperatures. In 1996, General
Motors and the Company entered into an agreement under which General Motors
paid the Company approximately $1.6 million to develop and enhance certain
MR position sensors for commercial production. In the first quarter of
fiscal 1997, the Company received a purchase order from General Motors,
pursuant to which it began production of these package-ready position
sensors.
CUSTOMERS
The Company's customers include several of the largest semiconductor,
telecommunications and computer manufacturing companies in the world and
thirteen of the largest electronics manufacturers in Japan. A number of
the Company's customers are listed below:
<PAGE>
<TABLE>
<S> <C> <C>
General Motors Lucent Technologies, Inc. Siemens AG
Hewlett Packard Co. Motorola, Inc. Texas Instruments Incorporated
Honeywell Inc. Philips AG Thomson CSF
Hughes-Spectrolab Polaroid Corporation Westinghouse Electric Corp.
Hyundai Electronics Rockwell International Business Machines
Samsung Co. LG Semiconductor Corp. Corporation
L.M. Ericsson AB Sharp U.S.A., Inc.
</TABLE>
In fiscal 1996, the Company adopted a comprehensive Total Quality
Management Program with special emphasis on total customer satisfaction.
The Company seeks to encourage active customer involvement with the design
and operation of its production systems. To accomplish this, the Company
conducts user group meetings among its customers on three continents. At
annual meetings, the Company's customers provide valuable feedback on key
operations, process oriented services, problems and recommendations to
improve the Company's products. This direct customer feedback has enabled
the Company to constantly update and improve the design of its systems and
processes. Changes that affect the reliability and capabilities of the
Company's systems are embodied in new designs to enable current and future
customers to utilize systems which the Company believes are high quality
and cost-efficient. As of September 30, 1996, the Company employed 18
field service engineers who install the Company's systems and provide on-
site support for all of the customers' needs. In its continuing effort to
maintain and enhance its relationships with its customers, the Company is
seeking ISO and QS 9000 quality certification.
SALES AND MARKETING
The Company markets and sells its products through its direct sales
force in Europe and North America, and through representatives and
distributors in Asia. In 1996, the Company signed a seven year exclusive
distributorship agreement with Hakuto, its Asian distributor, whose
territory encompasses seven Asian countries. This agreement is presently
under renegotiation. Hakuto has marketed and serviced the Company's
products since 1988 and is a minority shareholder in the Company. As of
September 30, 1996, the Company employed 13 persons in sales and marketing.
The Company's sales and marketing staff, senior management and technical
staff work closely with existing and potential customers to provide
compound semiconductor solutions for its customers' problems. The sales
process begins by understanding the customer's requirements and then
attempting to match them with the most optimal solution. Typically, the
Company will first try to match the customer's requirements to an existing
design or a modification of a standard design. Such modifications often
involve changing platform or process design. When necessary, the Company
will work with the customer to develop the appropriate design process and
to configure and manufacture the production system to meet the customer's
needs. The Company will also frequently produce customized samples and aid
the customer in matching the customized sample to the customer's
requirement. The amount of time from the initial contact with the customer
to the customer's placement of an order is typically two to nine months or
longer. In addition, the sales cycle for wafers and package-ready devices
also includes a period of two to six months during which the Company
develops the formula of materials necessary to meet the customer's
specifications and qualifies the materials, which may also require the
delivery of samples. The Company believes that the high level of
marketing, management and engineering support involved in this process is
beneficial in developing competitive differentiation and long-term
relationships with its customers.
<PAGE>
International sales as a percentage of total sales in fiscal 1994, 1995
and 1996 were 58.6%, 36.0% and 42.5%, respectively. Sales to customers in
the U.S. in fiscal 1994, 1995 and 1996 were approximately, $3.7 million,
$11.6 million and $16.0 million, respectively, while the Company's sales in
Asia for the same time periods were $4.9 million, $4.0 million and $8.2
million, respectively, and sales in Europe were $0.3 million, $2.5 million
and $3.6 million, respectively. In fiscal 1996, sales to Hughes-Spectrolab
accounted for 23.6% of the Company's revenues. The Company receives all
payments for all products and services in U.S. dollars.
SERVICE AND SUPPORT
The Company maintains an international service and support network
responsible for on site maintenance and process monitoring on either a
contractual or time-and-materials basis. Customers may purchase annual
service contracts under which the Company is required to maintain an
inventory of replacement parts and to service the equipment upon the
request of the customer. The Company also sells replacement parts from
inventory for customer needs. The Company pursues a program of system
upgrades for customers to increase the performance of older systems. The
Company generally does not offer extended payment terms to its customers
and generally adheres to a warranty policy of one year. Consistent with
industry practice, the Company maintains an inventory of components for
servicing systems in the field and it believes that its inventory is
sufficient to satisfy foreseeable short-term customer requirements.
RESEARCH AND DEVELOPMENT
To maintain and improve its competitive position, the Company's research
and development efforts are focused on designing new proprietary products,
improving the performance of existing systems, materials and devices and
reducing costs in the product manufacturing process. In addition, the
Company has developed a research and development production system for thin
film ferroelectric oxide applications intended for use in large area memory
and embedded logic devices. The Company has sold two such systems. The
Company has developed this experimental production system for the
deposition of thin-film ferroelectric materials onto silicon.
Ferroelectric oxides are anticipated to be necessary for the production of
advanced memory chips for one-gigabit memory devices.
The Company has dedicated six EMCORE TurboDiscTM systems for both
research and production which are capable of processing virtually all
compound semiconductor materials. The research and development staff
utilizes state-of-the-art x-ray, optical and electrical characterization
equipment which provide instant data allowing for shortened development
cycles and rapid customer response. The Company's research and development
expenses in fiscal 1994, 1995 and 1996 were approximately $1.1 million,
$1.8 million and $5.4 million, respectively. The Company expects that it
will continue to expend substantial resources on research and development.
As of September 30, 1996, the Company employed 24 persons in research and
development, nine of whom hold Ph.Ds in materials science.
The Company also competes for research and development funds. In view
of the high cost of development, the Company solicits research contracts
that provide opportunities to enhance its core technology base or promote
the commercialization of targeted products. The Company presently has two
such contracts in process. The contracts fall under the Small Business
Innovative Research programs or similar government sponsored programs.
From inception until September 30, 1996, government and other external
research contracts have provided approximately $11 million to support the
Company's research and development efforts. The Company is also positioned
to market technology and process development expertise directly to
customers who require it for their own product development efforts.
<PAGE>
INTELLECTUAL PROPERTY
The Company has been a leader in the development of new technologies in
the compound semiconductor field. The Company's success and competitive
position both for production systems, wafers and package-ready devices
depend materially on its ability to maintain trade secrets, patents and
other intellectual property protections. Trade secrets are routinely
employed in the Company's manufacturing processes. A "trade secret" is
information that has value to the extent it is not generally known, not
readily ascertainable by others through legitimate means, and protected in
a way that maintains its secrecy. In order to protect its trade secrets,
the Company takes certain measures to ensure their secrecy, such as
executing non-disclosure agreements with its employees, customers and
suppliers. Sales of the Company's production systems are substantially
dependent upon the Company's ability to maintain its trade secrets relating
to production system technology and operation. Sales of the Company's
wafers and package-ready devices depend heavily on the Company's trade
secrets related to its MOCVD technology and processes to give the Company a
competitive advantage for winning new customer orders for compound
semiconductor devices.
To date, the Company has been issued six U.S. patents. Provided that
all requisite maintenance fees are paid, these U.S. patents will expire
between 2005 and 2013. None of these U.S. patents claim any material
aspect of the current or planned commercial versions of the Company's
systems or devices. The Company has been granted the Rockwell License
under the Rockwell Patent in connection with sales of its MOCVD production
systems and had recently begun discussions with Rockwell in order to obtain
further licenses under the Rockwell Patent in connection with the
manufacture and sale of certain wafers and devices. On November 15, 1996,
the Rockwell Patent was declared invalid by the U.S. Court of Federal
Claims. The Company believes that Rockwell will appeal this decision.
There can be no assurance that the decision of the U.S. Court of Federal
Claims relating to the Rockwell Patent will be upheld. In the event that
the foregoing decision is reversed, the Company may be liable to Rockwell
for royalty payments, as well as other amounts which the Company may
ultimately be deemed to owe Rockwell in connection with the sales of its
systems and wafers and devices. Moreover, the Company may need to obtain a
license from Rockwell under the Rockwell Patent in connection with the
manufacture and sale of certain wafers and devices. There can be no
assurance that the Rockwell License can be maintained or that licenses for
wafers and devices made with the Company's MOCVD production systems can be
obtained or maintained on commercially reasonable terms, if at all.
Moreover, the defense and prosecution of infringement claims can be
expensive and time consuming, regardless of outcome, and can result in the
diversion of substantial resources of the Company.
ENVIRONMENTAL REGULATIONS
The Company is subject to federal, state and local laws and regulations
concerning the use, storage, handling, generation, treatment, emission,
release, discharge and disposal of certain materials used in its research
and development and production operations, as well as laws and regulations
concerning environmental remediation and employee health and safety. The
Company has retained an environmental consultant to advise it in complying
with applicable environmental and health and safety laws and regulations,
and believes that it is currently, and in the past has been, in substantial
compliance with all such laws and regulations. The Company also believes
that the costs of complying with existing environmental and health and
safety laws and regulations are not likely to have a material adverse
effect on its business, financial position or results of operations. There
can be no assurance, however, that future changes in such laws and
regulations will not result in expenditures or liabilities, or in restric-
<PAGE>
tions on the Company's operation, that could have such an effect. The
production of wafers and package-ready devices involves the use of certain
hazardous raw materials, including, but not limited to, ammonia, phosphine
and arsenic. The Company's expansion to offer wafers and package-ready
devices will require the increased usage and maintenance of these materials
on the Company's premises. While the Company believes it currently has and
will continue to have in place sufficient control systems for the safe use
and maintenance of these raw materials, there can be no assurance that the
Company's control systems will be successful in preventing a release of
these materials or other adverse environmental conditions, which could
cause a substantial interruption in the Company's operations. Such an
interruption could have a material adverse effect on the Company's
business, financial condition and results of operation.
BACKLOG
As of September 30, 1996, the Company had an order backlog of
approximately $25.7 million consisting of $22.5 million of production
systems, $1.1 million of research contracts and $2.1 million of package-
ready devices, compared to backlog of $11.9 million as of September 30,
1995 consisting of $10.0 million of production systems and $1.9 million of
research contracts. This increase in backlog was a result of increased
market acceptance of the Company's production systems and multiple unit
orders for such systems, and the introduction of the Company's wafer and
package-ready device product lines. The Company includes in backlog only
customer purchase orders which have been accepted by the Company and for
which shipment dates have been assigned within the twelve months to follow
and research contracts that are in process or awarded. The Company
receives partial advance payments or irrevocable letters of credit on most
production system orders and has never experienced an order cancellation.
The Company recognizes systems and package-ready device revenue upon
shipment. For research contracts with the U.S. government and commercial
enterprises, with durations greater than six months, the Company recognizes
revenue to the extent of costs incurred plus a portion of estimated gross
profit as stipulated in such contracts, based on contract performance. The
Company is seeking to increase capacity to meet anticipated continuing
increased production needs; however, there can be no assurance that the
Company will increase its capacity to meet its scheduled needs.
MANUFACTURING
The Company's manufacturing operations are located at the Company's
headquarters in Somerset, New Jersey and include systems engineering and
production, wafer fabrication and design and production of package-ready
devices. Many of the Company's manufacturing operations are computer
monitored or controlled, enhancing reliability and yield. The Company
manufactures its own systems and outsources some components and sub-assem-
blies, but performs all final system integration, assembly and testing.
Since nearly all steps in the production process are performed by the
Company, any interruption in manufacturing resulting from earthquake, fire,
equipment failures or other causes would have a material adverse effect on
the Company. As of September 30, 1996, the Company employed 109 persons in
its manufacturing operations.
Outside contractors and suppliers are used to supply raw materials and
standard components and to assemble portions of end systems from Company
specifications. The Company depends on sole or a limited number of
suppliers of components and raw materials. The Company generally purchases
these single or limited source products through standard purchase orders.
The Company also seeks to maintain ongoing communications with its
suppliers to guard against interruptions in supply and has, to date,
generally been able to obtain sufficient supplies in a timely manner and
maintains inventories it believes are sufficient to meet its near term
<PAGE>
needs. The Company has recently implemented a vendor program through which
it inspects quality and reviews supplies and prices in order to standardize
purchasing efficiencies and design requirements to maintain as low a cost
of sales as possible. However, operating results could be materially
adversely affected by a stoppage or delay of supply, receipt of defective
parts or contaminated materials, and increase in the pricing of such parts
or the Company's inability to obtain reduced pricing from its suppliers in
response to competitive pressures.
In fiscal 1996, the Company received substantial levels of new orders,
which will require the Company to increase its manufacturing capacity to
meet with demand for its compound semiconductor production systems and its
wafers and package-ready devices. The Company currently anticipates
utilizing a significant portion of the net proceeds from the Offering for
this purpose.
COMPETITION
The markets in which the Company competes are highly competitive. The
Company competes with several companies for sales of MOCVD systems
including, Aixtron AG, Nippon-Sanso and Thomas Swann. The primary
competitors for the Company's wafer foundry include Epitaxial Products
Inc., Kopin Corporation and Q.E.D. The Company also faces competition from
manufacturers that implement in-house systems for their own use. The Com-
pany may experience competition from corporations that have been in
business longer than the Company and have broader product lines, more
experience with high volume manufacturing, broader name recognition,
substantially larger installed bases, alternative technologies which may be
better established than the Company's and significantly greater financial,
technical and marketing resources than the Company. The Company competes
with many research institutions and universities for research contract
funding. The Company also sells its products to current competitors and
companies with the capability of becoming competitors. As the markets for
the Company's products grow, new competitors are likely to emerge, and
present competitors may increase their market share.
The Company believes that the primary competitive factors in the markets
in which the Company's products compete are yield, throughput, capital and
direct costs, system performance, size of installed base, breadth of
product line and customer satisfaction, as well as customer commitment to
competing technologies. While the Company believes it is in a position to
deliver low-cost and reliable solutions to its customers, many of the
Company's competitors have significantly greater financial, technical,
manufacturing, marketing, sales and other resources than the Company. The
Company believes that in order to remain competitive, it must invest
significant financial resources in developing new product features and
enhancements and in maintaining customer satisfaction worldwide. In
marketing its products, the Company may face competition from suppliers
employing new technologies in order to extend the capabilities of
competitive products beyond their current limits or increase their
productivity. In addition, increased competitive pressure could lead to
intensified price-based competition, resulting in lower prices and margins,
which would materially adversely affect the Company's business, financial
condition and results of operations.
LEGAL PROCEEDINGS
The Company is aware of no pending or threatened litigation against it
which would cause a material adverse effect on its operating results.
EMPLOYEES
As of September 30, 1996 the Company employed 185 persons. None of the
<PAGE>
Company's employees is covered by a collective bargaining agreement. The
Company considers its relationships with employees to be good.
FACILITIES
The Company's executive office and manufacturing facility are located in
Somerset, New Jersey, where the Company leases a 75,000 square foot
facility. This facility lease expires on February 29, 2000. The Company
has two five-year renewal options.
<PAGE>
MANAGEMENT
The executive officers and directors of the Company and their ages as of
the date of this Prospectus are as follows:
<TABLE>
NAME AGE POSITION(S)
<S> <C> <C>
Reuben F. Richards, Jr. . . . 41 President, Chief Executive Officer and Director
Thomas G. Werthan . . . . . . 40 Vice President - Finance and Administration,
Chief Financial Officer, Secretary, and Director
Richard A. Stall . . . . . . 40 Vice President - Technology and Director
William T. Kroll . . . . . . 52 Executive Vice President - Business Development
Paul T. Fabiano . . . . . . . 32 Vice President - Engineering
Louis A. Koszi . . . . . . . 52 Vice President - Device Manufacturing
Laurence P. Wagner . . . . . 36 Vice President - Electronic Materials
David H. Hess . . . . . . . . 35 Controller
Thomas J. Russell(1)(2) . . . 65 Chairman of the Board
Howard R. Curd(1)(2) . . . . 57 Director
Howard F. Curd(1)(2) . . . . 31 Director
</TABLE>
_____________________
(1) Member of Audit Committee
(2) Member of Compensation Committee
All directors of the Company hold office until the next annual meeting
of shareholders or until their successors are duly elected and qualified.
All officers serve at the discretion of the Board of Directors.
Reuben F. Richards, Jr. - Mr. Richards joined the Company in October 1995
as its President and Chief Operating Officer and became Chief Executive
Officer in December 1996. Mr. Richards has been a director of the Company
since May 1995. Prior to joining the Company, Mr. Richards was a Senior
Managing Director of Jesup & Lamont (a registered broker-dealer), and
President of its merchant banking affiliate, JLMP, the Company's largest
shareholder. Prior to joining Jesup & Lamont, Mr. Richards was a Director
at Prudential-Bache Capital Funding in its Investment Banking Division,
having joined that firm in 1986. Mr. Richards also serves as a director of
S.A. Telecommunications, Inc., a full service long distance
telecommunications company, located in Richardson, Texas.
Thomas G. Werthan - Mr. Werthan joined the Company in 1992 as its Chief
Financial Officer, Vice President - Finance and Administration and a
director. Mr. Werthan is a Certified Public Accountant and has over
fourteen years experience in assisting high technology, venture capital
financed growth companies. Prior to joining the Company in 1992, he was
associated with The Russell Group, a venture capital partnership, as Chief
Financial Officer for several portfolio companies. The Russell Group is
affiliated with Thomas J. Russell, a member of and Chairman of JLMP and
Chairman of the Board of Directors of the Company. From 1985 to 1989, Mr.
Werthan served as Chief Operating Officer and Chief Financial Officer for
Audio Visual Labs, Inc., a manufacturer of multi-media and computer
graphics equipment.
Richard A. Stall, Ph.D. - Dr. Stall became a director of the Company in
December 1996. Dr. Stall helped found the Company in 1984 and has been
Vice President - Technology at the Company since October, 1994, except for
a sabbatical year in 1993 during which Dr. Stall acted as a consultant to
the Company and his position was left unfilled. Prior to 1984, Dr. Stall
was a member of the technical staff of AT&T Bell Laboratories and was
responsible for the development of MBE and MOCVD technologies. He has co-
authored more than 100 papers and holds four patents on MBE and MOCVD
<PAGE>
technology and the characterization of compound semiconductor materials.
William J. Kroll - Mr. Kroll joined the Company in 1994 as Vice President -
Business Development and in 1996 became Executive Vice President - Business
Development. Prior to 1994, Mr. Kroll served for seven years as Senior
Vice President of Sales and Marketing for Matheson Gas Products, Inc., a
manufacturer and distributor of specialty gases and gas control and
handling equipment. In that position, Mr. Kroll was responsible for $100
million in sales and 700 employees worldwide. Prior to working at Matheson
Gas Products, Mr. Kroll was Vice President of Marketing for Machine
Technology, Inc., a manufacturer of semiconductor equipment for photoresist
or applications, plasma strip, and related equipment.
Paul T. Fabiano - Mr. Fabiano joined the Company in 1985 as a process
engineer and has served as Vice President - Engineering since March 1996.
Mr. Fabiano has experience in all critical phases of the Company's
operations including sales, service, manufacturing and engineering. During
his tenure at the Company, Mr. Fabiano has held various managerial posi-
tions including Vice President, Manufacturing and Director of Field
Engineering.
Louis A. Koszi - Mr. Koszi joined the Company in 1995 as Vice President for
the Company's Device Manufacturing. Prior to 1995, Mr. Koszi was a member
of AT&T Bell Laboratories for 25 years. Mr. Koszi has experience in all
phases of semiconductor device design and manufacturing processes and
associated quality programs. Mr. Koszi holds 17 U.S. patents, five foreign
patents, and is a co-author of 35 publications. He was named a
Distinguished Member of Technical Staff in 1989. In 1992, he was presented
with the Excellence in Engineering from the Optical Society of America.
Laurence P. Wagner - Mr. Wagner joined the Company in March 1996 as Vice
President - Wafer Manufacturing, and has more than twelve years experience
in operations, engineering and research in the electronic and semiconductor
materials industries. Before joining EMCORE, he spent seven years at Rohm
& Haas, a subsidiary of Shipley Company, L.L.C., where he served
successively as Corporate Projects Manager, Product Engineer, Engineering
Manager, Manufacturing Manager, and, from 1994 to 1996, Operating Unit
Manager.
David A. Hess - Mr. Hess joined the Company in 1989 as General Accounting
Manager. He was named Controller in 1990. He is responsible for
establishing the manner in which the Company presents its financial and
operational data. He has more than ten years experience in monitoring and
controlling all phases of product and process cost and general accounting
systems. Prior to his employment at EMCORE, he held several positions as
cost accounting manager, divisional accountant, and inventory control
supervisor in manufacturing firms such as Emerson Quiet Kool (air condi-
tioner manufacturers), Huls, North America (paint/solvent processors), and
Brintec Corporation (screw machine manufacturers).
Thomas J. Russell, Ph.D. - Dr. Russell has been a director of the Company
since May 1995 and was elected Chairman of the Board on December 6, 1996.
Dr. Russell founded Bio/Dynamics, Inc. in 1961 and managed the company
until its acquisition by IMS International in 1973, following which he
served as President of that company's Life Sciences Division. From 1984,
he served as Director, then as Chairman of IMS International until its
acquisition by Dun & Bradstreet in 1988. From 1988 to 1992, he served as
Chairman of Applied Biosciences, Inc. Dr. Russell also currently serves as
a director of Cordiant plc, Adidas AG, and Uniroyal Technology Corporation.
Dr. Russell is a member of and Chairman of JLMP, the Company's majority
shareholder.
Howard R. Curd - Mr. Curd has been a director of the Company since May
<PAGE>
1995. Mr. Curd is Chairman and Chief Executive Officer of Uniroyal
Technology Corporation ("UTC"). He is the founder of UTC's predecessor
business, Polycast Technology Corporation. He also sits on the advisory
board for Investment Seminars, Inc., the nation's leading provider of
independent investment advice. Mr. Curd is a member of and Vice President
of JLMP, LLC, the Company's majority shareholder. Mr. Curd is the father
of Howard F. Curd, a director of the Company.
Howard F. Curd - Mr. Curd has been a director of the Company since May
1995. Mr. Curd is president and chief executive officer and a director of
Jesup & Lamont Group Holdings, Inc., a diversified financial holding
company. Mr. Curd, together with Mr. Richards, is a director of S.A.
Telecommunications, Inc., a full service long distance telecommunication
company, located in Richardson, Texas. Mr. Curd is the son of Howard R.
Curd, a director of the Company.
Prior to completion of the offering, the Company intends to appoint at
least two outside directors to the Company's Board of Directors. It is the
intention of the Company that such outside directors will be appointed to
and replace the existing members of each of the Company's Audit Committee
and Compensation Committee.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee, which consists of Dr. Thomas J.
Russell, Howard F. Curd and Howard R. Curd, reviews and recommends to the
Board of Directors the compensation and benefits of all officers of the
Company, reviews general policy matters relating to compensation and bene-
fits of officers and employees of the Company and administers the issuance
of stock options and stock appreciation rights and awards of restricted
stock to the Company's officers and key salaried employees. No member of
the Compensation Committee is now or ever was an officer or an employee of
the Company. No executive officer of the Company serves as a member of the
compensation committee of the Board of Directors of any entity one or more
of whose executive officers serves as a member of the Company's Board of
Directors or Compensation Committee. See "Certain Transactions."
AUDIT COMMITTEE
The Company's Audit Committee currently consists of Thomas J. Russell,
Howard F. Curd and Howard R. Curd. The Audit Committee recommends the
engagement of the Company's independent accountants, approves the auditing
services performed, and reviews and evaluates the Company's accounting
policies and systems of internal controls.
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth certain information
concerning the annual and long-term compensation for services in all
capacities to the Company in fiscal 1996 of those persons who during such
fiscal year (i) served as the Company's chief executive officer or (ii)
were the five most highly-compensated officers (other than the chief
executive officer) (collectively, the "Named Executive Officers"):
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
ANNUAL COMPENSATION
OTHER
ADDITIONAL ANNUAL
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY COMPENSATION (1) COMPENSATION(2)
<S> <C> <C> <C> <C>
Reuben F. Richards, Jr. (3) 1996 $193,750(4) $ -- $ --
President and Chief
Operating Officer
Thomas G. Werthan 1996 120,487 33,000 6,000
Vice President-Finance and
Administration and
Chief Financial Officer
Richard A. Stall 1996 126,871 44,000 --
Vice President-Technology
William T. Kroll 1996 104,610 105,000 6,000
Executive Vice President-
Business Development
Paul T. Fabiano 1996 98,303 15,000 0
Vice President-
Engineering
Norman E. Schumaker 1996 180,330 103,050 6,750
Chairman and Chief
Executive Officer(3)
LONG TERM
COMPENSATION
SECURITIES ALL OTHER
UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION OPTIONS
<S> <C> <C>
Reuben F. Richards, Jr. (3) -- --
President and Chief
Operating Officer
Thomas G. Werthan -- --
Vice President-Finance and
Administration and
Chief Financial Officer
Richard A. Stall -- --
Vice President-Technology
William T. Kroll -- --
Executive Vice President-
Business Development
Paul T. Fabiano -- --
Vice President-
Engineering
Norman E. Schumaker -- --
Chairman and Chief
Executive Officer(3)
</TABLE>
__________________
(1) Consists of bonuses, commissions and vacation pay.
(2) Consists of insurance premiums and automobile allowances paid by the
Company.
(3) Dr. Schumaker served as Chairman and Chief Executive Officer until his
<PAGE>
retirement in December 1996, at which time Mr. Richards became Chief
Executive Officer.
(4) Of this amount, $145,000 was received from Jesup & Lamont. Mr.
Richards' salary is now paid by the Company and his base annual
compensation is $195,000. See "Certain Transactions."
<PAGE>
No options were issued to any of the Named Executive Officers in
fiscal 1996.
The following table sets forth the number of shares covered by
exercisable and unexercisable options held by the Named Executive Officers
on September 30, 1996 and the aggregate gains that would have been realized
had these options been exercised on September 30, 1996, even though these
options had not been exercised by the Named Executive Officers.
<TABLE>
AGGREGATED OPTION EXERCISES IN FISCAL 1996
AND OPTION VALUES AT FISCAL YEAR END
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR END AT FISCAL YEAR END(1)
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C>
Reuben F. Richards, Jr. 100,000 -- $211,000 --
Thomas G. Werthan 60,000 40,000 126,600 $84,400
Richard A. Stall 69,000 46,000 145,590 97,060
William T. Kroll 20,000 30,000 42,200 63,300
Paul T. Fabiano 30,000 20,000 63,300 42,200
Norman E. Schumaker 90,000 60,000 189,900 126,600
</TABLE>
__________________________
(1) Options are in-the-money if the market value of the shares covered
thereby is greater than the option exercise price. This calculation
is based on the fair market value at September 30, 1996 of $3.00 per
share, less the exercise price. If calculated based on the initial
public offering price of _____ per share, the value of unexercised in-
the-money options at fiscal year end would be _____% greater.
STOCK OPTION PLAN
In 1995, the Company's Board of Directors and its shareholders approved
the Company's 1995 Incentive and Non-Statutory Stock Option Plan (the
"Plan"). Under the terms of the Plan, as amended by the shareholders of
the Company in March 1996, options to acquire 2,200,000 shares of Common
Stock may be granted. Options with respect to 1,154,000 shares were
outstanding as of September 30, 1996, at exercise prices of $0.89 to $3.00
per share. Options granted generally become exercisable over five years.
As of September 30, 1996, options with respect to 553,400 shares were
exercisable.
The purpose of the Plan is to give officers and executive personnel,
and consultants or non-employee directors, of the Company and its
subsidiaries an opportunity to acquire Common Stock, to provide an
incentive for key employees and other participants to continue to promote
the best interests of the Company and enhance its long-term performance,
and to provide an incentive for key employees and other participants to
join or remain with the Company and its subsidiaries.
Incentive stock options ("ISOs") intended to qualify for special tax
treatment in accordance with Section 422 of the Internal Revenue Code of
1986, as amended, ("Code") and non-statutory stock options ("NSOs"), which
do not qualify for such special tax treatment, may be granted under the
Plan. In addition, stock appreciation rights ("SARs") may be granted under
the Plan in conjunction with ISOs.
The Plan is administered by the Board of directors which, to the extent
<PAGE>
it shall determine, may delegate its administrative powers (other than its
power to amend or terminate the Plan) to a committee (the "Committee")
appointed by the Board of Directors and composed of not less than three
members of the Board of Directors. The Board of Directors is authorized to
determine (i) the persons to whom awards under the Plan shall be granted,
(ii) the time or times at which such awards shall be granted, (iii) the
form and amount of the awards, and (iv) the limitations, restrictions and
conditions applicable to any such award. In general, the Board of
Directors also may interpret the Plan, prescribe, amend, and rescind rules
and regulations relating to it, and make all other determinations it deems
necessary or advisable for the administration of the Plan.
The Board of Directors may from time to time alter, amend or suspend
the Plan or any award granted thereunder, or may at any time terminate the
Plan, except that it may not, without the approval of the Company's
shareholders (except with respect to certain changes in corporate
structure), (i) materially increase the total number of shares of Common
Stock available for grant under the Plan, (ii) materially modify the class
of eligible employees or participants under the Plan, (iii) materially
increase benefits to any key employee who is subject to the restrictions of
Section 16 of the Securities Exchange Act of 1934, as amended, (the
"Exchange Act") or (iv) effect a change relating to ISOs granted thereunder
which is inconsistent with Section 422 of the Code and the regulations
issued thereunder. No action taken by the Board of Directors in connection
with the Plan, either with or without shareholder approval, may materially
and adversely affect any outstanding award without the consent of the
holder thereof. No award under the Plan may be granted after September 19,
2005.
A stock option granted under the Plan will be exercisable and subject
to such terms and conditions as the Board of Directors or the Committee
determines and which may be set forth in a written option agreement. In
general, the option price for ISOs shall not be less than 100% of the fair
market value of the Common Stock on the date of the grant, and such ISO
shall not be exercisable within one year of the date of grant. The option
price for NSOs shall not be less than 10% of the fair market value of the
Common Stock on the date of the grant. For purposes of the Plan, "fair
market value" means, in general, the average of the mean between the bid
and asked price for the Common Stock at the close of trading for the ten
consecutive trading days immediately preceding a given date.
ISOs granted under the Plan may include a SAR, either at the time of
the granting of the ISO or while the ISO is outstanding, which shall be
exercisable only (i) to the extent that the underlying ISO is exercisable
and (ii) for such period of time as determined by the Board of Directors.
A SAR is exercisable only when the fair market value of a share of Common
Stock exceeds the option price specified for the ISO under which the SAR
was granted. A SAR shall entitle the participant to surrender to the
Company unexercised the ISO, or portion thereof, to which such SAR is
related, and to receive from the Company in exchange therefor that number
of shares of Common Stock having an aggregate fair market value equal to
the excess of the fair market value on the date of exercise of one share of
Common Stock over the option price per share specified in such ISO,
multiplied by the number of shares of Common Stock subject to the ISO, or
portion thereof, which is so surrendered, or, at the election of the Board,
cash in such amount.
ISOs, NSOs, and SARs shall not be exercisable more than ten years after
the date of grant. Upon the termination of employment of an employee, or
if the contractual relationship between a non-employee participant and the
Company terminates, options and SARs granted to such participant shall
expire no later than 30 days after such termination although the Board of
Directors, in its sole discretion, may permit the exercise of such option
<PAGE>
or SAR to occur up to three months following such termination; provided,
that if such termination occurs as a result of the participant's death or
disability, outstanding options and SARs shall expire no later than one
year thereafter; and provided further, that outstanding options and SARs
held by a former employee participant shall earlier expire on the date that
such participant violates the terms of any covenant not to compete, if any,
in effect between the Company and such participant.
Upon notice of an intent to exercise an option, the option price shall
be paid in full in cash or by certified check or, in the Board of
Directors' discretion, in shares of Common Stock already owned by the
participant.
In the sole discretion of the Board of Directors, adjustments will be
made in the number of shares of Common Stock available under the Plan, and
the number of shares of Common Stock and the option price of shares subject
to outstanding grants of options and SARs to reflect increases or decreases
in the number of shares of issued Common Stock resulting from a
reorganization, recapitalization, stock split-up, stock distribution or
combination of shares, or the payment of a stock dividend or other increase
or decrease in the number of such shares outstanding effected without
receipt of consideration by the Company.
COMPENSATION OF DIRECTORS
All non-employee directors will receive a fee in the amount of $3,000
per Board meeting attended and $500 for each committee meeting attended
($600 for the Chairman of the committee), including in each case reimburse-
ment of reasonable out-of-pocket expenses incurred in connection with such
Board or committee. Payment of all fees will be made in Common Stock of
the Company at the average of the last reported bid and ask prices as of
the close of trading that day on the Nasdaq National Market. No director
who is an employee of the Company will receive compensation for services
rendered as a director.
LIMITATION OF OFFICERS' AND DIRECTORS'
LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation and By-Laws include
provisions (i) to reduce the personal liability of the Company's directors
for monetary damage resulting from breaches of their fiduciary duty and
(ii) to permit the Company to indemnify its directors and officers to the
fullest extent permitted by New Jersey law. Prior to the consummation of
this Offering, the Company intends to enter into indemnification agreements
with each of its directors and executive officers and to obtain a policy of
directors' and officers' liability insurance that insures such persons
against the costs of defense, settlement or payment of a judgment under
certain circumstances. There is no pending litigation or proceeding
involving any director, officer, employee or agent of the Company as to
which indemnification is being sought. The Company is not aware of any
pending or threatened litigation that might result in claims for
indemnification by any director or officer.
CERTAIN TRANSACTIONS
In May 1995, approximately 51% of the Company's outstanding shares of
Common Stock were purchased by JLMP, an affiliate of Jesup & Lamont Capital
Markets, Inc. ("Jesup & Lamont"), a registered broker-dealer. Since then,
four of the Company's six directors have been members of JLMP. In May
1995, the Company entered into a consulting agreement with Jesup & Lamont
(herein, the "Agreement") pursuant to which Jesup & Lamont agreed to
provide financial advisory services for the Company for one year. The
<PAGE>
Agreement provided for monthly retainers to be paid to Jesup & Lamont of
$12,500 per month. In October 1995, Reuben F. Richards, Jr. joined the
Company's management team as President and Chief Operating Officer. On
that date, the retainer to Jesup & Lamont was increased to $25,000 per
month to cover Mr. Richard's salary. At that time, Mr. Richards received
no compensation directly from the Company. Jesup & Lamont covered all
employee benefits and taxes for Mr. Richards until October 1, 1996 when Mr.
Richards became a full-time employee of the Company, and the monthly
retainer paid by the Company to Jesup & Lamont was decreased to $10,000.
The Agreement will terminate upon completion of the Offering.
In May 1996, the Company issued $9,500,000 Subordinated Notes (the
"Subordinated Notes") and warrants to purchase 7,916,667 shares of Common
Stock at $1.20 per share (the "Warrants"). The Warrants became exercisable
on November 1, 1996. JLMP holds 78.5% of the Subordinated Notes and
Warrants. In addition, Thomas G. Werthan, Vice President - Finance and
Administration, Chief Financial Officer, Secretary and a director,
currently holds $96,233 of the Subordinated Notes; Dr. Richard Stall, Vice
President - Technology and a director currently holds $122,450 of the
Subordinated Notes; William Kroll, Executive Vice President - Business
Development, currently holds $65,828 of the Subordinated Notes; Paul
Fabiano, Vice President - Engineering, currently holds $60,407 of the
Subordinated Notes; and David Hess, Controller, currently holds $4,753 of
the Subordinated Notes. Each of the persons named above also holds
Warrants received in conjunction with the Subordinated Notes.
In connection with the offering of the Subordinated Notes and Warrants,
on May 1, 1996, the Company executed a registration rights agreement (the
"Registration Rights Agreement") with the holders of the warrants (the
"Warrant Holders"). Upon written notice given by a majority in interest of
the Warrant Holders, the Company is obligated to use its best efforts to
register all or part of each Warrant Holders' registrable securities, and
to keep such registration open for period of not less than nine months.
Pursuant to the Registration Rights Agreement, the Company must give notice
to, and include if requested within thirty days of such notice, the Warrant
Holders in any registration statement filed by the Company under the
Securities Act subject to Underwriters' cut-back. See "Description of
Capital Stock - Registration Rights."
On September 1, 1996, the Company issued to JLMP $2,500,000 additional
subordinated notes (the "Additional Notes") with terms identical to those
of the Subordinated Notes, and warrants to purchase 833,333 shares of
Common Stock at $3.00 per share (the "Additional Warrants"). The
Additional Warrants become exercisable on July 1, 1997. In December 1996,
the Company issued to JLMP warrants to purchase 3,333,333 shares on the
same terms as the Additional Warrants in consideration of its acting to
guarantee and provide security for a $10 million demand note facility from
First Union National Bank. The Company expects to use a portion of the
proceeds of the Offering to pay down this facility. In connection with the
issuance of the warrants in September and December of 1996, the Company has
entered into a registration rights agreement with JLMP similar to the
Registration Rights Agreement.
Upon completion of the Offering, four of the Company's eight directors
will continue to be members of JLMP. In the event that the Underwriters'
over-allotment option is not exercised, JLMP will retain an ownership
interest in the Company of approximately ___%, _________% fully diluted.
From time to time, the Company has lent money to certain of its
executive officers and directors. Between October and December, 1995,
pursuant to the due authorization of the Company's Board of Directors the
Company lent $85,000 to Thomas G. Werthan, Vice President - Finance and
Administration, Chief Financial Officer and a director of the Company. The
<PAGE>
promissory note executed by Mr. Werthan provides for forgiveness of the
loan via bonuses payable to Mr. Werthan over a period of 25 years.
On December 4, 1996, Norman E. Schumaker, a founder of the Company and
a beneficial holder of more than 5% of the Company's Common Stock, retired
as Chairman and Chief Executive Officer. The Company has entered into a
Consulting Agreement dated as of December 6, 1996, pursuant to which the
Company agreed to retain Dr. Schumaker as a consultant for $250,000 per
year. The Company has also agreed to pay Dr. Schumaker $103,055 in full
satisfaction of accrued bonuses and vacation time. Dr. Schumaker has
agreed to provide consulting services for eight, eight-hour work days
per month (approximately two days a week less vacation time) for a term
of two years commencing January 1, 1997 and ending December 31, 1998.
The Agreement will automatically renew for one successive two-year term
unless either party gives the other notice of his or its intention not
to renew the Agreement. The Company has also agreed to forgive $115,300
of indebtedness of Dr. Schumaker to the Company and to provide him with
a monthly automobile allowance of $750 during the Agreement. The Company
has agreed to provide Dr. Schumaker with participation, during the period
ending on December 31, 2001, in the Company's plan of medical benefits and
to assign to Dr. Schumaker a disability insurance policy and two life
insurance policies in the aggregate face amount of $1,075,000. To the
extent that these policies may not be so assigned, the Company has agreed
to establish similar policies for Dr. Schumaker. The Company has also
agreed to extend the exercise of Dr. Schumaker's vested stock options
to March 4, 1997. Dr. Schumaker has agreed not to become involved,
directly or indirectly, in any business activity which the Company's
Board of Directors determines to be competitive with the Company. Dr.
Schumaker has also agreed, among others, to refrain from engaging in any
business competing with the Company in the U.S. for an additional period
of two years.
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of December 20, 1996 and as
adjusted to reflect the sale of ___________ shares of the Company's Common
Stock in the Offering, certain information with respect to the beneficial
ownership of the Company's Common Stock by: (i) each person who is known by
the Company to be the beneficial owner of five percent or more of the
Company's Common Stock, (ii) each of the Company's directors, (iii) each
Named Executive Officer, and (iv) all officers and directors of the Company
as a group.
<TABLE>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED
NUMBER OF SHARES PRIOR TO AFTER
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1)(2) OFFERING OFFERING
<S> <C> <C> <C>
Reuben F. Richards, Jr. (3) 11,828,382 71.7%
Richard A. Stall (4) 441,557 4.3
Thomas G. Werthan (5) 352,793 3.4
Paul T. Fabiano (6) 213,790 2.1
William T. Kroll (7) 220,282 2.2
Howard R. Curd (8) 11,728,382 71.5
Howard F. Curd (8) 11,728,382 71.5
Robert Louis-Dreyfus (8) 11,728,382 71.5
Thomas J. Russell (8) 11,728,382 71.5
JLMP (9) 11,728,382 71.5
All directors and executive 13,074,265 77.0
officers
as a group (12 persons)(10)
Norman E. Schumaker(11) 341,351 13.1
</TABLE>
___________________
(1) Unless otherwise indicated in these footnotes, the persons named in
the table above have sole voting and investment power with respect to
all shares beneficially owned.
(2) Based on 10,181,168 shares outstanding prior to the Offering and
______ shares to be outstanding after the Offering, except that
shares underlying warrants and options exercisable within 60 days of
December 20, 1996, are deemed to be outstanding for purposes of
calculating shares beneficially owned and percentages owned by the
holder of such warrants and options.
(3) Consists of options to purchase 100,000 shares, and shares and
warrants held by JLMP to purchase 6,215,087 shares.
(4) Includes options to purchase 69,000 shares and warrants to purchase
102,042 shares.
(5) Includes options to purchase 60,000 shares and warrants to purchase
80,194 shares.
(6) Includes options to purchase 30,000 shares and warrants to purchase
50,339 shares.
(7) Includes options to purchase 20,000 shares and warrants to purchase
54,857 shares.
(8) Consists of 5,513,295 shares and warrants to purchase 6,215,087
shares of Common Stock held by JLMP. See Note 9.
(9) Includes warrants to purchase 6,215,087 shares of Common Stock. JLMP
is a limited liability company whose members are Dr. Thomas J.
Russell, Howard R. Curd, Howard F. Curd, Reuben F. Richards, Jr. and
<PAGE>
Robert Louis-Dreyfus. The members share voting and investment power.
JLMP's address and its members' addresses are c/o JLMP, 650 Fifth
Avenue, New York, New York 10019.
(10) Includes options to purchase 282,000 shares and warrants to purchase
6,506,480 shares. See Notes 3 through 8 above.
(11) Includes options to purchase 90,000 shares and warrants to purchase
472,027 shares. Pursuant to Dr. Schumaker's consulting agreement
with the Company dated December 6, 1996, the warrants to purchase
472,027 shares of Common Stock have been placed in escrow until
January 6, 1998. See "Certain Transactions." Dr. Schumaker's
business address is 394 Elizabeth Avenue, Somerset, New Jersey 08873.
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 80,000,000
shares of Common Stock, no par value, of which 10,181,168 shares are
outstanding prior to completion of this Offering, which shares are held by
a total of 86 shareholders and 20,000,000 shares of Preferred Stock, none
of which are outstanding. In addition, there are outstanding warrants to
purchase 7,924,667 shares of Common Stock at $1.20 per share, warrants to
purchase 30,949 shares of Common Stock at $5.00 a share, and warrants to
purchase 4,166,666 shares of Common Stock at $3.00 per share. Moreover,
options to purchase 1,154,000 shares have been granted under the Plan
ranging from $0.89 per share to $3.00 a share.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on matters
to be voted upon by the shareholders of the Company. Subject to the
preferences that may be applicable to any outstanding shares of Preferred
Stock, the Holders of Common Stock are entitled to receive ratably such
dividends, if any, as may be declared by the Board of Directors out of
funds legally available therefor. See "Dividends Policy." In the event of
liquidation, dissolution or winding up of the Company, the holders of
Common Stock are entitled to share ratably in all assets remaining after
payment of liabilities, subject to the prior liquidation rights of any
outstanding shares of Preferred Stock. The Common Stock has no preemptive,
redemption, conversion or other subscription rights. The outstanding
shares of Common Stock are, and the shares offered by the Company in the
Offering will be, when issued and paid for, fully paid and nonassessable.
The rights, preferences and privileges of holders of Common Stock are
subject to, and may be adversely affected by, the rights of the holders of
shares of any series of Preferred Stock currently or outstanding or which
the Company may designate and issue in the future.
The Company has applied for listing of the Common Stock on the Nasdaq
National Market under the symbol "EMKR."
PREFERRED STOCK
The Company is authorized to issue up to 20,000,000 shares of
Preferred Stock that may be issued from time to time in one or more classes
series upon authorization of the Board of Directors. The Board of
Directors, without further approval of the shareholders, is authorized to
designate in any such class or series resolution, such par value and such
priorities, power, preferences and relative, participating, optional or
other special rights and qualifications, limitations and restrictions as it
shall determine.
The ability of the Company to issue Preferred Stock in this manner,
while providing flexibility in connection with possible acquisitions and
other corporate purposes, could adversely effect the voting power of the
voters of the Common Stock and could have the effect of making it more
difficult for a person to acquire, or of discouraging a person from seeking
to acquire, control of the Company. The Company has no present plans to
issue any of the Preferred Stock.
WARRANTS
The Company has outstanding the following warrants: warrants to
purchase a total of 30,949 shares of Common Stock at a purchase price of
$5.00 per share, which warrants expire in July 1997; warrants to purchase a
total of 7,924,667 shares of Common Stock at a purchase price of $1.20 per
share which expire in May 2001 and warrants to purchase 4,166,666 shares of
Common Stock at $3.00 per share, which warrants expire in September 2001.
<PAGE>
The last two classes of warrants may be repurchased by the Company at $0.25
per share after May 1997 and September 1997, respectively.
NEW JERSEY LAW AND OTHER LIMITATIONS UPON
TRANSACTIONS WITH "INTERESTED SHAREHOLDERS"
The New Jersey Business Corporation Act provides that in determining
whether a proposal or offer to acquire a corporation is in the best
interest of the corporation, the Board of Directors may, in addition to
considering the effects of any action on shareholders, consider any of the
following: (a) the effects of the proposed action on the corporation's
employees, suppliers, creditors and customers, (b) the effects on the
community in which the corporation operates and (c) the long-term as well
as short-term interests of the corporation and its shareholders, including
the possibility that these interests may best be served by the continued
independence of the corporation. The statute further provides that if,
based on these factors, the Board of Directors determines that any such
offer is not in the best interest of the corporation, it may reject the
offer. These provisions may make it more difficult for a shareholder to
challenge the Board of Directors' rejection of, and may facilitate the
Board of Directors' rejection of, an offer to acquire the Company.
The Company is also subject to the Protection Act, which prohibits
certain New Jersey corporations such as the Company from engaging in
business combinations (including mergers, consolidations, significant asset
dispositions and certain stock issuances) with any Interested Shareholder
(defined to include, among others, any person that after the Offering
becomes a beneficial owner of 10% or more off the affected corporation's
voting power) for five years after such person becomes an Interested
Shareholder, unless the business combination is approved by the Board of
Directors prior to the date the shareholder became an Interested
Shareholder. In addition, the Protection Act prohibits any business
combination at any time with an Interested Shareholder other than a trans-
action that (i) is approved by the Board of Directors prior to the date the
Interested Shareholder became an Interested Shareholder, or (ii) is
approved by the affirmative vote of the holders of two-thirds of the voting
stock not beneficially owned by the Interested Shareholder, or (iii)
satisfies certain "fair price" and related criteria. The New Jersey Act
does not apply to certain business combinations, including those with
persons who acquired 10% or more of the voting power of the corporation
prior to the time the corporation was required to file periodic reports
pursuant to the Exchange Act, or prior to the time the corporation's
securities began to trade on a national securities exchange.
REGISTRATION RIGHTS
Following the closing of the Offering, persons who hold warrants to
purchase 12,091,333 shares of Common Stock (herein, the "Warrant Holders")
will be entitled to certain rights with respect to the registration of such
shares under the Securities Act. Pursuant to terms of registration rights
agreements between the Company and the Warrant Holders, the Warrant Holders
have the right on written notice given by a majority of the Warrant
Holders, to require the Company, on only one occasion, to file a
registration statement under the Securities Act in order to register all or
any part of their shares of Common Stock. The Company may in certain
circumstances defer such registrations, and the underwriters have the
right, subject to certain limitations, to limit the number of shares
included in such registrations. In the event that the Company proposes to
register any of its securities under the Securities Act, either for its own
account or the account of other security holders, the Warrant Holders are
also entitled to include their shares of Common Stock in such registration,
subject to certain marketing and other limitations. Generally, the Company
is required to bear the expense of all such registrations.
<PAGE>
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ___________.
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
_____ shares of Common Stock assuming no exercise of outstanding options or
warrants. Of these shares, _____ shares sold in the Offering (plus any
shares issued upon exercise of the Underwriters' over-allotment options)
will be freely tradeable without restriction under the Securities Act,
unless purchased by "affiliates" of the Company. As defined in Rule 144,
an "affiliate" of an issuer is a person that directly or indirectly through
one or more intermediaries, controls or is controlled by, or is under
common control with such issuer. The remaining 10,181,168 shares of Common
Stock outstanding will be "restricted securities" within the meaning of
Rule 144 under the Securities Act ("Restricted Shares"). Restricted Shares
may not be sold in the absence of registration under the Securities Act
unless an exemption from registration is available, including the
exemptions contained in Rule 144. Sales of the Restricted Shares in the
public market, or the availability of such shares for sale, could adversely
affect the market price of the Common Stock.
In general, under Rule 144 as currently in effect, a person (or
persons whose shares are aggregated), including an "affiliate," who has
paid for shares is entitled, beginning two years from the later of the date
of acquisition of the shares from the Company or from an affiliate of the
Company, to sell within any three-month period up to that number of shares
that does not exceed the greater of (i) one percent of the shares
outstanding, as shown by the most recent report or statement published by
the Company, or (ii) the average weekly reported volume of trading in the
shares during the four calendar weeks preceding the date on which notice of
sale is filed with the Commission. A person (or persons whose shares are
aggregated) who is not deemed an affiliate of the Company, who has not been
an affiliate within three months prior to the sale and who has paid for his
shares is entitled, beginning three years from the later of the date of the
acquisition from the Company or from an affiliate of the Company, to sell
such shares under Rule 144(k) without regard to the volume limitations
described above. Affiliates continue to be subject to such volume
limitations after the three-year holding period.
On May 1, 1996, the Company issued warrants to purchase 7,924,667
shares of Common Stock of which warrants to purchase ____ shares have been
reacquired. The exercise price of the warrants sold in May 1996 is $1.20
per share. The Company has entered into a Registration Rights Agreement in
connection with the issuance of such warrants. If such registration rights
are exercised, the shares covered thereunder can be sold in the open
market. See "Description of Capital Stock - Warrants." On September 1,
1996, the Company issued warrants to purchase 833,333 shares of Common
Stock to JLMP. The exercise price of the warrants sold in September, 1996
is $3.00 per share. On December 20, 1996 the Company issued warrants to
purchase 3,333,333 shares of Common Stock to JLMP. The exercise price of
the warrants issued in December is $3.00 per share. These warrants are
first exercisable on July 1, 1997. In connection with the issuance of the
warrants in August and September 1996, the Company has entered into a
registration rights agreement similar to the Registration Rights Agreement.
See "Description of Capital Stock - Warrants."
The Company, executive officers and directors of the Company and
certain shareholders of the Company have agreed that they will not sell any
shares of Common Stock (other than by operation of law or pursuant to bona
fide gifts or other transactions not involving a public distribution to a
person or other entity who agrees in writing not to so sell) for a period
of 180 days after the date of the final Prospectus (the "lock-up period")
without the written consent of Donaldson, Lufkin & Jenrette Securities
Corporation. Upon expiration of the lock-up period, or earlier upon the
consent of Donaldson, Lufkin & Jenrette Securities Corporation, ____ shares
<PAGE>
will become eligible for sale without restriction under Rule 144(k), and an
additional ___ shares will become eligible for sale subject to the
restrictions of Rule 144.
Any employee or director of or consultant to the Company who has been
granted options to purchase shares or who has purchased shares pursuant to
a written compensatory plan or written contract prior to the effective date
of this Offering pursuant to Rule 701 will be entitled to rely on the
resale provisions of Rule 701, which permits non-affiliates to sell their
Rule 701 shares without having to comply with the public information,
holding-period, volume-limitation or notice provisions of Rule 144 and
permits affiliates to sell their Rule 701 shares without having to comply
with the Rule 144 holding period restrictions, in each case commencing 90
days after the date of this Prospectus.
Following the Offering, the Company intends to file a registration
statement under the Securities Act to register shares of Common Stock
issuable upon the exercise of stock options granted under the Plan. Shares
issued upon the exercise of stock options after the effective date of such
registration statement generally will be available for sale in the open
market. Immediately following the completion of the Offering, the Company
estimates that there will be ______ shares issuable upon the exercise of
options outstanding under the Plan and ______ shares of Common Stock
reserved for future grants of options.
The Company is unable to estimate the number of shares that may be
sold under Rule 144 or otherwise because this will depend on the market
price for the Common Stock of the Company, the individual circumstances of
the sellers and other factors. Prior to the Offering, there has been no
public market for the Common Stock. Future sales of shares of Common
Stock, or the availability for sale of substantial amounts of Common Stock,
or the perception that such sales could occur, could adversely affect
prevailing market prices for the Common Stock and could impair the
Company's future ability to raise capital through an offering of its equity
securities.
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement by
and among the Company and the Underwriters, the Company has agreed to sell
to each of the Underwriters named below and each of such Underwriters, for
whom Donaldson, Lufkin & Jenrette Securities Corporation and Needham &
Company, Inc. are acting as Representatives, have severally agreed to
purchase from the Company ____ shares of Common Stock. The number of
shares of Common Stock each Underwriter has agreed to purchase is set forth
opposite its name below.
Underwriter Number of Shares
Donaldson, Lufkin & Jenrette
Securities Corporation
Needham & Company, Inc.
The Underwriting Agreement provides that the obligation of the several
Underwriters to purchase all of the shares of Common Stock is subject to
the approval of certain legal matters by counsel and as to certain other
conditions. If any of the shares of Common Stock are purchased pursuant to
the Underwriting Agreement, all such shares of Common Stock (other than the
over-allotment option described below) must be so purchased.
Prior to the Offering, there has been no established trading market
for the Common Stock. The initial price to the public for the Common Stock
offered hereby has been determined by negotiations between the Company and
the Representatives. The factors considered in determining the initial
price to the public include the history of and the prospects for the
industry in which the Company competes, the ability of the Company's
management, the past and present future earnings of the Company, the
historical results of operations of the Company, the prospects for future
earnings of the Company, the general condition of the securities markets at
the time of this Offering and the recent market prices of generally
comparable companies.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to
contribute to payments that the Underwriters may be required to make in
respect thereof.
The Company has been advised by the Representatives that the
Underwriters propose to offer the shares of Common Stock to the public
initially at the public offering price set forth on the cover page of this
Prospectus, and to certain securities (who may include the Underwriters)
dealers at such price less a concession not in excess of $____ per share.
The Underwriters may allow, and such dealers may re-allow, discounts not in
excess of $___ per share to any other Underwriter and certain other
dealers.
The Company has granted to the Underwriters an option to purchase up
to an aggregate of _____ additional shares of Common Stock at the initial
public offering price less the underwriting discounts and commissions
solely to cover over-allotments. Such option may be exercised at anytime
until 30 days after the date of this Prospectus. To the extent that the
Underwriters exercise such options, each of the Underwriters will be
committed, subject to certain conditions, to purchase a number of option
shares proportionate to such Underwriter's initial commitment as indicated
in the preceding table.
The Company, all directors and executive officers of the Company and
certain shareholders, to the extent they are not otherwise shareholders,
<PAGE>
have agreed that, without the prior written consent of Donaldson, Lufkin &
Jenrette Securities Corporation, they will not, directly or indirectly,
offer, sell, contract to sell, grant any option to purchase or otherwise
dispose of any share of Common Stock or any securities convertible into or
exercisable for such Common Stock, or in any other manner transfer all or a
portion of the economic consequence associated with ownership of such
Common Stock, except to the Underwriters pursuant to the Underwriting
Agreement, for a period of 180 days after the date of this Prospectus.
The Representatives have informed the Company that neither they, nor
any other member of the National Association of Securities Dealers, Inc.
participating in the distribution of this Offering, will make sales of the
Common Stock offered hereby to accounts over which they exercise
discretionary authority without the prior specific written approval of the
customer.
The Company has applied for quotation of the Common Stock on the
Nasdaq National Market under the symbol "EMKR."
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon
for the Company by White & Case, New York, New York, who may rely upon
Dillon, Bitar & Luther, New Jersey counsel for the Company as to matters of
New Jersey law, and for the Underwriters by Brobeck, Phleger & Harrison
LLP, New York, New York.
EXPERTS
The balance sheets as of September 30, 1996 and 1995, and the
statements of operations, shareholders' (deficit) equity and cash flow for
the three years in the period ended September 30, 1996, included in this
Registration Statement, have been included herein in reliance on the report
of Coopers & Lybrand L.L.P., independent accountants, given on the
authority of that firm as experts in accounting and auditing.
The statements in this Prospectus set forth under the captions "Risk
Factors - Reliance on Trade Secrets; No Assurance of Continued Intellectual
Property Protections" and "Business - Intellectual Property" have been
reviewed and approved by Lerner David Littenberg Krumholz & Mentlik,
Westfield, New Jersey, patent counsel for the Company, as experts on such
matters, and are included herein in reliance upon such review and approval.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on
Form S-1 under the Securities Act with respect to the Common Stock offered
hereby. This Prospectus does not contain all the information set forth in
the Registration Statement and the exhibits and schedules thereto. For
further information with respect to the Company and such Common Stock,
reference is made to the Registration Statement and the exhibits and
schedules filed as part thereof. Statements contained in this Prospectus
as to the contents of any contract or other document referred to are not
necessarily complete, and, in each instance, if such contract or document
is filed as an exhibit, reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement, each
statement being qualified in all respects by such reference to such
exhibit. The Registration Statement, including exhibits and schedules
thereto, may be inspected without charge at the Commission's principal
office, the Public Reference Room of the Securities and Exchange
<PAGE>
Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at regional offices of the Commission at Seven World Trade
Center, 13th Floor, New York, New York 10048 and Northwestern Atrium
Center, Suite 1400, 500 West Madison Street, Chicago, Illinois 60661.
Copies of all or any part thereof may be obtained from the Commission at
its principal office in Washington, D.C. and its public reference
facilities in Chicago, Illinois and New York, New York after payment of
fees prescribed by the Commission.
The Company intends to furnish to its shareholders annual reports
containing consolidated financial statements audited by its independent
public accountants, and quarterly reports containing unaudited consolidated
financial statements for the first three quarters of each fiscal year.
Upon completion of the Offering, the Company shall be subject to the
informational requirements of the Exchange Act, and in accordance therewith
will file reports and other information with the Securities and Exchange
Commission. Such reports, proxy and information statements and other
information filed by the Company can be inspected and copied at the public
reference facilities maintained by the Commission in Washington, D.C., and
at its regional offices set forth above, and copies of such material can be
obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. The Commission
maintains a Web site that contains reports, proxy and information state-
ments and other information regarding the Company and other registrants
that file electronically with the Commission. The address of such site is:
http://www.sec.gov.
<PAGE>
EMCORE CORPORATION
INDEX OF FINANCIAL STATEMENTS
Report of Coopers & Lybrand L.L.P.,
Independent Accountants . . . . . . . . . . . . . F-2
Financial Statements:
Balance Sheets as of September 30, 1996 and 1995 F-3
Statements of Operations for the Years Ended
September 30, 1996, 1995 and 1994 . . . . . . . . F-5
Statements of Shareholders' (Deficit) Equity as of
September 30, 1996, 1995 and 1994 . . . . . . . . F-6
Statements of Cash Flows for the Years Ended
September 30, 1996, 1995 and 1994 . . . . . . . . F-8
Notes to Financial Statements . . . . . . . . . F-11
<PAGE>
REPORT OF COOPERS & LYBRAND L.L.P., INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
EMCORE Corporation:
We have audited the accompanying balance sheets of EMCORE Corporation
(the "Company") as of September 30, 1996 and 1995, the related statements
of operations, shareholders' equity (deficit) and cash flows for each of
the three years in the period ended September 30, 1996. We have also
audited the financial statement schedule listed in Item 16(b). These
financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and the financial
statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of EMCORE
Corporation as of September 30, 1996 and 1995, and the consolidated results
of its operations and its cash flows for each of the three years in the
period ended September 30, 1996, in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial
statement schedule taken as a whole, presents fairly, in all material
respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Parsippany, New Jersey
November 1, 1996, except
for Notes 13 and 15 as to which
the date is December 6, 1996
<PAGE>
EMCORE CORPORATION
BALANCE SHEETS
<TABLE>
AS OF SEPTEMBER 30,
ASSETS 1995 1996
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . $ 2,322,896 $ 1,367,386
Accounts receivable, net of allowance for doubtful
accounts of approximately $164,000 and $310,000 in 1995 2,129,633 3,025,171
and 1996, respectively . . . . . . . . . . . . . . . . .
Inventories, net . . . . . . . . . . . . . . . . . . . . 3,339,474 7,645,040
Costs in excess of billings on uncompleted contracts . . 16,440 19,322
Prepaid expenses and other current assets . . . . . . . 33,151 59,935
Total current assets . . . . . . . . . . . . . . . . 7,841,594 12,116,854
Property and equipment, net . . . . . . . . . . . . . . . . . . . 2,120,784 7,796,832
Other assets, net . . . . . . . . . . . . . . . . . . . . . . . . 180,365 520,735
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,142,743 $ 20,434,421
The accompanying notes are an integral part of these financial statements.
<PAGE>
EMCORE CORPORATION
BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
AS OF SEPTEMBER 30,
CURRENT LIABILITIES: 1995 1996
<S> <C> <C>
Accounts payable . . . . . . . . . . . . . . . . . . . . . $ 1,934,360 $ 5,660,438
Accrued expenses . . . . . . . . . . . . . . . . . . . . . 1,208,747 1,986,646
Advance billings . . . . . . . . . . . . . . . . . . . . . 2,183,795 3,306,462
Billings in excess of costs on uncompleted contracts . . . 306,359 -
Unearned service revenue . . . . . . . . . . . . . . . . . - 12,315
Total current liabilities . . . . . . . . . . . . . . . . . 5,633,261 10,965,861
Long-term debt:
Subordinated notes, net . . . . . . . . . . . . . . . . . . - 8,365,392
Convertible notes payable . . . . . . . . . . . . . . . . . 3,000,000 -
Commitments and contingencies . . . . . . . . . . . . . . . . . .
Shareholders' equity:
Common stock, no par value; authorized shares -
80,000,000; issued and outstanding shares 10,181,168 at
September 30, 1995 and 1996 . . . . . . . . . . . . . . . . 16,637,566 19,407,566
Accumulated deficit . . . . . . . . . . . . . . . . . . . . (14,981,977) (18,158,291)
1,655,589 1,249,275
Notes receivable from stock sales . . . . . . . . . . . . . . . . (146,107) (146,107)
Total shareholders' equity . . . . . . . . . . . . . . . . . . . 1,509,482 1,103,168
Total liabilities and shareholders' equity . . . . . . . . . . . $ 10,142,743 $ 20,434,421
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
EMCORE CORPORATION
STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30,
1994 1995 1996
<S>
<C> <C> <C>
Revenues . . . . . . . . . . . . . . $ 9,038,201 $ 18,136,667 $ 27,778,885
Cost of sales . . . . . . . . . . . . 5,212,922 9,926,971 18,606,420
Gross profit . . . . . . . . . . 3,825,279 8,209,696 9,172,465
Operating expenses:
Selling, general
and administrative . . . . . . . 2,697,172 4,451,534 6,524,482
Research and development . . . . 1,064,149 1,851,798 5,401,413
Amortization of deferred gain on
sale/leaseback transactions . . (51,846) - -
Operating income (loss) 115,804 1,906,364 (2,753,430)
Other expense:
Interest expense, net of
interest income of
$12,468, $84,101 and 285,613 255,384 422,884
$71,460 for 1994, 1995
and 1996, respectively . . .
Other . . . . . . . . . . . . . - 10,000 -
(Loss) income before income taxes . (169,809) 1,640,980 (3,176,314)
Provision for income taxes . . . . . - 125,000 -
Net (loss) income . . . . . . . . . . $ (169,809) $ 1,515,980 $ (3,176,314)
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
The accompanying notes are an integral part of these financial statements.
EMCORE CORPORATION
STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY
As of September 30, 1994, 1995 and 1996
<TABLE>
Common Stock Class I Preferred Stock
Shares Amount Shares Amount Discount
<S> <C> <C> <C> <C> <C>
Balance at September 30,
1993 . . . . . . . . . . . 198,439 $ 301,924 693,900 $1,235,142 $ (934,454)
Current year accretion to
redemption value of Class
III redeemable, convertible
preferred stock, redeemable
at $2.50 per share . . . .
Notes receivable due from
shareholders in connection
with issuance of 146,107
shares of Class IV
redeemable, convertible
preferred stock . . . . . .
Net loss . . . . . . . . .
Balance at September 30,
1994 . . . . . . . . . . . 198,439 301,924 693,900 1,235,142 (934,454)
Warrants exercised and
conversions . . . . . . . . 103,993 92,554 528,450
Repurchase of Class I
Preferred Stock . . . . . .
November 1994 preferred
stock conversions into
common stock and retirement
of preferred treasury shares
508,543 15,350,689 (1,222,350) (1,235,142) 934,454
August 1995 conversion of
Class A preferred stock into
common stock . . . . . . . 9,370,193 892,399
Net income . . . . . . . .
Balance at September 30,
1995 . . . . . . . . . . . 10,181,168 16,637,566
Issuance of common stock
purchase warrants . . . . . 2,770,000
Net loss . . . . . . . . .
Balance at September 30,
1996 . . . . . . . . . . . 10,181,168 $19,407,566 $ $
</TABLE>
<PAGE>
<TABLE>
Total
Shareholders' Shareholders'
Accumulated Treasury Notes Equity
Deficit Stock Receivable (Deficit)
<S> <C> <C> <C> <C>
Balance at September 30,
1993 . . . . . . . . . . . $(15,087,291) $ (28,104) - $(14,512,783)
Current year accretion to
redemption value of Class
III redeemable, convertible
preferred stock, redeemable
at $2.50 per share . . . . (1,240,857) (1,240,857)
Notes receivable due from
shareholders in connection
with issuance of 146,107
shares of Class IV
redeemable, convertible
preferred stock . . . . . . $ (146,107) (146,107)
Net loss . . . . . . . . . (169,809) (169,809)
Balance at September 30,
1994 . . . . . . . . . . . (16,497,957) (28,104) (146,107) (16,069,556)
Warrants exercised and
conversions . . . . . . . . 92,554
Repurchase of Class I
Preferred Stock . . . . . . (12,645) (12,645)
November 1994 preferred
stock conversions into
common stock and retirement
of preferred treasury shares
40,749 15,090,750
August 1995 conversion of
Class A preferred stock into
common stock . . . . . . . 892,399
Net income . . . . . . . . 1,515,980 1,515,980
Balance at September 30,
1995 . . . . . . . . . . . (14,981,977) - (146,107) 1,509,482
Issuance of common stock
purchase warrants . . . . . 2,770,000
Net loss . . . . . . . . . (3,176,314) (3,176,314)
Balance at September 30,
1996 . . . . . . . . . . . $(18,158,291) $ $(146,107) $1,103,168
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
The accompanying notes are an integral part of these financial statements.
EMCORE CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
YEARS ENDED SEPTEMBER 30,
1994 1995 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net (loss) income . . . . . . . . . . . $ (169,809) $ 1,515,980 $ (3,176,314)
Adjustments to reconcile net (loss)
income to net cash provided by (used
for) operating activities:
Depreciation and amortization . . 599,114 887,132 1,871,016
Provision for doubtful accounts . 22,101 95,430 146,418
Provision for inventory valuation 24,849 15,379 105,000
Detachable warrant accretion . . . - - 125,792
Amortization of deferred gain on
sale/leaseback transactions . . . (51,846) - -
CHANGE IN ASSETS AND LIABILITIES:
Accounts receivable . . . . . . . (1,041,443) (353,895) (1,041,956)
Inventories . . . . . . . . . . . (256,427) (2,209,540) (4,410,566)
Costs in excess of billings on
uncompleted contracts . . . . . . 25,876 17,282 (2,882)
Prepaid expenses and other
current assets . . . . . . . . . . (2,319) (18,858) (26,784)
Other assets . . . . . . . . . . . (74,333) (8,988) (468,565)
Accounts payable . . . . . . . . . 408,039 1,100,338 3,398,078
Accrued expenses . . . . . . . . . 82,617 538,719 777,899
Advanced billings . . . . . . . . 1,006,984 1,176,831 1,122,667
Billings in excess of costs
on uncompleted contracts . . . . . - 306,359 (306,359)
Unearned service revenue . . . . . - - 12,315
Total adjustments . . . . . . . . . . . 743,212 1,546,189 1,302,073
Net cash and cash equivalents provided
by (used for) operating activities . . 573,403 3,062,169 (1,874,241)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment . . (1,153,722) (1,316,968) (7,090,869)
Net cash and cash equivalents used for
investing activities . . . . . . . . . (1,153,722) (1,316,968) (7,090,869)
The accompanying notes are an integral part of these financial statements.
<PAGE>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from subordinated note issuance
- - 11,009,600
Proceeds from the exercise of stock
purchase warrants . . . . . . . . . . . - 102,554 -
Repurchase of Class I preferred stock . - (12,645) -
Proceeds from the issuance of Class IV
Preferred Stock . . . . . . . . . . . . 61,583 -
Payments on long-term debt and capital
lease obligations . . . . . . . . . . . (94,287) - (3,000,000)
Proceeds from 7.5% convertible notes 1,000,000 - -
payable . . . . . . . . . . . . . . . .
Net cash and cash equivalents provided
by financing activities . . . . . . . . 967,296 89,909 8,009,600
Net increase (decrease) in cash and cash
equivalents . . . . . . . . . . . . . . 386,977 1,835,110 (955,510)
Cash and cash equivalents at beginning 100,809 487,786 2,322,896
of period . . . . . . . . . . . . . . .
Cash and cash equivalents at end of $ 487,786 $ 2,322,896 $ 1,367,386
period . . . . . . . . . . . . . . . .
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest . . . . . . . . $ 170,174 $ 285,413 $ 276,012
Cash paid for income taxes . . . . . . $ - - 55,000
Non-cash expenditures for purchases of
property and equipment included in $ - - $ 328,000
accounts payable . . . . . . . . . . .
Reference is made to Note 11 - Preferred
Stock - for disclosure relating to
certain non-cash equity transactions
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS
EMCORE is a designer and developer of compound semiconductor materials
and process technology and a manufacturer of production systems used to
fabricate compound semiconductor wafers. Compound semiconductors are used
in a broad range of applications in wireless communications,
telecommunications, computers, and consumer and automotive electronics.
The Company has recently capitalized on its technology base by expanding
into the design and production of compound semiconductor wafers and
package-ready devices. The Company offers its customers a complete,
vertically-integrated solution for the design, development and production
of compound semiconductor wafers and devices.
For the year ended September 30, 1996, the Company generated an
operating loss and a negative cash flow from operations. The Company's
operations are subject to a number of risks, including but not limited to
a history of losses, future capital needs, dependence on key personnel,
competition and risk of technological obsolescence, governmental
regulations and approvals and limited compound semiconductor manufacturing
and marketing capabilities. The Company's operations for the year ended
September 30, 1996, were primarily funded through two subordinated debt
issuances completed in May and September of 1996, amounting to $8.5 million
and $2.5 million, respectively, of cash proceeds (see Note 8). A portion
of the proceeds was used to extinguish $3 million of debt due under a
convertible debt agreement. The Company's operating and financing plans
include, among other things, (i) attempting to improve operating cash flow
through increased sales of compound semiconductor systems, wafers and
package-ready devices, (ii) managing its cost structure to its anticipated
level of revenues and (iii) seeking equity and debt financing sufficient to
meet its obligations on a long-term basis in order to fund its business
expansion plans. On October 25, 1996, the Company entered into a $10.0
million demand note facility to finance its operating and capital
requirements.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents. The Company considers all highly liquid
short-term investments purchased with an original maturity of three months
or less to be cash equivalents. The Company had approximately $1,205,000
and $106,000 in cash equivalents at September 30, 1995 and 1996,
respectively.
Inventories. Inventories are stated at the lower of FIFO (first-in,
first-out) cost or market. Reserves are established for slow moving or
obsolete inventory based upon historical and anticipated usage.
Property and Equipment. Property and equipment are stated at cost.
Significant renewals and betterments are capitalized. Maintenance and
repairs which do not extend the useful lives of the respective assets are
expensed.
Depreciation is recorded using the straight line method over the
estimated useful lives of the applicable assets, which range from three to
five years. Leasehold improvements are amortized using the straight-line
method over the term of the related leases or the estimated useful lives of
the improvements, whichever is less.
When assets are retired or otherwise disposed of, the assets and
related accumulated depreciation accounts are adjusted accordingly, and any
resulting gain or loss is recorded in current operations.
<PAGE>
In the event that facts and circumstance indicate that the value of
assets may be impaired an evaluation of recoverability is performed. If an
evaluation is required, the estimated future undiscounted cash flows
associated with the asset would be compared to the assets carrying amount
to determine if an adjustment to the carrying amount is required.
<PAGE>
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Deferred Costs. Included in other assets are deferred costs related
to obtaining product patents and long-term debt refinancing (See Note 8).
Such costs are being amortized over a three to five year period,
respectively. Amortization expense amounted to approximately $56,000,
$58,000 and $128,000 for the years ended September 30, 1994, 1995 and 1996,
respectively.
Income Taxes. During fiscal 1994, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes." SFAS No. 109 required a change from the deferred method to the
asset and liability method of accounting for income taxes. Under the asset
and liability method, deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying enacted statutory tax
rates applicable to future years to differences between the financial
statement carrying amounts and the tax bases of existing assets and
liabilities. Under SFAS No. 109, the effect on deferred taxes of a change
in tax rates is recognized in income in the period that includes the
enactment date. Under the deferred method, deferred taxes were recognized
at the tax rate applicable to the year in which the difference between
financial statement carrying amounts and the corresponding tax bases arose.
Revenue and Cost Recognition.
Systems, Components and Service Revenues
Revenue from systems sales is recorded by shipment, when title passes
to the customer. Subsequent to product shipment, the Company incurs
certain installation costs at the customer's facility and warranty costs
which are estimated and accrued at the time the sale is recorded.
Component sales and service revenues are recognized when goods are
shipped or services are rendered to the customer. Service revenue under
contracts with specified service terms is recognized as earned over the
service period in accordance with the terms of the applicable contract.
Costs in connection with the procurement of the contracts are charged to
expense as incurred.
Contract Revenue
The Company's research contracts require the development or evaluation
of new material applications and have a duration of six to thirty-six
months. For research contracts with the U.S. Government and commercial
enterprises, with durations greater than six months, the Company recognizes
revenue to the extent of costs incurred plus the estimated gross profit as
stipulated in such contracts, based upon contract performance.
Contracts with a duration of six months or less are accounted for on
the completed contract method. A contract is considered complete when all
costs, except insignificant items, have been incurred, and the research
reporting requirements to the customer have been met.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs and depreciation costs, as well as coverage of
certain general and administrative costs. Provisions for estimated losses
on uncompleted contracts are made in the period in which such losses are
determined. Revenues from contracts amounted to approximately $1,295,000,
$1,321,000, $3,295,000 for the years ended September 30, 1994, 1995 and
1996, respectively.
Research and Development. Research and development costs related to
<PAGE>
the development of both present and future products and Company sponsored
materials application research are charged to expense as incurred.
Fair Value of Financial Instruments. The carrying values of the
Company's financial instruments recorded on the accompanying balance sheets
approximate fair value.
Use of Estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements. Estimates also affect
the reported amounts of revenues and expenses during the reporting period.
Actual results may differ from those estimates.
The Company's most significant estimates relate to accounts receivable
and inventory valuation reserves, warranty and installation reserves,
estimates of cost and related gross profits on certain research contracts
and the valuation of long-lived assets.
Reclassifications. Prior period balances have been reclassified to
conform with the current period financial statement presentations.
New Accounting Standards. In March 1995, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" ("SFAS No. 121"). This pronouncement establishes accounting standards
for when impairment losses relating to long-lived assets, identifiable
intangibles and goodwill related to those assets should be recognized and
how the losses should be measured. The Company plans to implement SFAS No.
121 in fiscal 1997. The adoption of SFAS No. 121 is not expected to have
an impact on the Company's financial position or results of operations
since Emcore's current policy is to monitor assets for impairment and
record any necessary write-downs.
In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock
Based Compensation" ("SFAS No. 123"). The provision of SFAS No. 123 sets
forth the method of accounting for stock based compensation based on the
fair value of stock options and similar instruments, but does not require
the adoption of this preferred method. SFAS No. 123 also requires the
disclosure of additional information about stock compensation plans, even
if the preferred method of accounting is not adopted. The Company plans to
implement SFAS No. 123 in fiscal 1997. The Company does not intend to
change its method of accounting for stock based compensation to the
preferred method under SFAS No. 123, but instead will continue to apply the
provisions of No. 25 "Accounting for Stock Issued to Employees." However,
the Company will disclose the pro forma effect of SFAS No. 123 on net
income and earnings per share.
<PAGE>
NOTE 3. CONCENTRATION OF CREDIT RISK
The Company sells its compound semiconductor systems domestically and
internationally. The Company also sells wafers and package-ready devices
in the U.S. The Company's international sales are generally made under
letter of credit arrangements.
For the years ended September 30, 1994, 1995 and 1996, the Company
sold 59%, 36%, and 43% of its products to foreign customers, respectively.
The Company's sales to major customers were as follows:
<TABLE>
AS OF SEPTEMBER 30,
1994 1995 1996
<S> <C> <C> <C>
Customer A . . . . . . . . . . . . . . . . . . . $ - $ 5,238,620 $6,558,930
Customer B . . . . . . . . . . . . . . . . . . . 1,870,871 887,390 2,075,722
Customer C . . . . . . . . . . . . . . . . . . . - 1,036,000 1,530,000
Customer D . . . . . . . . . . . . . . . . . . . 749,000 2,092,986 -
Total . . . . . . . . . . . . . . . . . . . . . . $ 2,619,871 $ 9,254,996 $ 10,164,652
</TABLE>
The Company's performs material application research under contract
with the U.S. Government or as a subcontractor of U.S. Government funded
projects.
The Company performs ongoing credit evaluations of its customers'
financial condition and collateral is not requested. The Company maintains
reserves for potential credit losses based upon the credit risk of specific
customers, historical trends and other information. To reduce credit risk,
and to fund manufacturing costs, the Company requires periodic prepayments
on equipment orders. Credit losses have generally not exceeded the
Company's expectations.
The Company has temporary cash investments with financial institutions
in excess of the $100,000 insured limit of the Federal Deposit Insurance
Corporation.
<PAGE>
NOTE 4. INVENTORIES
The components of inventories consisted of the following:
<TABLE>
AS OF SEPTEMBER 30,
1995 1996
<S> <C> <C>
Raw materials . . . . . . . . . . . . . . . . . . $ 2,330,991 $ 4,964,917
Work-in-progress . . . . . . . . . . . . . . . . 646,696 2,680,123
Finished goods . . . . . . . . . . . . . . . . . 361,787 -
$ 3,339,474 $ 7,645,040
</TABLE>
NOTE 5. PROPERTY AND EQUIPMENT
Major classes of property and equipment are summarized below:
<TABLE>
AS OF SEPTEMBER 30,
1995 1996
<S> <C> <C>
Equipment . . . . . . . . . . . . . . . . . . . . . $ 6,617,014 $ 11,748,577
Furniture and fixtures . . . . . . . . . . . . . . 904,326 1,650,488
Leasehold improvements . . . . . . . . . . . . . . 605,890 2,147,034
8,127,230 15,546,099
Less: accumulated depreciation and amortization (6,006,446) (7,749,267)
$ 2,120,784 $ 7,796,832
</TABLE>
The provisions for depreciation and amortization amounted to
approximately $543,000, $829,000 and $1,743,000 for the years ended
September 30, 1994, 1995 and 1996, respectively.
Included in equipment above are ten systems and eight systems with a
combined net book value of approximately $1,220,000 and $2,124,000 at
September 30, 1995 and 1996, respectively. Such systems are utilized for
systems demonstration purposes, in-house materials applications research,
contract research funded by third parties, system sales support and the
production of compound semiconductor wafers and package-ready devices for
sale to third parties.
NOTE 6. COSTS AND BILLINGS ON UNCOMPLETED CONTRACTS
Costs incurred and billings on uncompleted contracts are summarized
below:
<TABLE>
AS OF SEPTEMBER 30,
<PAGE>
1995 1996
<S> <C> <C>
Costs incurred on uncompleted contracts . . . . . . . . . . . . . $ 178,081 $ 19,322
Billings applicable to uncompleted contracts . . . . . . . . . . (468,000) -
$ (289,919) $ 19,322
The uncompleted contract costs and billings are classified in
the accompanying balance sheets under the following captions:
Costs in excess of billings on
uncompleted contracts . . . . . . . . . . . . . . . . . . . . . . $ 16,440 $ 19,322
Billings in excess of costs on
uncompleted contracts . . . . . . . . . . . . . . . . . . . . . . (306,359) -
$ (289,919) $ 19,322
</TABLE>
<PAGE>
NOTE 7. ACCRUED EXPENSES
Accrued expenses consisted of the following:
<TABLE>
AS OF SEPTEMBER 30,
1995 1996
<S> <C> <C>
Accrued payroll, vacation and other employee expenses . . . . . $ 476,505 $ 990,538
Installation and warranty costs . . . . . . . . . . . . . . . . 389,676 562,231
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . 177,048 269,315
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165,518 164,562
$ 1,208,747 $ 1,986,646
</TABLE>
NOTE 8. LONG-TERM DEBT
On May 1, 1996, the Company issued subordinated notes (the
"Subordinated Notes") in the amount of $9,500,000 to its existing
shareholders, $1,000,000 of which were exchanged for notes receivable from
officers and certain employees with identical payment and interest
provisions. The officers and employees' notes receivable have been
reflected as a contra liability, reducing the Company's Subordinated Notes
balance. The Company received cash proceeds of $8,500,000 in connection
with this Subordinated Notes issuance. The Subordinated Notes are
scheduled to mature on May 1, 2001, have a stated interest rate of 6.0%
which is payable semi-annually on May 1 and November 1. In addition, the
noteholders were issued 7,916,667 common stock purchase warrants with an
exercise price of $1.20 per share which expire on May 1, 2001. The
warrants are exercisable after November 1, 1996 and are callable at the
Company's option, after May 1, 1997, at $0.25 per warrant.
On September 1, 1996, the Company issued a subordinated note in the
amount of $2,500,000 to the Company's majority shareholder with terms
identical to the Subordinated Notes issued on May 1, 1996. In addition,
under the terms of this offering, 833,333 common stock purchase warrants
were issued to purchase common stock at $3.00 per share which expire
September 1, 2001. These warrants are exercisable after March 1, 1997 and
are callable at the Company's option after September 1, 1997 at $0.25 per
warrant.
The Company assigned a value of $1,440,000 to the May 1, 1996
detachable warrants based upon estimated interest rates which could be
obtained from third party creditors. The Company assigned a valuation of
$1,330,000 to the detachable warrants issued on September 1, 1996 based
upon estimated rates of return in consideration of the Company's
contemplated equity offering. The carrying value of the Subordinated Notes
will be subject to periodic accretions, using the interest method, in order
for the carrying amount to equal the Company's obligation upon maturity.
As a result, the May 1, 1996 and September 1, 1996 Subordinated Notes have
an effective interest rate of approximately 9.3% and 15.0%, respectively.
A portion of the proceeds from the May 1, 1996 Subordinated Notes
issuance was used to extinguish $3,000,000 of debt due to Hakuto & Co. Ltd.
("Hakuto"), the Company's Asian distributor under a convertible debt
agreement (the "Agreement") scheduled to expire on June 2, 1998. Under the
June 2, 1993 Agreement, the Company was permitted to borrow up to
<PAGE>
$3,000,000 at an interest rate of 7.5%. As of September 30, 1995, the
entire $3,000,000 was outstanding.
In connection with the Agreement, the Company issued 10,000 warrants
to Hakuto to purchase shares of the Company's Class IV Preferred Stock at
$1.00 per share (See Note 11). The warrants were exercised on January 1,
1995.
Under the Agreement, the $3,000,000 of debt was convertible into
preferred stock subject to the Company authorizing a new Class V series of
preferred stock prior to March 31, 1998. The debt was convertible in
$1,000,000 increments at a conversion rate of $2.50 per share of Class V
Preferred Stock. In addition, Hakuto had certain rights of first refusal,
with respect to the purchase of the Company through June 2, 1998, and the
distribution of the Company's products in Asia, excluding Taiwan and Korea.
The Agreement was collateralized by all the Company's assets. The
New Jersey Economic Development Authority ("NJEDA") had guaranteed 90% of
the Company's obligation pertaining to $1,000,000 of its outstanding debt.
Under the terms of the Agreement, the Company was required to repay
$1,000,000 of the debt upon expiration of the NJEDA guarantee. The NJEDA
guarantee expired on August 31, 1995, however, the lender permanently
waived the $1,000,000 repayment requirement through the expiration date of
the Agreement.
The Agreement contained certain covenants which included an employment
agreement with the Company's Chief Executive Officer for a period of five
years, and a personal guarantee from the Chief Executive Officer in the
amount of $100,000.
The Company had a $250,000 revolving loan agreement (the "Revolving
Loan") with the NJEDA which expired on February 14, 1996. The Revolving
Loan provided for the advancement of funds upon the Company's receipt of an
export sales contract and required repayment upon receipt of payment from
such customer or one hundred twenty days from the date of the advance. The
loan bore interest at a rate of the Federal Discount Rate (5.25% at
September 30, 1995). The Revolving Loan was collateralized by applicable
outstanding letters of credit. As of September 30, 1995, there were no
amounts outstanding under this facility.
The Revolving Loan Agreement contained restrictive covenants which
included among other restrictions, the Company could not issue any
additional stock, declare dividends, purchase its own stock, transfer
excess funds to an affiliated entity, borrow any funds or grant a
collateral position without the expressed written consent of the NJEDA.
The Company did not obtain the required written consent of the NJEDA for
the fiscal year 1995 capital restructuring activities as described in Note
11.
On October 25, 1996, the Company entered into a $10.0 million demand
note facility (the "Facility"). The Facility bears interest at the rate of
LIBOR plus 75 basis points and is due and payable on demand. The Facility
has been guaranteed by the Company's majority shareholder who has provided
collateral for the loan. In return for guaranteeing the facility, the
Company granted the majority shareholder 3,333,333 common stock purchase
warrants at $3.00 per share which expire September 1, 2001. These warrants
are exercisable after July 1, 1997 and are callable at the Company's option
after December 1, 1997 at $0.25 per warrant.
NOTE 9. COMMITMENTS AND CONTINGENCIES
On November 16, 1992, the Company entered into a three-year lease
agreement with a bank for 34,000 square feet of space in the building the
<PAGE>
Company presently occupies. On March 31, 1995, the agreement was renewed
for 5 years for 49,000 square feet.
The Company leases certain equipment under non-cancelable operating
leases.
Facility and equipment rent expense amounted to approximately
$298,000, $292,000 and $350,000 for the years ended September 30, 1994,
1995 and 1996, respectively.
Future minimum rental payments under the Company's non-cancelable
operating leases with an initial or remaining term of one year or more as
of September 30, 1996 are as follows:
<TABLE>
PERIOD ENDING
SEPTEMBER 30, OPERATING
<S> <C>
1997 $ 322,749
1998 301,120
1999 296,794
2000 126,250
Total minimum lease payments $ 1,046,913
</TABLE>
In November 1996, the Company signed an agreement to occupy the
remaining 26,000 square feet that they previously had not occupied, which
will increase the total future minimum lease payments over the remaining 4
years of the lease by approximately $ 863,000.
The Company is from time to time involved in litigation incidental to
the conduct of its business. Management and its counsel believe that such
pending litigation will not have a material adverse effect on the Company's
results of operations, cash flows or financial condition.
<PAGE>
NOTE 10. INCOME TAXES
As described in Note 2, effective October 1, 1993, the Company adopted
SFAS No. 109. The adoption of SFAS No. 109 did not have an impact on the
financial position of the Company, as a full valuation allowance was
provided against the net deferred tax asset position, as of the date of
adoption, due to the uncertainty of the ultimate realization of such
assets.
Income tax expense consists of the following:
<TABLE>
YEAR ENDED SEPTEMBER 30,
Current: 1994 1995 1996
<S> <C> <C> <C>
Federal . . . . . . . . . . . $ - $ 70,000 $ -
State . . . . . . . . . . . . - 55,000 -
Deferred:
Federal . . . . . . . . . . . - - -
State . . . . . . . . . . . . - - -
Total . . . . . . . . . . . . . . . . . $ - $ 125,000 $ -
</TABLE>
The principal differences between the U.S. statutory and effective income
tax rates were as follows:
<TABLE>
YEAR ENDED SEPTEMBER 30,
1994 1995 1996
<S> <C> <C> <C>
U.S. statutory income tax (benefit)
expense rate . . . . . . . . . . . . . . . . (34.0)% 34.0% (34.0)%
Net operating loss carryforward . . . . . . . (45.4)
Net operating loss not utilized . . . . . . . 34.0 27.7
Expenses not yet deductible for tax purposes 11.4 6.3
AMT and state taxes . . . . . . . . . . . . . 7.6
Effective tax rate . . . . . . . . . . . . . 0.0% 7.6% 0.0%
</TABLE>
NOTE 10. INCOME TAXES (CONTINUED)
The components of the Company's net deferred taxes were as follows:
<TABLE>
<PAGE>
SEPTEMBER 30,
1995 1996
Deferred tax assets:
<S> <C> <C>
Federal net operating
loss carryforwards . . . . . . . . . $ 2,489,641 $ 3,283,003
Research credit carryforwards . . . 237,177 264,966
Inventory reserves . . . . . . . . . 77,313 142,593
Accounts receivable reserves . . . . 55,601 105,383
Interest payable . . . . . . . . . . 84,022
Accrued installation reserve . . . . 68,000 109,684
Accrued warranty reserve . . . . . . 57,721 81,475
State net operating
loss carryforwards . . . . . . . . . 576,095 801,555
Other . . . . . . . . . . . . . . . 85,597 68,858
Valuation reserve - federal . . . . (3,057,926) (4,048,583)
Valuation reserve - state . . . . . (576,095) (801,555)
Total deferred tax assets . . . . . . . . . . 13,124 91,401
Deferred tax liabilities:
Fixed assets and intangibles . . . . . . . . (13,124) (91,401)
Total deferred tax liabilities . . . . . . . (13,124) (91,401)
Net deferred taxes . . . . . . . . . . . . . $ - $ -
</TABLE>
The Company has established a valuation reserve as it has not
determined that it is more likely than not that the deferred tax asset is
realizable, based upon the Company's past earnings history.
As of September 30, 1996, the Company has net operating loss
carryforwards for regular tax purposes of approximately $9,600,000 which
expire in the years 2003 through 2011. The Company believes that the
consummation of certain equity transactions and a significant change in the
ownership, during fiscal year 1995, has constituted a change in control
under Section 382 of the Internal Revenue Code ("IRC"). Due to the change
in control, the Company's ability to use its net operating loss carryovers
and research credit carryovers to offset future income and income taxes,
respectively, are subject to substantial annual limitations under IRC
Section 382 and 383.
NOTE 11. PREFERRED STOCK
Preferred Stock Restructuring Activities. In October 1994, the
Company offered the holders 1,399,333 of Class III preferred stock purchase
warrants the right to convert such warrants into 528,450 shares
(representing a reduced ratio of 1 to .38) of the Company's Class I
preferred stock. All the warrant holders exercised such rights. This
transaction increased the outstanding number of Class I preferred stock to
1,222,350 shares.
<PAGE>
In November 1994, in an effort to simplify its capital structure, the
Company's Board of Directors and shareholders approved a capital
restructuring plan (the "Plan"). Pursuant to this Plan, a newly formed and
wholly-owned subsidiary of the Company was formed and merged with and into
the Company. Under the Plan, shares of the Company's Class IV preferred
stock were exchanged for shares of Class A senior convertible preferred
stock at an exchange rate of 1.5 to 1.0. The shares of all other classes
of preferred stock were exchanged into common stock at the following
ratios; Class I preferred stock at 100 to 4 and Class III preferred stock
at 100 to 10. In addition, the Company effected a reverse stock split of
one for one hundred and retired its preferred treasury stock. Prior to
this exchange, the Class I preferred stockholders were given the right to
have their stock repurchased for $.09 per share. The holders of
approximately 140,000 shares exercised this right, resulting in a stock
repurchase amounting to $12,645.
In August 1995, the outstanding shares of Class A senior convertible
preferred stock were exchanged for shares of common stock on the basis of
seven shares of common stock for each Class A security. This transaction
reduced the classes of stock outstanding to common stock.
As part of the August 1995 restructuring activities, holders of
warrants to purchase common stock were allowed to exercise their warrants
at $0.89 per share, resulting in the exercise of 103,999 warrants for
aggregate cash consideration of $92,554.
In January 1995, the holder of 15,000 warrants to purchase Class A
senior convertible preferred stock exercised their rights by paying $0.67
per share, or $10,000. In August 1995, these 15,000 shares of Class A
preferred stock were converted into 105,000 shares of common stock.
The basis of all exchanges were approved by the Company's Board of
Directors and its shareholders and reflected the priorities of the Class A
securities upon liquidation and other factors.
The following table summarizes the Company's preferred stock
activities from October 1, 1993 through September 30, 1995.
<PAGE>
<TABLE>
Class I Class III
Preferred Stock Preferred Stock
Shares Amount Discount Shares Amount
<S> <C> <C> <C> <C> <C>
Balance at September
30, 1993 696,900 $ 1,235,142 $ (934,454) 6,617,227 $13,849,893
Current year accretion
to redemption value of
Class III redeemable,
convertible preferred
stock, redeemable at
$2.50 per share 1,240,857
Issuance of 207,690
shares of Class IV
redeemable, convertible
preferred stock,
redeemable at $2.50 per
share
Balance at September
30, 1994 696,900 1,235,142 (934,454) 6,617,227 15,090,750
Warrants exercised and
conversions 528,450
November 1994 preferred
stock conversions into
common stock and Class (1,222,350
A preferred stock ) (1,235,142) 934,454 (6,617,227) (15,090,750)
August 1995 conversion
of Class A preferred
stock into common stock
Balance at September - $ - $ - - $ -
30, 1995
</TABLE>
<PAGE>
<TABLE>
Class IV Class A
Preferred Stock Preferred Stock
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Balance at September 30,
1993 674,709 $ 674,709
Current year accretion to
redemption value of Class
III redeemable,
convertible preferred
stock, redeemable at $2.50
per share
Issuance of 207,690 shares
of Class IV redeemable,
convertible preferred
stock, redeemable at $2.50
per share 207,690 207,690
Balance at September 30,
1994 882,399 882,399
Warrants exercised and
conversions 15,000 15,000
November 1994 preferred
stock conversions into
common stock and Class A
preferred stock (882,399) (882,399) 1,323,599 882,399
August 1995 conversion of
Class A preferred stock
into common stock (1,338,599) (882,399)
Balance at September 30, - $ - - $ -
1995
</TABLE>
<PAGE>
Class I Preferred Stock. In connection with the restructuring
described above, as of September 30, 1995 and 1996, there were no issued or
outstanding shares of Class I preferred stock.
Each share of 9% cumulative convertible $1.78 par value preferred
stock was entitled to one vote, a cumulative of 9% annual dividend and
certain preference rights in the event of liquidation. Each preferred
share was convertible into 1.22 shares of the common stock and could be
redeemed for 1.22 shares of common stock upon an initial public offering of
the Company's common stock.
Class III Preferred Stock. In connection with the restructuring
described above, as of September 30, 1995 and 1996, there were no issued or
outstanding shares of Class III preferred stock.
Each share of the no par, Class III preferred stock was entitled to
one vote, an annual dividend, when and as declared by the Company's Board
of Directors, of $0.225 per share and had a liquidation preference senior
to the Company's Class I preferred stock. This liquidation preference
entitled each shareholder of the Class III preferred stock to $2.50 per
share, $16,543,068, and an amount equal to such amount received by the
Company's common stock shareholders upon liquidation. The Class III
preferred stock had a mandatory redemption feature which required one-third
of the outstanding stock to be redeemed on December 31, 1994, one-third on
December 31, 1995 and one-third on December 31, 1996, for $2.50 per share
and one share of the Company's common stock. Further, in the event the
Company was acquired, the Class III preferred stock was required to be
redeemed at $2.50 per share plus one share of the acquiring Company's
common stock. The Class III preferred stock mandatory redemption amount of
$16,543,068 was in excess of the $10,210,678 carrying amount of such stock
as of the Company's March 28, 1990 recapitalization. Accordingly, the
carrying amount was subject to periodic accretions, using the interest rate
method, in order for the carrying amount to equal the mandatory redemption
amount upon redemption. Each Class III preferred share was convertible
into 1 share of common stock.
Class IV Preferred Stock. In connection with the restructuring
described above, as of September 30, 1995 and 1996, there were no issued or
outstanding shares of Class IV preferred stock.
During fiscal year 1993, the Company issued 674,709 shares of Class IV
preferred stock in connection with the conversion of $674,709 of then
outstanding 90-day notes. Each share of the Class IV Stock was entitled to
five (5) votes, an annual dividend, when and as declared by the Company's
Board of Directors, of $0.09 per share, which dividend was cumulative, and
had a liquidation preference senior to all other existing classes of stock.
This liquidation preference entitled each shareholder of Class IV Preferred
Stock to an amount equal to the sum of (i) $1.00 per share, (ii) all
accrued and unpaid dividends, and (iii) 95% of the proceeds up to $14.00
per share.
The Class IV preferred stock had a mandatory redemption feature which
required one-third of the outstanding stock to be redeemed on November 30,
1994, one-third on November 30, 1995 and one-third on November 30, 1996,
for $1.00 per share plus share of common stock. Each share of Class IV
Preferred Stock was convertible into one share of common stock.
During fiscal year 1994, the Company issued 207,690 shares of Class IV
preferred stock for $1 per share. In connection with such issuance, the
Company entered into notes receivable agreements with certain employees
amounting to $146,107. Such notes have been recorded as a reduction to
equity. The notes bear interest at a rate of 6.0%.
<PAGE>
Class A Preferred Stock. In connection with the restructuring
described above, as of September 30, 1995 and 1996, there were no issued or
outstanding shares of Class A preferred stock.
In August 1995, all 1,338,599 shares of Class A preferred stock were
converted into 9,370,193 shares of common stock. The Class A stock was
issued in connection with the Company's plan to exchange the Class IV
preferred stock at a ratio of 1.5 shares of Class A for each share of Class
IV. The rights and preferences attached to the Class A preferred stock
were similar to the Class IV preferred stock.
NOTE 12. STOCK OPTIONS AND WARRANTS
Stock Option Plan. In November 1994, the Company's Incentive Stock
Option Plan, initiated in 1987, was eliminated. On June 5, 1995, the Board
of Directors approved the 1995 Incentive and Non-Statutory Stock Option
Plan (the "Option Plan") and such plan was subsequently approved at the
annual meeting of shareholders held on June 23, 1995. Under the terms of
the Option Plan, options to acquire 1,100,000 shares of common stock may be
granted to eligible employees, as defined, at no less than 100 percent of
the fair market value on the date of grant. In March 1996, options to
acquire an additional 1,100,000 shares of common stock was approved.
Certain options under the Option Plan are intended to qualify as
incentive stock options pursuant to Section 422A of the Internal Revenue
Code. Options with respect to 957,000 and 1,154,000 shares were
outstanding at September 30, 1995 and 1996 at an exercise prices ranging
from $0.89 to $3.00 per share. At September 30, 1994, options with respect
to 111,500 shares were outstanding under previous plan at exercise prices
ranging from $0.50 to $2.50 per share.
Stock options granted generally vest over three to five years and are
exercisable over a six year period. As of September 30, 1994, 1995 and
1996, options with respect to 97,300, 341,300 and 553,400 shares were
exercisable, respectively.
The following table summarizes the activity under the plan:
Outstanding as of
September 30, 1994 111,500
Granted 957,000
Exercised
Cancelled (111,500)
Outstanding as of
September 30, 1995 957,000
Granted 197,000
Exercised
Cancelled
Outstanding as of
September 30, 1996 1,154,000
Warrants. In connection with the capital restructuring plan described
in Note 11 above, certain of the Company's outstanding preferred stock
purchase warrants were exchanged for common stock purchase warrants. Set
forth below is a summary of the Company's outstanding warrants at
September 30, 1996:
<TABLE>
<PAGE>
EXERCISE
SECURITY PREVIOUS SECURITY PRICE WARRANTS EXPIRATION DATE
<S> <C> <C> <C> <C>
Common Stock Class III preferred $5.00 30,949 July 24, 1997
stock
Common Stock - $1.20 7,924,667 May 1, 2001
Common Stock - $3.00 833,333 September 1, 2001
</TABLE>
The above table excludes: (i) Class III preferred stock purchase
warrants which were exchanged for Class I preferred stock in October 1994,
(ii) warrants exercised in August 1995, as described in Note 11 and (iii)
warrants to purchase 15,000 shares of Class A senior convertible preferred
stock which were exercised in January 1995, as described in Note 8 and 11.
As described in Note 8 in December 1996, the Company issued an
additional 3,333,333 common stock purchase warrants with a $3.00 exercise
price and September 1, 2001 expiration date.
<PAGE>
NOTE 13. RELATED PARTIES
In May 1995, 52% of the Company's outstanding shares of Common Stock
were purchased by Jesup & Lamont, L.L.C. ("JLMP LLC"). Since that date
four of the Company's six directors have been members of JLMP LLC. As of
September 30, 1996, JLMP LLC has an ownership interest in the Company of
approximately 59.8%. In May 1995, the Company entered into a consulting
agreement with JLMP LLC (the "Agreement") pursuant to which JLMP LLC agreed
to provide financial advisory and employee services for the Company for one
year. Total fees paid to JLMP LLC amounted to approximately $241,697 and
$288,385 for the years ended September 30, 1995 and 1996, respectively.
In December 1996, the Company's chairman and chief executive officer
retired. The Company has entered into a consulting agreement with him for
a term of two years and will provide compensation of $250,000 per annum.
In addition, the Company has also forgiven $115,300 of his indebtedness to
the Company and has agreed to extend the exercise of his vested stock
options to March 4, 1997.
NOTE 14. EXPORT SALES
The information below summarizes the Company's export sales by
geographic area.
The Company's export sales are as follows:
<TABLE>
FAR EAST EUROPE TOTAL
<S> <C> <C> <C>
Year ended September 30, 1994 $ 4,974,957 $ 319,788 $ 5,294,745
Year ended September 30, 1995 $ 3,978,118 $
2,546,301 $ 6,524,419
Year ended September 30, 1996 $ 8,209,309 $
3,588,066 $ 11,797,375
</TABLE>
NOTE 15. SUBSEQUENT EVENTS
On December 6, 1996, the Board of Directors authorized management of
the Company to file a Registration Statement with the Securities and
Exchange Commission permitting the Company to sell shares of its common
stock to the public.
<PAGE>
No dealer, salesperson, or other person has been authorized to give any
information or to make any representations other than those contained in
this Prospectus and, if given or made, such information or representations
must not be relied upon as having been authorized by the Company or any of
the Underwriters. This Prospectus does not constitute an offer to sell or
the solicitation of an offer to buy any securities other than the
securities to which it relates or any offer to sell or the solicitation of
an offer to buy such securities in any jurisdiction where such an offer or
solicitation would be unlawful. Neither the delivery of this Prospectus
nor any sale made hereunder shall, under any circumstances, create any
implication that the information contained herein is correct as of any time
subsequent to the date hereof.
_________________________
Table of Contents
Page
Prospectus Summary . . . . . . . . . 2
Risk Factors . . . . . . . . . . . . 4
Use of Proceeds . . . . . . . . . . . 13
Dividend Policy . . . . . . . . . . . 13
Capitalization . . . . . . . . . . . 14
Dilution . . . . . . . . . . . . . . 15
Selected Financial Data . . . . . . . 16
Management's Discussion and
Analysis of Financial Condition
and Results of Operation . . . . . . 17
Business . . . . . . . . . . . . . . 24
Management . . . . . . . . . . . . . 36
Certain Transactions . . . . . . . . 42
Principal Shareholders . . . . . . . 44
Description of Capital Stock . . . . 46
Shares Eligible for Future Sale . . . 49
Underwriting . . . . . . . . . . . . 51
Legal Matters . . . . . . . . . . . . 52
Experts . . . . . . . . . . . . . . . 52
Additional Information . . . . . . . 53
Index to Financial Statements . . . F-1
_________________________
Until _______ __, 1997 (25 days after the date of this Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a
Prospectus. This is in addition to the obligation of dealers to deliver a
Prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
<PAGE>
__________ SHARES
[LOGO]
EMCORE CORPORATION
COMMON STOCK
______________
PROSPECTUS
______________
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
NEEDHAM & COMPANY, INC.
[DATE OF PROSPECTUS]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection
with the sale and distribution of the securities being registered, other
than underwriting discounts and commissions. All amounts shown are
estimates except the Securities and Exchange Commission registration fee,
the NASD filing fee and the Nasdaq National Market application fee.
To Be Paid
By The
Registrant*
Securities and Exchange Commission
registration fee . . . . . . . . . . . . . $ 9,090.91
NASD filing fee . . . . . . . . . . 3,500.00
Nasdaq National Market application fee ___________*
Accounting fees and expenses . . . . . ___________*
Printing expenses . . . . . . . . . . ___________*
Transfer agent and registrar fees . . ___________*
Blue Sky fees and expenses . . . . 5,000.00
Legal fees and expenses . . . . . . . ___________*
Other expenses . . . . . . . . . . . . ___________*
Total . . . . . . . . . . . . . . ___________*
_____________________
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation provides that the
Company shall indemnify its directors and officers to the full extent
permitted by New Jersey law, including in circumstances in which
indemnification is otherwise discretionary under New Jersey law.
Section 14A:2-7 of the New Jersey Business Corporation Act provides that a
New Jersey corporation's:
"certificate of incorporation may provide that a director or officer
shall not be personally liable, or shall be liable only to the extent
therein provided, to the corporation or its shareholders for damages for
breach of any duty owed to the corporation or its shareholders, except that
such provision shall not relieve a director or officer from liability for
any breach of duty based upon an act or omission (a) in breach of such
person's duty of loyalty to the corporation or its shareholders, (b) not in
good faith or involving a knowing violation of law or (c) resulting in
receipt by such person of an improper personal benefit. As used in this
subsection, an act or omission in breach of a person's duty of loyalty
means an act or omission which that person knows or believes to be contrary
to the best interests of the corporation or its shareholders in connection
with a matter in which he has a material conflict of interest."
In addition, Section 14A:3-5 (1995) of the New Jersey Business
Corporation Act (1995) provides as follows:
INDEMNIFICATION OF DIRECTORS, OFFICERS AND EMPLOYEES
(1) As used in this section,
(a) "Corporate agent" means any person who is or was a director,
officer, employee or agent of the indemnifying corporation or of any
constituent corporation absorbed by the indemnifying corporation in a
<PAGE>
consolidation or merger and any person who is or was a director, officer,
trustee, employee or agent of any other enterprise, serving as such at the
request of the indemnifying corporation, or of any such constituent
corporation, or the legal representative of any such director, officer,
trustee, employee or agent;
(b) "Other enterprise" means any domestic or foreign corporation, other
than the indemnifying corporation, and any partnership, joint venture, sole
proprietorship, trust or other enterprise, whether or not for profit,
served by a corporate agent;
(c) "Expenses" means reasonable costs, disbursements and counsel fees;
(d) "Liabilities" means amounts paid or incurred in satisfaction of
settlements, judgments, fines and penalties;
(e) "Proceeding" means any pending, threatened or completed civil,
criminal, administrative or arbitrative action, suit or proceeding, and any
appeal therein and any inquiry or investigation which could lead to such
action, suit or proceeding; and
(f) References to "other enterprises" include employee benefit plans;
references to "fines" include any excise taxes assessed on a person with
respect to an employee benefit plan; and references to "serving at the
request of the indemnifying corporation" include any service as a corporate
agent which imposes duties on, or involves services by, the corporate agent
with respect to an employee benefit plan, its participants, or
beneficiaries; and a person who acted in good faith and in a manner the
person reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in
a manner "not opposed to the best interests of the corporation" as referred
to in this section.
(2) Any corporation organized for any purpose under any general or
special law of this State shall have the power to indemnify a corporate
agent against his expenses and liabilities in connection with any
proceeding involving the corporate agent by reason of his being or having
been such a corporate agent, other than a proceeding by or in the right of
the corporation, if
(a) such corporate agent acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation; and
(b) with respect to any criminal proceeding, such corporate agent had no
reasonable cause to believe his conduct was unlawful. The termination of
any proceeding by judgment, order, settlement, conviction or upon a plea of
nolo contendere or its equivalent, shall not of itself create a presumption
that such corporate agent did not meet the applicable standards of conduct
set forth in paragraphs 14A:3-5(2)(a) and 14A:3-5(2)(b).
(3) Any corporation organized for any purpose under any general or
special law of this State shall have the power to indemnify a corporate
agent against his expenses in connection with any proceeding by or in the
right of the corporation to procure a judgment in its favor which involves
the corporate agent by reason of his being or having been such corporate
agent, if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation. However, in
such proceeding no indemnification shall be provided in respect of any
claim, issue or matter as to which such corporate agent shall have been
adjudged to be liable to the corporation, unless and only to the extent
that the Superior Court or the court in which such proceeding was brought
shall determine upon application that despite the adjudication of
liability, but in view of all circumstances of the
case, such corporate agent is fairly and reasonably entitled to indemnity
<PAGE>
for such expenses as the Superior Court or such other court shall deem
proper.
(4) Any corporation organized for any purpose under any general or
special law of this State shall indemnify a corporate agent against
expenses to the extent that such corporate agent has been successful on the
merits or otherwise in any proceeding referred to in subsections 14A:3-5(2)
and 14A:3-5(3) or in defense of any claim, issue or matter therein.
(5) Any indemnification under subsection 14A:3-5(2) and, unless ordered
by a court, under subsection 14A:3-5(3) may be made by the corporation only
as authorized in a specific case upon a determination that indemnification
is proper in the circumstances because the corporate agent met the
applicable standard of conduct set forth in subsection 14A:3-5(2) or
subsection 14A:3-5(3). Unless otherwise provided in the certificate of
incorporation or bylaws, such determination shall be made
(a) by the board of directors or a committee thereof, acting by a
majority vote of a quorum consisting of directors who were not parties to
or otherwise involved in the proceeding; or
(b) if such a quorum is not obtainable, or, even if obtainable and such
quorum of the board of directors or committee by a majority vote of the
disinterested directors so directs, by independent legal counsel, in a
written opinion, such counsel to be designated by the board of directors;
or
(c) by the shareholders if the certificate of incorporation or bylaws or
a resolution of the board of directors or of the shareholders so directs.
(6) Expenses incurred by a corporate agent in connection with a
proceeding may be paid by the corporation in advance of the final dis-
position of the proceeding as authorized by the board of directors upon
receipt of an undertaking by or on behalf of the corporate agent to repay
such amount if it shall ultimately be determined that he is not entitled to
be indemnified as provided in this section.
(7) (a) If a corporation upon application of a corporate agent has
failed or refused to provide indemnification as required under subsection
14A:3-5(4) or permitted under subsections 14A:3-5(2), 14A:3-5(3) and
14A:3-5(6), a corporate agent may apply to a court for an award of
indemnification by the corporation, and such court
(i) may award indemnification to the extent authorized under subsections
14A:3-5(2) and 14A:3-5(3) and shall award indemnification to the extent
required under subsection 14A:3-5(4), notwithstanding any contrary deter-
mination which may have been made under subsection 14A:3-5(5); and
(ii) may allow reasonable expenses to the extent authorized by, and
subject to the provisions of, subsection 14A:3-5(6), if the court shall
find that the corporate agent has by his pleadings or during the course of
the proceeding raised genuine issues of fact or law.
(b) Application for such indemnification may be made:
(i) in the civil action in which the expenses were or are to be incurred
or other amounts were or are to be paid; or
(ii) to the Superior Court in a separate proceeding. If the application
is for indemnification arising out of a civil action, it shall set forth
reasonable cause for the failure to make application for such relief in the
action or proceeding in which the expenses were or are to be incurred or
other amounts were or are to be paid.
The application shall set forth the disposition of any previous
<PAGE>
application for indemnification and shall be made in such manner and form
as may be required by the applicable rules of court or, in the absence
thereof, by direction of the court to which it is made. Such application
shall be upon notice to the corporation. The court may also direct that
notice shall be given at the expense of the corporation to the shareholders
and such other persons as it may designate in such manner as it may
require.
(8) The indemnification and advancement of expenses provided by or
granted pursuant to the other subsections of this section shall not exclude
any other rights, including the right to be indemnified against liabilities
and expenses incurred in proceedings by or in the right of the corporation,
to which a corporate agent may be entitled under a certificate of
incorporation, bylaw, agreement, vote of shareholders, or otherwise;
provided that no indemnification shall be made to or on behalf of a
corporate agent if a judgment or other final adjudication adverse to the
corporate agent establishes that his acts or omissions (a) were in breach
of his duty of loyalty to the corporation or its shareholders, as defined
in subsection (3) of N.J.S.14A:2-7, (b) were not in good faith or involved
a knowing violation of law or (c) resulted in receipt by the corporate
agent of an improper personal benefit.
(9) Any corporation organized for any purpose under any general or
special law of this State shall have the power to purchase and maintain
insurance on behalf of any corporate agent against any expenses incurred in
any proceeding and any liabilities asserted against him by reason of his
being or having been a corporate agent, whether or not the corporation
would have the power to indemnify him against such expenses and liabilities
under the provisions of this section. The corporation may purchase such
insurance from, or such insurance may be reinsured in whole or in part by,
an insurer owned by or otherwise affiliated with the corporation, whether
or not such insurer does business with other insureds.
(10) The powers granted by this section may be exercised by the
corporation, notwithstanding the absence of any provision in its
certificate of incorporation or bylaws authorizing the exercise of such
powers.
(11) Except as required by subsection 14A:3-5(4), no indemnification
shall be made or expenses advanced by a corporation under this section, and
none shall be ordered by a court, if such action would be inconsistent with
a provision of the certificate of incorporation, a bylaw, a resolution of
the board of directors or of the shareholders, an agreement or other proper
corporate action, in effect at the time of the accrual of the alleged cause
of action asserted in the proceeding, which prohibits, limits or otherwise
conditions the exercise of indemnification powers by the corporation or the
rights of indemnification to which a corporate agent may be entitled.
(12) This section does not limit a corporation's power to pay or
reimburse expenses incurred by a corporate agent in connection with the
corporate agent's appearance as a witness in a proceeding at a time when
the corporate agent has not been made a party to the proceeding.
The Underwriting Agreement provides for indemnification by the
Underwriters of the Registrant and its officers and directors for certain
liabilities, including liabilities under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since December 1, 1993, the Company has sold and issued the
following unregistered securities:
1. November 30, 1994. Exchange of 706,982 shares of Common Stock
and 1,338,600 shares of Class A Stock pursuant to a merger by
EMCORE Merger Subsidiary Corporation with and into EMCORE
<PAGE>
Corporation. All purchasers of these shares were existing
shareholders of EMCORE Corporation. The exchange ratio was as
follows: 100 shares of EMCORE Corporation Class IV Stock for 150
shares of Class A Stock; 100 shares of EMCORE Corporation Class
III Stock for 10 shares of Common Stock; 100 shares of EMCORE
Corporation Class I Stock for 4 shares of Common Stock; and, 100
shares of old Common Stock for 1 share of new Common Stock. No
cash was involved in this transaction. The transaction was
exempt from registration pursuant to Section 3(a)(9) of the
Securities Act.
2. October 25, 1995. The issuance of 9,370,200 number of shares of
Common Stock in exchange for 1,338,600 shares of Class A Common
Stock pursuant to a merger of EMCORE Merger Subsidiary Two
Corporation with and into EMCORE Corporation. All purchasers of
these shares were existing shareholders of EMCORE Corporation.
No cash was involved in this transaction. This exchange was
exempt from registration pursuant to Section 3(a)(9) of the
Securities Act.
3. October 25, 1995. Sale of 103,993 shares at $0.89 a share to
holders of the Company's warrants to purchase the Company's
Common Stock at $5.00 a shares until 1997. The consideration
received included the surrender of warrants plus a total cash
consideration of $92,554. This transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act.
4. December 1, 1995. Sale of shares issued to Hakuto upon exercise
of warrants held. Hakuto is a publicly held Japanese
corporation. The warrants had been issued in connection with a
Distributorship Agreement with Hakuto. The total amount of cash
consideration was $10,000. This transaction was exempt from
registration pursuant to Regulation S under the Securities Act.
5. May 1, 1996. Issuance of $9,500,000 of 6% Subordinated Notes due
2001 in a unit paired with warrants to purchase 7,916,667 shares
of Common Stock at $1.20 a share. Holders have the right to use
the principal amount of the Note to exercise the warrants until
the expiration date. The warrants expire on the same date the
Notes mature. In this Offering, $9,500,000 was raised, of which
$1,000,000 was in the form of notes from officers of the Company.
This transaction was exempt from registration pursuant to Section
4(2) of the Securities Act.
6. July 12, 1996. Sale to Dane C. Scott. $9,600 6% Subordinated
Notes due 2001 in a unit paired with warrants to purchase 8,000
shares of Common Stock at $1.20 a share in the aggregate amount
of $9,600. Mr. Scott is a Senior Design Engineer of the Company.
This transaction was exempt from registration pursuant to Section
4(2) of the Securities Act.
7. Employee stock options were granted at various times at prices
ranging from $0.89 a share to $3.00. These transactions were
exempt from registration pursuant to Section 4(2) of and Rule 701
under the Securities Act.
8. September 1996. Sale to JLMP. $2.5 million 6% Subordinated Note
and warrants to purchase 833,333 shares at $3 a share. This
transaction was exempt from registration pursuant to Section 4(2)
of the Securities Act.
9. December 1996. Issuance to JLMP. Warrants to purchase 3,333,333
shares at $3.00 a share in consideration for guaranteeing and
securing the guarantee of a $10 million credit facility. This
transaction was exempt from registration pursuant to Section 4(2)
<PAGE>
of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following exhibits are filed with this Registration
Statement:
Exhibit No. Description
1.1 Form of Underwriting Agreement*
3.1 Amended and Restated Certificate
of Incorporation*
3.2 Amended and Restated By-Laws*
4.1 Specimen certificate for shares
of Common Stock*
5.1 Opinion of White & Case*
10.1 1995 Incentive and Non-Statutory
Stock Option Plan*
10.2 1996 Amendment to Option Plan*
10.3 Specimen Incentive Stock
Option Agreement*
10.4 Hakuto Distributorship Agreement*
10.5 Lease for premises at 394 Elizabeth
Avenue, Somerset, New Jersey 08873*
10.6 September 1996 Registration
Rights Agreement*
10.7 December 1996 Registration
Rights Agreement*
10.8 Form of 6% Subordinated Note Due
May 1, 2001*
10.9 Form of 6% Subordinated Note Due
September 1, 2001*
10.10 Form of $1.20 Warrants*
10.11 Form of $5.00 Warrants*
10.12 Form of $3.00 Warrants*
10.13 Demand note facility with First
Union National Bank*
10.14 Consulting Agreement dated December 6,
1996 between the Registrant and Norman
E. Schumaker*
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of White & Case (included
in Exhibit 5.1)*
23.3 Consent of Lerner David Littenberg
Krumholz & Mentlik
24.1 Power of Attorney (included in
signature page of this
Registration Statement)
27.1 Financial Data Schedule
99.1 Schedule II: Valuation and Qualified
Accounts & Reserves
* To be filed by amendment
(b) Financial Statement Schedule
The following Financial Statement Schedule is filed pursuant to Item
11(e) of
Regulation S-X:
Schedule II: Valuation and Qualified Accounts & Reserves
All other schedules are omitted because they are not applicable or the
required information is shown in the Financial Statements or Notes thereto.
ITEM 17. UNDERTAKINGS
<PAGE>
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement
certificates in such denomination and registered in such names as required
by the Underwriters to permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Township of Somerset, State
of New Jersey, on December 23, 1996.
EMCORE CORPORATION
By /s/ Reuben F. Richards, Jr.
Name: Reuben F. Richards, Jr.
Title: President and Chief
Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints and
hereby authorizes Reuben F. Richards, Jr. and Thomas G. Werthan, severally,
such person's true and lawful attorneys-in-fact, with full power of
substitution or resubstitution, for such person and in his name, place and
stead, in any and all capacities, to sign on such person's behalf,
individually and in each capacity stated below, any and all amendments,
including post-effective amendments to this registration statement and to
sign any and all additional registration statements relating to the same
offering of securities as this registration statement that are filed
pursuant to Rule 462(b) of the Securities Act, and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Commission granting unto said attorneys-in-fact, full power and authority
to do and perform each and every act and thing requisite or necessary to be
done in and about the premises, as fully to all intents and purposes as
such person might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact, or their substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement on Form S-1 has been signed by the following persons in the
capacities indicated, on December 23, 1996.
Signature Title
/s/ Reuben F. Richards, Jr. President, Chief Executive
Reuben F. Richards, Jr. Officer and Director
(Principal Executive Officer)
/s/ Thomas G. Werthan Vice President, Chief
Thomas G. Werthan Financial Officer, Secretary
and Director (Principal
Accounting and Financial
Officer)
Richard A. Stall Director
/s/ Thomas J. Russell Chairman of the Board
Thomas J. Russell and Director
/s/ Howard R. Curd Director
Howard R. Curd
/s/ Howard F. Curd Director
Howard F. Curd
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
1.1 Form of Underwriting Agreement*
3.1 Amended and Restated Certificate
of Incorporation*
3.2 Amended and Restated By-Laws*
4.1 Specimen certificate for shares
of Common Stock*
5.1 Opinion of White & Case*
10.1 1995 Incentive and Non-Statutory
Stock Option Plan*
10.2 1996 Amendment to Option Plan*
10.3 Specimen Incentive Stock
Option Agreement*
10.4 Hakuto Distributorship Agreement*
10.5 Lease for premises at 394 Elizabeth
Avenue, Somerset, New Jersey 08873*
10.6 September 1996 Registration
Rights Agreement*
10.7 December 1996 Registration
Rights Agreement*
10.8 Form of 6% Subordinated Note Due
May 1, 2001*
10.9 Form of 6% Subordinated Note Due
September 1, 2001*
10.10 Form of $1.20 Warrants*
10.11 Form of $5.00 Warrants*
10.12 Form of $3.00 Warrants*
10.13 Demand note facility with First
Union National Bank*
10.14 Consulting Agreement dated December 6,
1996 between the Registrant and Norman
E. Schumaker*
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of White & Case (included
in Exhibit 5.1)*
23.3 Consent of Lerner David Littenberg
Krumholz & Mentlik
24.1 Power of Attorney (included in
signature page of this
Registration Statement)
27.1 Financial Data Schedule
99.1 Schedule II: Valuation and Qualified
Accounts & Reserves
* To be filed by amendment
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1
of our report dated November 1, 1996, except for Notes 13 and 15 as to
which the date is December 6, 1996, on our audits of the financial
statements and financial statement schedule of EMCORE Corporation. We also
consent to the reference to our Firm under the caption "Experts".
Coopers & Lybrand L.L.P.
Parsippany, New Jersey
December 23, 1996
<PAGE>
Exhibit 23.3
CONSENT OF LERNER DAVID LITTENBERG KRUMHOLZ & MENTLIK
We hereby consent to the reference to our firm under the caption
"Experts" in the Registration Statement on Form S-1 of EMCORE Corporation
for the registration of its Common Stock.
Lerner David
Littenberg Krumholz & Mentlik
Westfield, New Jersey
December 23, 1996
<PAGE>
Exhibit 99.1
EMCORE CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
BALANCE AT BALANCE AT
BEGINNING CHARGED RECOVERIES END OF
DESCRIPTION OF PERIOD TO EXPENSE (DEDUCTIONS) PERIOD
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts
For the year ended September $163,531 183,000 (36,582)(1) $309,949
30, 1996
For the year ended September $ 68,101 128,630 (33,200)(1) $163,531
30, 1995
For the year ended September $ 46,000 17,759 4,342 (2) $ 68,101
30, 1994
Reserves for Inventory
Obsolescence
For the year ended September $115,000 105,000 - $220,000
30, 1996
For the year ended September $ 99,621 15,379 - $115,000
30, 1995
For the year ended September $ 74,752 24,869 - $ 99,621
30, 1994
</TABLE>
____________________
(1) Uncollectible accounts written off.
(2) Recoveries of accounts previously written off.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS AND NOTES INCLUDED IN THE REGISTRATION STATEMENT ON FORM
S-1 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 1,367,386
<SECURITIES> 0
<RECEIVABLES> 3,335,171
<ALLOWANCES> 310,000
<INVENTORY> 7,645,040
<CURRENT-ASSETS> 12,116,854
<PP&E> 15,546,099
<DEPRECIATION> 7,749,267
<TOTAL-ASSETS> 20,434,421
<CURRENT-LIABILITIES> 10,965,861
<BONDS> 8,365,392
0
0
<COMMON> 19,407,566
<OTHER-SE> (18,304,398)
<TOTAL-LIABILITY-AND-EQUITY> 20,434,421
<SALES> 27,778,885
<TOTAL-REVENUES> 27,778,885
<CGS> 18,606,420
<TOTAL-COSTS> 18,606,420
<OTHER-EXPENSES> 11,925,895
<LOSS-PROVISION> 146,418
<INTEREST-EXPENSE> 422,884
<INCOME-PRETAX> (3,176,314)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,176,314)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,176,314)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
