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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number: 0-22175
EMCORE CORPORATION
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-2746503
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
394 ELIZABETH AVENUE, SOMERSET, NJ 08873
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (732) 271-9090
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK,
NO PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of common stock held by non-affiliates of the
registrant as of December 1, 1999 was approximately $205,186,625 (based on the
closing sale price of $23 15/16 per share).
The number of shares outstanding of the registrant's no par value common stock
as of December 1, 1999 was 13,565,769.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the 2000 Annual
Meeting of Shareholders (to be filed with the Securities and Exchange Commission
on or before January 28, 2000) are incorporated by reference in Part III of this
Form 10-K.
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CAUTIONARY STATEMENT IDENTIFYING IMPORTANT FACTORS
THAT COULD CAUSE EMCORE'S ACTUAL RESULTS TO DIFFER
FROM THOSE PROJECTED IN FORWARD-LOOKING STATEMENTS:
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, you are advised that this report contains both
statements of historical facts and forward looking statements.
This report includes forward-looking statements that reflect current
expectations or beliefs of EMCORE Corporation concerning future results and
events. The words "expects," "intends," "believes," "anticipates," "likely,"
"will", and similar expressions identify forward-looking statements. These
forward-looking statements are subject to certain risks and uncertainties that
could cause actual results and events to differ materially from those
anticipated in the forward-looking statements. Factors that might cause such a
difference include, but are not limited to, delays in developing and
commercializing new products; cancellations, rescheduling or delays in product
shipments; delays in obtaining export licenses for product shipments; the
uncertainty of additional funding; continued acceptance of our MOCVD
technologies; operations and performance of our joint ventures; our ability to
achieve and implement the planned enhancements of products and services on a
timely and cost effective basis and customer acceptance of those product
introductions; product obsolescence due to advances in technology and shifts in
market demand; competition and resulting price pressures; labor actions against
EMCORE's customers or vendors; difficulties in obtaining licenses on
commercially reasonable terms necessary to manufacture and sell certain of our
products; economic and stock market conditions, particularly in the U.S., Europe
and Asia, and their impact on sales of our products and services; and such other
risk factors as may have been or may be included from time to time in EMCORE's
reports filed with the Securities and Exchange Commission.
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PART I
ITEM 1. BUSINESS
COMPANY OVERVIEW
EMCORE Corporation designs, develops and manufactures compound
semiconductor materials and is a leading developer and manufacturer of the tools
and manufacturing processes used to fabricate compound semiconductor wafers and
devices. EMCORE's products and technology enable its customers, both in the
United States and internationally, to manufacture commercial volumes of
high-performance electronic devices using compound semiconductors. EMCORE has
recently established a number of strategic relationships through joint ventures,
long-term supply agreements and an acquisition in order to facilitate the
development and manufacture of new products in targeted growth markets. EMCORE's
products are used for a wide variety of applications in the communications
(satellite, data, telecommunications and wireless), consumer and automotive
electronics, computers and peripherals and lighting markets. Our customers
include Agilent Technologies Ltd., AMP, Inc., Hewlett Packard Co., General
Motors Corp., Hughes-Spectrolab, Lucent Technologies, Inc., Motorola, Inc.,
Siemens AG's Osram GmbH subsidiary and 12 of the largest electronics
manufacturers in Japan.
INDUSTRY OVERVIEW
Recent advances in information technologies have created a growing need
for efficient, high-performance electronic systems that operate at very high
frequencies, have increased storage capacity and computational and display
capabilities, and can be produced cost-effectively in commercial volumes. In the
past, electronic systems manufacturers have relied on advances in silicon
semiconductor technology to meet many of these demands. However, the newest
generation of high-performance electronic and optoelectronic applications
require certain functions that are generally not achievable using silicon-based
components.
Compound semiconductors have emerged as an enabling technology to meet
the complex requirements of today's advanced information systems. Many compound
semiconductor materials have unique physical properties that allow electrons to
move at least four times faster than through silicon-based devices. Advantages
of compound semiconductor devices over silicon devices include:
o operation at higher speeds;
o lower power consumption;
o less noise and distortion; and
o optoelectronic properties that enable these devices to emit and
detect light.
Compound semiconductor devices can be used to perform individual
functions as discrete devices, such as solar cells, HB LEDs, VCSELs, MR sensors
and RF materials. Compound semiconductor devices can also be combined into
integrated circuits, such as transmitters, receivers and alphanumeric displays.
Although compound semiconductors are more expensive to manufacture than
silicon-based devices, electronics manufacturers are increasingly integrating
compound semiconductor devices into their products in order to achieve higher
performance in applications targeted for a wide variety of markets. These
include satellite communications, data communications, telecommunications,
wireless communications, consumer and automotive electronics, computers and
peripherals, and lighting.
The following factors have resulted in an increased demand for compound
semiconductor products and systems that enable electronic systems manufacturers
to reach the market faster with large volumes of high-performance products and
applications:
o rapid build-out of satellite communications systems;
o widespread deployment of fiber optic networks and the increasing use
of optical systems within these networks;
o launch of new wireless services and wireless high speed data systems;
o increasing use of infrared emitters and optical detectors in computer
systems;
o emergence of advanced consumer electronics applications, such as DVDs
and flat panel displays;
o increasing use of high-performance electronic devices in automobiles;
and
o the anticipated conversion to HB LEDs from incandescent, halogen and
compact fluorescent lighting.
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The following chart summarizes the principal markets, examples of
applications for compound semiconductor devices, products incorporating these
devices and certain benefits and characteristics of these devices.
<TABLE>
<CAPTION>
MARKET REPRESENTATIVE APPLICATIONS PRODUCTS BENEFITS/CHARACTERISTICS
------ --------------------------- -------- ------------------------
<S> <C> <C> <C>
Satellite Power modules for satellites Solar cells Radiation tolerance
communications Satellite to ground RF materials Conversion of more light
communication to power than silicon
Reduced launch costs
Increased bandwidth
Data communications High-speed fiber optic VCSEL Increased network capacity
networks and optical links components Increased data transmission
(including Gigabit Ethernet, and arrays speeds
asynchronous transfer mode, HB LEDs Increased bandwidth
or ATM, and FibreChannel Lasers
Networks) RF materials
Telecommunications High capacity fiber optic trunk VCSEL Increased data transmission
lines components speeds
and arrays Increased bandwidth
Lasers
RF materials
Wireless Cellular telephones HB LEDs Improved display visibility
communication Pagers RF materials Improved signal to noise
PCS handsets performance
Direct broadcast systems Lower power consumption
Increased network capacity
Reduced network congestion
Extended battery life
Consumer electronics DVDs HB LEDs Improved display visibility
Radios VCSEL High-speed data transmission
Telephones components Low power requirements
Calculators and arrays
CD-Roms Integrated circuits
Lasers
Automotive electronics Engine sensors MR sensors Reduced weight
Dashboard displays HB LEDs Lower power consumption
Indicator lights Lower emissions
Antilock brake systems
Computers and Local area networks VCSEL Increased data transmission speeds
peripherals Chip-to-chip and board-to-board components Increased bandwidth
optical links and arrays
Transceivers
Lighting Flat panel displays HB LEDs Lower power consumption
Solid state lighting Miniature lamps Longer life
Outdoor signage and display
Digital readout signals
</TABLE>
COMPOUND SEMICONDUCTOR PROCESS TECHNOLOGY
Compound semiconductors are composed of two or more elements and usually
consist of a metal such as gallium, aluminum or indium and a non-metal such as
arsenic, phosphorous or nitrogen. The resulting compounds include gallium
arsenide, indium phosphide, gallium nitride, indium antimonide and indium
aluminum phosphide. The performance characteristics of compound semiconductors
are dependent on the composition of these compounds. Many of the unique
properties of compound semiconductor devices are achieved by the layering of
different compound semiconductor materials in the same device. This layered
structure creates an optimal configuration to permit the emission or detection
of light and the detection of magnetic fields.
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Accordingly, the composition and properties of each layer and the
control of the layering process, or epitaxy, are fundamental to the performance
of advanced electronic and optoelectronic compound semiconductor devices. The
variation of thickness and composition of layers determines the intensity and
color of the light emitted or detected and the efficiency of power conversion.
The ability to vary the intensity, color and efficiency of light generation and
detection enables compound semiconductor devices to be used in a broad range of
advanced information systems.
Compound semiconductor device manufacturers predominantly use four
methods to deposit compound materials: molecular beam epitaxy, vapor phase
epitaxy, liquid phase epitaxy and metal organic chemical vapor deposition
("MOCVD"). The use of molecular beam epitaxy technology can yield wafers having
high thickness uniformity. Compound semiconductor materials fabricated using
liquid phase epitaxy or vapor phase epitaxy technologies often have high
electronic and optical properties. However, due to the nature of the underlying
processes, these methods are not easily scaled up to high volume production,
which is necessary for the commercial viability of compound semiconductor
devices. All of the methods used to manufacture compound semiconductor devices
pose technical, training and safety challenges that are not present in the
manufacture of silicon devices. These production systems typically require
expensive reactant materials, the use of certain toxic chemicals, and tight
control over numerous manufacturing parameters. The key differences between
MOCVD and the three other methods is that compound semiconductor wafers
fabricated using MOCVD generally possess a better combination of uniformity and
optical and electronic properties and are easier to produce in high volumes than
wafers manufactured by the three more traditional methods. Currently, MOCVD
technology is being used to manufacture a broad range of compound semiconductor
devices.
Historically, manufacturers who use compound semiconductor devices in
their products have met research, pilot production and capacity needs with
in-house systems and technologies. However, as the need for the production of
commercial volumes of high-performance compound semiconductor devices and the
variety of these devices grows, manufacturers are often unable to meet these
requirements using in-house solutions. In response to these growing demands for
higher volumes of a broad range of higher performance devices, manufacturers are
increasingly turning to outside vendors to meet their needs for compound
semiconductor wafers and devices.
THE EMCORE SOLUTION
EMCORE provides its customers with a broad range of compound
semiconductor products and services intended to meet their diverse technology
requirements. EMCORE has developed extensive materials science expertise,
process technology and MOCVD production systems to address our customers' needs
and believes that its proprietary TurboDisc(TM) deposition technology makes
possible one of the most cost-effective production processes for the commercial
volume manufacture of high-performance compound semiconductor wafers and
devices. This platform technology provides the basis for the production of
various types of compound semiconductor wafers and devices and enables EMCORE to
address the critical need of manufacturers to cost-effectively get to market
faster with high volumes of new and improved high-performance products. EMCORE's
compound semiconductor products and services include:
o materials and process development;
o design and development of devices;
o MOCVD production systems; and
o manufacture of wafers and devices in high volumes.
Customers can take advantage of EMCORE's vertically integrated approach
by purchasing custom-designed wafers and devices from EMCORE or they can
manufacture their own devices in-house using a TurboDisc(TM) production system
configured to their specific needs.
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STRATEGY
EMCORE's objective is to capitalize on its position in MOCVD process
technology and production systems to become the leading supplier of compound
semiconductor wafers, devices and production systems. The key elements of
EMCORE's strategy include:
APPLY CORE TECHNOLOGY ACROSS MULTIPLE APPLICATIONS. EMCORE continually
leverages its proprietary core technology to develop compound semiconductor
products for multiple applications in a variety of markets. These activities
include developing new products for targeted applications as well as expanding
existing products into new applications. For example, EMCORE's MR sensors,
currently used by General Motors Corporation as crank shaft sensors, also have
other potential product applications, including as sensors in brushless motors
and antilock brakes. Other existing products, which EMCORE intends to introduce
in new applications, include VCSELs for communications products and HB LEDs for
broader lighting applications.
TARGET HIGH GROWTH MARKET OPPORTUNITIES. EMCORE's strategy is to target
high growth market opportunities where performance characteristics and high
volume production efficiencies can give compound semiconductors a competitive
advantage over other devices. Historically, while technologically superior,
compound semiconductors have not been widely deployed because they are more
expensive to manufacture than silicon-based semiconductors and other existing
solutions. EMCORE believes that as compound semiconductor production costs are
reduced, new customers will be compelled to use these solutions because of their
higher performance characteristics. For example, EMCORE has reduced the average
cost of compound semiconductor solar cells to the point that customers are
replacing silicon-based solar cells because of the compound semiconductor solar
cells' higher overall efficiency and lower weight.
PARTNER WITH KEY INDUSTRY PARTICIPANTS. EMCORE seeks to identify and
develop long-term relationships with leading companies in targeted industries.
EMCORE develops these relationships in a number of ways that include long-term
high-volume supply agreements, joint ventures, an acquisition, and distribution
and other arrangements. For example, EMCORE entered into a joint venture with
General Electric Lighting for the development and marketing of white light and
colored HB LED products for automotive, traffic, flat panel display and other
lighting applications. EMCORE has also entered into a long-term supply agreement
with AMP Incorporated for VCSELs to be used in its transceivers for Gigabit
Ethernet and other applications. EMCORE intends to actively seek similar
strategic relationships with other key customers and industry participants in
order to further expand its technological and production base.
CONTINUE INVESTMENT TO MAINTAIN TECHNOLOGY LEADERSHIP. Through
substantial investment in research and development, EMCORE seeks to expand its
leadership position in compound semiconductor production systems, wafers and
devices. EMCORE works with its customers to identify specific performance
criteria and uses this information to enhance the performance of its production
systems and to further expand its process and materials science expertise,
including the development of new low cost, high-volume wafers and devices for
its customers. In addition, EMCORE's development efforts are focused on
continually lowering the production costs of its solutions.
PRODUCTS
PRODUCTION SYSTEMS
EMCORE is a leading supplier of MOCVD compound semiconductor production
systems, with more than 250 systems shipped as of September 30, 1999. EMCORE
believes that its TurboDisc(TM) systems offer significant ownership advantages
over competing systems and that the high throughput capabilities of its
TurboDisc(TM) systems make possible superior reproducibility of thickness,
composition, electronic properties and layer accuracy required for electronic
and optoelectronic devices. Each system can be customized for the customer's
throughput, wafer size and process chemistry requirements. EMCORE's production
systems also achieve a high degree of reliability with an average time available
for production, based on customer data, of approximately 95%.
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EMCORE believes its TurboDisc(TM) systems enable the lowest cost of
ownership for the manufacture of compound semiconductor materials. The major
components of the cost of ownership include yield, throughput, direct costs and
capital costs. Yield primarily relates to material uniformity, which is a
function of the precision of the physical and chemical processes by which atomic
layers are deposited. Throughput, the volume of wafers produced per unit of
time, includes both the time required for a process cycle and the handling time
between process steps. Direct costs include consumables used in manufacturing
and processing and the clean room space required for the equipment. Capital
costs include the cost of acquisition and installation of the process equipment.
EMCORE's proprietary TurboDisc(TM) technology utilizes a unique high
speed rotating disk in a stainless steel growth chamber with integrated
vacuum-compatible loading chambers. To produce a wafer, a bare substrate, such
as gallium arsenide, sapphire or germanium, is placed on a wafer carrier in the
TurboDisc(TM) growth chamber and subjected to high temperatures. Based on a
predetermined formula, metal organic gases are released into the growth chamber.
These gases decompose on the hot, rapidly spinning wafer. Semiconductor
materials are then deposited on the substrate in a highly uniform manner. The
resulting wafer thus carries one or more ultra-thin layers of compound
semiconductor material such as gallium arsenide, gallium nitride, or indium
aluminum phosphide. The TurboDisc(TM) technology not only produces uniformity of
deposition across the wafer, but also offers flexibility for diverse
applications with improved material results and increased production rates. The
unique precision control of reactant gas flow in the TurboDisc(TM) technology
platform allows users to scale easily from research to commercial volumes with
substantially reduced time and effort. Upon removal from the growth chamber, the
wafer is transferred to a device processing facility for various steps such as
photolithography, etching, masking, metallization and dicing. Upon completion of
these steps, the devices are then sent for packaging by the customer or other
third parties and inclusion in the customer's product.
EMCORE offers the following family of TurboDisc(TM) systems:
<TABLE>
<CAPTION>
MODEL LIST PRICE APPLICATION
----- ---------- -----------
<S> <C> <C>
Discovery $ 600,000 - $1,300,000 Development/Pilot Production
Enterprise $1,300,000 - $2,500,000 Volume Production
</TABLE>
EMCORE's next generation of TurboDisc(TM) products is being designed to
provide a number of innovations including:
o new reactor design to improve efficiency;
o cassette-to-cassette wafer handling to increase automation;
o digital control system to reduce noise;
o real-time process control and data acquisition on WindowsNT platform;
o modular component design to ease outsourcing and upgrading; and
o improved temperature control.
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WAFERS AND DEVICES
Since its inception, EMCORE has worked closely with its customers to
design and develop materials processes for use in production systems for its
customers' end-use applications. EMCORE has leveraged its process and materials
science knowledge base to manufacture a broad range of compound semiconductor
wafers and devices such as solar cells, HB LEDs, VCSELs, MR sensors and RF
materials.
Within most of these product lines, EMCORE has established strategic
relationships through joint ventures, long-term supply agreements and an
acquisition. A summary of these relationships is found below:
<TABLE>
<CAPTION>
PRODUCTS AND STRATEGIC RELATIONSHIPS
- -------------------------------------------------------------------------------------------------------------------
PRODUCT LINE COMPANY NATURE OF RELATIONSHIP APPLICATION
------------ ------- ---------------------- -----------
<S> <C> <C> <C>
Solar cells Space Systems / Long-term supply agreement Solar panels in
Loral communications
satellite powered
Lockheed Martin Strategic Partner systems
Missiles and Space
Union Miniere Inc. Long-term germanium sourcing
agreement
HB LEDs General Electric GELcore joint venture for the Traffic lights
Lighting development, marketing and Miniature lamps
distribution of white light Automotive lighting
and colored HB LED Flat panel displays
products
Uniroyal Uniroyal Optoelectronics joint Other lighting applications
Technology venture for the
Corporation manufacture of HB LED
wafers and package-ready
devices
VCSELs AMP Incorporated Strategic alliance and long- Optical links (including
term supply agreement Gigabit Ethernet, ATM, and
FibreChannel networks)
MicroOptical Acquisition
Devices, Inc.
MR sensors Optek Technology, Emtech joint venture for Antilock brake systems
Inc. packaging and marketing of Brushless motors
MR sensors Engine timing sensors
Cam and crank shaft sensors
General Motors Long-term supply agreement
Corporation
Germanium research Union Miniere Inc. UMCore joint venture Exploring alternative uses for
and development germanium substrates
RF materials Sumitomo Electric Cooperative development Digital wireless and cellular
Industries, Ltd. agreement applications
Long-term supply agreement
</TABLE>
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SOLAR CELLS.
Compound semiconductor solar cells are used to power satellites because
they are more resistant to radiation levels in space, convert substantially more
light to power and therefore weigh less per unit of power than silicon-based
solar cells. These characteristics increase satellite life, increase payload
capacity and reduce launch costs. EMCORE is currently involved in five solar
cell projects:
o In November 1999, EMCORE entered into a Technical Assistance
Agreement with Loral and Mitsubishi Electric Corporation.
o In November 1998, EMCORE signed a four-year purchase agreement with
Space Systems/Loral, a wholly owned subsidiary of Loral Space &
Communications. Under this agreement, EMCORE will supply compound
semiconductor high efficiency gallium arsenide solar cells for
Loral's satellites. EMCORE received purchase orders from Space
Systems/Loral that total $7.2 million and will service this agreement
through our newly completed facility in Albuquerque, New Mexico.
EMCORE plans to start shipping solar cells as early as December 1999
and a majority of the solar cell shipments are scheduled for the
second fiscal quarter, which ends March 31, 2000.
o In November 1998, EMCORE received a $2.2 million contract under the
U.S. Air Force's Broad Agency Announcement Program for the
development of high-efficiency advanced solar cells.
o In September 1998, EMCORE entered into an agreement with Lockheed
Martin Missiles and Space, a strategic business unit of Lockheed
Martin Corporation, to provide technical management and support of a
Cooperative Research and Development Agreement between Lockheed
Martin and Sandia National Laboratory for the advancement and
commercialization of a new compound semiconductor high efficiency
solar cell. Pursuant to this strategic agreement, (1) Lockheed Martin
will grant EMCORE a sub-license for all related intellectual property
developed on behalf of or in conjunction with Lockheed Martin, and
(2) EMCORE and Lockheed Martin will jointly qualify and validate the
high efficiency solar cells for operational satellite use.
o In August 1998, EMCORE and Union Miniere Inc., a mining and materials
company, entered into a long-term supply agreement for germanium,
which EMCORE uses to fabricate solar cells. In addition to their
solar cell relationship, in November 1998, EMCORE formed UMCore, a
joint venture with Union Miniere to explore and develop alternate
uses for germanium using EMCORE's material science and production
platform expertise and Union Miniere's access to and experience with
germanium. UMCore commenced research and development operations in
January 1999.
HB LEDS.
High-brightness light-emitting diodes (HB LEDs) are solid state compound
semiconductor devices that emit light. The global demand for HB LEDs is
experiencing rapid growth because LEDs have a long useful life of approximately
10 years, consume approximately 10% of the power consumed by incandescent or
halogen lighting and improve display visibility. In February 1998, EMCORE and
Uniroyal Technology Corporation formed Uniroyal Optoelectronics, a joint venture
to manufacture, sell and distribute HB LED wafers and package-ready devices.
In May 1999, EMCORE and General Electric Lighting formed GELcore, a
joint venture to develop and market HB LED lighting products. General Electric
Lighting and EMCORE have agreed that this joint venture will be the exclusive
vehicle for each party's participation in solid state lighting. GELcore seeks to
combine EMCORE's materials science expertise, process technology and compound
semiconductor production systems with General Electric Lighting's brand name
recognition and extensive marketing and distribution capabilities. GELcore's
long-term goal is to develop products to replace traditional lighting.
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VCSELS.
Vertical cavity surface-emitting lasers ("VCSELs") are semiconductor
lasers that emit light in a cylindrical beam. Leading electronic systems
manufacturers are integrating VCSELs into a broad array of end-market
applications including Internet access, digital cross-connect telecommunications
switches, DVD, and fiber optic switching and routing, such as Gigabit Ethernet.
VCSELs offer significant advantages over traditional laser diodes, including:
o greater control over beam size and wavelength;
o reduced manufacturing complexity and packaging costs;
o lower power consumption; and
o higher frequency performance.
In December 1997, EMCORE acquired MicroOptical Devices, Inc. ("MODE"), a
development stage company, primarily dedicated to the research and development
of enabling VCSEL technologies. In February 1998, EMCORE announced Gigalase, its
first commercial high speed VCSEL laser. In September 1998, EMCORE signed a
four-year purchase agreement with AMP Inc. to provide VCSELs for a family of
optical transceivers for the Gigabit Ethernet, FibreChannel and ATM markets. In
December 1998, EMCORE announced its second VCSEL product, Gigarray, a VCSEL
array.
MR SENSORS.
Magneto resistive ("MR") sensors are compound semiconductor devices that
possess sensing capabilities. MR sensors improve vehicle performance through
more accurate control of engine and crank shaft timing, which allows for
improved spark plug efficiency and reduced emissions. In January 1997, EMCORE
initiated shipments of compound semiconductor MR sensors using technology
licensed to EMCORE from General Motors. This license allows EMCORE to
manufacture and sell products using this technology to anyone. As of September
30, 1999 EMCORE has delivered over eight million devices to General Motors
Powertrain for crank and cam speed and position sensing applications for 5
different engine builds under 20 different vehicle platforms.
In October 1998, EMCORE formed Emtech, a joint venture with Optek
Technology, Inc., a packager and distributor of optoelectronic devices, to
market an expanded line of MR sensors to the automotive and related industries.
This joint venture seeks to combine EMCORE's strength in producing devices with
Optek's strength in packaging and distributing devices to offer off-the-shelf
products and expand market penetration. As of September 30, 1999, the joint
venture has not commenced operations.
RF MATERIALS.
Radio frequency ("RF") materials are compound semiconductor materials
that transmit and receive communications. Compound semiconductor RF materials
have a broader bandwidth and superior performance at high frequencies than
silicon-based materials. EMCORE currently produces RF materials for use as power
amplifiers in cellular phone handsets. In addition, EMCORE is exploring
opportunities to market these materials for additional uses in fiber optics and
satellite communications. EMCORE believes that its ability to produce high
volumes of RF materials at a low cost will facilitate their adoption in new
applications and new products.
In May 1999, EMCORE signed a long-term agreement with Sumitomo Electric
Industries, Ltd. (Hyogo, Japan) to jointly develop and produce Indium Gallium
Phosphide (InGaP) epitaxial wafers for use as Heterojunction Bipolar Transistor
(HBT) devices used in digital wireless and cellular applications. Sumitomo
Electric is one of the world's leading electronics manufacturers. These advanced
compound semiconductor HBT wafers will be produced at EMCORE's Epitaxial
Materials (E2M) wafer foundry in Somerset, New Jersey, and shipments of
commercial product are expected to begin in February 2000.
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CUSTOMERS
EMCORE's customers include many of the largest semiconductor,
telecommunications, consumer goods and computer manufacturing companies in the
world. A number of EMCORE's customers are listed below. In addition, EMCORE has
sold its products to 12 of the largest electronics manufacturers in Japan.
AMP Incorporated LG Semiconductor Rockwell International
The Boeing Company L.M. Ericsson AB Samsung
General Motors Lucent Technologies Sharp U.S.A.
Hewlett Packard Motorola Siemens AG - Osram
Honeywell Northrop Grumman Texas Instruments
Hughes-Spectrolab Philips AG Thomson CSF
Hyundai Electronics Polaroid Westinghouse Electric
IBM
EMCORE has a comprehensive total quality management program with special
emphasis on total customer satisfaction. EMCORE seeks to encourage active
customer involvement with the design and operation of its production systems. To
accomplish this, EMCORE conducts user group meetings among its customers in
Asia, Europe and North America. At annual meetings, EMCORE's customers provide
valuable feedback on key operations, process oriented services, problems and
recommendations to improve EMCORE products. This direct customer feedback has
enabled EMCORE to constantly update and improve the design of its systems and
processes. Changes that affect the reliability and capabilities of EMCORE's
systems are embodied in new designs to enable current and future customers to
utilize systems which EMCORE believes are high quality and cost-efficient. As of
September 30, 1999, EMCORE employed 18 field service engineers who install
EMCORE systems and provide on-site support.
MARKETING AND SALES
EMCORE markets and sells its wafers, devices and systems through its
direct sales force in Europe, North America and Taiwan and through
representatives and distributors elsewhere in Asia. To market and service its
products in China, Japan and Singapore, EMCORE relies on a single marketing,
distribution and service provider, Hakuto Co., Ltd. EMCORE's agreements with
Hakuto have a term of 10 years, expiring March 2008. Hakuto has exclusive
distribution rights for certain EMCORE products in Japan. Hakuto has marketed
and serviced EMCORE's products since 1988, is a minority shareholder in EMCORE,
and the President of Hakuto is a member of EMCORE's Board of Directors. EMCORE
recently opened sales offices in Taiwan and California in order to be closer to
its customers. As of September 30, 1999, EMCORE employed 27 persons in sales and
marketing.
EMCORE's sales and marketing, senior management and technical staff work
closely with existing and potential customers to provide compound semiconductor
solutions for its customers' needs. The sales process begins by understanding
the customer's requirements and then attempting to match these requirements with
the optimal solution. EMCORE seeks to match the customer's requirements to an
existing design or a modification of a standard design, such as a change in
platform or process design. When necessary, EMCORE will work with the customer
to develop the appropriate design process and to configure and manufacture the
production system to meet the customer's needs. Also, EMCORE will produce
samples to demonstrate conformance to the customer's specifications. For
production systems, the amount of time from the initial contact with the
customer to the customer's placement of an order is typically two to nine months
or longer. EMCORE's sales cycle for wafers and devices usually runs three to
nine months, during which time EMCORE develops the formula of materials
necessary to meet the customer's specifications and qualifies the materials,
which may also require the delivery of samples. EMCORE believes that the high
level of marketing, management and engineering support involved in this process
is beneficial in developing competitive differentiation and long-term
relationships with its customers.
-11-
<PAGE> 12
SERVICE AND SUPPORT
EMCORE maintains a worldwide service and support network responsible for
on-site maintenance and process monitoring on either a contractual or
time-and-materials basis. Customers may purchase annual service contracts under
which EMCORE is required to maintain an inventory of replacement parts and to
service the equipment upon the request of the customer. EMCORE also sells
replacement parts from inventory for customer needs. EMCORE pursues a program of
system upgrades for customers to increase the performance of older systems.
EMCORE generally does not offer extended payment terms to its customers and
generally adheres to a warranty policy of one year. Consistent with industry
practice, EMCORE maintains an inventory of components for servicing systems in
the field and it believes that its inventory is sufficient to satisfy
foreseeable short-term customer requirements. In fiscal year 1998, EMCORE opened
a warehouse depot in Taiwan to provide improved service to its Asian customers.
RESEARCH AND DEVELOPMENT
To maintain and improve its competitive position, EMCORE's research and
development efforts are focused on designing new proprietary processes and
products, improving the performance of existing systems, wafers and devices and
reducing costs in the product manufacturing process. EMCORE has dedicated 21
TurboDisc(TM) systems for both research and production that are capable of
processing virtually all compound semiconductor materials. The research and
development staff utilizes x-ray, optical and electrical characterization
equipment, which provide instant data allowing for shortened development cycles
and rapid customer response. EMCORE's recurring research and development
expenses were approximately $20.7 million in fiscal year 1999, $16.5 million in
fiscal year 1998 and $9.0 million in fiscal year 1997. EMCORE also incurred a
one-time, non-cash acquired in-process research and development expense in
fiscal year 1998 in the amount of $19.5 million in connection with the
acquisition of MODE. EMCORE expects that it will continue to expend substantial
resources on research and development. As of September 30, 1999, EMCORE employed
77 persons in research and development, 33 of whom held Ph.D.s in materials
science or related fields.
EMCORE also competes for research and development funds. In view of the
high cost of development, EMCORE solicits research contracts that provide
opportunities to enhance its core technology base or promote the
commercialization of targeted products. EMCORE presently has ten contracts under
the Small Business Innovative Research programs or similar government sponsored
programs. From inception until September 30, 1999, government and other external
research contracts have provided approximately $15.3 million to support EMCORE's
research and development efforts. EMCORE is also positioned to market technology
and process development expertise directly to customers who require it for their
own product development efforts.
-12-
<PAGE> 13
INTELLECTUAL PROPERTY AND LICENSING
EMCORE's success and competitive position both for production systems
and wafers and devices depend significantly on its ability to maintain trade
secrets and other intellectual property protections. Our strategy is to rely
more on trade secrets than patents. A "trade secret" is information that has
value to the extent it is not generally known, not readily ascertainable by
others through legitimate means, and protected in a way that maintains its
secrecy. Reliance on trade secrets is only an effective business practice
insofar as trade secrets remain undisclosed and a proprietary product or process
is not reverse engineered or independently developed. In order to protect its
trade secrets, EMCORE takes certain measures to ensure their secrecy, such as
executing non-disclosure agreements with its employees, joint venture partners,
customers and suppliers.
To date, EMCORE has been issued 11 U.S. patents and others are either
pending or under review. These U.S. patents will expire between 2005 and 2013.
None of these U.S. patents claim any material aspect of the current or planned
commercial versions of EMCORE's systems, wafers or devices. EMCORE relies on
trade secrets rather than patents to protect its intellectual property because
it believes publishing patents would make it easier for others to reverse
engineer EMCORE's proprietary processes. EMCORE is a licensee of certain VCSEL
technology and associated patent rights owned by Sandia Corporation. The Sandia
license grants EMCORE:
o exclusive rights (subject to certain rights granted to Department of
Energy and AT&T Corporation) to develop, manufacture and sell
products containing Sandia VCSEL technologies for barcode scanning
and plastic optical fiber communications applications under five U.S.
patents that expire between 2007 and 2015;
o nonexclusive rights with respect to all other applications of these
patents; and
o nonexclusive rights to employ a proprietary oxidation fabrication
method in the manufacture of VCSEL products under a sixth U.S. patent
that expires in 2014. Our exclusivity with respect to the barcode
scanning and plastic optical fiber communications applications
expires in 2003 or such earlier time as we fail to meet certain
development and marketing criteria. EMCORE's success and competitive
position as a producer of VCSEL products depends on the continuation
of its rights under the Sandia license, the scope and duration of
those rights and the ability of Sandia to protect its proprietary
interests in the underlying technology and patents.
In 1992, we received a royalty bearing, non-exclusive license under a
patent held by Rockwell International Corporation which relates to an aspect of
the manufacturing process used by our TurboDisc(TM) systems. In October 1996, we
initiated discussions with Rockwell to receive additional licenses to permit us
to use this technology to manufacture and sell compound semiconductor wafers and
devices. In November 1996, we suspended these negotiations because of litigation
surrounding the validity of the Rockwell patent. We also ceased making royalty
payments to Rockwell under the license during the pendency of the litigation. In
January 1999, the case was settled and a judgment was entered in favor of
Rockwell. As a result, we may be required to pay royalties to Rockwell for
certain of our past sales of wafers and devices to our customers who did not
hold licenses directly from Rockwell. Management has reviewed and reassessed the
royalty agreements and concluded that it has the appropriate amounts reserved
for at both September 30, 1998 and 1999.
Additionally, until the patent expires in January 2000, we may require
additional licenses from Rockwell under the Rockwell patent in order to continue
to manufacture and sell wafers and devices. We are currently negotiating with
Rockwell to obtain the necessary licenses. The failure to obtain or maintain
licenses to manufacture these wafers and devices on commercially reasonable
terms may materially and adversely affect our business, financial condition and
results of operations.
ENVIRONMENTAL REGULATIONS
EMCORE is subject to federal, state and local laws and regulations
concerning the use, storage, handling, generation, treatment, emission, release,
discharge and disposal of certain materials used in its research and development
and production operations, as well as laws and regulations concerning
environmental remediation and employee health and safety. The production of
wafers and devices involves the use of certain hazardous raw materials,
including, but not limited to, ammonia, phosphine and arsene. If EMCORE's
control systems are unsuccessful in preventing release of these or other
hazardous materials, EMCORE could experience a substantial interruption of
-13-
<PAGE> 14
operations. EMCORE has retained an environmental consultant to advise it in
complying with applicable environmental and health and safety laws and
regulations, and believes that it is currently, and in the past has been, in
substantial compliance with all such laws and regulations.
BACKLOG
As of September 30, 1999, EMCORE had an order backlog of $43.1 million,
scheduled to be shipped through September 30, 2000. This represented an increase
of 67% since September 30, 1998. This increase primarily relates to increased
production systems bookings in Asia and initial orders for solar cells from
Loral. EMCORE includes in backlog only customer purchase orders that have been
accepted by EMCORE and for which shipment dates have been assigned within the 12
months to follow and research contracts that are in process or awarded. Wafer
and device agreements extending longer than one year in duration are included in
backlog only for the ensuing 12 months. EMCORE receives partial advance payments
or irrevocable letters of credit on most production system orders. EMCORE
recognizes revenue from the sale of its systems and materials upon shipment. For
research contracts with the U.S. government and commercial enterprises with
durations greater than six months, EMCORE recognizes revenue to the extent of
costs incurred plus a portion of estimated gross profit, as stipulated in such
contracts, based on contract performance.
MANUFACTURING
EMCORE's manufacturing operations are located at EMCORE's headquarters
in Somerset, New Jersey and in Albuquerque, New Mexico and include systems
engineering and production, wafer fabrication, and design and production of
devices. Many of EMCORE's manufacturing operations are computer monitored or
controlled to enhance reliability and yield. EMCORE manufactures its own systems
and outsources some components and sub-assemblies, but performs all final system
integration, assembly and testing. As of September 30, 1999, EMCORE had 267
employees involved in manufacturing. EMCORE fabricates wafers and devices at its
facilities in Somerset, New Jersey and Albuquerque, New Mexico and has a
combined clean room area totaling approximately 12,000 square feet. EMCORE's
joint venture with Uniroyal Technology Corporation has begun to manufacture HB
LED wafers and package-ready devices at its Tampa, Florida manufacturing
facility. In May 1998, EMCORE received ISO 9001 and QS 9002 quality
certification for its Somerset, New Jersey facility. In November 1999, EMCORE
received ISO 9001 quality certification for its newly completed solar cell
facility in Albuquerque, New Mexico. EMCORE is pursing ISO 9001 quality
certification for its VCSEL facility in Albuquerque, New Mexico.
Outside contractors and suppliers are used to supply raw materials and
standard components and to assemble portions of end systems from EMCORE
specifications. EMCORE depends on sole, or a limited number of, suppliers of
components and raw materials. EMCORE generally purchases these single or limited
source products through standard purchase orders. EMCORE also seeks to maintain
ongoing communications with its suppliers to guard against interruptions in
supply and has, to date, generally been able to obtain sufficient supplies in a
timely manner and maintains inventories it believes are sufficient to meet its
near term needs. EMCORE implemented a vendor program through which it inspects
quality and reviews suppliers and prices in order to standardize purchasing
efficiencies and design requirements to maintain as low a cost of sales as
possible. However, operating results could be materially and adversely affected
by a stoppage or delay of supply, receipt of defective parts or contaminated
materials, and increase in the pricing of such parts or EMCORE's inability to
obtain reduced pricing from its suppliers in response to competitive pressures.
COMPETITION
The markets in which EMCORE competes are highly competitive. EMCORE
competes with several companies for sales of MOCVD systems including Aixtron
GmbH and Nippon-Sanso K.K. The primary competitors for EMCORE's wafer foundry
include Epitaxial Products Inc., Kopin Corporation and Quantum Epitaxial
Designs, Inc. EMCORE's principal competitors for sales of VCSEL-related products
include Honeywell, Inc. and Mitel Corporation. The principal competitors for MR
sensors are Honeywell, Inc., Matshushita Electric Industrial Co. Ltd., Siemens
AG and Asahi. The principal competitors for HB LEDs and EMCORE's joint ventures
with Uniroyal Technology Corporation and General Electric Lighting include the
Phillips Electronics and Hewlett Packard Company joint venture, Siemens AG's
Osram GmbH subsidiary, Nichia Chemical Industries and Toshiba Corporation.
EMCORE also faces competition from manufacturers that implement in-house systems
-14-
<PAGE> 15
for their own use. In addition, EMCORE competes with many research institutions
and universities for research contract funding. EMCORE also sells its products
to current competitors and companies with the capability of becoming
competitors. As the markets for EMCORE's products grow, new competitors are
likely to emerge, and present competitors may increase their market share.
EMCORE believes that the primary competitive factors in the markets in
which EMCORE's products compete are yield, throughput, performance, breadth of
product line, customer satisfaction, customer commitment to competing
technologies and, in the case of production systems, capital and directs costs
and size of installed base. Competitors may develop enhancements to or future
generations of competitive products that offer superior price and performance
factors. EMCORE believes that in order to remain competitive, it must invest
significant financial resources in developing new product features and
enhancements and in maintaining customer satisfaction worldwide.
EMPLOYEES
At September 30, 1999, EMCORE had 368 full-time employees. None of
EMCORE's employees are covered by a collective bargaining agreement. EMCORE
considers its relationship with its employees to be good.
ITEM 2. PROPERTIES
The following chart contains certain information regarding each of
EMCORE's principal facilities. Each of these facilities contains office space,
marketing and sales, and research and development space. EMCORE also leases
office space in Hsinchu, Taiwan and Santa Clara, California. In addition to
EMCORE's facilities, Uniroyal Optoelectronics, a joint venture between EMCORE
and Uniroyal Technology Corporation, leases a 75,000 square foot office and
manufacturing facility in Tampa, Florida.
<TABLE>
<CAPTION>
LOCATION FUNCTION SQUARE FEET TERMS
-------- -------- ----------- -----
<S> <C> <C> <C>
Somerset, - Headquarters 75,900 Lease Expires in 2005(1)
New Jersey - Manufacturing of systems, wafers
and MR sensors
Albuquerque, Manufacturing of solar cells 50,000(2) Owned
New Mexico
Albuquerque, Manufacturing of VCSELs 27,500 Leases Expire in 2001(1)
New Mexico and 2002(1)
</TABLE>
(1) These leases all have options to renew by EMCORE, subject to cost of
living adjustments.
(2) EMCORE plans a three-phase construction project to expand the facility
from an initial 50,000 square feet in October 1998 to 70,000 square
feet by 2002.
ITEM 3. LEGAL PROCEEDINGS
EMCORE is not aware of any pending or threatened litigation against it
that could have a material adverse effect on its business, financial condition
and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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<PAGE> 16
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
EMCORE's common stock is quoted on the NASDAQ National Market under the
symbol "EMKR". The following table sets forth the quarterly high and low sale
prices for EMCORE's common stock during the two most recent fiscal years and
subsequent interim period.
HIGH LOW
---- ---
FISCAL YEAR ENDED SEPTEMBER 30, 1998:
First Quarter.................................... $23 3/8 $15 1/2
Second Quarter................................... $19 5/8 $11
Third Quarter ................................... $16 3/4 $ 9
Fourth Quarter .................................. $13 1/2 $ 6
FISCAL YEAR ENDED SEPTEMBER 30, 1999:
First Quarter.................................... $18 3/8 $ 7 1/4
Second Quarter................................... $28 3/4 $13 7/8
Third Quarter ................................... $23 $12 7/8
Fourth Quarter .................................. $25 $11 1/4
FISCAL YEAR ENDED SEPTEMBER 30, 2000:
First Quarter (through December 1, 1999)......... $24 1/4 $12 1/16
The reported closing sale price of EMCORE's common stock on December 1,
1999 was $23 15/16 per share. As of December 1, 1999, EMCORE had approximately
1,838 shareholders of record.
EMCORE has never declared or paid dividends on its common stock since
its formation. EMCORE currently does not intend to pay dividends on its common
stock in the foreseeable future so that it may reinvest its earnings in its
business. The payment of dividends, if any, in the future will be at the
discretion of the Board of Directors.
The shares of EMCORE's manditorily redeemable convertible preferred
stock are entitled to receive cumulative quarterly dividends at the annual rate
of 2% of their liquidation preference ($0.28 per annum per share).
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<PAGE> 17
RECENT SALES OF UNREGISTERED SECURITIES
On November 30, 1998, EMCORE sold an aggregate of 1,550,000 shares of
Series I mandatorily redeemable convertible Preferred Stock (the "Series I
Preferred Stock") to related parties (Hakuto Company, Uniroyal Technology
Corporation and Union Miniere, Inc.) for an aggregate consideration of $21.7
million before deducting costs and expenses of the offering which amounted to
approximately $500,000. The shares of Series I Preferred Stock are convertible,
at any time, at the option of the holders thereof, unless previously redeemed,
into shares of common stock at an initial conversion price of $14.00 per share
of common stock, subject to adjustment in certain cases. The Series I Preferred
Stock is redeemable, in whole or in part, at the option of EMCORE at any time
the common stock has traded at or above $28.00 per share for 30 consecutive
trading days, at a price of $14.00 per share, plus accrued and unpaid dividends,
if any, to the redemption date. In addition, the Series I Preferred Stock is
subject to mandatory redemption by November 17, 2003. EMCORE believes the sale
of the shares of Series I Preferred Stock is exempt from registration pursuant
to Section 4(2) of the Securities Act of 1933, as amended (the "Securities
Act").
On May 27, 1999, EMCORE issued 282,010 warrants to General Electric to
purchase common stock at $22.875 per share. These warrants are exercisable at
any time and will expire in 2006. These warrants were granted in connection with
EMCORE's initial capital contribution of $7.8 million into GELcore. In order to
fund its initial capital contribution for GELcore, EMCORE borrowed $7.8 million
from General Electric in the form of a convertible subordinated debenture (the
"Debenture"), with an interest rate of 4.75% and a May 2006 maturity date. The
Debenture is convertible into EMCORE common stock at a conversion price of
$22.875 or 340,984 shares. The Debenture is convertible at any time at the
option of General Electric and may be called by EMCORE after three years, if the
price of EMCORE's common stock has traded at or above $34 for at least thirty
days. EMCORE believes the issuance of the warrants was exempt from registration
pursuant to Section 4(2) of the Securities Act.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data for the five most
recent fiscal years ended September 30, 1999 of EMCORE is qualified by reference
to and should be read in conjunction with the Financial Statements and the Notes
thereto, and Management's Discussion and Analysis of Financial Condition and
Results of Operations included elsewhere in this document. The Statement of
Operations Data set forth below with respect to fiscal years 1997, 1998 and 1999
and the Balance Sheet Data as of September 30, 1998 and 1999 are derived from
EMCORE's audited financial statements included elsewhere in this document. The
Statement of Income Data for fiscal years 1995 and 1996 and the Balance Sheet
Data as of September 30, 1995, 1996 and 1997 are derived from audited financial
statements not included herein.
On December 5, 1997, EMCORE acquired MODE in a stock transaction
accounted for under the purchase method of accounting for a purchase price of
$32.8 million. In connection with this transaction, EMCORE recorded a
non-recurring, non-cash charge of $19.5 million for acquired in-process research
and development, which affects the comparability of EMCORE's operating results
and financial condition.
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<PAGE> 18
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) For the fiscal years ended September 30,
---------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue....................................... $18,137 $27,779 $47,752 $43,760 $58,341
Cost of sales................................. 9,927 18,607 30,094 24,676 33,158
------- ------- ------- -------- --------
Gross profit........................ 8,210 9,172 17,658 19,084 25,183
Operating expenses:
Selling, general and administrative....... 4,452 6,524 9,346 14,082 14,433
Goodwill amortization..................... -- -- -- 3,638 4,393
Research and development:
Recurring............................ 1,852 5,401 9,001 16,495 20,713
One-time acquired in-process......... -- -- -- 19,516 --
------- ------- ------- -------- --------
Total operating expenses.......... 6,304 11,925 18,347 53,731 39,539
Operating income (loss)....................... 1,906 (2,753) (689) (34,647) (14,356)
Stated interest expense, net............. 265 297 520 973 866
Imputed warrant interest expense......... -- 126 3,988 601 1,136
Equity in net loss of unconsolidated
affiliates............................ -- -- -- 198 4,997
------- ------- ------- -------- --------
Total other expenses.............. 265 423 4,508 1,772 6,999
------- ------- ------- -------- --------
Income (loss) before income taxes and
extraordinary item......................... 1,641 (3,176) (5,197) (36,419) (21,355)
Provision for income
taxes............................. 125 -- 137 -- --
------- ------- ------- -------- --------
Income (loss) before extraordinary item....... 1,516 (3,176) (5,334) (36,419) (21,355)
Extraordinary item.................. -- -- 285 -- 1,334
------- ------- ------- -------- --------
Net income (loss)............................. $ 1,516 $(3,176) $(5,619) $(36,419) $(22,689)
------- ------- ------- -------- --------
PER SHARE DATA:
Weighted average shares used in
calculating per share data................. 1,701 2,994 4,669 8,775 10,590
------- ------- ------- -------- --------
Income (loss) per basic and diluted
shares before extraordinary item........... $ 0.89 $ (1.06) $ (1.14) $ (4.15) $ (2.05)
------- ------- ------- -------- --------
Net income (loss) per basic and diluted
shares..................................... $ 0.89 $ (1.06) $ (1.20) $ (4.15) $ (2.18)
------- ------- ------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
(IN THOUSANDS) As of September 30,
---------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficiency).................. $ 2,208 $ 1,151 $12,156 $ (2,017) $ 20,690
Total assets.................................. 10,143 20,434 39,463 73,220 99,611
Long-term liabilities......................... 3,000 8,947 7,577 26,514 9,038
Redeemable convertible preferred stock........ -- -- -- -- 14,193
Shareholders' equity........................... 1,509 522 21,831 19,580 61,623
</TABLE>
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<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
EMCORE designs, develops and manufactures compound semiconductor
materials and is a leading developer and manufacturer of the tools and
manufacturing processes used to fabricate compound semiconductor wafers and
devices. EMCORE's vertically-integrated product offering allows it to provide a
complete compound semiconductor solution to its customers. EMCORE assists its
customers with device design, process development and optimal configuration of
TurboDisc(TM) production systems.
EMCORE recognizes revenue upon shipment. Systems-related revenues
include sales of EMCORE's TurboDisc(TM) production systems as well as spare
parts and services. The book-to-ship time period on systems is approximately
four to six months, and the average selling price is in excess of $1.0 million.
For systems, EMCORE incurs certain installation and warranty costs subsequent to
shipment which are estimated and accrued at the time the sale is recognized.
EMCORE reserves for estimated returns and allowances at the time of shipment.
Materials revenues include wafers, devices and process development technology.
The materials sales cycle is generally shorter than for systems and average
selling prices vary significantly based on the products and services provided.
Generally, EMCORE achieves a higher gross profit on its materials related
products.
EMCORE has recently established a number of strategic relationships
through joint ventures, long-term supply agreements and an acquisition as
summarized below:
o In May 1999, EMCORE and General Electric Lighting formed GELcore, a
joint venture to develop and market HB LED lighting products. General
Electric Lighting and EMCORE have agreed that this joint venture will
be the exclusive vehicle for each party's participation in solid
state lighting. GELcore seeks to combine EMCORE's materials science
expertise, process technology and compound semiconductor production
systems with General Electric Lighting's brand name recognition and
extensive marketing and distribution capabilities. GELcore's
long-term goal is to develop products to replace traditional
lighting. EMCORE has invested $7.8 million in GELcore and has
seconded various employees to the joint venture to assist in the
development of products.
o In May 1999, EMCORE signed a long-term agreement with Sumitomo
Electric Industries, Ltd. (Hyogo, Japan) to jointly develop and
produce Indium Gallium Phosphide (InGaP) epitaxial wafers for use as
Heterojunction Bipolar Transistor (HBT) devices used in digital
wireless and cellular applications. Sumitomo Electric is one of the
world's leading electronics manufacturers. These advanced compound
semiconductor HBT wafers will be produced at EMCORE's Epitaxial
Materials (E2M) wafer foundry in Somerset, New Jersey, and shipments
of commercial product are expected to begin in February 2000.
o In November 1998, EMCORE signed a long-term supply agreement with
Space Systems/Loral, a wholly owned subsidiary of Loral Space &
Communications. Under this agreement, EMCORE will supply compound
semiconductor high-efficiency gallium arsenide solar cells for
Loral's satellites. EMCORE received purchase orders from Space
Systems/Loral that total $7.2 million and expects to service this
agreement through our newly completed facility in Albuquerque, New
Mexico. EMCORE plans to start shipping solar cells as early as
December 1999 and a majority of the solar cell shipments are
scheduled for the second fiscal quarter ended March 31, 2000. This
facility presently employs approximately 53 people, including sales
and marketing, administrative and manufacturing personnel.
o In November 1998, EMCORE formed UMCore, a joint venture with Union
Miniere Inc., a mining and materials company, to explore and develop
alternate uses for germanium using EMCORE's materials science and
production platform expertise and Union Miniere's access to and
experience with germanium. EMCORE has seconded various personnel to
the joint venture to assist in the development of products.
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<PAGE> 20
o In October 1998, EMCORE formed Emtech, a joint venture with Optek
Technology, Inc., a packager and distributor of optoelectronic
devices, to market an expanded line of magneto resistive sensors to
the automotive and related industries. This joint venture combines
EMCORE's expertise in the manufacture of magneto resistive die and
Optek's expertise in packaging these die. This combination will allow
us to offer customers off-the-shelf products. No additional personnel
are anticipated to meet the obligations to the joint venture.
o In September 1998, EMCORE entered into an agreement with Lockheed
Martin to provide technical management and support for the
commercialization of a new high-efficiency solar cell. It is
anticipated that we will provide high efficiency solar cells to
Lockheed Martin upon completion of the research and development
agreement. EMCORE's new facility in Albuquerque, New Mexico, will
provide the support necessary to meet our obligations under this
agreement.
o In September 1998, EMCORE also signed a four-year purchase agreement
with AMP Incorporated to provide high speed VCSELs, for use in
transceivers for high-speed networks that link computers. The
contract requires AMP to purchase a minimum of 80% of their VCSEL
needs from EMCORE. EMCORE's MODE facility in Albuquerque, New Mexico,
will produce the devices under this contract.
o In December 1997, the Company and a wholly owned subsidiary of
Uniroyal Technology Corporation formed Uniroyal Optoelectronics LLC,
a joint venture, to manufacture, sell and distribute High Brightness
(HB) LED wafers and package-ready devices. This joint venture
commenced operations in July 1998. EMCORE has invested $6.0 million
in Uniroyal Optoelectronics and has seconded various employees to the
joint venture to assist in the development of products. Uniroyal
Optoelectronics is hiring its own administrative and management
personnel. The impact on EMCORE's operations will be limited to a few
seconded employees who will continue to be managed by EMCORE
personnel.
o In December 1997, EMCORE acquired MODE in a stock transaction
accounted for under the purchase method of accounting for a purchase
price of $32.8 million. This acquisition allowed EMCORE to expand its
technology base into the data communications and telecommunications
markets. MODE, a development stage company, constituted a significant
and strategic investment for EMCORE to acquire and gain access to
MODE's in-process research and development of micro-optical
technology. As part of this acquisition, EMCORE incurred a one-time
in-process research and development write-off of $19.5 million.
EMCORE also recorded goodwill of approximately $13.2 million, which
is being charged against operations over a three-year period, and
will therefore impact financial results through December 2000. These
operations are located in Albuquerque, New Mexico and currently
employ approximately 39 people including sales and marketing,
administrative and manufacturing personnel.
Because EMCORE does not have a controlling economic and voting interest
in the Uniroyal Technology, Union Miniere, Optek and General Electric Lighting
joint ventures, EMCORE accounts for these joint ventures under the equity method
of accounting and, as such, our share of profits and losses are included below
the operating income line in our statements of operations.
EMCORE has generated a significant portion of its sales to customers
outside the United States. In fiscal 1997, 1998 and 1999, international sales
constituted 42.0%, 39.1% and 52.5%, respectively, of revenues. In fiscal year
1999, the majority of EMCORE's international sales were made to customers in
Asia, particularly in Taiwan. EMCORE's sales revenues from Europe have
fluctuated because most of our sales of TurboDisc(TM) systems are to a limited
number of customers, who do not purchase production systems regularly. EMCORE
anticipates that international sales will continue to account for a significant
portion of revenues. Historically, we have received all payments for products
and services in U.S. dollars. We do not anticipate that Europe's Euro-currency
conversion will have a material effect on our financial condition or results of
operations.
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<PAGE> 21
The following chart contains a breakdown of EMCORE's worldwide revenues
and percentages by geographic region.
<TABLE>
<CAPTION>
(in thousands) FOR THE FISCAL YEARS ENDED SEPTEMBER 30,
---------------------------------------------------------------------------
1997 1998 1999
----------------- ----------------- -----------------
Region Revenues % Revenues % Revenues %
- ------ -------- -- -------- -- -------- --
<S> <C> <C> <C> <C> <C> <C>
North America $27,690 58% $26,648 61% $27,698 48%
Asia 14,584 31% 15,527 35% 28,211 48%
Europe 5,478 11% 1,585 4% 2,432 4%
------- --- ------- --- ------- ---
Total $47,752 100% $43,760 100% $58,341 100%
------- --- ------- --- ------- ---
</TABLE>
As of September 30, 1999, EMCORE had an order backlog of $43.1 million
scheduled to be shipped through September 30, 2000. This represented an increase
of 67% since September 30, 1998, which primarily relates to increased systems
bookings in Asia and initial orders for solar cells from Loral. EMCORE includes
in backlog only customer purchase orders that have been accepted by EMCORE and
for which shipment dates have been assigned within the 12 months to follow and
research contracts that are in process or awarded. Wafer and device agreements
extending longer than one year in duration are included in backlog only for the
ensuing 12 months. EMCORE receives partial advance payments or irrevocable
letters of credit on most production system orders.
RESULTS OF OPERATIONS:
The following table sets forth the statement of operations data of
EMCORE expressed as a percentage of total revenues for the fiscal years ended
September 30, 1997, 1998 and 1999.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SEPTEMBER 30,
--------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue.................................... 100.0% 100.0% 100.0%
Cost of sales.............................. 63.0% 56.4% 56.8%
----- ----- -----
Gross profit...................... 37.0% 43.6% 43.2%
Operating expenses:
Selling, general and administrative..... 19.6% 32.2% 24.7%
Goodwill amortization................... -- 8.3% 7.5%
Research and development:
Recurring.......................... 18.8% 37.7% 35.5%
One-time acquired in-process....... -- 44.6% --
----- ----- -----
Total operating expenses........ 38.4% 122.8% 67.7%
----- ----- -----
Operating loss.................... (1.4%) (79.2%) (24.5%)
Stated interest expense, net........... 1.1% 2.2% 1.5%
Imputed warrant interest expense....... 8.4% 1.4% 1.9%
Equity in net loss of unconsolidated
affiliates.......................... -- 0.4% 8.6%
----- ----- -----
Total other expenses............ 9.5% 4.0% 12.0%
----- ----- -----
Loss before income taxes and
extraordinary item....................... (10.9%) (83.2%) (36.6%)
Provision for income taxes........ 0.3% -- --
----- ----- -----
Loss before extraordinary item.............. (11.2%) (83.2%) (36.6%)
Extraordinary item................ 0.6% -- 2.3%
----- ----- -----
Net loss................................... (11.8%) (83.2%) (38.9%)
----- ----- -----
</TABLE>
-21-
<PAGE> 22
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30, 1998 AND 1999
REVENUES. EMCORE's revenues increased 33.3% from $43.8 million for the fiscal
year ended September 30, 1998 to $58.3 million for the fiscal year ended
September 30, 1999. The revenue increase was attributable to increased revenues
in the systems-related product lines. Revenues from systems-related sales and
materials-related sales were $26.3 million and $17.4 million, respectively, for
the fiscal year ended September 30, 1998 and $44.5 million and $13.9 million,
respectively, for the fiscal year ended September 30, 1999. As a percentage of
revenues, systems- and materials-related revenues accounted for 60.2% and 39.8%,
respectively, for the fiscal year ended September 30, 1998 and 76.2% and 23.8%,
respectively, for the fiscal year ended September 30, 1999. EMCORE expects the
product mix between systems and materials to approach 50% as new products such
as solar cells, VCSELS and HBT's are introduced and production of commercial
volumes of these materials commences. International sales accounted for 39.1% of
revenues for the fiscal year ended September 30, 1998 and 52.5% of revenues for
the fiscal year ended September 30, 1999.
COST OF REVENUES/GROSS PROFIT. Cost of sales includes direct material and labor
costs, allocated manufacturing and service overhead, and installation and
warranty costs. EMCORE's gross profit increased 32.0% from $19.1 million for the
fiscal year ended September 30, 1998, to $25.2 million for the fiscal year ended
September 30, 1999. As a percentage of revenue, gross profit decreased slightly
from 43.6% of revenue for the fiscal year ended September 30, 1998 to 43.2% of
revenue for the fiscal year ended September 30, 1999. During the first half of
fiscal year 1999, EMCORE sold three compound semiconductor production systems
for approximately $5.3 million to a joint venture in which it has a 49% minority
interest. EMCORE deferred $1.3 million of gross profit on such sales. Such
deferred gross profit will be recognized ratably over the assigned life of the
production systems purchased by the joint venture.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by 2.5% from $14.1 million for the fiscal year ended
September 30, 1998 to $14.4 million for the fiscal year ended September 30,
1999. As a percentage of revenue, selling, general and administrative expenses
decreased from 32.2% for the fiscal year ended September 30, 1998 to 24.7% for
the fiscal year ended September 30, 1999.
GOODWILL AMORTIZATION. Goodwill of $13.2 million was recorded in connection with
our acquisition of MODE on December 5, 1997. EMCORE recognized approximately
$4.4 million of goodwill amortization for the fiscal year ended September 30,
1999, reflecting a full year of amortization. As of September 30, 1999, EMCORE
had approximately $5.1 million of net goodwill remaining, which will be fully
amortized by December 2000.
RESEARCH AND DEVELOPMENT. Recurring research and development expenses increased
25.6% from $16.5 million in the fiscal year ended September 30, 1998 to $20.7
million in the fiscal year ended September 30, 1999. As a percentage of revenue,
recurring research and development expenses decreased from 37.7% for the fiscal
year ended September 30, 1998 to 35.5% for the fiscal year ended September 30,
1999. The increase in research and development spending was primarily
attributable to EMCORE's acquisition of MODE, the startup of our new
Albuquerque, New Mexico facility and increased staffing and equipment costs
necessary to enhance current products and develop new product offerings.
Products introduced or under development include HB LEDs, high efficiency solar
cells, new generation TurboDisc(TM) production systems, VCSELs, RF materials and
other optoelectronic devices. In fiscal year 1998, EMCORE recognized a $19.5
million one-time charge for acquired in-process research and development
relating to the purchase of MODE. To maintain growth and to continue to pursue
market leadership in materials science technology, EMCORE expects to continue to
invest a significant amount of its resources in research and development.
OPERATING LOSS. EMCORE reported a 58.6% decrease in operating loss from $34.6
million for the fiscal year ended September 30, 1998, as compared to an
operating loss of $14.4 million for the fiscal year ended September 30, 1999.
The change in operating loss was principally due to the $19.5 million one-time
charge for acquired in-process research and development in 1998. In fiscal year
1999, EMCORE deferred $1.3 million of gross profit on three compound
semiconductor production systems sold to a joint venture in which it has a 49%
minority interest. In addition, EMCORE's fiscal year 1999 operating loss was
impacted by increased research and development spending, the loss generated from
the operations of MODE and the startup expenses associated with the opening of
EMCORE's new Albuquerque, New Mexico facility.
-22-
<PAGE> 23
OTHER EXPENSE. During fiscal 1996, EMCORE issued 2,575,883 detachable warrants
along with subordinated notes to certain of its existing shareholders. EMCORE
subsequently assigned a value to these detachable warrants issued using the
Black-Scholes option-pricing model. EMCORE recorded the subordinated notes at a
carrying value that is subject to periodic accretions, using the interest
method. In June 1998, EMCORE issued 284,684 warrants to its Chairman and its
Chief Executive Officer for providing a guarantee in connection with an 18-month
credit facility with First Union National Bank. EMCORE also assigned a value to
these warrants using the Black-Scholes option-pricing model. The consequent
expense of the subordinated note accretion and warrant value amortization is
charged to "Imputed warrant interest, non-cash" and equals approximately
$601,000 and $950,000 for the fiscal years ended September 30, 1998 and 1999,
respectively. The subordinated notes and the 18-month credit facility were
repaid using a portion of the proceeds from the public offering, which was
completed in June 1999.
In order to fund its initial capital contribution for GELcore, EMCORE
borrowed $7.8 million from General Electric in the form of a convertible
subordinated debenture (the "Debenture"), with an interest rate of 4.75% and a
May 2006 maturity date. In connection with the funding of EMCORE's initial
capital contribution, General Electric received 282,010 warrants to purchase
common stock at $22.875 per share. These warrants are exercisable at any time
and will expire in 2006. EMCORE subsequently assigned a value to these warrants
using the Black-Scholes option-pricing model. The warrant value of $2.6 million
is included in other assets and is being amortized over seven years. The
consequent expense of the warrant amortization is charged to "Imputed warrant
interest, non-cash" and equaled approximately $186,000 for the fiscal year ended
September 30, 1999.
For the fiscal year ended September 30, 1999, stated interest expense,
net decreased by $107,000 to $866,000. On June 15, 1999, EMCORE completed the
issuance of an additional 3.0 million common stock shares through a public
offering, which resulted in proceeds of $52.0 million, net of issuance costs. A
significant portion of the proceeds was used to repay all outstanding bank loans
and subordinated notes.
Because EMCORE does not have a controlling economic and voting interest
in the Uniroyal Technology, Union Miniere and General Electric Lighting joint
ventures, EMCORE accounts for these joint ventures under the equity method of
accounting. For the fiscal year ended September 30, 1998, EMCORE incurred a net
loss of $198,000 related to the Uniroyal joint venture. For the fiscal year
ended September 30, 1999, EMCORE incurred a net loss of $2.2 million related to
the Uniroyal joint venture, a $2.5 million net loss related to the GELcore joint
venture and a $297,000 net loss related to the UMCore joint venture.
INCOME TAXES. As a result of its losses, EMCORE did not incur any income tax
expense in both fiscal years 1998 and 1999. As of September 30, 1999, EMCORE has
net operating loss carryforwards for tax purposes of approximately $24.0
million, which expire in the years 2003 through 2019. EMCORE believes that the
consummation of certain equity transactions and a significant change in the
ownership during fiscal years 1995, 1998 and 1999 has constituted a change in
control under Section 382 of the Internal Revenue Code. Due to the change in
control, EMCORE's ability to use its federal net operating loss carryovers and
federal research credit carryovers to offset future income and income taxes,
respectively, are subject to annual limitations under Internal Revenue Code
Sections 382 and 383.
EXTRAORDINARY ITEM. On June 15, 1999, EMCORE repaid its outstanding bank loans
using a portion of the proceeds from the public offering. EMCORE also used a
portion of the net proceeds to repurchase its outstanding 6.0% subordinated
notes due 2001. The early extinguishment of debt resulted in an extraordinary
charge of $1.3 million or $0.13 per share in fiscal year 1999 that consisted of
$867,000 related to the discount on prepayment of the subordinated notes and
$467,000 related to the write-off of related deferred financing costs.
NET LOSS. EMCORE reported a 37.7% decrease in net loss from $36.4 million for
the fiscal year ended September 30, 1998, as compared to a net loss of $22.7
million for the fiscal year ended September 30, 1999. The decrease in the
year-to-date loss was attributable to the $19.5 million write-off of acquired
in-process research and development in connection with the acquisition of MODE
on December 5, 1997 offset in part by an increase in recurring research and
development expenses and the net loss from unconsolidated affiliates.
-23-
<PAGE> 24
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30, 1997 AND 1998
REVENUES. EMCORE's revenues decreased 8.4% from $47.8 million for the fiscal
year ended September 30, 1997 to $43.8 million for the fiscal year ended
September 30, 1998. The revenue decrease represented a shift in product mix
during the year. Systems-related revenues decreased approximately 22.8% while
materials-related revenues increased approximately 27.6%. The decrease in
systems-related revenues was primarily attributable to the financial issues in
the Asian economies as well as a general slowdown in the semiconductor equipment
market overall. While materials-related revenues did experience a 27.6%
increase, the General Motors three-month strike adversely affected revenue, as
shipments to General Motors were halted during the strike. Systems-related
revenues were $34.1 million for the fiscal year ended September 30, 1997 and
$26.3 million for the fiscal year ended September 30, 1998. Materials-related
revenues were $13.7 million for the fiscal year ended September 30, 1997 and
$17.4 million for the fiscal year ended September 30, 1998. As a percentage of
revenues, systems-related revenues accounted for 71.4% for the fiscal year ended
September 30, 1997 and 60.2% for the fiscal year ended September 30, 1998. As a
percentage of revenues, materials-related revenues accounted for 28.6% for the
fiscal year ended September 30, 1997 and 39.8% for the fiscal year ended
September 30, 1998. International sales accounted for approximately 42.0% and
39.1% of revenues for the fiscal years ended September 30, 1997 and 1998,
respectively.
COST OF REVENUES/GROSS PROFIT. Cost of sales includes direct material and labor
costs, allocated manufacturing and service overhead, and installation and
warranty costs. Gross profit increased from 37.0% of revenue to 43.6% of revenue
for the fiscal years ended September 30, 1997 and 1998, respectively. The gross
profit percentage increase was attributable to a shift in product mix towards
higher gross margin materials-related revenues.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by 50.7% from $9.3 million for the year ended September 30,
1997, to $14.1 million for the year ended September 30, 1998. The increase was
largely due to sales personnel headcount increases to support both domestic and
foreign markets and general headcount additions to sustain the internal
administrative support necessary for EMCORE's expanded product lines and new
locations. During fiscal 1998, EMCORE wrote-off a $1.0 million receivable due
from an Asian customer which was deemed to be uncollectible. As a percentage of
revenue, selling, general and administrative expenses increased from 19.6% of
revenue during fiscal 1997 to 32.2% of revenue for fiscal 1998.
GOODWILL AMORTIZATION. In connection with the purchase of MODE, EMCORE recorded
goodwill of $13.2 million that is being amortized over 36 months. Goodwill
amortization expense amounted to $3.6 million for the year ended September 30,
1998. Net goodwill at September 30, 1998 was $9.5 million.
RESEARCH AND DEVELOPMENT. Recurring research and development expenses increased
by 83.3% from $9.0 million for the year ended September 30, 1997, to $16.5
million for the year ended September 30, 1998. The increase was primarily
attributable to EMCORE's acquisition of MODE and increased staffing and
equipment costs necessary to enhance current products and develop new product
offerings. Products introduced or under development include HB LEDs, high
efficiency solar cells, new generation TurboDisc(TM) production systems, VCSELs
and other optoelectronic devices. For the year ended September 30, 1998, EMCORE
incurred $1.1 million of research and development costs associated with MODE's
in-process (at the date of acquisition) research and development projects. As a
percentage of revenue, research and development expenses increased from 18.8% of
revenue during fiscal 1997 to 37.7% of revenue for fiscal 1998. To maintain
growth and market leadership in epitaxial technology, EMCORE expects to continue
to invest a significant amount of its resources in research and development. In
connection with the MODE acquisition, EMCORE incurred a one-time charge for the
write-off of acquired in-process research and development amounting to $19.5
million. The acquisition of MODE, a development stage company, constituted a
significant and strategic investment for EMCORE. The principal investment
consideration was to acquire and gain access to MODE's micro-optical technology,
which was under development at the time. EMCORE plans to use MODE's
micro-optical laser technology in new products for data communications and
telecommunications applications.
-24-
<PAGE> 25
OPERATING LOSS. During fiscal 1998, operating loss increased from a loss of $0.7
million for the fiscal year ended September 30, 1997 to a loss of $34.6 million
for the year ended September 30, 1998. The change in operating loss was
primarily due to the $19.5 million one-time charge for in-process research and
development written off in connection with the purchase of MODE. Additionally,
recurring research and development expense increased by $7.5 million from the
prior year, as a result of increased research and development activities at MODE
and in our core business. In addition, the General Motors three-month strike
adversely affected operating performance as shipments to General Motors were
halted during the strike. General Motors is among EMCORE's largest customers.
EMCORE was unable to furlough or reduce their workforce during the strike and
thereby incurred charges without the benefit of related revenues.
OTHER EXPENSE. Other expenses decreased, particularly due to the reduced imputed
warrant interest expense associated with EMCORE's subordinated debt and debt
issuance guarantee cost. During fiscal 1996, EMCORE issued detachable warrants
along with subordinated notes to certain of its existing shareholders. In fiscal
1997, EMCORE also issued detachable warrants in return for a $10.0 million
demand note facility guarantee by the Chairman of the Board of EMCORE, who
provided collateral for the facility. EMCORE subsequently assigned a value to
these detachable warrants issued using the Black-Scholes option-pricing model.
EMCORE recorded the subordinated notes at a carrying value that is subject to
periodic accretions, using the interest method, and reflected the facility's
detachable warrant value as debt issuance cost which was written off in its
entirety in fiscal 1997. The consequent expense of these subordinated note
accretion amounts and the now terminated facility's debt issuance cost is
charged to "imputed warrant interest, non-cash," and amounted to approximately
$4.0 million and $370,000 for the fiscal years ended September 30, 1997 and
1998, respectively. In June 1998, EMCORE issued 284,684 warrants to its Chairman
and its Chief Executive Officer for providing a guarantee in connection with the
1998 Agreement, an $8.0 million 18-month credit facility with First Union
National Bank. EMCORE assigned a value to these warrants using the Black-Scholes
option-pricing model.
INCOME TAXES. EMCORE's effective income tax rate was 2.5% in fiscal 1997 and
0.0% in fiscal 1998. The lower effective rate in fiscal 1998, relative to fiscal
1997, was attributable to a federal income tax benefit offset by net operating
loss and expenses not utilized or deductible for tax purposes.
EXTRAORDINARY ITEM. In the fiscal year ended September 30, 1997, EMCORE repaid
$2.0 million of its outstanding subordinated notes due May 1, 2001. In
connection with this discharge of EMCORE's subordinated notes, an extraordinary
loss of $285,000 was recognized in fiscal 1997 relating to such early
extinguishment of debt.
NET LOSS. Net loss increased from $5.6 million for the fiscal year ended
September 30, 1997 to $36.4 million for the fiscal year ended September 30,
1998. This increase was primarily attributable to the acquisition of MODE and
subsequent write-off of in-process research and development of $19.5 million as
well as an increase in recurring research and development expenses of $7.5
million. In addition, the General Motors three-month prolonged strike adversely
affected operating performance.
-25-
<PAGE> 26
QUARTERLY RESULTS OF OPERATIONS
The following tables present EMCORE's unaudited results of operations
expressed in dollars and as a percentage of revenues for the eight most recently
ended fiscal quarters. EMCORE believes that all necessary adjustments,
consisting only of normal recurring adjustments, have been included in the
amounts below to present fairly the selected quarterly information when read in
conjunction with the consolidated financial statements and notes included
elsewhere in this document. EMCORE's results from operations may vary
substantially from quarter to quarter. Accordingly, the operating results for a
quarter are not necessarily indicative of results for any subsequent quarter or
for the full year.
<TABLE>
<CAPTION>
(in thousands) DEC. MAR. JUNE SEPT. DEC. MAR. JUN. SEPT.
31, 31, 30, 30, 31, 31, 30, 30,
1997 1998 1998 1998 1998 1999 1999 1999
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 12,357 $ 13,808 $ 9,074 $ 8,521 $ 10,125 $ 16,072 $ 17,667 $ 14,477
Cost of sales 6,376 7,534 5,448 5,317 6,016 9,203 9,853 8,086
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit 5,981 6,274 3,626 3,204 4,109 6,869 7,814 6,391
Operating expenses:
Selling, general
& administrative 3,003 2,901 4,596 3,582 3,144 3,225 3,650 4,414
Goodwill
amortization 343 1,099 1,098 1,098 1,099 1,098 1,098 1,098
Research & development:
Recurring 2,836 2,889 5,887 4,883 5,924 4,348 4,959 5,482
One-time acquired
in process 19,516 -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Total operating
expenses 25,698 6,889 11,581 9,563 10,167 8,671 9,707 10,994
-------- -------- -------- -------- -------- -------- -------- --------
Operating (loss)
income (19,717) (615) (7,955) (6,359) (6,058) (1,802) (1,893) (4,603)
Stated interest
expenses, net 70 47 211 626 230 463 290 (117)
Imputed warrant
interest, non-cash 96 96 94 315 316 317 410 93
Equity in net loss of
unconsolidated
affiliates -- -- -- 198 276 1,395 1,311 2,015
-------- -------- -------- -------- -------- -------- -------- --------
Total other expenses 166 143 305 1,139 822 2,175 2,011 1,991
-------- -------- -------- -------- -------- -------- -------- --------
(Loss) income
before income
taxes (19,883) (758) (8,260) (7,498) (6,880) (3,977) (3,904) (6,594)
Provision for
income taxes -- 20 -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
(Loss) income before
extraordinary item (19,883) (778) (8,260) (7,498) (6,880) (3,977) (3,904) (6,594)
Extraordinary loss -- -- -- -- -- -- 1,334 --
-------- -------- -------- -------- -------- -------- -------- --------
Net (loss) income $(19,883) $ (778) $ (8,260) $ (7,498) $ (6,880) $ (3,977) $ (5,238) $ (6,594)
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DEC. MAR. JUNE SEPT. DEC. MAR. JUN. SEPT.
31, 31, 30, 30, 31, 31, 30, 30,
1997 1998 1998 1998 1998 1999 1999 1999
------ ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales 51.6 54.6 60.0 62.4 59.4 57.3 55.8 55.9
Gross profit 48.4 45.4 40.0 37.6 40.6 42.7 44.2 44.1
Operating expenses:
Selling, general
& adminstrative 24.3 21.0 50.7 42.0 31.0 20.1 20.7 30.5
Goodwill
amortization 2.8 7.9 12.1 12.9 10.9 6.8 6.2 7.6
Research &
development:
Recurring 23.0 20.9 64.9 57.3 58.5 27.0 28.1 37.9
One-time acquired
in process 157.9 -- -- -- -- -- -- --
Total operating
expenses 208.0 49.8 127.7 112.2 100.4 53.9 55.0 76.0
------- ----- ----- ----- ----- ----- ----- -----
Operating (loss)
income (159.6) (4.4) (87.7) (74.6) (59.8) (11.2) (10.8) (31.9)
Stated interest
expenses, net 0.6 0.3 2.3 7.3 2.3 2.9 1.6 (0.8)
Imputed warrant
interest, non-cash 0.8 0.7 1.0 3.7 3.1 2.0 2.3 0.6
Equity in net loss
of unconsolidated
affiliates -- -- -- 2.3 2.7 8.6 7.4 13.9
------- ----- ----- ----- ----- ----- ----- -----
Total other expenses 1.4 1.0 3.3 13.3 8.1 13.5 11.3 13.7
(Loss) income before
income taxes (161.0) (5.4) (91.0) (87.9) (67.9) (24.7) (22.1) (45.6)
Provision for
income taxes -- 0.2 -- -- -- -- -- --
------- ----- ----- ----- ----- ----- ----- -----
(Loss) income
before extraordinary
item (161.0) (5.6) (91.0) (87.9) (67.9) (24.7) (22.1) (45.6)
Extraordinary loss -- -- -- -- -- -- 7.6 --
Net (loss) income (161.0) (5.6) (91.0) (87.9) (67.9) (24.7) (29.7) (45.6)
======= ===== ===== ===== ===== ===== ===== =====
</TABLE>
-26-
<PAGE> 27
From inception through December 31, 1996, EMCORE derived the majority of
its revenues from the sale of TurboDisc(TM) production systems. Beginning in
January 1997, EMCORE expanded its product line to offer wafers and devices.
Throughout fiscal year 1997 and the first half of fiscal year 1998, EMCORE
benefited from the expanded product offerings. Early in fiscal year 1998, the
capital equipment market experienced a downturn and bookings of TurboDisc(TM)
systems decreased substantially. The result was lower revenues for the last two
quarters of fiscal year 1998 and the first quarter of fiscal year 1999. Since
then, the bookings of TurboDisc(TM) systems has substantially increased as well
as bookings for our materials-related products. EMCORE's backlog at September
30, 1999 was $43.1 million, which represents the highest amount for any year-end
in the Company's history
Cost of sales was also affected by revenue shifts. Gross profit improved
consistently from the introduction of the new product lines through the second
quarter of fiscal year 1998. Thereafter, in late fiscal year 1998 and into the
early part of fiscal year 1999, gross profit was affected primarily by reduced
revenues and the resulting under-absorbed overhead. Since then, with increased
revenues, gross profit has increased at a relatively consistent percentage rate.
Operating expenses have generally increased both in absolute dollars and
as a percentage of revenues, due to increased staffing in research and
development, sales and marketing, and general and administrative functions. The
increase in research expenditures was related to the development of systems for
the processing of gallium nitride materials used in the production of blue HB
LEDs, enhancement of production systems, and the introduction of wafers and
devices, in particular, MR sensors, VCSELs and solar cells. Selling, general and
administrative expenses increased as a result of increased marketing and sales
related activities, including the hiring of additional personnel, commissions,
customer samples, expansion of facilities, and the opening of field offices in
Taiwan and California.
EMCORE has experienced and expects to continue to experience significant
fluctuations in quarterly results. Factors which have had an influence on and
may continue to influence EMCORE's operating results in a particular quarter
include, but are not limited to, the timing of receipt of orders, cancellation,
rescheduling or delay in product shipment or supply deliveries, product mix,
competitive pricing pressures, EMCORE's ability to design, manufacture and ship
products on a cost effective and timely basis, including the ability of EMCORE
to achieve and maintain acceptable production yields for wafers and devices,
regional economic conditions and the announcement and introduction of new
products by EMCORE and by its competitors. The timing of sales of EMCORE's
TurboDisc(TM) production systems may cause substantial fluctuations in quarterly
operating results due to the substantially higher per unit price of these
products relative to EMCORE's other products. If the compound semiconductor
industry experiences downturns or slowdowns, EMCORE's business, financial
condition and results of operations may be materially and adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by $2.7 million from $4.5 million at
September 30, 1998 to $7.2 million at September 30, 1999. For the fiscal year
ended September 30, 1999, net cash used for operations amounted to $15.2
million, primarily due to EMCORE's net loss, an increase in accounts receivable
and a decrease in accounts payable.
For the fiscal year ended September 30, 1999, net cash used for
investment activities amounted to $31.3 million, primarily due to the purchase
and manufacture of new equipment for the facilitation of EMCORE's wafer and
device product lines, and clean room modifications and enhancements of
approximately $17.1 million, as well as investments in unconsolidated affiliates
of approximately $14.2 million.
Net cash provided by financing activities for the fiscal year ended
September 30, 1999 amounted to approximately $49.2 million, primarily due to the
$52.0 million of net proceeds from the public offering in June 1999, $21.2
million of net proceeds from the private placement of preferred stock in
November 1998 and long-term convertible subordinated debenture of $7.8 million.
This was offset by debt repayments of $33.5 million on bank loans, short-term
related party debt and subordinated debt.
-27-
<PAGE> 28
In March 1997, the Company entered into a $10.0 million loan agreement
with First Union National Bank (the "Loan Agreement") that had an interest rate
of Prime plus 50 basis points (8.75% at September 30, 1998). As of September 30,
1998, the Company had $9,950,000 outstanding under this facility. As of
September 30, 1999, there were no amounts outstanding under this facility. The
Loan Agreement contains financial covenants which, among other things, require
maintenance of certain financial ratios, liquidity and net worth. As a result of
the net loss for certain quarters in the years ended September 30, 1998 and
1999, the Company was not in compliance with the Loan Agreement's debt
covenants. The Company received a waiver from the bank regarding this
non-compliance. Subsequent to year-end 1999, the Company's Loan Agreement was
extended through January 31, 2001. The Loan Agreement's financial covenants were
modified under the third amendment, and management believes that the Company
will be able to comply with such requirements throughout fiscal year 2000.
EMCORE's planned capital expenditures are expected to total
approximately $16.8 million during fiscal year 2000, including approximately
$7.8 million in expenditures related to investments in our joint ventures.
Capital spending in fiscal year 2000 also is expected to include upgrading
manufacturing facilities, continued investment in analytical and diagnostic
research and development equipment, upgrading and purchasing computer equipment
and the manufacture of TurboDisc(TM) systems for in-house use.
EMCORE believes that its current liquidity, together with available
credit, should be sufficient to meet its cash needs for working capital through
fiscal year 2000. However, if the available credit facilities, cash generated
from operations and cash on hand are not sufficient to satisfy EMCORE's
liquidity requirements, EMCORE will seek to obtain additional equity or debt
financing. Additional funding may not be available when needed or on terms
acceptable to EMCORE. If EMCORE is required to raise additional financing and if
adequate funds are not available or not available on acceptable terms, the
ability to continue to fund expansion, develop and enhance products and
services, or otherwise respond to competitive pressures will be severely
limited. Such a limitation could have a material adverse effect on EMCORE's
business, financial condition or operations.
In January 1999, Rockwell settled litigation that challenged the
validity of certain patents which EMCORE licensed from Rockwell prior to the
commencement of the litigation. As a result of this settlement, EMCORE will be
required to pay Rockwell a royalty including interest under our license
agreement relating to TurboDisc(TM) tools. EMCORE believes it has adequately
accrued for these royalties. In addition, prior to the commencement of the
litigation, EMCORE had initiated discussions with Rockwell to receive additional
licenses to permit EMCORE to use the technology to manufacture and sell wafers
and devices. EMCORE may be required to pay royalties to Rockwell for certain
past sales of wafers and devices to customers who do not hold licenses directly
from Rockwell. Management has reviewed and reassessed the royalty agreements and
concluded that it has the appropriate amounts reserved for at both September 30,
1998 and 1999. We are currently negotiating with Rockwell to obtain the
necessary licenses to continue to manufacture and sell wafers and devices. The
Rockwell patent expires in January 2000. The failure to obtain licenses to
manufacture these wafers and devices on commercially reasonable terms may
materially and adversely affect our business, financial condition and results of
operations through January 2000.
-28-
<PAGE> 29
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are
coded to accept or recognize only two digit entries in the date code field.
These systems and software products will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and/or software used by many companies and governmental agencies may
need to be upgraded to comply with such Year 2000 requirements or risk system
failure or miscalculations causing disruptions of normal business activities.
STATE OF READINESS. EMCORE has made an assessment of the Year 2000
readiness of its operating financial and administrative systems, including the
hardware and software that support such systems. EMCORE's assessment plan
consisted of:
(1) contacting third-party vendors and licensors of material
hardware, software and services that are both directly and
indirectly related to EMCORE's business;
(2) contacting vendors of third-party systems;
(3) assessing repair or replacement requirements;
(4) implementing repair or replacement; and
(5) creating contingency plans in the event of Year 2000
failures.
Our compound semiconductor wafers and devices are date insensitive and,
therefore, do not have any Year 2000 issues associated with them. Our
TurboDisc(TM) production systems have several components that could give rise to
Year 2000 compliance concerns. We have assessed the Year 2000 issues associated
with these components and have found that they have either been certified by the
vendor to be compliant or are date insensitive.
Our principal concern has been the status of our operating, financial
and administrative systems. These systems include accounting and production
control software at our New Jersey and the two New Mexico facilities. All
software has been certified as Year 2000 compliant by the vendors.
There are other information technology systems and non-information
technology systems that could give rise to Year 2000 concerns. These include
scientific and engineering applications, desktop applications (such as Microsoft
Word and Excel) and facilities controls such as HVAC and security. A review of
these systems leads us to believe that the systems are Year 2000 compliant, are
not critical to business operations, are used on a limited basis or are date
insensitive.
COSTS. To date, EMCORE has not incurred any material expenditures in connection
with identifying, evaluating or addressing Year 2000 compliance issues. Most of
EMCORE expenses have related to, and are expected to continue to relate to, the
operating costs associated with time spent by employees in the evaluation
process and Year 2000 compliance matters generally. The exact costs related to
Year 2000 compliance are difficult to determine EMCORE's costs for bringing our
in-house information technology systems into compliance should not exceed
$200,000. EMCORE does not anticipate that remediation expenses will be material.
If the remediation expenses are higher than anticipated EMCORE's business,
financial condition and results of operations could be materially and adversely
affected.
RISKS. EMCORE is not currently aware of any Year 2000 compliance problems
relating to its systems that would have a material adverse effect on EMCORE's
business, results of operations and financial condition. There can be no
assurance that EMCORE will not discover Year 2000 compliance problems in its
systems that will require substantial revision. In addition, there can be no
assurance that third-party software, hardware or services incorporated into
EMCORE's material systems will not need to be revised or replaced, all of which
could be time-consuming and expensive. The failure of EMCORE to fix or replace
its internally developed proprietary software or third-party software, hardware
or services on a timely basis could result in lost revenues, increased operating
costs, the loss of customers and other business interruptions, any of which
could have a material adverse effect on EMCORE's business, result of operations
and financial condition. In addition, the failure of governmental agencies,
utility companies, third-party service providers and others outside of EMCORE's
control to be Year 2000 compliant could result in systemic failure beyond
EMCORE's control such as a telecommunications or electrical failure, which could
have a material adverse effect on EMCORE's business, results of operations and
financial condition.
-29-
<PAGE> 30
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-l, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-l
provides guidance over accounting for computer software developed or obtained
for internal use including the requirement to capitalize specified costs and
amortization of such costs. EMCORE will be required to adopt this standard in
its fiscal year ending September 30, 2000. EMCORE does not expect the adoption
of this standard to have a material effect on results of operations, financial
position or cash flows.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities". SOP 98-5 provides guidance on the financial reporting of
start-up costs and organization costs. It requires costs of start-up activities
and organization costs to be expensed as incurred. EMCORE will be required to
adopt this standard in its fiscal year ending September 30, 2000. The adoption
of this standard is not expected to have a material impact on EMCORE's results
of operations, financial position or cash flows.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and requires recognition of all
derivatives as assets or liabilities in the statement of financial position and
measurement of these instruments at fair value. The statement, as amended, is
effective for fiscal years beginning after June 15, 2000. EMCORE will be
required to adopt this standard, as amended, in its fiscal year ending September
30, 2001. Management believes that adopting this statement will not have a
material impact on the financial position, results of operations, or cash flows
of EMCORE.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During fiscal years 1998 and 1999, EMCORE was not a party to any
derivative contracts, hedging or other material market risk transactions.
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<PAGE> 31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
EMCORE CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1998 AND 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................................ $ 4,456 $ 7,165
Restricted cash.......................................................................... 62 --
Accounts receivable, net of allowance for doubtful accounts of
$611 and $563 at September 30, 1998 and 1999, respectively.......................... 7,438 11,423
Accounts receivable - related parties.................................................... 500 2,480
Inventories, net......................................................................... 12,445 13,990
Costs in excess of billings on uncompleted contracts..................................... 78 123
Prepaid expenses and other current assets................................................ 130 266
-------- --------
Total current assets................................................................ 25,109 35,447
Property, plant and equipment, net.......................................................... 36,210 46,282
Goodwill, net............................................................................... 9,519 5,126
Investments in unconsolidated affiliates.................................................... 292 9,496
Other assets, net........................................................................... 2,090 3,260
-------- --------
Total assets........................................................................ $ 73,220 $ 99,611
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable - related party............................................................. $ 7,000 $ --
Accounts payable......................................................................... 12,023 5,359
Accrued expenses......................................................................... 4,197 4,173
Advanced billings........................................................................ 3,180 4,350
Capitalized lease obligation - current................................................... 673 713
Other current liabilities................................................................ 53 162
-------- --------
Total current liabilities........................................................... 27,126 14,757
Bank loans.................................................................................. 17,950 --
Convertible subordinated debenture.......................................................... -- 7,800
Subordinated notes, net..................................................................... 7,809 --
Capitalized lease obligation, net of current portion........................................ 755 141
Other liabilities........................................................................... -- 1,097
-------- --------
Total liabilities................................................................... 53,640 23,795
Commitments and contingencies
Mandatorily redeemable convertible preferred stock, 1,030,000 shares issued and
outstanding at September 30, 1999 (redeemable at maturity for $14,420)................... -- 14,193
Shareholders' equity:
Preferred stock, $0.0001 par, 5,882,353 shares authorized................................... -- --
Common stock, no par value, 50,000,000 shares authorized, 9,375,952 shares issued and
outstanding in 1998; 13,353,807 shares issued and outstanding in 1999................... 87,443 152,426
Accumulated deficit......................................................................... (60,196) (83,256)
Notes receivable from warrant issuance and stock sales...................................... (7,667) (7,547)
-------- --------
Total shareholders' equity.......................................................... 19,580 61,623
-------- --------
Total shareholders' equity and mandatorily redeemable preferred stock............... 19,580 75,816
-------- --------
Total liabilities, shareholders' equity and mandatorily redeemable preferred stock. $ 73,220 $ 99,611
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATED FINANCIAL STATEMENTS.
-31-
<PAGE> 32
EMCORE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1998 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Systems-related ............................... $ 34,091 $ 26,324 $ 44,477
Materials-related ............................. 13,661 17,436 13,864
-------- -------- --------
Total revenues ........................... 47,752 43,760 58,341
Cost of revenues:
Systems-related ............................... 24,250 15,942 26,522
Materials-related ............................. 5,844 8,734 6,636
-------- -------- --------
Total cost of revenues ................... 30,094 24,676 33,158
-------- -------- --------
Gross profit ............................. 17,658 19,084 25,183
Operating expenses:
Selling, general and administrative ........... 9,346 14,082 14,433
Goodwill amortization ......................... -- 3,638 4,393
Research and development - recurring .......... 9,001 16,495 20,713
Research and development - one time acquired
in-process, non-cash ................... -- 19,516 --
-------- -------- --------
Total operating expenses ...................... 18,347 53,731 39,539
-------- -------- --------
Operating loss ........................... (689) (34,647) (14,356)
Other (income) expense:
Stated interest income ........................ (237) (448) (751)
Stated interest expense ....................... 757 1,421 1,617
Imputed warrant interest expense, non-cash .... 3,988 601 1,136
Equity in net loss of unconsolidated affiliates -- 198 4,997
-------- -------- --------
Loss before income taxes and extraordinary item .. (5,197) (36,419) (21,355)
Provision for income taxes .................. 137 -- --
-------- -------- --------
Loss before extraordinary item ................... (5,334) (36,419) (21,355)
Extraordinary item - loss on early
extinguishment of debt .................... 285 -- 1,334
-------- -------- --------
Net loss ......................................... $ (5,619) $(36,419) $(22,689)
======== ======== ========
Per share data:
Weighted average basic and diluted shares
outstanding used in per share data calculations 4,669 8,775 10,590
-------- -------- --------
Loss per basic and diluted share before
extraordinary item ............................ $ (1.14) $ (4.15) $ (2.05)
======== ======== ========
Net loss per basic and diluted share ............. $ (1.20) $ (4.15) $ (2.18)
======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
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<PAGE> 33
EMCORE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AS OF SEPTEMBER 30, 1997, 1998 AND 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Common Stock Shareholders' Total
------------------------ Accumulated Notes Shareholders'
Shares Amount Deficit Receivable Equity
--------- -------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1996.................. 2,994,461 $ 18,978 $(18,158) $ (298) $ 522
Issuance of common stock purchase warrants..... 3,601 3,601
Issuance of common stock in initial public
offering, net of issuance cost of
$3,110...................................... 2,875,000 22,765 22,765
Stock purchase warrant exercise................ 94,124 384 384
Stock option exercise.......................... 34,965 54 54
Redemptions of shareholders' notes receivable.. 32 32
Forgiveness of notes receivable from
shareholder................................. 57 57
Compensatory stock issuance.................... 1,841 35 35
Net loss....................................... (5,619) (5,619)
---------- -------- -------- ------- --------
BALANCE AT SEPTEMBER 30, 1997.................. 6,000,391 $ 45,817 $(23,777) $ (209) $ 21,831
Issuance of common stock purchase warrants..... 1,310 1,310
Issuance of common stock on exercise of
warrants in exchange for note receivable.... 1,827,966 7,458 (7,458) --
Issuance of common stock and common stock
purchase options and warrants in connection 1,461,866 32,329 32,329
with the acquisition of MODE................
Stock option exercise.......................... 35,809 83 83
Stock purchase warrant exercise................ 5,660 23 23
Issuance of common stock on exercise of
warrants in exchange for subordinated notes. 17,605 72 72
Compensatory stock issuance.................... 26,655 351 351
Net loss....................................... (36,419) (36,419)
---------- -------- -------- ------- --------
BALANCE AT SEPTEMBER 30, 1998.................. 9,375,952 $ 87,443 $(60,196) $(7,667) $ 19,580
Preferred stock dividends...................... (319) (319)
Periodic accretion of redeemable preferred
stock to mandatory redemption value........ (52) (52)
Issuance of common stock purchase warrants..... 2,596 2,596
Issuance of common stock from public offering,
net of issuance cost of $5,000.............. 3,000,000 52,000 52,000
Stock option exercise.......................... 110,072 376 376
Stock purchase warrant exercise................ 321,467 2,450 2,450
Conversion of mandatorily redeemable
convertible preferred stock into common
stock....................................... 520,000 7,125 7,125
Redemptions of shareholders' notes receivable.. 120 120
Compensatory stock issuance.................... 26,316 436 436
Net loss....................................... (22,689) (22,689)
---------- -------- -------- ------- --------
BALANCE AT SEPTEMBER 30, 1999.................. 13,353,807 $152,426 $(83,256) $(7,547) $ 61,623
========== ======== ======== ======= ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
-33-
<PAGE> 34
EMCORE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1998 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1998 1999
--------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,619) $(36,419) $(22,689)
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities:
Acquired in-process research and development, -- 19,516 --
non-cash
Depreciation and amortization 3,188 8,767 11,575
Provision for doubtful accounts 515 1,118 390
Provision for inventory valuation 120 120 40
Deferred gain on sale to unconsolidated affiliate -- -- 1,259
Detachable warrant accretion and debt issuance cost
amortization 3,988 601 1,136
Extraordinary loss on early extinguishment of debt 286 -- 1,335
Equity in net loss of unconsolidated affiliates 198 4,997
Compensatory stock issuance 35 351 436
Write-off of note receivable due from shareholder 57 -- --
Change in assets and liabilities:
Accounts receivable - trade (5,930) 2 (4,375)
Accounts receivable - related party (2,500) 2,000 (1,980)
Inventories 399 (5,243) (1,585)
Costs in excess of billings on uncompleted contracts 19 (77) (46)
Prepaid expenses and other current assets (60) 13 (94)
Other assets 28 (624) (69)
Accounts payable (2,029) 7,950 (6,664)
Accrued expenses 1,881 (970) (24)
Advanced billings (1,308) 1,182 1,170
Unearned service revenue 112 (72) (53)
-------- -------- --------
Total adjustments (1,259) 34,832 7,448
-------- -------- --------
Net cash and cash equivalents used for operating activities (6,878) (1,587) (15,241)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant, and equipment (11,631) (22,132) (17,110)
Acquisition, cash acquired -- 193 --
Investments in unconsolidated affiliates -- (490) (14,203)
(Funding) payments of restricted cash (313) 250 62
-------- -------- --------
Net cash and cash equivalents used for investing activities (11,944) (22,179) (31,251)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering, net of issuance
cost of $3,110 22,765 -- --
Proceeds from preferred stock offering, net of
issuance cost of $500 -- -- 21,200
Proceeds from public stock offering, net of issuance
cost of $5,000 -- -- 52,000
Proceeds under convertible subordinated debenture -- -- 7,800
Proceeds (payments) under bank loans -- 17,950 (17,950)
Proceeds (payments) under notes payable - related party -- 7,000 (7,000)
Payments on demand note facility and subordinated debt (2,000) -- (8,563)
Proceeds from exercise of stock purchase warrants 85 23 2,164
Proceeds from exercise of stock options 54 83 376
Payments on capital lease obligations (6) (487) (573)
Dividends paid on preferred stock -- -- (253)
Reduction in notes receivable from shareholders 210 -- --
-------- -------- --------
Net cash and cash equivalents provided by financing
activities 21,108 24,569 49,201
-------- -------- --------
Net increase in cash and cash equivalents 2,286 803 2,709
Cash and cash equivalents, beginning of year 1,367 3,653 4,456
-------- -------- --------
Cash and cash equivalents, end of year $ 3,653 $ 4,456 $ 7,165
======== ======== ========
</TABLE>
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<PAGE> 35
EMCORE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1998 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 600 $ 1,347 $ 1,739
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued on the exercise of warrants in
exchange for subordinated notes -- 72 --
Issuance of common stock on the exercise of warrants in
exchange for notes receivable -- 7,458 --
Issuance of common stock, common stock purchase options
and warrants in connection with the acquisition of
MicroOptical Devices, Inc -- 32,329 --
Conversion of mandatorily redeemable convertible
preferred stock to common stock -- -- 7,280
</TABLE>
Reference is made to Note 8 - Debt Facilities - for disclosure relating to
certain non-cash warrant issuance.
Reference is made to Note 11 - Stockholders' Equity - for disclosure relating to
certain non-cash equity transactions.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
-35-
<PAGE> 36
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS
As of September 30, 1998 and 1999 and for the years ended September 30, 1997,
1998 and 1999
NOTE 1. DESCRIPTION OF BUSINESS
EMCORE Corporation (the "Company"), a New Jersey Corporation, designs, develops
and manufactures compound semiconductor materials and is a leading developer and
manufacturer of the tools and manufacturing processes used to fabricate compound
semiconductor wafers and devices. EMCORE's products and technology enable its
customers, both in the United States and internationally, to manufacture
commercial volumes of high-performance electronic devices using compound
semiconductors. EMCORE has recently established a number of strategic
relationships through joint ventures, long-term supply agreements and an
acquisition in order to facilitate the development and manufacture of new
products in targeted growth markets. EMCORE's products are used for a wide
variety of applications in the communications (satellite, data,
telecommunications and wireless), consumer and automotive electronics, computers
and peripherals, and lighting markets. The Company offers its customers a
complete, vertically integrated solution for the design, development and
production of compound semiconductor wafers and devices.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the
accounts of the Company and it's wholly owned subsidiary. The equity method of
accounting is used for unconsolidated affiliates where the Company exercises
significant influence, generally when ownership is at least 20% and not more
than 50%. All intercompany accounts and transactions are eliminated upon
consolidation. Prior period balances have been reclassified to conform to the
current period financial statement presentation.
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 $3.0 million and $5.7 million in
cash equivalents at September 30, 1998 and 1999, 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.
Depreciation expense includes the amortization of capital lease assets. 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.
LONG-LIVED ASSETS. The carrying amount of long-lived assets are reviewed on a
regular basis for the existence of facts or circumstances, both internally and
externally, that suggest impairment. To date no such impairment has been
indicated. The Company determines if the carrying amount of a long-lived asset
is impaired based on anticipated undiscounted cash flows before interest. In the
event of an impairment, a loss is recognized based on the amount by which the
carrying amount exceeds fair value of the asset. Fair value is determined
primarily using the anticipated cash flows before interest, discounted at a rate
commensurate with the risk involved.
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<PAGE> 37
DEFERRED COSTS. Included in other assets are various deferred costs and warrant
valuation costs. The deferred costs are primarily related to obtaining product
patents that are being amortized over five years. Total amortization expense
amounted to approximately $40,000 $79,000 and $143,000 for the years ended
September 30, 1997, 1998 and 1999, respectively. During the year ended September
30, 1998, EMCORE issued 284,684 common stock purchase warrants in exchange for
the guaranteeing of a credit facility by both the Chairman and Chief Executive
Officer of EMCORE. These warrants were assigned a value of $1.3 million using
the Black-Scholes Option Pricing Model ("Black-Scholes"). Amortization expense,
recorded as imputed warrant interest expense, related to these warrants amounted
to $219,000 and $657,000 for the years ended September 30, 1998 and 1999,
respectively. On June 15, 1999 with the completion of EMCORE's public offering,
this credit facility was cancelled, and the remaining $434,000 of this warrant
valuation was recognized as an extraordinary charge related to the early
extinguishment of debt. Also, during the year ended September 30, 1999, EMCORE
issued 282,010 common stock purchase warrants to General Electric for financing
EMCORE's initial capital contribution in the GELcore joint venture through the
issuance of a $7.8 million subordinated debenture. The warrants were assigned a
value of $2.6 million also using the Black-Scholes option pricing model.
Amortization expense related to these warrants, also recorded as imputed warrant
interest expense, amounted to $186,000 for the year ended September 30, 1999.
GOODWILL. Goodwill is amortized using the straight-line method over three years.
The Company, as applicable, evaluates whether there has been a permanent
impairment in the value of goodwill. Any impairment would be recognized when the
sum of expected undiscounted cash flows derived from the acquired business is
less than its carrying value.
INCOME TAXES. The Company recognizes deferred taxes by the asset and liability
method of accounting for income taxes. Under the asset and liability method,
deferred income taxes are recognized for differences between the financial
statement and tax bases of assets and liabilities at enacted statutory tax rates
in effect for the years in which the differences are expected to reverse. The
effect on deferred taxes of a change in tax rates is recognized in income in the
period that includes the enactment date. In addition, valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized. The primary sources of temporary differences are depreciation
and amortization of intangible assets.
REVENUE AND COST RECOGNITION - SYSTEMS- AND MATERIALS-RELATED REVENUES. Revenue
from systems sales is recognized upon shipment, when title passes to the
customer. Subsequent to product shipment, the Company incurs certain
installation costs at the customer's facility and warranty costs that are
estimated and accrued at the time the sale is recognized. Materials and service
revenues are recognized when goods are shipped or services are rendered to the
customer. Service revenue under contracts with specified service terms is
recognized as earned over the service period in accordance with the terms of the
applicable contract. Costs in connection with the procurement of the contracts
are charged to expense as incurred.
REVENUE AND COST RECOGNITION - CONTRACT REVENUE. The Company's research
contracts require the development or evaluation of new materials applications
and have a duration of six to thirty-six months. For research contracts with the
U.S. Government and commercial enterprises with a duration 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 $614,000, $438,000 and $1.4 million for the years ended September
30, 1997, 1998 and 1999, respectively.
RESEARCH AND DEVELOPMENT. Research and development costs related to the
development of both present and future products and Company-sponsored materials
application research are charged to expense as incurred. In connection with the
acquisition of MicroOptical Devices, Inc. ("MODE"), the Company recorded a
charge of $19,516,000 for acquired in-process research and development.
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<PAGE> 38
FAIR VALUE OF FINANCIAL INSTRUMENTS. The Company estimates the fair value of its
financial instruments based upon discounted cash flow analyses using the
Company's incremental borrowing rate on similar instruments as the discount
rate. As of September 30, 1999, the carrying values of the Company's cash and
cash equivalents, accounts receivables and accounts payable as reflected on the
Company's accompanying balance sheet approximates fair value.
USE OF ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Estimates also affect the reported amounts of revenues and expenses
during the reporting period. Actual results may differ from those estimates. The
Company's most significant estimates relate to acquired in-process research and
development, accounts receivable and inventory valuation reserves, warranty and
installation accruals, estimates of cost and related gross profits on certain
research contracts and the valuation of long-lived assets.
NET LOSS PER SHARE. The Company accounts for earnings per share under the
provision of Statement of Financial Accounting Standards No. 128 "Earnings per
Share". Basic earnings per common share was calculated by dividing net loss by
the weighted average number of common stock shares outstanding during the
period. The effect of outstanding common stock purchase options and warrants,
the number of shares available to be issued upon the conversion of the Company's
Series I Preferred Stock and the number of shares to be issued upon conversion
of the convertible subordinated debenture have been excluded from the earnings
per share calculation since the effect of such securities is anti-dilutive. The
following table reconciles the number of shares utilized in the earnings per
share calculations.
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED SEPTEMBER 30,
----------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Loss before extraordinary item $ (5,334) $(36,419) $(21,355)
Extraordinary item, loss on early
retirement of debt 285 -- 1,334
-------- -------- --------
Net loss $ (5,619) $(36,419) $(22,689)
Preferred stock dividends -- -- 319
Periodic accretion of preferred stock
to redemption value -- -- 52
-------- -------- --------
Net loss attributable to common shareholders $ (5,619) $(36,419) $(23,060)
======== ======== ========
Loss per basic and diluted share before
extraordinary item $ (1.14) $ (4.15) $ (2.05)
======== ======== ========
Net loss per basic and diluted share $ (1.20) $ (4.15) $ (2.18)
======== ======== ========
Weighted average of outstanding common shares -
basic 4,669 8,775 10,590
Effect of dilutive securities:
Stock option and warrants -- -- --
Preferred stocks -- -- --
Convertible subordinated debenture -- -- --
-------- -------- --------
Weighted average of outstanding common shares -
diluted 4,669 8,775 10,590
======== ======== ========
</TABLE>
-38-
<PAGE> 39
CONCENTRATION OF CREDIT RISK. The Company performs material application research
under contract with the U.S. Government or as a subcontractor of U.S. Government
funded projects. The demand for services and products is directly related to the
level of funding of government programs. There can be no assurance that Federal
programs will continue to be funded even if government agencies have available
financial resources or that the Company will continue to be awarded contracts
under such programs.
The Company performs ongoing credit evaluations of its customers'
financial condition and generally requires no collateral from its customers. The
Company maintains reserves for potential credit losses based upon the credit
risk of specified customers, historical trends and other information. To reduce
credit risk and to fund manufacturing costs, the Company requires periodic
prepayments or irrevocable letters of credit on most production system orders.
During fiscal year 1998, the Company wrote off outstanding receivables of
approximately $1.0 million that was due from an Asian customer. Prior to this
event, the Company's credit losses generally had not exceeded its expectations.
Although such loses have been within management's expectations to date, there
can be no assurance that such reserves will continue to be adequate.
The Company has maintained cash balances with certain financial
institutions in excess of the $100,000 insured limit of the Federal Deposit
Insurance Corporation.
SEGMENTS DATA. Effective October 1, 1998, the Company adopted the Financial
Accounting Standards Board's Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS No. 131"). SFAS No. 131 establishes standards for reporting information
about operating segments in annual financial statements and selected information
about operating segments in interim financial reports. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. The adoption of SFAS No. 131 did not affect results of
operations or financial position, but did affect the disclosure of segment
information (See Note 14).
RECENT FINANCIAL ACCOUNTING PRONOUNCEMENTS In March 1998, the American Institute
of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP")
98-1, "Accounting for the Cost of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"). SOP 98-1 provides guidance over accounting for
computer software developed or obtained for internal use, including the
requirement to capitalize specified costs and amortization of such costs. The
Company is required to adopt this standard in its fiscal year ended September
30, 2000. The Company does not expect the adoption of this standard to have a
material effect on its results of operations, financial position or cash flows.
In April 1998, AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities". SOP 98-5 provides guidance on the financial reporting of
start-up costs and organization costs. It requires costs of start up activities
and organization costs to be expensed as incurred. The Company is required to
adopt this standard in its fiscal year ended September 30, 2000. The adoption of
this standard is not expected to have a material impact on its results of
operations, financial position or cash flows.
In June of 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement establishes
accounting and reporting standards for derivative instruments and requires
recognition of all derivatives as assets or liabilities in the statement of
financial position and measurement of these instruments at fair value. The
statement, as amended, is effective for fiscal years beginning after June 15,
2000. The Company is required to adopt this standard, as amended, in its fiscal
year ended September 30, 2001. Management believes that adopting this statement
will not have a material impact on the financial position, results of
operations, or cash flows of the Company.
-39-
<PAGE> 40
NOTE 3. ACQUISITION
On December 5, 1997, the Company acquired all of the outstanding capital stock
of MicroOptical Devices, Inc. ("MODE") in exchange for 1,461,866 shares of
EMCORE common stock, 200,966 common stock purchase options (exercise prices
ranging from $0.43 to $0.59), and 47,118 common stock purchase warrants
(exercise prices ranging from $4.32 to $5.92). The purchase price was
approximately $32,829,000 including direct acquisition costs of approximately
$500,000. The acquisition of MODE was recorded using the purchase method of
accounting. Accordingly, the results of operations of the acquired business and
the fair values of the acquired tangible and intangible assets and assumed
liabilities have been included in the Company's financial statements as of
December 5, 1997. The allocation of the fair value of the net assets acquired is
as follows:
(in thousands)
--------------
Net tangible assets $ 156
Goodwill 13,157
Acquired in process research and development 19,516
-------
Total purchase price $32,829
=======
The common stock issued in connection with the MODE acquisition was valued based
upon the average closing price of the Company's common stock for the five days
before and after the announcement date of the acquisition. The assumed MODE
options and warrants were valued using Black-Scholes and such values amounted to
approximately $3,761,000 and $793,000, respectively.
The MODE options have a term of 10 years from the date of grant, with such
options expiring at various dates through July 2007. The options vest, with
continued service, over a four-year period; 25% in year one and 75% equally over
the remaining 36 months. The warrants have a term of 10 years from the date of
grant, were exercisable upon grant, and expire at various dates through May
2007.
MODE was a development stage company (incorporated in August 1995) and had 18
employees at the date of acquisition. MODE's activities were substantially
dedicated towards the research and development of optical laser devices at the
date of acquisition.
Management is responsible for estimating the fair value of the acquired
in-process research and development. As of the date of acquisition, MODE had six
primary micro-optical laser research and development projects in-process, which
had not reached technological feasibility. MODE's in-process research and
development related to new technologies, the fair value assumptions relating to
pricing, product margins and expense levels were based upon management's
experience with its own operations and the compound semiconductor industry as a
whole.
The Company allocated $475,000 of the purchase price to the acquired workforce
of MODE which is included in the approximately $13.2 million of goodwill
discussed above. The amount allocated to goodwill is being amortized over a
period of three years.
-40-
<PAGE> 41
NOTE 4. JOINT VENTURES
In May 1999, EMCORE and General Electric Lighting formed GELcore, a joint
venture to develop and market HB LED lighting products. General Electric
Lighting and EMCORE have agreed that this joint venture will be the exclusive
vehicle for each party's participation in solid state lighting. GELcore seeks to
combine EMCORE's materials science expertise, process technology and compound
semiconductor production systems with General Electric Lighting's brand name
recognition and extensive marketing and distribution capabilities. GELcore's
long-term goal is to develop products to replace traditional lighting. Under
terms of the joint venture agreement, EMCORE has a 49% non-controlling interest
in the GELcore venture and accounts for its investment under the equity method
of accounting. EMCORE has seconded various employees to the joint venture to
assist in the development of products.
In May, 1999, in connection with the GELcore venture, General Electric funded
the Company's initial capital contribution of $7.8 million into GELcore. The
funding was in the form of a subordinated debenture (the "Debenture") with an
interest rate of 4.75%. The Debenture will mature in 2006 and is convertible
into common stock of the Company at a conversion price of $22.875 or 340,984
shares. The Debenture is convertible at any time at the option of General
Electric and may be called by the Company after three years, if the price of the
Company's common stock has traded at or above $34 for at least thirty days. In
addition, General Electric also received 282,010 warrants to purchase common
stock at $22.875 per share. These warrants are exercisable at any time and will
expire in 2006. These warrants were valued using the Black Scholes model,
resulting in a valuation of $2.6 million, which has been included in other
assets. Such asset is being amortized over seven years. On a fully diluted
basis, General Electric would own approximately 4.5% of the common stock of the
Company.
For the fiscal year ended September 30, 1999, the Company recognized a loss of
$2.5 million related to this venture which has been recorded as a component of
other income and expense. As of September 30, 1999, the Company's net investment
in this venture amounted to $5.3 million. The Company is obligated to fund the
joint venture with an additional $7.8 million in fiscal year 2000.
In November 1998, EMCORE formed UMCore, a joint venture with Union Miniere Inc.,
a mining and materials company, to explore and develop alternate uses for
germanium using EMCORE's materials science and production platform expertise and
Union Miniere's access to and experience with germanium. EMCORE has a 50%
non-controlling interest in the venture and accounts for its interest in the
venture under the equity method of accounting. In fiscal year 1999, the Company
invested $896,000 in the venture. The Company is obligated to fund the venture's
capital requirements in proportion to its equity interest. EMCORE has seconded
various personnel to the joint venture to assist in the development of products.
For the fiscal year ended September 30, 1999, the EMCORE recognized a loss of
$297,000 related to this venture which has been recorded as a component of other
income and expense. As of September 30, 1999, the Company's net investment in
this venture amounted to $599,000.
In October 1998, EMCORE formed Emtech, a joint venture with Optek Technology,
Inc., a packager and distributor of optoelectronic devices, to market an
expanded line of magneto resistive sensors to the automotive and related
industries. This joint venture combines EMCORE's expertise in the manufacture of
magneto resistive die and Optek's expertise in packaging these die. This
combination will provide customers with off-the-shelf products. No additional
personnel are anticipated to meet the obligations to the joint venture. EMCORE
has a 50% non-controlling interest in the venture and accounts for its interest
in the venture under the equity method of accounting. EMCORE is obligated to
fund the venture's capital requirements in proportion to its equity interest. As
of September 30, 1999, EMCORE has not funded the joint venture nor has the joint
venture commenced operations.
In December 1997, the Company and a wholly owned subsidiary of Uniroyal
Technology Corporation formed Uniroyal Optoelectronics LLC ("UOE"), a joint
venture, to manufacture, sell and distribute High Brightness (HB) LED wafers and
package-ready devices. EMCORE has a 49% non-controlling interest in the joint
venture and accounts for its investment under the equity method of accounting.
In fiscal years 1998 and 1999, the Company invested $490,000 and $5.5 million,
respectively, in the venture that is classified as a component of other
long-term assets. During the fiscal year ended September 30, 1999, EMCORE sold
three compound semiconductor production systems to the venture totaling $5.3
million in revenues. EMCORE deferred gross profit of approximately $1.3 million
on such sales to the extent of its minority interest. Such deferred gross profit
will be recognized ratably over the assigned life of the production systems
purchased by the joint venture. For the fiscal years ended September 30, 1998
and 1999, the Company recognized a loss of $198,000 and 2.2 million,
-41-
<PAGE> 42
respectively related to this venture which has been recorded as a component of
other income and expense. As of September 30, 1999, the Company's net investment
in this venture amounted to $3.6 million. The following summarized financial
information of EMCORE's joint ventures, (GELcore, UMCore and UOE), in aggregate,
is provided as of and for the year ended September 30, 1999.
(in thousands) UNAUDITED
-------------- ---------
Net sales $490
Gross loss (600)
Net loss (10,218)
Current assets 16,480
Non-current assets 21,567
Current liabilities 8,136
Non-current liabilities 17,790
NOTE 5. INVENTORIES
The components of inventories consisted of the following:
(in thousands) As of September 30,
-----------------------
1998 1999
------- -------
Raw materials $11,346 $ 9,146
Work-in-process 1,092 3,620
Finished goods 7 1,224
------- -------
Total $12,445 $13,990
======= =======
NOTE 6. PROPERTY AND EQUIPMENT
Major classes of property and equipment are summarized below:
(in thousands) As of September 30,
-----------------------
1998 1999
-------- --------
Land $ 1,029 $ 1,029
Building 7,493 9,179
Equipment 28,367 41,225
Furniture and fixtures 3,256 4,880
Leasehold improvements 9,948 10,764
Equipment, furniture and fixtures and
leasehold improvement under capital
lease 2,043 2,164
-------- --------
52,136 69,241
Less: accumulated depreciation and
amortization (15,926) (22,959)
-------- --------
Total $ 36,210 $ 46,282
======== ========
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<PAGE> 43
At September 30, 1999, minimum future lease payments due under the
capital leases are as follows:
(IN THOUSANDS)
Period ending:
September 30, 2000 $776
September 30, 2001 82
September 30, 2002 41
September 30, 2003 15
September 30, 2004 5
---------
Total minimum lease payments 919
Less: amount representing interest
(imputed interest rate of 14.4%) (65)
---------
Net minimum lease payments 854
Less: current portion 713
---------
Long-term portion $141
=========
The provisions for depreciation and amortization expense on owned property and
equipment amounted to approximately $3.1 million, $4.7 million and $6.6 million
for the years ended September 30, 1997, 1998 and 1999, respectively. Accumulated
amortization on assets accounted for as capital lease amounted to approximately
$366,000 and $834,000 as of September 30, 1998 and 1999, respectively.
Included in equipment above are twenty systems and twenty-one systems with a
combined net book value of approximately $9.8 million and $13.7 million at
September 30, 1998 and 1999, respectively. Such systems are utilized for the
production of compound semiconductor wafers and package-ready devices for sale
to third parties, systems demonstration purposes, system sales support, in-house
materials applications, internal research and contract research funded by third
parties.
NOTE 7. ACCRUED EXPENSES
Accrued expenses consisted of the following:
(in thousands) As of September 30,
----------------------------
1998 1999
----------------------------
Accrued payroll, vacation and
other employee expenses $2,114 $1,631
Installation and warranty costs 704 929
Interest 346 129
Other 1,033 1,484
------ ------
Total $4,197 $4,173
====== ======
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<PAGE> 44
NOTE 8. DEBT FACILITIES
CONVERTIBLE SUBORDINATED DEBENTURE
In May 1999, in connection with the GELcore venture, General Electric funded the
Company's initial capital contribution of $7.8 million into GELcore. The funding
was in the form of a subordinated debenture (the "Debenture") with an interest
rate of 4.75%. The Debenture will mature in 2006 and is convertible into common
stock of the Company at a conversion price of $22.875 or 340,984 shares. The
Debenture is convertible at any time at the option of General Electric and may
be called by the Company after three years, if the price of the Company's common
stock has traded at or above $34 for at least thirty days. In addition, General
Electric also received 282,010 warrants to purchase common stock at $22.875 per
share. These warrants are exercisable at any time and will expire in 2006. These
warrants were valued using the Black Scholes model, resulting in a valuation of
$2.6 million, which has been included in other assets. Such asset is being
amortized over seven years and is charged to "Imputed warrant interest,
non-cash". On a fully diluted basis, General Electric would own approximately
4.5% of the common stock of the Company.
BANK LOANS
LOAN AGREEMENT:
In March 1997, the Company entered into a $10.0 million loan agreement with
First Union National Bank (the "Loan Agreement") that had an interest rate of
Prime plus 50 basis points (8.75% at September 30, 1998). As of September 30,
1998 the Company had $9,950,000 outstanding under this facility. As of September
30, 1999, there were no amounts outstanding under this facility (see below). The
Loan Agreement contains financial covenants which, among other things, require
maintenance of certain financial ratios, liquidity and net worth. As a result of
the net loss for certain quarters in the years ended September 30, 1998 and
1999, the Company was not in compliance with the Loan Agreement's debt
covenants. The Company received a waiver from the bank regarding this
non-compliance. Subsequent to year-end 1999, the Company's Loan Agreement was
extended through January 31, 2001. The Loan Agreement's financial covenants were
modified under the third amendment, and management believes that the Company
will be able to comply with such requirements throughout fiscal year 2000.
1998 AGREEMENT:
In June 1998, the Company entered into an $8.0 million loan agreement with First
Union National Bank (the "1998 Agreement") that had an interest rate equal to
one-month LIBOR plus three-quarters of one percent per annum (6.4% at September
30, 1998). As of September 30, 1998, $8.0 million was outstanding under the 1998
Agreement. As of September 30, 1999, there were no amounts outstanding under
this facility (see below). The 1998 Agreement expired upon completion of the
public offering (see Note 11). The 1998 Agreement was guaranteed by both the
Company's Chairman and Chief Executive Officer. In exchange for guaranteeing the
facility, both the Chairman and the Chief Executive Officer were granted an
aggregate of 284,684 common stock purchase warrants exercisable at $11.375 per
share until May 1, 2001. These warrants are callable at the Company's option at
$0.85 per warrant at such time as the Company's Common Stock has traded at or
above 150% of the exercise price for a period of thirty days. The Company
assigned a value of $1,310,000 to the warrants issued to the guarantors. This
valuation was based upon the Company's application of Black-Scholes. This value
was accounted for as debt issuance cost and was completely amortized by
September 30, 1999. See extraordinary item described below.
In June 1999, the Company completed the issuance of an additional 3.0 million
common stock shares through a public offering, which resulted in proceeds of
$52.0 million, net of issuance costs. A portion of the proceeds was used to
repay all outstanding bank loans.
-44-
<PAGE> 45
SUBORDINATED NOTES:
In May 1996, the Company issued subordinated notes (the "Subordinated Notes") in
the amount of $9,500,000 to its existing shareholders, $1,000,000 of which were
exchanged for notes receivable from officers and certain employees with
identical payment and interest provisions. The Subordinated Notes are scheduled
to mature on May 1, 2001, and have a stated interest rate of 6.0% which is
payable semi-annually on May 1 and November 1. In addition, the noteholders were
issued 2,328,432 common stock purchase warrants with an exercise price of $4.08
per share which expire on May 1, 2001. The warrants are exercisable after
November 1, 1996, and are callable at the Company's option, after May 1, 1997,
at $0.85 per warrant. The Company has the legal right of offset with respect to
the notes receivable from officers and certain key employees, and it is their
full intention to offset the corresponding notes receivable and payable upon
maturity. As such, the Company reflected $848,000 of the officers' and
employees' notes receivable as a contra liability, reducing the Company's
Subordinated Notes balance. The remaining $152,000 note receivable has been
reflected as a contra equity note receivable balance, representing the portion
of the employee note receivable associated with common stock purchase warrants
issued to such employees. The Company received cash proceeds of $8,500,000 in
connection with this Subordinated Notes issuance.
In September 1996, the Company issued a subordinated note in the amount of
$2,500,000 to the Company's then majority shareholder with terms identical to
the Subordinated Notes issued on May 1, 1996. In addition, under the terms of
this issuance, 245,098 common stock purchase warrants were issued to purchase
common stock at $10.20 per share and which expire September 1, 2001. These
warrants are exercisable after March 1, 1997, and are callable at the Company's
option after September 1, 1997, at $0.85 per warrant. The Company assigned a
value of $1,440,000 to the May 1, 1996 detachable warrants and $900,000 to the
September 1, 1996 detachable warrants. These valuations were based upon the
Company's application of Black-Scholes and the Company's assessment of the
underlying valuation factors, as well as an assessment of the terms of the
Subordinated Notes. The carrying value of the Subordinated Notes will be subject
to periodic accretions, using the interest method, in order for the carrying
amount to equal the Company's obligation upon maturity. As a result, the May 1,
1996 and September 1, 1996 Subordinated Notes have an effective interest rate of
approximately 9.3% and 15.0%, respectively. For the years ended September 30,
1997, 1998 and 1999, imputed warrant interest related to the Subordinated Notes
amounted to $388,000, $370,000 and $293,000, respectively.
In June 1999, a portion of the proceeds from the public offering was used to
repay all outstanding subordinated notes. The difference between the carrying
value of the subordinated notes and the face value was recorded as an
extraordinary loss, as noted below.
DEMAND NOTE FACILITIES:
On September 17, 1998, the Company borrowed $7.0 million from its Chairman at an
interest rate of Prime plus 200 basis points (10.25% as of September 30, 1998),
per annum. In addition, on October 23, 1998 the Company borrowed an additional
$1.5 million from its Chairman on identical terms. The entire sum of $8.5
million borrowed plus interest was repaid from the proceeds of the Private
Placement (see Note 11). The demand note facility expired upon completion of the
public offering (see Note 11)
EXTRAORDINARY ITEMS:
On June 15, 1999, the Company repaid its outstanding bank loans using a portion
of the proceeds from the public offering. The Company also used a portion of the
net proceeds to repurchase its outstanding 6.0% subordinated notes due 2001. The
early extinguishment of debt resulted in an extraordinary charge of $1.3 million
or $0.13 per share in fiscal year 1999 that consisted of the following:
(in thousands)
EXTRAORDINARY ITEMS:
--------------------
Discount on prepayment of 6% subordinated notes due 2001...... $ 867
Write-off of deferred financing costs......................... 467
------
Net extraordinary loss $1,334
======
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<PAGE> 46
On October 25, 1996, the Company entered into a $10.0 million demand note
facility (the "Facility"). The Facility bore interest at the rate of LIBOR plus
75 basis points, had a term of one year and was due and payable on demand. The
Facility was guaranteed by the Chairman of the Company's Board of Directors who
provided collateral for the Facility. In December 1996, in return for
guaranteeing the facility, the Company granted the Chairman 980,392 common stock
purchase warrants at $10.20 per share which expire September 1, 2001. These
warrants are exercisable after July 1, 1997, and are callable at the Company's
option after December 1, 1997 at $0.85 per warrant. The Facility was terminated
in conjunction with the Company's initial public offering.
The Company assigned a value of $3,600,000 to the warrants issued to the
guarantor. This valuation was based upon the Company's application of
Black-Scholes. This value was accounted for as debt issuance cost and was
amortized over the expected period that the facility was to be in place (four
months). The Company utilized a portion of the proceeds from its initial public
offering to pay down or discharge certain of its debts. The Company repaid the
entire $8.0 million outstanding under its October 1996 Facility and $2.0 million
was used to repay a portion of the Company's outstanding subordinated notes, due
May 1, 2001. In connection with the discharge of the Company's subordinated
notes, an extraordinary loss of $286,000 was recognized in fiscal year 1997.
NOTE 9. COMMITMENTS AND CONTINGENCIES
On November 16, 1992, the Company entered into a three-year lease agreement with
a bank for 34,000 square feet of space in the building the Company presently
occupies. On March 31, 1995, the agreement was renewed for 5 years for 49,000
square feet. In November 1996, the Company signed an agreement to occupy the
remaining 26,000 square feet that it previously had not occupied. In May 1999,
the agreement was renewed for another 5 years.
The Company leases certain equipment under non-cancelable operating leases.
Facility and equipment rent expense under such leases amounted to approximately
$548,000, $637,000 and $761,000 for the years ended September 30, 1997, 1998 and
1999, 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,
1999 are as follows:
(in thousands)
PERIOD ENDING: Operating
-------------- ------------
September 30, 2000 $448
September 30, 2001 129
September 30, 2002 55
September 30, 2003 7
September 30, 2004 --
----
Total minimum lease payments $639
----
In January 1999, Rockwell settled litigation that challenged the validity of
certain patents which EMCORE licensed from Rockwell prior to the commencement of
the litigation. As a result of this settlement, EMCORE will be required to pay
Rockwell a royalty including interest under our license agreement relating to
TurboDisc(TM) tools. EMCORE believes it has adequately accrued for these
royalties. In addition, prior to the commencement of the litigation, EMCORE had
initiated discussions with Rockwell to receive additional licenses to permit
EMCORE to use the technology to manufacture and sell wafers and devices. EMCORE
may be required to pay royalties to Rockwell for certain past sales of wafers
and devices to customers who do not hold licenses directly from Rockwell.
Management has reviewed and reassessed the royalty agreements and concluded that
it has the appropriate amounts reserved for at both September 30, 1998 and 1999.
We are currently negotiating with Rockwell to obtain the necessary licenses to
continue to manufacture and sell wafers and devices. The Rockwell patent expires
in January 2000. The failure to obtain licenses to manufacture these wafers and
devices on commercially reasonable terms may materially and adversely affect our
business, financial condition and results of operations through January 2000.
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.
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<PAGE> 47
NOTE 10. INCOME TAXES
Income tax expense consists of the following:
(IN THOUSANDS) For the years ended September 30,
--------------------------------------------
1997 1998 1999
------------- ------------- -------------
Current:
Federal $ 113 $ -- $ --
State 24 -- --
----- ---- ----
137 -- --
Deferred:
Federal -- -- --
State -- -- --
----- ---- ----
Total $ 137 $ -- $ --
----- ---- ----
The principal differences between the U.S. statutory and effective income tax
rates were as follows:
<TABLE>
<CAPTION>
For the years ended September 30,
--------------------------------------------
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
US statutory income tax (benefit) expense rate (34.0)% (34.0)% (34.0)%
State rate, net of federal benefit (5.9)% (5.9)% (5.9)%
Acquired in-process research and development -- 18.2% --
Change in valuation allowance 37.7% 19.8% 35.0%
Non-deductible amortization -- 3.4% 4.8%
Other 4.7% (1.5)% 0.1%
------- ------- -------
Effective tax rate 2.5% -- --
======= ======= =======
</TABLE>
The components of the Company's net deferred taxes were as follows:
<TABLE>
<CAPTION>
(in thousands) For the years ended
September 30,
----------------------------
1998 1999
------ -------
<S> <C> <C>
Deferred tax assets:
Federal net operating loss carryforwards $ 7,943 $ 11,800
Research credit carryforwards (state and federal) 1,479 1,554
Inventory reserves 248 133
Accounts receivable reserves 240 191
Fixed assets -- 2,325
Interest 1,657 386
Accrued installation reserve 164 146
Accrued warranty reserve 76 157
State net operating loss carryforwards 1,494 1,336
Other 238 569
Valuation reserve - federal (9,438) (15,430)
Valuation reserve - state (3,751) (2,936)
------- --------
Total deferred tax assets 350 231
Deferred tax liabilities:
Fixed assets and intangibles (350) (231)
------- --------
Total deferred tax liabilities (350) (231)
------- --------
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 net deferred tax asset is realizable, based
upon the Company's past earnings history.
-47-
<PAGE> 48
As of September 30, 1999, the Company has net operating loss carryforwards for
tax purposes of approximately $24.0 million that expire in the years 2003
through 2019. The Company believes that the consummation of certain equity
transactions and a significant change in the ownership during fiscal years 1995,
1998 and 1999 have constituted a change in control under Section 382 of the
Internal Revenue Code ("IRC"). Due to the change in control, the Company's
ability to use its federal net operating loss carryovers and federal research
credit carryovers to offset future income and income taxes, respectively, are
subject to annual limitations under IRC Sections 382 and 383.
The Company believes that the acquisition of MODE and the consummation of
certain other equity transactions has constituted a change in control in fiscal
1998 under Section 382 of the IRC. As such, Federal net operating loss
carryovers and research credit carryovers incurred subsequent to the Company's
fiscal 1995 change in control (as described above) will also be subject to
annual limitations under IRC Sections 382 and 383.
NOTE 11. STOCKHOLDERS' EQUITY
REVERSE STOCK SPLIT. On February 3, 1997, the Board of Directors approved a
3.4:1 reverse stock split of its common stock and approved a decrease in the
number of shares of common stock authorized. All references in the accompanying
financial statements to the number of common stock and per-share amounts have
been restated to reflect the reverse split.
COMMON STOCK OFFERING. On March 6, 1997, the Company completed an initial public
offering of 2,500,000 shares of common stock at a price of $9.00 per share (the
"Offering"), and upon the exercise of the Underwriter's overallotment option,
375,000 additional shares of common stock were also sold at $9.00 per share. The
proceeds, net of commissions and certain expenses, to the Company from the
offering were approximately $22.8 million. Prior to the Offering, there was no
public market for the Company's common stock.
PUBLIC OFFERING. On June 15, 1999, the Company completed the issuance of an
additional 3.0 million common stock shares through a public offering, which
resulted in proceeds of $52.0 million, net of issuance costs of $5.0 million. A
portion of the proceeds was used to repay all outstanding bank indebtedness and
subordinated notes.
PREFERRED STOCK. The Company's certificate of incorporation authorizes the Board
of Directors to issue up to 5,882,353 shares of preferred stock of the Company
upon such terms and conditions having such rights, privileges and preferences as
the Board of Directors may determine.
PRIVATE PLACEMENT OFFERING. On November 30, 1998, the Company sold an aggregate
of 1,550,000 shares of Series I Redeemable Convertible Preferred Stock ("the
Series I Preferred Stock") for aggregate consideration of $21.7 million before
deducting costs and expenses, which amounted to approximately $500,000. The
Series I Preferred Stock was recorded net of issuance costs. The excess of the
preference amount over the carrying value is being accreted by periodic charges
to accumulated deficit. The shares of Series I Preferred Stock are convertible,
at any time, at the option of the holders thereof, unless previously redeemed,
into shares of common stock at an initial conversion price of $14.00 per share
of common stock, subject to adjustment in certain cases. The market price of the
Company's common stock was $12.875 on the date the Series I Preferred Stock was
issued. The Series I Preferred Stock is redeemable, in whole or in part, at the
option of the Company at any time the Company's stock has traded at or above
$28.00 per share for 30 consecutive trading days, at a price of $14.00 per
share, plus accrued and unpaid dividends, if any, to the redemption date. The
Series I Preferred Stock carries a dividend of 2% per annum. Dividends are being
charged to accumulated deficit. In addition, the Series I Preferred Stock is
subject to mandatory redemption by the Company at $14.00 per share plus
accumulated and unpaid dividends, if any, on November 17, 2003. On June 15,
1999, 520,000 shares of Series I Redeemable Convertible Preferred Stock were
converted to common stock.
-48-
<PAGE> 49
NOTE 12. STOCK OPTIONS AND WARRANTS
STOCK OPTION PLAN. In November 1994, the Company's Incentive Stock Option Plan,
initiated in 1987, was eliminated. On June 5, 1995, the Company adopted the 1995
Incentive and Non-Statutory Stock Option Plan (the "Option Plan"). Under the
terms of the Option Plan, options to acquire 323,529 shares of common stock may
be granted to eligible employees, as defined, at no less than 100 percent of the
fair market value on the date of grant. In March 1996, the ability to grant
options to acquire an additional 323,530 shares of common stock was approved. In
February 1997, the ability to grant options to acquire an additional 725,000
shares of common stock was approved. As of September 30, 1999, 82,578 stock
options were available for issuance under the Company's Option Plan.
Certain options under the Option Plan are intended to qualify as incentive stock
options pursuant to Section 422A of the Internal Revenue Code.
During fiscal 1999, options with respect to 330,795 shares were granted pursuant
to the Company's option plan at exercise prices ranging from $8.00 to $26.50 per
share.
Stock options granted generally vest over three to five years and are
exercisable over a ten-year period. As of September 30, 1997, 1998 and 1999,
options with respect to 199,368, 481,863 and 554,439 shares were exercisable,
respectively.
The following table summarized the activity under the plan:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------ ----------------
<S> <C> <C>
Outstanding as of September 30, 1996 339,412 $ 3.54
Granted 182,700 11.06
Exercised (42,165) 3.17
Cancelled (4,475) 3.08
--------- ------
Outstanding as of September 30, 1997 475,472 $ 6.47
Assumed in MODE acquisition 200,978 0.50
Granted 615,306 13.34
Exercised (35,809) 2.33
Cancelled (43,221) 10.22
--------- ------
Outstanding as of September 30, 1998 1,212,726 $ 8.95
Granted 330,795 13.74
Exercised (110,072) 3.41
Cancelled (127,436) 9.33
--------- ------
Outstanding as of September 30, 1999 1,306,013 $10.59
--------- ------
</TABLE>
At September 30, 1999, stock options outstanding were as follows:
<TABLE>
<CAPTION>
Exercise Options Weighted Average Remaining Exercisable Weighted Average
Prices Outstanding Contractual Life (Years) Options Exercise Price
-------- ----------- -------------------------- ---------- ----------------
<S> <C> <C> <C> <C>
less than or
equal to $5 298,875 6.70 269,806 $ 2.18
less than $5 to
less than or
equal to $10 39,300 8.96 3,860 9.38
less than $10 to
less than or
equal to $15 830,118 8.53 257,129 12.39
less than $15 to
less than or
equal to $20 76,220 8.42 11,644 18.02
greater than $20 61,500 8.79 12,000 21,92
</TABLE>
In connection with the Company's acquisition of MODE, it assumed 200,978 common
stock purchase options with exercise prices ranging from $0.43 to $0.60. The
MODE options have a term of 10 years from the date of grant, with such options
expiring at various dates through July 31, 2007. The options vest, with
continued service, over a four-year period; 25% in year one and 75% equally over
the remaining 36 months.
-49-
<PAGE> 50
The following table summarizes the activity of options assumed in the MODE
acquisition:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
------ --------------
<S> <C> <C>
Outstanding as of September 30, 1997 -- --
Options assumed at the date of acquisition 200,978 $0.50
Exercised (15,890) 0.51
Cancelled (7,764) 0.56
------- -----
Outstanding as of September 30, 1998 177,324 0.50
Granted -- --
Exercised (52,799) 0.54
Cancelled (28,029) 0.56
------- -----
Outstanding as of September 30, 1999 96,496 0.46
======= =====
</TABLE>
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"ACCOUNTING FOR STOCK BASED COMPENSATION" ("SFAS 123"). SFAS 123 establishes
financial and reporting standards for stock based compensation plans. The
Company has adopted the disclosure only provisions of this standard and has
elected to continue to apply the provision of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees". Had the Company
elected to recognize compensation expense for stock options based on the fair
value at the grant dates of awards, net loss and net loss per share would have
been as follows:
<TABLE>
<CAPTION>
(in thousands) FOR THE FISCAL YEARS ENDED SEPTEMBER 30,
--------------------------------------------
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
Loss before extraordinary item
As reported $5,334 $36,419 $21,354
Pro forma 5,441 37,038 22,648
Loss per basic and diluted share before
extraordinary item
As reported $(1.14) $(4.15) $(2.05)
Pro forma $(1.17) $(4.22) $(2.17)
Net loss
As reported $5,619 $36,419 $22,689
Pro forma $5,727 $37,038 $23,983
Net loss per basic and diluted share
As reported $(1.20) $(4.15) $(2.18)
Pro forma $(1.23) $(4.22) $(2.30)
</TABLE>
The weighted average fair value of the Company's stock options was calculated
using Black-Scholes with the following weighted-average assumptions used for
grants: no dividend yield; expected volatility of 0% prior to the Company's
initial public offering, 60% for fiscal years 1997 and 1998 and 76% for fiscal
year 1999; a risk-free interest rate of 6.0%, 5.6% and 5.8% for fiscal years
1997, 1998 and 1999, respectively; and expected lives of 5 years. The weighted
average fair value of options granted during the years ended September 30, 1997,
1998 and 1999 was $3.82, $7.50 and $9.05 per share, respectively. Stock options
granted by the Company prior to its initial public offering were valued using
the minimum value method under FASB No. 123.
WARRANTS.
WARRANT EXERCISE. On December 3, 1997, the holders of 1.8 million common stock
purchase warrants (with an exercise price of $4.08) exercised such warrants with
the Company taking full recourse notes amounting to approximately $7.5 million
in exchange for the issued common stock. The notes receivable mature and are
payable in full on May 1, 2001 and have an interest rate of 6%, compounding
semi-annually. In addition, the holders are required to provide collateral at a
2:1 coverage ratio. The Company presently holds this collateral.
-50-
<PAGE> 51
Set forth below is a summary of the Company's outstanding warrants at September
30, 1999:
<TABLE>
<CAPTION>
Exercise Expiration
Underlying Security Price Warrants Date
------------------- -------- -------- ---------------
<S> <C> <C> <C>
Common Stock (1) $4.08 249,990 May 1, 2001
Common Stock (2) $4.33 36,990 August 21, 2006
Common Stock (2) $5.92 10,128 May 16, 2007
Common Stock (3) $10.20 1,039,460 September 1, 2001
Common Stock (4) $11.38 284,684 May 1, 2001
Common Stock (5) $22.88 282,010 May 26, 2006
---------
1,903,262
</TABLE>
(1) issued in connection with EMCORE's May 1996 subordinated note
issuance.
(2) issued in connection with EMCORE's December 1997 acquisition of
MicroOptical Devices, Inc.
(3) issued in connection with EMCORE's September 1996 subordinated
debt issuance and October 1996 debt guarantee.
(4) issued in connection with EMCORE's June 1998 bank loan agreement.
(5) issued in connection with EMCORE's May 1999 formation of the joint
venture with GEL.
NOTE 13. RELATED PARTIES
In fiscal year 1997, the Company entered into a $5.0 million non-exclusive and
non-refundable technology licensing and royalty agreement with Uniroyal
Technology Corporation ("UTC") for the process technology to develop and
manufacture high brightness light emitting diodes ("HB LEDs"). During fiscal
years 1997 and 1998, revenue associated with the UTC licensing agreement
amounted to $2.5 million annually. At the time the transaction was originally
entered into, UTC's Chairman and CEO was a member of EMCORE's Board of Directors
and EMCORE's Chairman was on the Board of Directors of UTC.
In December 1997, the Company and a wholly owned subsidiary of Uniroyal
Technology Corporation formed Uniroyal Optoelectronics LLC, a joint venture, to
manufacture, sell and distribute High Brightness (HB) LED wafers and
package-ready devices (see Note 4). During the fiscal year ended September 30,
1999, EMCORE sold three compound semiconductor production systems to the venture
totaling $5.3 million in revenues. EMCORE deferred gross profit of approximately
$1.3 million on such sales to the extent of its minority interest. Such deferred
gross profit will be recognized ratably over the assigned life of the production
systems purchased by the joint venture. As of September 30, 1999, the Company
had an outstanding related party receivable of $1.8 million.
In May 1999, EMCORE and General Electric Lighting formed GELcore, a joint
venture to develop and market HB LED lighting products. As of September 30,
1999, the Company had an outstanding related party receivable of $673,000.
The President of Hakuto Co. Ltd. ("Hakuto"), the Company's Asian distributor, is
a member of the Company's Board of Directors and Hakuto is a minority
shareholder of the Company. During the years ended September 30, 1998 and 1999,
sales made through Hakuto approximated $9.2 million and $10.2 million
respectively.
On June 22, 1998, the Company entered into a bank loan agreement, which was
guaranteed by the Chairman and the Chief Executive Officer of the Company (see
Note 8).
On September 17, 1998, the Company borrowed $7.0 million from its Chairman,
Thomas J. Russell at an interest rate of 9.75% per annum. In addition, on
October 23, 1998 the Company borrowed an additional $1.5 million from its
Chairman on identical terms. The entire $8.5 million, borrowed from Mr. Russell
was repaid from the proceeds of a private placement (See Note 8).
-51-
<PAGE> 52
NOTE 14. SEGMENT DATA AND RELATED INFORMATION
EMCORE has two reportable operating segments: the systems-related business unit
and the materials-related business unit. The systems-related business unit
designs, develops and manufactures tools and manufacturing processes used to
fabricate compound semiconductor wafer and devices. Revenues for the
systems-related business unit consists of sales of EMCORE's Turbodisc(TM)
production systems as well as spare parts and services. Our systems-related
business unit assists our customers with device design, process development and
optimal configuration of TurboDisc(TM) production systems. The materials-related
business unit designs, develops and manufactures compound semiconductor
materials. Revenues for the materials-related business unit include sales of
semiconductor wafers, devices and process development technology. EMCORE's
vertically-integrated product offering allows it to provide a complete compound
semiconductor solution to its customers.
The segments reported below are the segments of the Company for which separate
financial information is available and for which gross profit amounts are
evaluated regularly by executive management in deciding how to allocate
resources and in assessing performance. The accounting policies of the operating
segments are the same as those described in the summary of accounting policies
(see Note 2). The Company does not allocate assets or operating expenses to the
individual operating segments. There are no intercompany sales transactions
between the two operating segments.
The Company's reportable operating segments are business units that offer
different products. The reportable segments are each managed separately because
they manufacture and distribute distinct products and services.
Information about reported segment gross profit is as follows:
<TABLE>
<CAPTION>
(in thousands)
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Revenues:
Systems-related............................. $34,091 $26,324 $44,477
Materials-related........................... 13,661 17,436 13,864
------- ------- -------
Total revenues......................... 47,752 43,760 58,341
Cost of sales:
Systems-related............................. 24,250 15,942 26,522
Materials-related........................... 5,844 8,734 6,636
------- ------- -------
Total cost of sales.................... 30,094 24,676 33,158
------- ------- -------
Gross profit:
Systems-related............................. 9,841 10,382 17,955
Materials-related........................... 7,817 8,702 7,228
------- ------- -------
Total gross profit..................... $17,658 $19,084 $25,183
------- ------- -------
Gross margin:
Systems-related............................. 28.9% 39.4% 40.4%
Materials-related........................... 57.2% 49.9% 52.1%
------- ------- -------
Total gross margin..................... 37.0% 43.6% 43.2%
------- ------- -------
</TABLE>
-52-
<PAGE> 53
The Company sells its compound semiconductor products domestically and
internationally. The Company's international sales are generally made under
letter of credit arrangements. The following chart contains a breakdown of
EMCORE's worldwide sales to customers and percentages by geographic region.
Historically, EMCORE has received all payments for products and services in U.S.
dollars.
<TABLE>
<CAPTION>
(in thousands) For the fiscal years ended September 30,
----------------------------------------------------------
1997 1998 1999
------------- -------------- ---------------
Region Revenues % Revenues % Revenues %
- ------ -------- --- -------- --- -------- ---
<S> <C> <C> <C> <C> <C> <C>
North America $27,690 58% $26,648 61% $27,698 48%
Asia 14,584 31% 15,527 35% 28,211 48%
Europe 5,478 11% 1,585 4% 2,432 4%
------- --- ------- --- ------- ----
Total $47,752 100% $43,760 100% $58,341 100%
------- --- ------- --- ------- ----
</TABLE>
All long-lived assets are located in the North America region. Significant sales
in the Asia region are predominately made in Japan and Taiwan. Sales to
customers that accounted for at least 10% of total EMCORE revenues are outlined
below. In fiscal year 1999, no individual customer had sales equal to or in
excess of 10% of total fiscal year 1999 revenues.
(in thousands) For the fiscal years ended September 30,
----------------------------------------
1997 1998
------- -------
Customer A $ 4,873 $ 7,583
Customer B 7,159 5,602
------- -------
Total $12,032 $13,185
======= =======
NOTE 15. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
(in thousands except per share data) Operating Net Income Net Income
Income Net Income (Loss)
Revenues (Loss) (Loss) Per Share
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Fiscal Year 1997:
December 31, 1996 $ 8,591 $(2,585) $ (3,798) $ (0.86)
March 31, 1997 12,929 147 (3,150) (0.82)
June 30, 1997 14,106 907 830 0.10
September 30, 1997 12,126 841 498 0.06
Fiscal Year 1998:
December 31, 1997 $12,357 $(19,717)* $(19,883)* $(2.81)*
March 31, 1998 13,808 (615) (778) (0.08)
June 30, 1998 9,074 (7,955) (8,260) (0.88)
September 30, 1998 8,521 (6,359) (7,498) (0.80)
Fiscal Year 1999:
December 31, 1998 $10,125 $(6,058) $(6,880) $(0.74)
March 31, 1999 16,072 (1,802) (3,977) (0.44)
June 30, 1999 17,667 (1,893) (5,238) (0.53)
September 30, 1999 14,477 (4,603) (6,594) (0.50)
</TABLE>
* includes $19.5 million one-time acquired in-process, non-cash research and
development.
-53-
<PAGE> 54
NOTE 16. EMPLOYEE SAVINGS PLAN
The Company has a savings plan (the "Savings Plan") that qualifies as a deferred
salary arrangement under Section 401(k) of the Internal Revenue Code. Under the
Savings Plan, participating employees may defer a portion of their pretax
earnings, up to the Internal Revenue Service annual contribution limit.
Effective August 1, 1997, the Company began contributing to the Savings Plan.
All employer contributions are made in the Company's common stock. For the years
ended September 30, 1998 and 1999, the Company contributed approximately
$252,000 and $376,000, respectively to the Savings Plan.
-54-
<PAGE> 55
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Shareholders of EMCORE Corporation
We have audited the accompanying consolidated balance sheets of EMCORE
Corporation (the "Company") as of September 30, 1999 and 1998, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the years then ended. Our audits also included the financial statement schedule
listed in the Index at Item 14(a)(2) for the years ended September 30, 1999 and
1998. These financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and 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 consolidated financial statements present fairly,
in all material respects, the financial position of EMCORE Corporation as of
September 30, 1999 and 1998, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedule for the
years ended September 30, 1999 and 1998, when considered in relation to the
basic consolidated financials statements taken as a whole, presents fairly in
all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
November 10, 1999
-55-
<PAGE> 56
STATEMENT OF MANAGEMENT RESPONSIBILITY FOR FINANCIAL STATEMENTS
To the Shareholders of
EMCORE Corporation:
Management has prepared and is responsible for the consolidated
financial statements and related information in the Annual Report. The financial
statements, which include amounts based on judgment, have been prepared in
conformity with generally accepted accounting principles consistently applied.
Management has developed, and continues to strengthen, a system of
internal accounting and other controls for the Company. Management believes
these controls provide reasonable assurance that assets are safeguarded from
loss or unauthorized use and that the Company's financial records are a reliable
basis for preparing the financial statements. Underlying the concept of
reasonable assurance is the premise that the cost of control should not exceed
the benefit derived.
The Board of Directors, through its audit committee, is responsible for
reviewing and monitoring the Company's financial reporting and accounting
practices. The audit committee meets regularly with management and independent
accountants - both separately and together. The independent accountants have
free access to the audit committee to review the results of their audits, the
adequacy of internal accounting controls and the quality of financial reporting.
-56-
<PAGE> 57
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
PricewaterhouseCoopers LLP ("PwC") and one of its predecessors, Coopers
& Lybrand L.L.P., have served as the Company's independent public accountants
since 1986. On May 13, 1999 the staff of the Securities and Exchange Commission
(the "SEC") advised EMCORE that, in its view, because several current and former
Price Waterhouse LLP partners owned shares of EMCORE's common stock, PwC had
violated the independence standards promulgated by the SEC. The SEC staff
required that EMCORE change auditors and have a new accounting firm reaudit its
fiscal 1998 financial statements as a result of such violations by PwC.
In connection with the foregoing, on May 13, 1999, EMCORE engaged
Deloitte & Touche LLP as its independent public accountants to reaudit EMCORE's
financial statements for fiscal year 1998 and dismissed PwC as EMCORE's
independent public accountant for fiscal year 1998. Both of these decisions were
approved by the audit committee of our Board of Directors.
PwC's report on EMCORE's financial statements for the fiscal years 1997
and 1998 did not contain an adverse opinion or a disclaimer of opinion and was
not qualified or modified as to uncertainty, audit scope, or accounting
principles. In addition, through May 13, 1998, there were no disagreements with
PwC on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements, if not resolved
to the satisfaction of PwC, would have caused PwC to make reference to the
subject matter of the disagreement in connection with its report.
During the Company's two most recent fiscal years and through May 13,
1999, there have been no reportable events, as defined in Regulation S-K Item
304(a)(1)(v).
Prior to formally being appointed as auditors on May 13, 1999, Deloitte
& Touche LLP performed certain audit-related work at the request of the Company
as a precaution in the event the SEC staff required the Company to change
accountants.
Despite providing its consent to the inclusion of its auditor's report
for the Company's financial statements for the fiscal year ended September 30,
1997 on ten separate occasions in the past, following several requests by the
Company, PwC refused to provide its consent to the inclusion of its auditor's
report for the Company's financial statements for the fiscal year ended
September 30, 1997 in this Form 10-K filing. As a result of PwC's refusal, the
auditor's report for the Company's financial statements for the fiscal year
ended September 30, 1997 is not included herein. PwC's auditor's report for the
financial statements for the fiscal year ended September 30, 1997 was most
recently included in the Company's 1998 Form 10-K/A filed on May 17, 1999 and
the Company's Form S-3/A filed on October 6, 1999.
The Company believes that PwC has refused to provide its report and
written consent solely in retaliation to a lawsuit that the Company recently
filed against PwC in connection with PwC's violation of the independence
standards promulgated by the SEC discussed above.
PwC's report on the Company's financial statements for the fiscal year
ended September 30, 1997 did not contain an adverse opinion or a disclaimer of
opinion and was not qualified or modified as to uncertainty, audit scope, or
accounting principles. There is no assurance that PwC would reissue its
auditor's report for the Company's financial statements for the fiscal year
ended September 30, 1997 in its original form and without qualification. The
Company is not aware of any subsequent events, transactions or other matters
that may have affected the previous report. The Company is currently taking
actions to engage Deloitte & Touche LLP to reaudit the Company's financial
statements for the fiscal year ended September 30, 1997.
-57-
<PAGE> 58
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated herein by
reference to EMCORE's 1999 Proxy Statement, which will be filed on or before
January 28, 2000.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by
reference to EMCORE's 1999 Proxy Statement, which will be filed on or before
January 28, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by
reference to EMCORE's 1999 Proxy Statement, which will be filed on or before
January 28, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this term is incorporated herein by
reference to EMCORE's 1999 Proxy Statement, which will be filed on or before
January 28, 2000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
PAGE
REFERENCE
---------
<S> <C>
14(a)(1) FINANCIAL STATEMENTS:
Included in Part II, Item 8 of this report:
Consolidated Balance Sheets as of September 30, 1998 and 1999 31
Consolidated Statements of Operations for the years ended September 30, 1997, 1998 and 1999 32
Consolidated Statements of Shareholders' Equity for the years ended
September 30, 1997, 1998 and 1999 33
Consolidated Statements of Cash Flows for the years ended September 30, 1997, 1998 and 1999 34-35
Notes to financial statements 36-54
Report of independent accountants 55
14(a)(2) FINANCIAL STATEMENT SCHEDULE:
Included in Part IV of this report:
Schedule II - Valuation and qualifying accounts and reserves 63
</TABLE>
Other schedules have been omitted since they are either not required or
not applicable.
-58-
<PAGE> 59
14(A)(3) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
3.1 Restated Certificate of Incorporation, dated March 31, 1999.*
3.2 Amended By-Laws, as amended January 11, 1989 (incorporated by reference to Exhibit 3.2 to Amendment No. 1 to the
1997 S-1).
4.1 Specimen certificate for shares of common stock (incorporated by reference to Exhibit 4.1 to Amendment No. 3 to the
1997 S-1).
4.2 Form of $11.375 Warrant (incorporated by reference to Exhibit 4.2 to EMCORE's filing on Form 10-K, dated December
29, 1998).
10.1 1995 Incentive and Non-Statutory Stock Option Plan (incorporated by reference to Exhibit 10.1 to Amendment No. 1 to
the 1997 S-1).
10.2 1996 Amendment to Option Plan (incorporated by reference to Exhibit 10.2 to Amendment No. 1 to the 1997 S-1).
10.3 Specimen Incentive Stock Option Agreement (incorporated by reference to Exhibit 10.3 to Amendment No. 1 to the 1997
S-1).
10.4 Second Amended and Restated Distribution Agreement dated as of March 31, 1998 between EMCORE and Hakuto
(incorporated by reference to Exhibit 10.4 to EMCORE's filing on Form 10-K/A, dated May 17, 1999). Confidential
Statement has been requested by EMCORE for portions of this document. Such portions are indicated by "[*]".
10.5 Amendment to Lease for premises at 394 Elizabeth Avenue, Somerset, New Jersey 08873 (incorporated by reference to
Exhibit 10.5 to Amendment No. 1 to the 1997 S-1).
10.6 Registration Rights Agreement relating to September 1996 warrant issuance (incorporated by reference to Exhibit 10.6
to Amendment No. 1 to the 1997 S-1).
10.7 Registration Rights Agreement relating to December 1996 warrant issuance (incorporated by reference to Exhibit 10.7
to Amendment No. 1 to the 1997 S-1).
10.8 Form of 6% Subordinated Note Due May 1, 2001 (incorporated by reference to Exhibit 10.8 to Amendment No. 1 to the
1997 S-1).
10.9 Form of 6% Subordinated Note Due September 1, 2001 (incorporated by reference to Exhibit 10.9 to Amendment No. 1 to
the 1997 S-1).
10.10 Form of $4.08 Warrant (incorporated by reference to Exhibit 10.10 to Amendment No. 1 to the 1997 S-1).
</TABLE>
<PAGE> 60
EXHIBIT INDEX - (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
10.11 Form of $10.20 Warrant (incorporated by reference to Exhibit 10.12 to Amendment No. 1 to the 1997 S-1).
10.12 Consulting Agreement dated December 6, 1996 between EMCORE and Norman E. Schumaker (incorporated by reference to
Exhibit 10.14 to Amendment No. 1 to the 1997 S-1).
10.13 Purchase Order issued to EMCORE by General Motors Corporation on November 17, 1996. (incorporated by reference to
Exhibit 10.15 to Amendment No. 1 to the 1997 S-1). Confidential treatment has been requested by EMCORE with respect
to portions of this document. Such portions are indicated by "[*]".
10.14 Acquisition Agreement, dated as of December 5, 1997, between EMCORE and MicroOptical Devices, Inc. (incorporated by
reference to Exhibit 2 to EMCORE's filing on Form 8-K, dated December 22, 1997).
10.15 Purchase Agreement, dated November 30, 1998, by and between EMCORE, Hakuto UMI and UTC (incorporated by reference to
Exhibit 10.15 to EMCORE's filing on Form 10-K, dated December 29, 1998).
10.16 Registration Rights Agreement, dated November 30, 1998 by and between EMCORE, Hakuto, UMI and UTC (incorporated by
reference to Exhibit 10.16 to EMCORE's filing on Form 10-K, dated December 29, 1998).
10.17 Long Term Purchase Agreement dated November 24, 1998 by and between EMCORE and Space Systems/Loral, Inc.
(incorporated by reference to Exhibit 10.17 to EMCORE's filing on Form 10-K/A, dated May 17, 1999). Confidential
treatment has been requested by EMCORE for portions of this document. Such portions are indicated by "[*]".
10.18 Note Purchase Agreement dated as of May 26, 1999 by and between EMCORE and GE Capital Equity Investements, Inc.
(incorporated by reference to Exhibit 10.18 to Amendment No. 2 to the 1998 S-3 filed on June 9, 1999).
10.19 Registration Rights Agreement dated as of May 26, 1999 by and between EMCORE and GE Capital Equity Investements,
Inc. (incorporated by reference to Exhibit 10.19 to Amendment No. 2 to the 1998 S-3 filed on June 9, 1999).
10.20 $22.875 Warrant issued to General Electric Company (incorporated by reference to Exhibit 10.20 to Amendment No. 2 to
the 1998 S-3 filed on June 9, 1999).
10.21 Transaction Agreement dated January 20, 1999 between General Electric Company and EMCORE (incorporated by reference
to Exhibit 10.1 to EMCORE's filing on Form 10-Q/A, dated May 17, 1999). Confidential treatment has been requested by
EMCORE for portions of this document. Such portions are indicated by "[*]".
10.22 Third Amendment to Revolving Loan and Security Agreement, dated as of December 1, 1999 between EMCORE and First
Union National Bank.*
</TABLE>
<PAGE> 61
21 Subsidiaries of the registrant.*
23.1 Consent of Deloitte & Touche LLP.*
27 Financial Data Schedule.*
- ----------
* Filed herewith
<PAGE> 62
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 27, 1999.
EMCORE CORPORATION
By: /s/ REUBEN F. RICHARDS, JR.
--------------------------------------------
Name: Reuben F. Richards, Jr.
TITLE: PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report on Form 10-K has been signed below by the following persons on
behalf of EMCORE Corporation in the capacities indicated, on December 23, 1999.
SIGNATURE TITLE
--------- -----
/s/ THOMAS J. RUSSELL Chairman of the Board and Director
- ------------------------------
Thomas J. Russell
/s/ REUBEN F. RICHARDS, JR. President, Chief Executive Officer and Director
- ------------------------------ (Principal Executive Officer)
Reuben F. Richards, Jr.
/s/ THOMAS G. WERTHAN Vice President, Chief Financial Officer
- ------------------------------ and Director (Principal Accounting and
Thomas G. Werthan Financial Officer)
/s/ HOWARD W. BRODIE Vice President and Secretary
- ------------------------------
Howard W. Brodie
/s/ RICHARD A. STALL Director
- ------------------------------
Richard A. Stall
/s/ ROBERT LOUIS-DREYFUS Director
- ------------------------------
Robert Louis-Dreyfus
/s/ HUGH H. FENWICK Director
- ------------------------------
Hugh H. Fenwick
/s/ SHIEGO TAKAYAMA Director
- ------------------------------
Shiego Takayama
/s/ CHARLES T. SCOTT Director
- ------------------------------
Charles T. Scott
/s/ JOHN HOGAN Director
- -----------------------------
John Hogan
-61-
<PAGE> 63
Schedule II
EMCORE CORPORATION
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
Additions
Balance at Charged to Balance at
Beginning of Costs and Write-offs End of
Period Expenses (Deductions) Period
-------------- ------------- --------------- ------------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
- ----------------------------------------------------
For the year ended September 30, 1997 $310,000 $ 515,000 $ (128,000) $697,000
For the year ended September 30, 1998 697,000 1,118,000 (1,204,000) 611,000
For the year ended September 30, 1999 611,000 390,000 (438,000) 563,000
RESERVES FOR INVENTORY OBSOLESCENCE
- ----------------------------------------------------
For the year ended September 30, 1997 $220,000 $ 120,000 $ -- $340,000
For the year ended September 30, 1998 340,000 120,000 -- 460,000
For the year ended September 30, 1999 460,000 40,000 (110,000) 390,000
</TABLE>
-62-
<PAGE> 1
Exhibit 3.1
RESTATED
CERTIFICATE OF INCORPORATION
OF EMCORE CORPORATION
Reuben F. Richards, Jr., being over the age of eighteen and
acting as a duly authorized officer of Emcore Corporation and by virtue of the
provisions of the New Jersey Business Corporation Act, Title 14A of the Revised
Statutes of the State of New Jersey, hereby certifies that the Restated
Certificate of Incorporation of Emcore Corporation is as follows:
FIRST: The name of the Corporation is:
EMCORE Corporation
SECOND: The purpose for which this Corporation is organized is
to engage in any activity within the purposes for which corporations may be
organized under the New Jersey Business Corporation Act.
THIRD: The registered office of the Corporation is:
394 Elizabeth Avenue
Somerset, NJ 08873
and the name of the corporation's registered agent at such address is:
Thomas G. Werthan
FOURTH: The total number of shares of Capital Stock of the
Corporation shall be 55,882,352 shares of which:
A. Of the Capital Stock, 50,000,000 shares shall consist of
Common Stock which shall be entitled to one vote per share of all matters which
holders of the Common Stock shall be entitled to vote on.
B. Of the Capital Stock, 5,882,352 shares shall consist of
Preferred Stock which may be divided into such classes and such series as shall
be established from time to time by resolutions of the Board of Directors and
filed as an amendment to this Certificate of Incorporation, without any
requirement of vote or class vote of shareholders. The Board of Directors shall
have the right and power to establish and designate in any such Class or Series
Resolution such priorities, powers, preferences and relative, participating,
optional or other special rights and qualifications, limitations and
restrictions as it shall determine.
The priorities, powers, preferences and relative,
participating optional or other special rights and qualifications, limitations
and restrictions of the Class of Preferred Stock
<PAGE> 2
designated "Series I Redeemable Convertible Preferred Stock" are as set forth in
this Article Fourth and in Exhibit A to this Restated Certificate of
Incorporation.
FIFTH: A. The Board of Directors presently consists of nine
(9) persons and the names and addresses of the persons who serve on the Board of
Directors are as follows:
Name Address
---- -------
Reuben F. Richards, Jr. 394 Elizabeth Avenue
Somerset, NJ 08873
Thomas G. Werthan 394 Elizabeth Avenue
Somerset, NJ 08873
Richard A. Stall 394 Elizabeth Avenue
Somerset, NJ 08873
Thomas J. Russell Two North Tamiami Trail
Sarasota, Florida 34236
Robert Louis-Dreyfus c/o Harborstone Capital
152 West 57th Street, 21st Floor
New York, NY 10019
Hugh H. Fenwick 400 Mendham Road
Bernardsville, NJ 07924
John J. Hogan c/o Harborstone Capital
152 West 57th Street, 21st Floor
New York, N.Y. 10019
Shigeo Takayama 1-1-13 Shinjuku
Shinjuku, Tokyo 160
Japan
Charles Scott c/o Cordiant PLC
83-89 Whitfield Street
London, WIA-4XA
United Kingdom
B. The number of directors constituting the entire Board of
Directors shall be not less than six nor more than twelve as fixed from time to
time by the vote of not less than 66 2/3% of the entire Board of Directors;
provided, however, that the number of directors shall not be reduced so as to
shorten the term of any director at the time in office, and provided further,
-2-
<PAGE> 3
that the number of directors constituting the entire Board of Directors shall be
nine unless and until otherwise fixed by the vote of not less than 66 2/3% of
the entire Board of Directors. The phrase "66 2/3% of the entire Board of
Directors" as used in this Restated Certificate of Incorporation shall be deemed
to refer to 66 2/3% of the number of directors constituting the Board of
Directors as provided in or pursuant to this Section B of this Article Fifth,
without regard to any vacancies then existing.
C. At the 1999 Annual Meeting of Shareholders, the Board of
Directors shall be divided into three classes, as nearly equal in number as the
then total number of directors constituting the entire Board of Directors
permits, the first class to expire at the 2002 Annual Meeting of Shareholders,
the term of office of the second class to expire at the 2001 Annual Meeting of
Shareholders and the term of office of the third class to expire at the 2000
Annual Meeting of Shareholders. Commencing with the 2000 Annual Meeting of
Shareholders, the directors elected at an annual meeting of shareholders to
succeed those whose terms then expire shall be identified as being directors of
the same class as the directors whom they succeed, and each of them shall hold
office until the third succeeding annual meeting of shareholders and until such
director's successor is elected and has qualified. Any vacancies in the Board of
Directors for any reason and any created directorships resulting from any
increase in the number of directors may be filled by the vote of not less than
66 2/3% of the members of the Board of Directors then in office, although less
than a quorum, and any directors so chosen shall hold office until the next
election, of the class for which such directors shall have been chosen and until
their successors shall be elected and qualified. No decrease in the number of
directors shall shorten the term of any incumbent director. Notwithstanding the
foregoing, and except as otherwise required by law, whenever the holders of any
one or more series of Preferred Stock shall have the right, voting separately as
a class, to elect one or more directors of the Corporation, the then authorized
number of directors shall be increased by the number of directors so to be
elected, and the terms of the director or directors elected by such holders
shall expire at the next succeeding annual meeting of shareholders.
D. Notwithstanding any other provisions of this Restated
Certificate of Incorporation or the By-Laws of the Corporation (and
notwithstanding the fact that some lesser percentage may be specified by law,
this Restated Certificate of Incorporation of the Corporation or the By-Laws of
the Corporation), any director or the entire Board of Directors of the
Corporation may be removed at any time, but only for cause and only by the
affirmative vote of the holders of 80% or more of the outstanding shares of
Capital Stock of the Corporation entitled to vote generally in the election of
directors (considered for this purpose as one class) cast at a meeting of the
shareholders called for that purpose. Notwithstanding the foregoing, and except
as otherwise required by law, whenever the holders of any one or more series of
Preferred Stock shall have the right, voting separately as a class, to elect one
or more directors of the Corporation, the provisions of this Section D of this
Article Fifth shall not apply with respect to the director or directors elected
by such holders of Preferred Stock.
E. Notwithstanding any other provisions of this Restated
Certificate of Incorporation or the By-Laws of the Corporation (and
notwithstanding the fact that some lesser percentage may be specified by law,
this Restated Certificate of Incorporation or the By-Laws of
-3-
<PAGE> 4
the Corporation), the affirmative vote of the holders of 80% or more of the
outstanding shares of Capital Stock of the Corporation entitled to vote
generally in the election of directors (considered for this purpose as one
class) shall be required to amend, alter, change or repeal this Article Fifth.
SIXTH: Neither a Director nor an Officer shall be liable to
the Corporation or its shareholders for damages for breach of any duty owed to
the Corporation or its shareholders, except that this provision shall not
relieve a Director or an Officer from liability for any breach of duty based
upon an act or omission (a) in breach of such person's duty of loyalty to the
Corporation or its shareholders; (b) not in good faith or involving a knowing
violation of law; or (c) resulting in the receipt of such person of an improper
personal benefit.
SEVENTH: Intentionally Left Blank.
EIGHTH: The Board of Directors by a vote of a majority of the
entire Board may lend money to, guarantee any obligation of or otherwise assist
any officer or employee of the Corporation who is also a director provided that
such loan shall be adequately secured and no such loan, guarantee or other
assistance shall be made unless there shall be an appropriate business purpose.
NINTH: The Corporation shall indemnify every officer and
director of the Corporation to the full extent permitted by law.
TENTH: A. In addition to any affirmative vote required by law
or this Restated Certificate of Incorporation or the By-Laws of the Corporation,
and except as otherwise expressly provided in Section B of this Article Tenth, a
Business Combination shall require the affirmative vote of not less than eighty
percent (80%) of the votes entitled to be cast by the holders of all then
outstanding shares of Voting Stock (as hereinafter defined), voting together as
a single class. Such affirmative vote shall be required notwithstanding the fact
that no vote may be required, or that a lesser percentage or separate class vote
may be specified, by law or in any agreement with any national securities
exchange or otherwise.
B. The provisions of Section A of this Article Tenth shall not
be applicable to any particular Business Combination, and such Business
Combination shall require only such affirmative vote, if any, as is required by
law or by any other provision of this Restated Certificate of Incorporation or
the By-Laws of the Corporation, or any agreement with any national securities
exchange, if all of the conditions specified in either of the following
paragraphs (1) or (2) are met:
(1) The Business Combination shall have been approved by
two-thirds of the Continuing Directors (as hereinafter defined), whether such
approval is made prior to or subsequent to the acquisition of beneficial
ownership of the Voting Stock that caused the Interested Stockholder (as
hereinafter defined) to become an Interested Stockholder.
(2) All of the following conditions shall have been met:
-4-
<PAGE> 5
(a) The aggregate amount of cash and the Fair Market Value (as
hereinafter defined) as of the date of the consummation of the Business
Combination of consideration other than cash to be received per share
by holders of Common Stock in such Business Combination shall be at
least equal to the highest amount determined under clauses (i) and (ii)
below:
(i) (if applicable) the highest per share price
(including any brokerage commissions, transfer taxes and
soliciting dealers' fees) offered or paid by or on behalf of
the Interested Stockholder for shares of Common Stock within
the two-year period immediately prior to the first public
announcement of the proposed Business Combination (the
"Announcement Date") or in the transaction in which the
Interested Stockholder became an Interested Stockholder (the
"Determination Date"), whichever is higher;
(ii) the Fair Market Value per share of Common Stock
on the Announcement Date or on the Determination Date,
whichever is higher; and
All per share prices shall be adjusted to reflect any intervening stock splits,
stock dividends, recapitalizations, combination of shares or similar events.
(b) The aggregate amount of cash and the Fair Market Value as
of the date of the consummation of the Business Combination of
consideration other than cash to be received per share by holders of
shares of any class or series of outstanding Capital Stock (as
hereinafter defined), other than Common Stock, shall be at least equal
to the highest amount determined under clauses (i), (ii) and (iii)
below:
(i) (if applicable) the highest per share price
(including any brokerage commissions, transfer taxes and
soliciting dealers' fees) offered or paid by or on behalf of
the Interested Stockholder for any share of such class or
series of Capital Stock in connection with the acquisition by
the Interested Stockholder of beneficial ownership of shares
of such class or series of Capital Stock within the two-year
period immediately prior to the Announcement Date or in the
transaction in which the Interested Stockholder became an
Interested Stockholder, whichever is higher;
(ii) the Fair Market Value per share of such class or
series of Capital Stock on the Announcement Date or on the
Determination Date, whichever is higher; and
(iii) (if applicable) the highest preferential amount
per share to which the holders of shares of such class or
series of Capital Stock would be entitled in the event of any
voluntary or involuntary liquidation, dissolution or winding
up of the affairs of the Corporation regardless of whether the
Business Combination to be consummated constitutes such an
event.
-5-
<PAGE> 6
All per share prices shall be adjusted to reflect any intervening stock splits,
stock dividends, recapitalizations, combination of shares or similar events. The
provisions of this sub-paragraph (2)(b) shall be required to be met with respect
to every class or series of outstanding Capital Stock, other than Common Stock,
whether or not the Interested Stockholder has previously acquired beneficial
ownership of any shares of a particular class or series of Capital Stock.
(c) The consideration to be received by holders of a
particular class or series of outstanding Capital Stock shall be in
cash or in the same form as previously had been paid by or on behalf of
the Interested Stockholder in connection with its direct or indirect
acquisition of beneficial ownership of shares of such class or series
of Capital Stock. If the consideration so paid for shares of any class
or series of Capital Stock varied as to form, the form of consideration
for such class or series of Capital Stock shall be either cash or the
form used to acquire beneficial ownership of the largest number of
shares of such class or series of Capital Stock previously acquired by
the Interested Stockholder.
(d) After such Interested Stockholder has become an Interested
Stockholder and prior to the consummation of such Business Combination:
(i) except as approved by a majority of the
Continuing Directors, there shall have been no failure to
declare and pay at the regular date therefor any dividends
(whether or not cumulative) payable in accordance with the
terms of any outstanding Capital Stock;
(ii) there shall have been no reduction in the annual
rate of dividends paid on the Common Stock (except as
necessary to reflect any stock split, stock dividend or
subdivision of the Common Stock), except as approved by a
majority of the Continuing Directors;
(iii) there shall have been an increase in the annual
rate of dividends paid on the Common Stock as necessary to
reflect any reclassification (including any reverse stock
split), recapitalization, reorganization or any similar
transaction that has the effect of reducing the number of
shares of Common Stock, unless the failure so to increase such
annual rate is approved by a majority of the Continuing
Directors; and
(iv) such Interested Stockholder shall not have
become the beneficial owner of any additional shares of
Capital Stock except as part of the transaction that results
in such Interested Stockholder becoming an Interested
Stockholder and except in a transaction that, after giving
effect thereto, would not result in any increase in the
Interested Stockholder's percentage of beneficial ownership of
any class or series of Capital Stock.
(e) After such Interested Stockholder has become an Interested
Stockholder, such Interested Stockholder shall not have received the
benefit, directly or indirectly (except proportionately as a
shareholder of the Corporation), of any loans, advances, guarantees,
pledges or other financial assistance or any tax credits or other tax
advantages provided
-6-
<PAGE> 7
by the Corporation, whether in anticipation of or in connection with
such Business Combination or otherwise.
(f) A proxy or information statement describing the proposed
Business Combination and complying with the requirements of the
Securities Exchange Act of 1934 and the rules and regulations
thereunder (the "Act") (or any subsequent provisions replacing such
Act, rules or regulations) shall be mailed to all shareholders of the
Corporation at least 30 days prior to the consummation of such Business
Combination (whether or not such proxy or information statement is
required to be mailed pursuant to such Act or subsequent provisions).
The proxy or information statement shall contain on the first page
thereof, in a prominent place, any statement as to the advisability (or
inadvisability) of the Business Combination that the Continuing
Directors, or any of them, may choose to make and, if deemed advisable
by a majority of the Continuing Directors, the opinion of an investment
banking firm selected by a majority of the Continuing Directors as to
the fairness (or not) of the terms of the Business Combination from a
financial point of view to the holders of the outstanding shares of
Capital Stock other than any Interested Stockholder and any Affiliate
or Associate (as hereinafter defined), of any Interested Stockholder,
such investment banking firm to be paid a reasonable fee for its
services by the Corporation.
(g) Such Interested Stockholder shall not have made any major
change in the Corporation's business or equity capital structure
without the approval of a majority of the Continuing Directors.
C. For the purposes of this Article Tenth
(1) The term "Business Combination" shall mean:
(a) any merger or consolidation of the Corporation or any
Subsidiary (as hereinafter defined) with (i) any Interested Stockholder
or (ii) any other corporation (whether or not itself an Interested
Stockholder) which is, or after such merger or consolidation would be,
an Affiliate or Associate of an Interested Stockholder; or
(b) any sale, lease, exchange, mortgage, pledge, transfer or
other disposition (in one transaction or a series of transactions) with
any Interested Stockholder or any Affiliate or Associate of any
Interested Stockholder involving any assets or securities of the
Corporation, any Subsidiary or any Interested Stockholder or any
Affiliate or Associate of any Interested Stockholder having an
aggregate Fair Market Value of 10% of the total assets of the
Corporation and its Subsidiaries as reflected on the consolidated
balance sheet of the Corporation and its Subsidiaries as of the end of
the Corporation's most recent fiscal year; provided that the sale or
other dispositions of securities of the Corporation to anyone other
than an Interested Stockholder or any Affiliate or Associate of an
Interested Stockholder shall not be deemed in itself to be a Business
Combination; or
-7-
<PAGE> 8
(c) the adoption of any plan or proposal for the liquidation
or dissolution of the Corporation proposed by or on behalf of any
Interested Stockholder or any Affiliate or Associate of any Interested
Stockholder; or
(d) any reclassification of securities (including any reverse
stock split), or recapitalization of the Corporation, or any merger or
consolidation of the Corporation with any of its subsidiaries or any
other transaction (whether or not with or otherwise involving an
Interested Stockholder) that has the effect, directly or indirectly, of
increasing the proportionate share of any class or series of Capital
Stock, or any securities convertible into Capital Stock or into equity
securities of any Subsidiary, that is beneficially owned by any
Interested Stockholder or any Affiliate or Associate of any Interested
Stockholder; or
(e) any agreement, contract or other arrangement providing for
any one or more of the actions specified in the foregoing clauses (a)
to (d).
(2) The term "Capital Stock" shall mean all capital stock of
the Corporation authorized to be issued from time to time under Article Fourth
of this Restated Certificate of Incorporation, and the term "Voting Stock" shall
mean all Capital Stock which by its terms may be voted on all matters submitted
to shareholders of the Corporation generally.
(3) The term "person" shall mean any individual, firm,
corporation or other entity and shall include any group comprised of any person
and any other person with whom such person or any Affiliate or Associate of such
person has any agreement, arrangement or understanding directly or indirectly,
for the purpose of acquiring, holding, voting or disposing of Capital Stock.
(4) The term "Interested Stockholder" shall mean any person
(other than the Corporation, any Subsidiary, any pension, retirement,
profit-sharing employee stock ownership or other employee benefit plan of the
Corporation or any Subsidiary or any trustee of or fiduciary with respect to any
such plan when acting in such capacity or any person who on January 1, 1999 was
the beneficial owner, directly or indirectly, of more than 10% of the Common
Stock of the Corporation) who (a) acquires and beneficially owns Voting Stock
representing ten percent (10%) or more of the votes entitled to be cast by the
holders of all then outstanding shares of Voting Stock; or (b) is an Affiliate
or Associate of the Corporation and at any time within the two-year period
immediately prior to the date in question acquired and beneficially owned Voting
Stock representing ten percent (10%) or more of the votes entitled to be cast by
the holders of all then outstanding shares of Voting Stock.
(5) A person shall be a "beneficial owner" of any Capital
Stock (a) which such person or any of its Affiliates or Associates beneficially
owns, directly or indirectly; (b) which such person or any of its Affiliates or
Associates has, directly or indirectly, (i) the right to acquire (whether such
right is exercisable immediately or subject only to the passage of time),
pursuant to any agreement, arrangement or understanding or upon the exercise of
conversion rights, exchange rights, warrants or options, or otherwise, or (ii)
the right to vote pursuant to any agreement, arrangement or understanding; or
(c) which are beneficially owned, directly or
-8-
<PAGE> 9
indirectly, by any other person with which such person or any of its Affiliates
or Associates has any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting or disposing of any shares of Capital Stock. For the
purposes of determining whether a person is an Interested Stockholder pursuant
to paragraph (4) of this section C, the number of shares of Capital Stock deemed
to be outstanding shall include shares deemed beneficially owned by such person
through application of paragraph (5) of this section C, but shall not include
any other shares of Capital Stock that may be issuable pursuant to any
agreement, arrangement or understanding, or upon exercise of conversion rights,
warrants or options, or otherwise.
(6) The terms "Affiliate" and "Associate" shall have the
respective meanings ascribed to such terms in Rule 12b-2 under the Act as in
effect on January 1, 1999.
(7) The term "Subsidiary" shall mean any corporation of which
a majority of any class of equity security is beneficially owned by the
Corporation; provided, however, that for the purposes of the definition of
Interested Stockholder set forth in paragraph (4) of this section C, the term
"Subsidiary" shall mean only a corporation of which a majority of each class of
equity security is beneficially owned by the Corporation.
(8) The term "Continuing Director" shall mean any member of
the Board of Directors of the Corporation (the "Board") who is not an Affiliate
or Associate or representative of an Interested Stockholder in question in
connection with a particular Business Combination and either: (a) was a member
of the Board prior to the time that such Interested Stockholder became an
Interested Stockholder; or (b) is or was recommended or elected to fill a
vacancy on the Board, however caused, by at least three-quarters of the
Continuing Directors.
(9) The term "Fair Market Value" shall mean (a) in the case of
cash, the amount of such cash; (b) in the case of stock, the highest closing
sale price during the 30-day period ending on the date in question of a share of
such stock on the Composite Tape for New York Stock Exchange-Listed Stocks, or,
if such stock is not quoted on the Composite Tape, on the New York Stock
Exchange, or, if such stock is not listed on such exchange, on the principal
United States securities exchange registered under the Act on which such stock
is listed, or, if such stock is not listed on any such exchange, the highest
closing bid quotation with respect to a share of such stock during the 30-day
period ending on the date in question on the National Association of Securities
Dealers, Inc. Automated Quotations System or any similar system then in use, or
if no such quotations are available, the Fair Market Value on the date in
question of a share of such stock as determined by a majority of the Continuing
Directors in good faith; and (c) in the case of property other than cash or
stock, the Fair Market Value of such property on the date in question as
determined in good faith by a majority of the Continuing Directors.
(10) In the event of any Business Combination in which the
Corporation survives, the phrase "consideration other than cash to be received"
as used in sub-paragraphs (2)(a) and (2)(b) of section B of this Article Tenth
shall include the shares of Common Stock and/or the shares of any other class or
series of Capital Stock retained by the holders of such shares.
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<PAGE> 10
D. The Board of Directors shall have the power and duty to
determine for the purposes of this Article Tenth, on the basis of information
known to them after reasonable inquiry, (a) whether a person is an Interested
Stockholder, (b) the number of shares of Capital Stock or other securities
beneficially owned by any person, (c) whether a person is an Affiliate or
Associate of another, and (d) whether the assets that are the subject of any
Business Combination have, or the consideration to be received for the issuance
or transfer of securities by the Corporation or any Subsidiary in any Business
Combination has, an aggregate Fair Market Value of more than 10% of the total
assets of the Corporation and its Subsidiaries as reflected on the consolidated
balance sheet of the Corporation and its Subsidiaries as of the end of the
Corporation's most recent fiscal year. Any such determination made in good faith
shall be binding and conclusive on all parties.
E. Nothing contained in this Article Tenth shall be construed
to relieve any Interested Stockholder from any fiduciary obligation imposed by
law.
F. The fact that any Business Combination complies with the
provisions of section B of this Article Tenth shall not be construed to impose
any fiduciary duty, obligation or responsibility on the Board, or any member
thereof, to approve such Business Combination or recommend its adoption or
approval to the shareholders of the Corporation, nor shall such compliance
limit, prohibit or otherwise restrict in any manner the Board, or any member
thereof, with respect to evaluations of or actions and responses taken with
respect to such Business Combination.
G. Notwithstanding any other provisions of this Restated
Certificate of Incorporation or the By-Laws of the Corporation (and
notwithstanding the fact that a lesser percentage or separate class vote may be
specified by law, this Restated Certificate of Incorporation or the By-Laws of
the Corporation), the affirmative vote of the holders of not less than eighty
percent (80%) of the votes entitled to be cast by the holders of all then
outstanding shares of Voting Stock, voting together as a single class shall be
required to amend or repeal, or adopt any provisions inconsistent with, this
Article Tenth.
ELEVENTH: This Corporation shall have perpetual existence.
IN WITNESS, the undersigned has set his hand this 31st day of
March 1999.
/s/ Reuben F. Richards, Jr.
----------------------------
Reuben F. Richards, Jr.
President
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<PAGE> 11
EXHIBIT A
---------
SERIES I REDEEMABLE CONVERTIBLE PREFERRED STOCK
$.0001 PAR VALUE PER SHARE
OF
EMCORE CORPORATION
1. NUMBER OF SHARES AND DESIGNATION. 2,000,000 shares of the
Preferred Stock, $.0001 par value per share, of the Company are hereby
constituted as a series of the Preferred Stock designated as Series I Preferred
Stock (the "Series I Preferred Stock"). The Series I Preferred Stock will rank
senior to the Common Stock with respect to the payment of dividends and upon
liquidation, dissolution or winding up of the Company.
2. DEFINITIONS. For purposes of the Series I Preferred Stock,
the following terms shall have the meanings indicated.
"Board of Directors" shall mean the board of
directors of the Company or any committee authorized by such
Board of Directors to perform any of its responsibilities with
respect to the Series I Preferred Stock.
"Business Day" shall mean any day other than a
Saturday, Sunday or a day on which banking institutions in the
city of New York are authorized or obligated by law or
executive order to close.
"Change in Control" shall have the meaning set forth
in Section 8 hereof.
"Closing Price" of the Common Stock on any day shall
mean on such day the reported last sales price, regular way,
for the Common Stock or, in case no sale takes place on such
day, the average of the reported closing bid and asked prices,
regular way, for the Common Stock, in either case, as reported
on the National Market system of the National Association of
Securities Dealers, Inc. Automated Quotation System ("NASDAQ
National Market") or, if the Common Stock is not quoted on the
NASDAQ National Market, on such national securities exchange
on which the Common Stock is listed or admitted to trading or,
if the Common Stock is not listed or admitted to trading on
any national securities exchange, the average of the closing
bid and asked prices for the Common Stock on such day in the
over-the-counter market as reported by NASDAQ or, if bid and
asked prices for the Common Stock on each such date shall not
have been reported by NASDAQ, the average of the bid and asked
prices of the Common Stock for such day as furnished by any
NASD member firm regularly making a
<PAGE> 12
market in the Common Stock selected for such purpose by the
Board of Directors or, if no such quotations are available,
the fair market value of the Common Stock furnished by any
NASD member firm selected from time to time by the Board of
Directors for that purpose.
"Common Stock" shall mean the common stock of the
Company, no par value per share.
"Conversion Price" shall mean the conversion price
per share of Common Stock into which the Series I Preferred
Stock is convertible, as such Conversion Price may be adjusted
pursuant to Section 7 hereof. The initial Conversion Price
will be $14.00 (equivalent to the conversion rate of one share
of Common Stock for each share of Series I Preferred Stock).
"Current Market Price" per share of Common Stock on
any date shall mean the average of the daily Closing Prices
for the 20 consecutive Trading Dates commencing 30 Trading
Dates before the date of determination.
"dividend payment date" shall have the meaning set
forth in Section 3(a) hereof.
"dividend payment record date" shall have the meaning
set forth in Section 3(a) hereof.
"Dividend Period" shall mean quarterly dividend
periods commencing on March 31, June 30, September 30 and
December 31, and continuing through and including the day
preceding the first day of the next succeeding Dividend Period
(other than the initial Dividend Period, which shall commence
on the Issue Date).
"Issue Date" shall mean the first date on which
shares of Series I Preferred Stock are issued.
"Person" shall mean any individual, firm,
partnership, corporation or other entity, and shall include
any successor (by merger or otherwise) of such entity.
"Trading Date" or "Trading Day" with respect to
Common Stock means (i) if the Common Stock is quoted on the
NASDAQ National Market, or any similar system of automated
dissemination of quotations of securities prices, a day on
which trades may be made on such system, (ii) if the Common
Stock is listed or admitted for trading on a national
securities exchange, a day or on which such national
securities exchange is open for business, (iii) if not quoted
as described in clauses (i) or (ii), days on which quotations
are reported by the National Quotation Bureau Incorporated, or
(iv) otherwise, any Business Day.
"Transaction" shall have the meaning set forth in
Section 7(a) hereof.
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<PAGE> 13
"Transfer Agent" means the Company or such other
agent or agents of the Company as may be designated by the
Board of Directors from time to time as the transfer agent for
the Series I Preferred Stock.
3. DIVIDENDS.
(a) The holders of shares of the Series I Preferred
Stock shall be entitled to receive, when, as and if declared by the Board of
Directors out of funds legally available therefor, cumulative cash dividends at
an annual rate of 2% of the liquidation preference per share (an amount
initially equivalent to $.28 per annum per share) of Series I Preferred Stock,
payable at the option of the Company in cash or additional duly and validly
issued, fully paid and non-assessable shares of Series I Preferred Stock, free
from all taxes, liens and charges with respect to the issuance thereof, which
will be valued at the liquidation preference (without giving effect to accrued
and unpaid dividends) as of the relevant dividend payment record date.
Notwithstanding the foregoing, the Company shall not be required to issue
fractional shares of Series I Preferred Stock; the Company may elect, in its
sole discretion, independently for each holder, whether such number of shares
(on an aggregated basis) will be rounded up to the nearest whole share or
whether such holder will be given cash in lieu of any fractional shares. Such
dividends shall be cumulative from the Issue Date, whether or not in any
Dividend Period or Periods there shall be funds of the Company legally available
for the payment of such dividends and whether or not such dividends are declared
and shall be payable quarterly, when, as and if declared by the Board of
Directors on March 31, June 30, September 30 and December 31 in each year (each
a "dividend payment date"), commencing on December 31, 1998. If December 31,
1998 or any other dividend payment date shall be on a day other than a Business
Day, then the dividend shall be payable on the next following Business Day.
Dividends are payable in arrears to the holders of record of shares of the
Series I Preferred Stock, as they appear on the stock records of the Company at
the close of business on those dates (each such date, a "dividend payment record
date"), not less than 10 days nor more than 60 days preceding the dividend
payment dates thereof, as shall be fixed by the Board of Directors. Dividends on
the Series I Preferred Stock shall accrue (whether or not declared) on a daily
basis from the Issue Date and accrued dividends for each Dividend Period shall
accumulate to the extent not paid on the dividend payment date first following
the Dividend Period for which they accrue. As used herein, the term "accrued"
with respect to dividends includes both accrued and accumulated dividends.
Accrued and unpaid dividends for any past Dividend Periods may be declared and
paid at any time, without reference to any regular dividend payment date, to
holders of record on the record date, not less than 10 nor more than 60 days
preceding the payment date thereof, as may be fixed by the Board of Directors.
(b) The amount of dividends payable for each full
Dividend Period for the Series I Preferred Stock shall be computed by dividing
the annual dividend rate by four (rounded to the nearest tenth of a cent). The
amount of dividends payable for the initial Dividend Period on the Series I
Preferred Stock, or any other period shorter or longer than a full Dividend
Period on the Series I Preferred Stock, shall be computed on the basis of a
360-day year consisting of twelve 30-day months. Holders of shares of Series I
Preferred Stock called for redemption on a redemption date falling between the
close of business on a dividend payment
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<PAGE> 14
record date and the close of business on the corresponding dividend payment date
shall, in lieu of receiving such dividend on the dividend payment date fixed
therefor, receive such dividend payment together with all other accrued and
unpaid dividends on the date fixed for redemption (unless such holder converts
such shares in accordance with Section 7 hereof). Holders of shares of Series I
Preferred Stock shall not be entitled to any dividends, whether payable in cash,
property or securities, in excess of cumulative dividends, as herein provided,
on the Series I Preferred Stock. No interest, or sum of money in lieu of
interest, shall be payable in respect of any dividend payment or payments on the
Series I Preferred Stock which are in arrears.
(c) So long as any shares of the Series I Preferred
Stock are outstanding, no dividends, except as described in the next succeeding
sentence, shall be declared or paid or set apart for payment on any class or
series of stock of the Company ranking, as to dividends, on a parity with the
Series I Preferred Stock, for any period unless full cumulative dividends have
been or contemporaneously are declared and paid or declared and a sum sufficient
for the payment thereof is set apart for such payment on the Series I Preferred
Stock for all Dividend Periods terminating on or prior to the date of payment,
or setting apart for payment, of such dividends on such parity stock. When
dividends are not paid in full or a sum sufficient for such payment is not set
apart, as aforesaid, upon the shares of the Series I Preferred Stock and any
other class or series of stock ranking on a parity as to dividends with the
Series I Preferred Stock, all dividends declared upon shares of the Series I
Preferred Stock and all dividends declared upon such other stock shall be
declared pro rata so that the amounts of dividends per share declared on the
Series I Preferred Stock and such other stock shall in all cases bear to each
other the same ratio that accrued dividends per share on the shares of the
Series I Preferred Stock and on such other stock bear to each other.
(d) So long as any shares of the Series I Preferred
Stock are outstanding, no other stock of the Company ranking on a parity with
the Series I Preferred Stock as to dividends or upon liquidation, dissolution or
winding up shall be redeemed, purchased or otherwise acquired for any
consideration (or any moneys be paid to or made available for a sinking fund or
otherwise for the purchase or redemption of any shares of any such stock) by the
Company (except by conversion into or exchange for stock of the Company ranking
junior to the Series I Preferred Stock as to dividends and upon liquidation,
dissolution or winding up) unless (i) the full cumulative dividends, if any,
accrued on all outstanding shares of the Series I Preferred Stock shall have
been paid or set apart for payment for all past Dividend Periods and (ii)
sufficient funds shall have been set apart for the payment of the dividend for
the current Dividend Period with respect to the Series I Preferred Stock and for
the current dividend period with respect to any other stock of the Company
ranking on a parity with the Series I Preferred Stock as to dividends.
(e) So long as any shares of the Series I Preferred
Stock are outstanding, no dividends (other than dividends or distributions paid
in shares of, or options, warrants or rights to subscribe for or purchase shares
of, Common Stock or other stock ranking junior to the Series I Preferred Stock
as to dividends and upon liquidation, dissolution or winding up) shall be
declared or paid or set apart for payment and no other distribution shall be
declared or made or set apart for payment, in each case, upon the Common Stock
or other stock of the
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<PAGE> 15
Company ranking junior to the Series I Preferred Stock as to dividends or upon
liquidation, dissolution or winding up, nor shall any Common Stock nor any other
such stock of the Company ranking junior to the Series I Preferred Stock as to
dividends or upon liquidation, dissolution or winding up be redeemed, purchased
or otherwise acquired for any consideration (or any moneys be paid to or made
available for a sinking fund or otherwise for the purchase or redemption of any
shares of any such stock) by the Company (except by conversion into or exchange
for stock of the Company ranking junior to the Series I Preferred Stock as to
dividends and upon liquidation, dissolution or winding up) unless, in each case
(i) the full cumulative dividends, if any, accrued on all outstanding shares of
the Series I Preferred Stock and any other stock of the Company ranking on a
parity with the Series I Preferred Stock as to dividends shall have been paid or
set apart for payment for all past Dividend Periods and all past dividend
periods with respect to such other stock and (ii) sufficient funds shall have
been set apart for the payment of the dividend for the current Dividend Period
with respect to the Series I Preferred Stock and for the current dividend period
with respect to any other stock of the Company ranking on a parity with the
Series I Preferred Stock as to dividends.
4. LIQUIDATION PREFERENCE.
(a) In the event of any liquidation, dissolution or
winding up of the Company, whether voluntary or involuntary, the holders of the
shares of Series I Preferred Stock shall be entitled to receive out of assets of
the Company available for distribution to shareholders $14.00 per share (as
adjusted for any stock combinations or splits with respect to the Series I
Preferred Stock) plus an amount per share equal to all dividends (whether or not
earned or declared) accrued and unpaid thereon to the date of final distribution
to such holders (collectively, the "Liquidation Preference") before any payment
or distribution of the assets of the Company (whether capital or surplus) shall
be made to or set apart for the holders of Common Stock or any other series or
class or classes of stock of the Company ranking junior to the Series I
Preferred Stock upon liquidation, dissolution or winding up of the Company and
no payments or distributions of any assets of the Company shall be made to the
holders of any class or series of stock ranking on a parity with the Series I
Preferred Stock in respect of the distribution of assets upon dissolution,
liquidation or winding up unless there shall likewise be paid at the same time
to the holders of the Series I Preferred Stock a like proportionate amount
determined ratably in proportion to the full amounts to which the holders of all
outstanding shares of Series I Preferred Stock and the holders of all
outstanding shares of such parity stock are respectively entitled with respect
to such distribution. If, upon any liquidation, dissolution or winding up of the
Company, the assets of the Company, or proceeds thereof, distributable among the
holders of the shares of Series I Preferred Stock shall be insufficient to pay
in full the preferential amount aforesaid and liquidating payments on any other
shares of stock ranking, as to the liquidation, dissolution or winding up, on a
parity with the Series I Preferred Stock, then such assets, or the proceeds
thereof, shall be distributed among the holders of shares of Series I Preferred
Stock and any such other stock ratably in accordance with the respective amounts
which would be payable on such shares of Series I Preferred Stock and any such
other stock if all amounts payable thereon were paid in full. For the purposes
of this Section 4, (i) a consolidation or merger of the Company with one or more
corporations or other entities, (ii) a sale, lease, exchange or transfer of all
or any part of the Company's assets or (iii) a statutory share exchange
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<PAGE> 16
shall not be deemed to be a liquidation, dissolution or winding up of the
Company, voluntary or involuntary.
(b) Subject to the rights of the holders of shares of
any series or class of stock ranking on a parity with the Series I Preferred
Stock upon liquidation, dissolution or winding up, upon any liquidation,
dissolution or winding up of the Company, after payment shall have been made in
full to the holders of Series I Preferred Stock, as provided in this Section 4,
any other series or class or classes of stock ranking junior to the Series I
Preferred Stock upon liquidation, dissolution or winding up shall, subject to
the respective terms and provisions (if any) applying thereto, be entitled to
receive any and all assets remaining to be paid or distributed, and the holders
of Series I Preferred Stock shall not be entitled to share therein.
(c) Written notice of any liquidation, dissolution or
winding up of the Company, stating the payment date or dates when and the place
or places where the amounts distributable in such circumstances shall be
payable, shall be given by first class mail, postage prepaid, not less than 30
days prior to any payment date stated therein, to the holders of record of the
Series I Preferred Stock at their respective addresses as the same shall appear
on the books of the Transfer Agent.
5. REDEMPTION.
(a) Except as provided in Section 5(b) hereof, the
shares of Series I Preferred Stock may not be redeemed by the Company prior to
such date as the Closing Price of the Company's Common Stock is $28.00 or more
per share for 30 consecutive Trading Dates, on or after which the Company, at
its option, may redeem the shares of the Series I Preferred Stock, in whole or
in part, at any time or from time to time out of funds legally available
therefor, subject to the notice provisions and provisions for partial redemption
described below, at a price equal to $14.00 per share (as adjusted for any stock
combinations or splits with respect to the Series I Preferred Stock) plus a cash
amount equal to accrued and unpaid dividends, if any, to (and including) the
date of redemption.
(b) The Company shall redeem all outstanding shares
of the Series I Preferred Stock on November 17, 2003 at a price of $14.00 per
Share (as adjusted for any stock combinations or splits with respect to the
Series I Preferred Stock), plus accrued and unpaid dividends.
(c) In the event the Company shall redeem shares of
Series I Preferred Stock pursuant to Section 5(a) or 5(b) hereof, notice of such
redemption shall be given not less than 30 nor more than 60 days prior to the
redemption date, to each holder of record of the shares to be redeemed, at such
holder's address as the same appears on the stock records of the Company. Each
such notice shall state: (i) the redemption date; (ii) the number of shares of
Series I Preferred Stock to be redeemed and, if less than all the shares held by
such holder are to be redeemed, the number of such shares to be redeemed from
such holder; (iii) the redemption price; (iv) the place or places where
certificates for such shares are to be surrendered for payment of the redemption
price; (v) the then current conversion price; (vi) that dividends on the shares
to be redeemed shall cease to accrue on such redemption date and (vii) that
shares of Series I
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<PAGE> 17
Preferred Stock called for redemption may be converted at any time prior to the
close of business on the date of redemption. Notice having been given as
aforesaid, from and after the redemption date, unless the Company shall be in
default in providing money for the payment of the redemption price (including
any accrued and unpaid dividends to (and including) the date fixed for
redemption), (i) dividends on the shares of the Series I Preferred Stock so
called for redemption shall cease to accrue, (ii) said shares shall be deemed no
longer outstanding, and (iii) all rights of the holders thereof as shareholders
of the Company (except the right to receive from the Company the moneys payable
upon redemption without interest thereon) shall cease. The Company's obligation
to provide moneys in accordance with the preceding sentence shall be deemed
fulfilled if, on or before the redemption date, the Company shall deposit with a
bank or trust company having a capital and surplus of at least $50,000,000,
funds necessary for such redemption, in trust for the account of the holders of
the shares to be redeemed (and so as to be and continue to be available
therefor), with irrevocable instructions and authority to such bank or trust
company that such funds be applied to the redemption of the shares of Series I
Preferred Stock so called for redemption. Any interest accrued on such funds
shall be paid to the Company from time to time. Any funds so deposited and
unclaimed at the end of three years from such redemption date shall be released
or repaid to the Company, after which, subject to any applicable laws relating
to escheat or unclaimed property, the holder or holders of such shares of Series
I Preferred Stock so called for redemption shall look only to the Company for
payment of the redemption price.
(d) Upon surrender in accordance with said notice of the
certificates for any such shares so redeemed (properly endorsed or assigned for
transfer, if the Board of Directors shall so require and the notice shall so
state), such shares shall be redeemed by the Company at the applicable
redemption price aforesaid. If fewer than all the outstanding shares of Series I
Preferred Stock are to be redeemed, shares to be redeemed shall be selected by
the Company from outstanding shares of Series I Preferred Stock not previously
called for redemption by lot or pro rata (as near as may be). If fewer than all
the shares represented by any certificate are redeemed, a new certificate shall
be issued representing the unredeemed shares without cost to the holder thereof.
(e) Notwithstanding the foregoing, if notice of redemption has
been given pursuant to this Section 5 and any holder of shares of Series I
Preferred Stock shall, prior to the close of business on the redemption date,
give written notice to the Company pursuant to Section 7(b) hereof of the
conversion of any or all of the shares to be redeemed held by such holder
(accompanied by a certificate or certificates for such shares, duly endorsed or
assigned to the Company), then the conversion of such shares to be redeemed
shall become effective as provided in Section 7.
6. SHARES TO BE RETIRED. All shares of Series I Preferred
Stock purchased, redeemed, exchanged or converted by the Company shall be
retired and canceled and shall be restored to the status of authorized but
unissued shares of Preferred Stock, without designation as to series, and may
thereafter be reissued.
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<PAGE> 18
7. CONVERSION. Holders of shares of Series I Preferred Stock
shall have the right to convert all or a portion of such shares (including
fractions of such shares) into shares of Common Stock, as follows:
(a) Subject to and upon compliance with the
provisions of this Section 7, a holder of shares of Series I Preferred Stock
shall have the right, at such holder's option, at any time (except that, with
respect to any shares called for redemption or exchange, such right shall
terminate at the close of business on the date fixed for redemption or exchange
of such shares) to convert any of such shares (or fractions thereof) into the
number of fully paid and non-assessable shares of Common Stock (as such shares
shall then be constituted) obtained by dividing the aggregate liquidation
preference of the shares to be converted by the Conversion Price and by
surrender of such shares, such surrender to be made in the manner provided in
Section 7(b). Subject to the following provisions of this Section 7(a), any
shares of Series I Preferred Stock may be converted, at the option of its
holder, in part into Common Stock under the procedure set forth above. If a part
of a share of Series I Preferred Stock is converted, then the Company will
convert such share into the appropriate number of shares of Common Stock
(subject to Section 7(c)). No fractional shares or securities representing
fractional shares of Common Stock will be issued upon conversion; in lieu of
fractional shares of Common Stock, the Company will pay a cash adjustment based
upon the Closing Price of the Common Stock at the close of business on the first
Trading Date preceding the date of conversion.
(b) In order to exercise the conversion right, the
holder of each share of Series I Preferred Stock (or fraction thereof) to be
converted shall surrender the certificate representing such share, duly endorsed
or assigned to the Company or in blank, at the office of the Transfer Agent,
which shall initially be the Company, accompanied by funds, if any, required by
the last paragraph of this Section 7(b), and shall give written notice to the
Company in the form set forth on the reverse of the stock certificates for the
Series I Preferred Stock that the holder thereof elects to convert such Series I
Preferred Stock or a specified portion thereof. Such notice shall also state the
name or names (with address) in which the certificate or certificates for shares
of Common Stock which shall be issuable upon such conversion shall be issued,
and shall be accompanied by funds in an amount sufficient to pay any transfer or
similar tax resulting from the issuance of certificates in a name other than the
name of the holder of the Series I Preferred Stock. Each share surrendered for
conversion shall, unless the shares issuable on conversion are to be issued in
the same name as the name in which such share of Series I Preferred Stock is
registered, be duly endorsed by, or be accompanied by instruments of transfer
(in each case, in form satisfactory to the Company), duly executed by the holder
or such holder's duly authorized attorney.
As promptly as practicable after the surrender of
certificates for shares of Series I Preferred Stock for conversion and the
receipt of such notice and funds, if any, as aforesaid, the Company shall issue
and shall deliver at such office to such holder, or on such holder's written
order, a certificate or certificates for the number of full shares of Common
Stock issuable upon the conversion of such shares of Series I Preferred Stock in
accordance with the provisions of this Section 7, a certificate or certificates
representing any shares of Series I Preferred Stock not so surrendered for
conversion but previously evidenced by the stock
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<PAGE> 19
certificate representing shares of Series I Preferred Stock surrendered for
conversion and a check or cash in respect of any fractional interest in respect
of a share of Common Stock arising upon such conversion, as provided in
Section 7(c).
Each conversion shall be deemed to have been effected
immediately prior to the close of business on the date on which the certificates
for shares of Series I Preferred Stock shall have been surrendered (accompanied
by the funds, if any, required by the last paragraph of this section 7(b)) and
such notice shall have been received by the Company as aforesaid, and the person
or persons in whose name or names any certificate or certificates for shares of
Common Stock shall be issuable upon such conversion shall be deemed to have
become on said date the holder or holders of record of the shares represented
thereby; provided, however, that any surrender on any date when the stock
transfer books of the Company shall be closed shall cause the person or persons
in whose name or names the certificates are to be issued to become the holder or
holders of record thereof for all purposes on the next succeeding day on which
such stock transfer books are open, but such conversion shall be at the
Conversion Price in effect on the date upon which such shares shall have been
surrendered. All shares of Common Stock delivered upon conversion of the Series
I Preferred Stock will, upon delivery, be duly and validly issued, fully paid
and nonassessable, free from all taxes, liens and charges with respect to the
issuance thereof.
If a Holder shall surrender a share of Series I
Preferred Stock for conversion during the period from the close of business on
any dividend payment record date to the close of business on the following
dividend payment date, such holder shall nevertheless be entitled to receive the
dividend payable on such shares on such dividend payment date notwithstanding
the conversion thereof following the close of business on such former dividend
payment record date and prior to the close of business on such latter dividend
payment date. However, shares of Series I Preferred Stock surrendered for
conversion during the period between the close of business on any dividend
payment record date and the close of business on the corresponding dividend
payment date (except shares called for redemption or exchange on a redemption
date or exchange date during such period) must be accompanied by payment of an
amount equal to the dividend payment for the then current Dividend Period with
respect to such share of Series I Preferred Stock presented for conversion on
such dividend payment date; provided, however, that no such payment need be made
if, at the time of conversion, dividends payable on the shares of Series I
Preferred Stock outstanding shall be in arrears for more than 30 days beyond the
previous dividend payment date. The dividend payment with respect to shares of
Series I Preferred Stock which are called for redemption on a redemption date
during the period from the close of business on a dividend payment record date
to the close of business on the corresponding dividend payment date shall be
payable on such dividend payment date to the holder of record of such shares on
the books of the Company at the close of business on the dividend payment record
date notwithstanding the conversion of such shares during the period between the
close of business on such dividend payment record date and the close of business
on such dividend payment date, and the holder of such shares need not make a
payment equal to the dividend payment amount upon surrender of such shares for
conversion. A holder of shares of Series I Preferred Stock on a dividend payment
record date will receive the dividend payable by the Company on such shares of
Series I Preferred Stock surrendered for conversion. Except as
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<PAGE> 20
provided above, the Company shall make no payment or allowances for unpaid
dividends, whether or not in arrears, on converted shares or for dividends on
the shares of Common Stock issued upon such conversion.
(c) In connection with the conversion of any shares
of Series I Preferred Stock, fractions of such shares may be converted; however,
no fractional shares or scrip representing fractions of shares of Common Stock
shall be issued upon conversion of the Series I Preferred Stock. If more than
one share (or fraction thereof) shall be surrendered for conversion at one time
by the same holder, the number of full shares of Common Stock issuable upon
conversion thereof shall be computed on the basis of the aggregate number of
shares of Series I Preferred Stock so surrendered. If any fractional share of
Common Stock would otherwise be issuable upon the conversion of a share of
Series I Preferred Stock (or fraction thereof), the Company shall make an
adjustment therefor in cash (computed to the nearest cent) equal to the Closing
Price of Common Stock on the Trading Date immediately preceding the date of
conversion multiplied by the fraction of a share of Common Stock otherwise
issuable.
(d) The Conversion Price shall be adjusted from time
to time by the Company as follows:
(i) This section intentionally omitted.
(ii) In case the Company shall issue after
the Issue Date rights or warrants to all holders of Common Stock
entitling them to subscribe for or purchase Common Stock at a price per
share less than the Current Market Price per share of Common Stock at
the record date for the determination of shareholders entitled to
receive such rights or warrants, then the Conversion Price in effect
immediately prior thereto shall be adjusted to equal the price
determined by multiplying (A) the Conversion Price in effect
immediately prior to the date of issuance of such rights or warrants by
(B) a fraction, the numerator of which shall be the sum of (1) the
number of shares of Common Stock outstanding on the date of issuance of
such rights or warrants (without giving effect to any such issuance)
and (2) the number of shares of Common Stock which the aggregate
proceeds from the exercise of such rights or warrants for Common Stock
would purchase at such Current Market Price, and the denominator of
which shall be the sum of (1) the number of shares of Common Stock
outstanding on the date of issuance of such rights or warrants (without
giving effect to any such issuance) and (2) the number of additional
shares of Common Stock offered for subscription or purchase. Such
adjustment shall be made successively whenever any such rights or
warrants are issued, and shall become effective immediately after such
record date. In determining whether any rights or warrants entitle the
holder of Common Stock to subscribe for or purchase shares of Common
Stock at less than such Current Market Price, there shall be taken into
account any consideration received by the Company upon issuance and
upon exercise of such rights or warrants, the value of such
consideration, if other than cash, to be reasonably determined in good
faith by the Board of Directors.
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<PAGE> 21
(iii) In case the Company shall pay a
dividend or make a distribution to all holders of its Common Stock
after the Issue Date of any shares of capital stock of the Company or
its subsidiaries (other than Common Stock, which shall be subject to
adjustment pursuant to Section 7(d)(vi)) or evidences of indebtedness
of the Company or its subsidiaries or assets (including securities, but
excluding those rights, warrants, dividends and distributions referred
to in subparagraph (ii) and (vi) of this Section 7(d)), excluding
dividends or distributions in connection with the liquidation,
dissolution or winding up of the Company and excluding cash dividends
referred to in subparagraph (v) of this Section 7(d) then in each such
case, the Conversion Price shall be adjusted so that it shall equal the
price determined by multiplying (A) the Conversion Price in effect on
the record date mentioned below by (B) a fraction, the numerator of
which shall be the Current Market Price per share of the Common Stock
on the record date mentioned below less the then fair market value (as
determined by the Board of Directors, whose determination shall, if
made in good faith, be conclusive) as of such record date of the
portion of the capital stock or evidences of indebtedness or assets so
distributed or of such rights or warrants applicable to one share of
Common Stock, and the denominator of which shall be the Current Market
Price per share of the Common Stock on such record date. Such
adjustment shall become effective immediately, except as provided in
Section 7(h) below, after the record date for the determination of
shareholders entitled to receive such distribution.
(iv) Notwithstanding anything in
subparagraphs (ii) and (iii) of this Section 7(d), if such rights or
warrants shall by their terms provide for an increase or increases (or
decrease or decreases) with the passage of time or otherwise in the
price payable to the Company upon the exercise thereof, the Conversion
Price upon any such increase or decrease becoming effective shall
forthwith be readjusted (but, in case of an increase or increases in
exercise price, to no greater extent than originally adjusted by reason
of such issuance or sale) to reflect the same. Upon the expiration or
termination of such rights or warrants, if any such rights or warrants
shall not have been exercised, then the Conversion Price shall
forthwith be readjusted and thereafter be the rate which it would have
been had an adjustment been made on the basis that (A) the only rights
or warrants issued or sold were those so exercised and they were issued
or sold for the consideration actually received by the Company for the
granting of all such options, rights or warrants whether or not
exercised and (B) the Company issued and sold a number of shares of
Common Stock equal to those actually issued upon exercise of such
rights, and such shares were issued and sold for a consideration equal
to the aggregate exercise price in effect under the exercise rights
actually exercised at the respective dates of their exercise. For
purposes of subparagraphs (ii) and (iii) of this Section 7(d), the
aggregate consideration received by the Company in connection with the
issuance of shares of Common Stock or of rights or warrants shall be
deemed to be equal to the sum of the aggregate offering price (before
deduction of underwriting discounts or commissions and expenses payable
to third parties) of all such securities plus the minimum aggregate
amount, if any, payable upon the exercise of such rights or warrants
into shares of Common Stock.
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<PAGE> 22
(v) In case the Company shall, by dividend
or otherwise, at any time distribute to all holders of the Common Stock
cash (excluding any cash that is distributed as part of a distribution
referred to in subparagraph (iii) of this Section 7(d) or in connection
with a transaction to which Section 7(e) applies) in an aggregate
amount that, together with (A) the aggregate amount of any other
distributions to all holders of the Common Stock made exclusively in
cash within the 12 months preceding the date fixed for the
determination of shareholders entitled to such distribution and in
respect of which no Conversion Price adjustment has been made
previously and (B) the aggregate amount of any cash plus the fair
market value (as determined by the Board of Directors, whose
determination shall, if made in good faith, be conclusive) as of such
date of determination of any other consideration payable in respect of
any tender or exchange offer or other purchase by the Company or a
subsidiary of the Company for all or any portion of the Common Stock
consummated within 12 months preceding such date of determination and
in respect of which no Conversion Price adjustment has been made
previously, exceeds 5.0% of the product of the Current Market Price per
share of Common Stock multiplied by the number of shares of Common
Stock outstanding on such date, then in each such case the Conversion
Price shall be reduced (but not increased) so that it shall equal the
price obtained by multiplying the Conversion Price in effect
immediately prior to the close of business on such date of
determination by a fraction of which the numerator shall be (x) the
product of the Current Market Price per share of Common Stock on such
date, multiplied by the number of shares of Common Stock outstanding on
such date, less (y) the sum of (i) the aggregate amount of cash to be
distributed at such time, (ii) the aggregate amount of any other
distributions to holders of Common Stock made exclusively in cash
within the preceding 12 months, in respect of which no Conversion Price
adjustment has been made previously, and (iii) the aggregate amount of
any cash plus the fair market value (determined as aforesaid) of any
other consideration payable in respect of any tender or exchange offer
or other purchase by the Company or a subsidiary of the Company for all
or any portion of the Common Stock within the preceding 12 months, in
respect of which no Conversion Price adjustment has been made
previously; and the denominator shall be the product of such Current
Market Price, multiplied by the number of shares of Common Stock
outstanding on such date. Such reduction shall become effective
immediately prior to the opening of business on the date after such
determination.
(vi) In case outstanding shares of Common
Stock shall be subdivided into a greater number of shares of Common
Stock or in case the Company effects a dividend of Common Stock to the
holders of its Common Stock, the Conversion Price in effect at the
opening of business on the day following the day upon which such
subdivision becomes effective or the record date of such dividend, as
the case may be, shall be proportionately reduced, and, conversely in
case outstanding shares of Common Stock shall be combined into a
smaller number of shares of Common Stock, the conversion price in
effect at the opening of business on the day following the day upon
which such combination becomes effective shall be proportionately
increased, such reduction or increase, as the case may be, to become
effective immediately after the
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<PAGE> 23
opening of business on the day following the day upon which such
subdivision or combination becomes effective.
(vii) The reclassification of Common Stock
into securities which include securities other than Common Stock (other
than any reclassification upon a consolidation or merger) shall be
deemed to involve (i) a distribution of such securities other than
Common Stock to all holders of Common Stock (and the effective date of
such reclassification shall be deemed to be the "date fixed for a
determination of shareholders entitled to such distribution" within the
meaning of paragraph (iii) of this Section and (ii) a subdivision or
combination, as the case may be, of the number of shares of Common
Stock outstanding immediately prior to such reclassification into the
number of shares of Common Stock outstanding immediately thereafter
(and the effective date of such reclassification shall be deemed to be
"the day upon which such subdivision becomes effective" or "the day
upon which such combination becomes effective," as the case may be, and
"the day upon which such subdivision or combination becomes effective"
within the meaning of paragraph (vi) of this Section). Rights or
warrants issued by the Company to all holders of the Common Stock that
entitle the holders thereof to subscribe for or purchase shares of
Common Stock (either initially or under certain circumstances), which
rights or warrants (i) are deemed to be transferred with such shares of
Common Stock, (ii) are not exercisable and (iii) are also issued in
respect of future issuances of Common Stock, in each case in clauses
(i) through (iii) until the occurrence of a specified event or events
("Trigger Event"), shall for purposes of this Section 7(d)(vii) not be
deemed issued until the occurrence of the earliest Trigger Event.
(viii) In case a tender or exchange offer or
other purchase made by the Company or any subsidiary of the Company for
all or any portion of the Common Stock shall be consummated and such
tender or exchange offer or purchase shall involve an aggregate
consideration having a fair market value (as determined by the Board of
Directors, whose determination shall, if made in good faith, be
conclusive) as of the last time (the "Expiration Time") that tenders or
exchanges may be made pursuant to such tender or exchange offer (as it
shall have been amended) or the date of such other purchase, as the
case may be, that, together with (A) the aggregate amount of the cash
plus the fair market value (as determined by the Board of Directors,
whose determination shall, if made in good faith, be conclusive) as of
the Expiration Time of any other consideration paid in respect of any
other tender or exchange offer or other purchase by the Company or a
subsidiary of the Company for all or any portion of the Common Stock
consummated within 12 months preceding the Expiration Time and in
respect of which no Conversion Price adjustment has been made
previously and (B) the aggregate amount of any distributions to all
holders of the Common Stock made exclusively in cash within the 12
months preceding the Expiration Time and in respect of which no
Conversion Price adjustment has been made previously, exceeds 5.0% of
the product of the Current Market Price per share of Common Stock
immediately prior to the Expiration Time times the number of shares of
Common Stock outstanding (including any tendered, exchanged or
purchased shares) at the Expiration Time, then in each such case the
Conversion Price shall be reduced (but not increased) so that it shall
equal the price obtained by
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<PAGE> 24
multiplying the Conversion Price in effect immediately prior to the
Expiration Time by a fraction of which the numerator shall be (x) the
product of the Current Market Price per share of Common Stock
immediately prior to the Expiration Time, multiplied by the number of
shares of Common Stock outstanding (including any tendered, exchanged
or purchased shares) at the Expiration Time less (y) the sum of (i) the
aggregate amount of cash plus the fair market value (determined as
aforesaid) of any other consideration payable in respect of such tender
or exchange offer or other purchase, (ii) the aggregate amount of any
distributions to holders of Common Stock made exclusively in cash
within the preceding 12 months, in respect of which no Conversion Price
adjustment has been made previously, and (iii) the aggregate amount of
any cash plus the fair market value (determined as aforesaid) of any
other consideration payable in respect to any other tender or exchange
offer or other purchase by the Company or a subsidiary of the Company
for all or any portion of the Common Stock within the preceding 12
months, in respect of which no Conversion Price adjustment has been
made previously; and the denominator shall be the product of such
Current Market Price, multiplied by the number of shares of Common
Stock outstanding (excluding any tendered, exchanged or purchased
shares) at the Expiration Time. Such reduction shall become effective
immediately prior to the opening of business on the date following the
Expiration Time; provided, however, that if the number of tendered,
exchanged or purchased shares or the aggregate consideration payable
therefor has not been finally determined by such opening of business,
the adjustment required by this subparagraph (viii) shall be made based
upon the number of tendered, exchanged or purchased shares and the
aggregate consideration payable therefor as so finally determined.
(ix) No adjustment in the Conversion Price
shall be required unless such adjustment would require an increase or
decrease of at least 1% in such price; provided, however, that any
adjustments which by reason of this subparagraph (ix) are not required
to be made shall be carried forward and taken into account in any
subsequent adjustment; and provided, further, that any adjustment
required in order to preserve the tax-free nature of a distribution to
the holders of shares of Common Stock shall be made when so required.
All calculations under this Section 7 shall be made to the nearest cent
(with $.005 being rounded upward). Anything in this Section 7(d) to the
contrary notwithstanding, the Company shall be entitled, to the extent
permitted by law, to make such reductions in the Conversion Price, in
addition to those required by this Section 7(d), as it in its
discretion shall determine to be advisable in order that any stock
dividends, subdivision or combination of shares, distribution of
capital stock or rights or warrants to purchase stock or securities,
distribution of evidences of indebtedness or assets or any other
transaction which could be treated as any of the foregoing transactions
pursuant to Section 305 of the Internal Revenue Code of 1986, as
amended (and any successor provision), hereafter made by the Company to
its shareholders shall not be taxable to such shareholders.
(e) Subject to the provisions of Section 8, in case
the Company shall be a party to any transaction (including, without limitation,
a merger, consolidation, sale of all or substantially all of the Company's
assets, or recapitalization of the Common Stock and excluding
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<PAGE> 25
any transaction as to which paragraph (d)(iii), (vi) or (vii) of this Section 7
applies) (each of the foregoing being referred to as a "Transaction"), in each
case as a result of which shares of Common Stock shall be converted into the
right to receive stock, securities or other property (including cash or any
combination thereof), then each share of the Series I Preferred Stock will
thereafter no longer be subject to conversion into Common Stock pursuant to
Section 7, but instead shall be convertible into the kind and amount of shares
of stock and other securities and property receivable (including cash) upon the
consummation of such Transaction by a holder of that number of shares or
fraction thereof of Common Stock into which one share of Series I Preferred
Stock was convertible immediately prior to such Transaction. The Company shall
not be a party to any Transaction unless the terms of such Transaction are
consistent with the provisions of this Section 7(e) and it shall not consent or
agree to the occurrence of any Transaction until the Company has entered into an
agreement with the successor or purchasing entity, as the case may be, for the
benefit of the holders of the Series I Preferred Stock which will contain
provisions enabling the holders of the Series I Preferred Stock which remains
outstanding after such Transaction to convert into the kind and amount of stock,
securities or other property (including cash or any combination thereof) which
such holder would have been entitled to receive if such holder had held the
Common Stock issuable upon conversion of such Series I Preferred Stock
immediately prior to such Transaction. In the event that at any time, as a
result of an adjustment made pursuant to this Section 7, the Series I Preferred
Stock shall become subject to conversion into any securities other than shares
of Common Stock, thereafter the number of such other securities so issuable upon
conversion of the shares of Series I Preferred Stock shall be subject to
adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the shares of Series I Preferred
Stock contained in this Section 7. The provisions of this Section 7(e) shall
similarly apply to successive Transactions.
(f) If:
(i) the Company shall take any action which
would require an adjustment in the Conversion Price pursuant to Section
7(d); or
(ii) the Company shall authorize the
granting to the holders of its Common Stock generally of rights or
warrants to subscribe for or purchase any shares of any class or any
other rights or warrants; or
(iii) there shall be any reclassification or
change of the Common Stock (other than a subdivision or combination of
its outstanding Common Stock or a change in par value) or any
consolidation, merger or statutory share exchange to which the Company
is a party and for which approval of any shareholders of the Company is
required, or the sale or transfer of all or substantially all of the
assets of the Company or any Change in Control (each as defined in
Section 8 below) or any Transaction; or
(iv) there shall be a voluntary or
involuntary dissolution, liquidation or winding up of the Company;
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<PAGE> 26
then, except as provided otherwise in Section 8, the Company shall
cause to be filed with the Transfer Agent (if different than the
Company) and shall cause to be given to the holders of shares of the
Series I Preferred Stock, as promptly as possible, but at least 30 days
prior to the applicable date hereinafter specified, a notice stating
(A) the date on which a record is to be taken for the purpose of such
dividend, distribution or granting of rights or warrants, or, if a
record is not to be taken, the date as of which the holders of Common
Stock of record to be entitled to such dividend, distribution or rights
or warrants are to be determined or (B) the date on which such
reclassification, change, consolidation, merger, statutory share
exchange, sale, Change in Control, transfer, dissolution, Transaction,
liquidation or winding up is expected to become effective or occur, and
the date as of which it is expected that holders of Common Stock of
record shall be entitled to exchange their shares of Common Stock for
securities or other property deliverable upon such reclassification,
change, consolidation, merger, statutory share exchange, sale, Change
in Control, transfer, dissolution, liquidation or winding up. Failure
to give such notice or any defect therein shall not affect the legality
or validity of the proceedings described in this Section 7(f).
(g) Whenever the Conversion Price is adjusted as
herein provided, the Company shall promptly file with the Transfer Agent (if
different than the Company) or, if the Transfer Agent is the Company, shall
provide to all holders of Series I Preferred Stock an officer's certificate
signed by the President or a Vice President and the Chief Financial Officer or
the Treasurer setting forth a brief statement of the facts requiring such
adjustment and upon which such adjustments are based. Promptly after delivery of
such certificate, the Company shall prepare a notice of such adjustment of the
Conversion Price setting forth the adjusted Conversion Price, the facts
requiring such adjustment and upon which such adjustments are based, the
calculation of the Conversion Price adjustment and the date on which such
adjustment becomes effective and shall give such notice of such adjustment of
the Conversion Price to the holder of each share of Series I Preferred Stock.
(h) In any case in which Section 7(d) provides that
an adjustment shall become effective immediately after a record date for an
event and the date fixed for such adjustment pursuant to Section 7 occurs after
such record date but before the occurrence of such event, the Company may defer
until the actual occurrence of such event (i) issuing to the holder of any
shares of Series I Preferred Stock converted after such record date and before
the occurrence of such event the additional shares of Common Stock issuable upon
such conversion by reason of the adjustment required by such event over and
above the Common Stock issuable upon such conversion before giving effect to
such adjustment and (ii) paying to such holder any amount in cash in lieu of any
fraction pursuant to Section 7(c).
(i) For purposes of this Section 7, the number of
shares of Common Stock at any time outstanding shall not include any shares of
Common Stock then owned or held by or for the account of the Company or any
corporation controlled by the Company.
(j) Notwithstanding any other provision herein to the
contrary, the issuance of any shares of Common Stock pursuant to any plan
providing for the reinvestment of
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<PAGE> 27
dividends or interest payable on securities of the Company and the investment of
additional optional amounts of shares of Common Stock under any such plan shall
not be deemed to constitute an issuance of Common Stock. In case of the issuance
of any stock of the Company in a reorganization, acquisition or other similar
transaction which would require adjustment of the Conversion Price pursuant to
more than one paragraph of this Section 7, only one adjustment shall be made and
such adjustment shall be the amount of adjustment which has the highest absolute
value to the holders of Series I Preferred Stock.
(k) The Board of Directors may in its discretion,
decrease the Conversion Price to the extent permitted by law, in such manner, if
any, and at such time, as the Board of Directors determines to be equitable in
the circumstances; provided, however, that in no event shall the Board of
Directors be required to take any such action.
(l) The Company shall at all times reserve and keep
available, free from preemptive rights, out of its authorized but unissued
shares of Common Stock, sufficient shares of Common Stock to provide for the
conversion of the Series I Preferred Stock from time to time as such Series I
Preferred Stock is presented for conversion. For purposes of this Section 7(l),
the number of shares of Common Stock which shall be deliverable upon the
conversion of all outstanding shares of Series I Preferred Stock shall be
computed as if at the time of computation all such outstanding shares were held
by a single holder.
Before taking any action which would cause an
adjustment reducing the Conversion Price below the then par value of the shares
of Common Stock deliverable upon conversion of the Series I Preferred Stock, the
Company will take any corporate action which may, in the opinion of its counsel,
be necessary in order that the Company may validly and legally issue fully paid
and nonassessable shares of Common Stock at such adjusted Conversion Price.
The Company will, pursuant to the Registration Rights
Agreement relating to the Series I Preferred Stock, list the shares of Common
Stock required to be delivered upon conversion of the Series I Preferred Stock,
prior to delivery, upon each national securities exchange, the NASDAQ National
Market or any similar system of automated dissemination of securities prices, if
any, upon which the Common Stock is listed at the time of delivery.
Prior to the delivery of any securities which the
Company shall be obligated to deliver upon conversion of the Series I Preferred
Stock, the Company will use its best efforts to comply with all federal and
state laws and regulations thereunder requiring the registration of such
securities with, or any approval of or consent to the delivery thereof by, any
governmental authority.
(m) The Company will pay any and all documentary
stamp or similar issue or transfer taxes payable in respect of the issue or
delivery of the shares of Series I Preferred Stock (or any other securities
issued on account of the Series I Preferred Stock pursuant hereto) or shares of
Common Stock issued upon conversion of the Series I Preferred Stock pursuant
hereto; provided, however, that the Company shall not be required to pay any tax
which may be payable in respect of any transfer involved in the issue or
delivery of shares of Series I
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<PAGE> 28
Preferred Stock pursuant hereto or shares of Common Stock in a name other than
the name in which the shares of Series I Preferred Stock with respect to which
such shares of Common Stock are issued were registered and the Company shall not
be required to make any issue or delivery unless and until the person requesting
such issue or delivery has paid to the Company the amount of any such tax or has
established, to the reasonable satisfaction of the Company, that such tax has
been paid or is not required to be paid.
8. SPECIAL CONVERSION RIGHTS UPON CHANGE IN CONTROL.
(a) If a Change in Control (as defined below) should
occur with respect to the Company, each holder of shares of the Series I
Preferred Stock shall have the right, at the holder's option, for a period of 45
days after the giving of notice by the Company that a Change in Control has
occurred, to convert all, but not less than all, of such holder's shares of the
Series I Preferred Stock into the kind and amount of cash, securities, property
or other assets receivable upon such Change in Control by a holder of the number
of shares of Common Stock into which such holder's Series I Preferred Stock
would have been convertible immediately prior to the Change in Control at an
adjusted conversion price equal to the Special Conversion Price (as defined
below). Shares of the Series I Preferred Stock that are not converted as
provided above will remain convertible into the kind and amount of cash,
securities, property or other assets that the holders of the shares of the
Series I Preferred Stock would have owned immediately after the Change in
Control if the holders had converted the shares of the Series I Preferred Stock
immediately before the effective date of the Change in Control. The Company will
notify the holders of the Series I Preferred Stock of any pending Change in
Control as soon as practicable and in any event at least 30 days in advance of
the effective date of such Change in Control. In the event of a pending Change
in Control, the Company (or any successor corporation) shall take all action
necessary to provide for sufficient amounts of cash, securities, property or
other assets for the conversion of the Series I Preferred Stock as provided
herein.
(b) If a Change in Control shall occur, then, as soon
as practicable and in any event within five (5) business days after the
occurrence of such Change in Control, the Company shall provide notice to each
registered holder of a share of Series I Preferred Stock a notice (the "Special
Conversion Notice") setting forth details regarding the Special Right of the
holders to convert their shares of Series I Preferred Stock as a result of such
Change in Control. A holder of a share of Series I Preferred Stock must exercise
such conversion right within the 45-day period after the giving of the Special
Conversion Notice by the Company or such Special Right shall expire. The
conversion date for shares so converted shall be the 45th day after the giving
of the Special Conversion Notice or, if the merger, consolidation,
reorganization, liquidation or dissolution related to such Change in Control has
not become effective within 45 days of the giving of the Special Conversion
Notice but becomes effective within 90 days after the giving of the Special
Conversion Notice, then on the date of such effectiveness. If such merger,
consolidation, reorganization, liquidation or dissolution shall not occur within
90 days after the date on which the Special Conversion Notice is given, the
Company shall be required to give a new Special Conversion Notice. Within five
Business Days following the conversion date, the Company shall deliver a
certificate for the Common Stock together with a check for any fractional shares
issuable or the cash, securities, property or other assets receivable by a
holder.
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<PAGE> 29
Exercise of such conversion right to the extent permitted by law (including, if
applicable, Rule 13d-3 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act") shall be irrevocable and no dividends on the shares of
Series I Preferred Stock tendered for conversion shall accrue from and after the
conversion date.
(c) The Special Conversion Notice shall state:
(i) The event constituting the Change in
Control;
(ii) the last date upon which holders may
submit shares of Series I Preferred Stock for conversion at the Special
Conversion Price;
(iii) the Special Conversion Price;
(iv) the Conversion Price then in effect
under Section 7 and the continuing conversion rights, if any, under
Section 7;
(v) the name and address of any paying agent
and conversion agent;
(vi) that holders who wish to convert shares
of Series I Preferred Stock must satisfy the requirements of Section 7
and must exercise such conversion right within the 45-day period after
giving of such notice by the Company;
(vii) that exercise of such conversion right
shall be irrevocable and no dividends on shares of Series I Preferred
Stock tendered for conversion shall accrue from and after the
conversion date; and
(viii) that the consideration to be received
shall be delivered within the five Business Days after the last date
upon which holders may submit Series I Preferred Stock for conversion.
(d) (i) As used herein, a "Change in Control" with
respect to the Company means (A) the acquisition by a person, entity or "group,"
within the meaning of Section 13(d)(3) of the Exchange Act, (excluding, for this
purpose, the Company or any of its subsidiaries and any of Thomas Russell, The
AER Trust 1997, Robert Louis-Dreyfus, Gallium Enterprises, Inc. and Reuben
Richards which acquires beneficial ownership of voting securities of the
Company) of securities of the Company that result in such person, entity or
group having beneficial ownership (within the meaning of Rule 13d-3 promulgated
under the Exchange Act) of (x) 50% or more of either the then outstanding shares
of Common Stock or the combined voting power of the Company's then outstanding
voting securities entitled to vote generally in the election of directors or (y)
35% or more of either the then outstanding shares of Common Stock or the
combined voting power of the Company's then outstanding voting securities
entitled to vote generally in the election of directors, unless Thomas Russell,
The AER Trust 1997, Robert Louis-Dreyfus, Gallium Enterpises, Inc. and Reuben
Richards collectively beneficially own a greater percentage than such person,
entity or "group"; (B) approval by the shareholders of the
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<PAGE> 30
Company of a reorganization, merger or consolidation, in each case, with respect
to which persons who were the shareholders of the Company immediately prior to
such reorganization, merger or consolidation do not, immediately thereafter, own
more than 50% of the combined voting power entitled to vote generally in the
election of directors of the reorganized, merged or consolidated company's then
outstanding voting securities (a "Control Transaction"); or (C) approval of the
Board of Directors and, if required, of the shareholders of the Company of a
liquidation or dissolution of the Company (other than pursuant to the United
States Bankruptcy Code) or the sale of all or substantially all of the assets of
the Company.
(ii) As used herein, a person shall be
deemed to have "beneficial ownership" with respect to, and shall be
deemed to "beneficially own," any securities of the Company in
accordance with the definitions of such terms in Section 13 of the
Exchange Act and rules and regulations (including Rule 13d-3, Rule
13d-5, and any successor rules) promulgated by the Securities and
Exchange Commission thereunder; PROVIDED, HOWEVER, that a person shall
be deemed to have beneficial ownership of all securities that any such
person has a right to acquire whether such right is exercisable
immediately or only after the passage of time and without regard to the
60-day limitation referred to in Rule 13d-3.
(iii) As used herein, the "Market Value" of
a share of the Common Stock shall be the average of the Closing Prices
of the Common Stock for the five Trading Dates ending on the last
Trading Day preceding the date of the Change in Control provided that,
in the event the Change in Control was not announced at least ten (10)
Trading Dates prior to its occurrence, then five Trading Dates ending
ten (10) Trading Dates after a public announcement of such Change in
Control.
(iv) As used herein, the "Special Conversion
Price" shall mean the lower of the Market Value of the Common Stock or
$14.00 per share (which amount will, each time the Conversion Price is
adjusted, be likewise adjusted).
9. REPURCHASE AT OPTION OF HOLDERS UPON CHANGE IN CONTROL.
(a) Upon the occurrence of a Change in Control (as
defined in Section 8(d)) each holder of Series I Preferred Stock shall
have the right (the "Repurchase Right") to require the Company to
repurchase all of such holder's Series I Preferred Stock, or any
portion thereof which is 100 shares or any integral multiple thereof at
a price equal to 101% of the liquidation preference of the Series I
Preferred Stock, plus accrued and unpaid dividends, if any, to the
Repurchase Date. Such repurchase shall occur on the date (the
"Repurchase Date") that is 45 days after the date of the Company Notice
(as defined below). The Company will give a notice containing the
information set forth in Section 9(b) below (the "Company Notice") to
all holders within five (5) business days following any Change in
Control, and the Company will purchase all tendered shares of Series I
Preferred Stock by making payment of 101% of the liquidation preference
plus accrued and unpaid dividends, if any, on the Repurchase Date. The
Company shall promptly deliver a copy of the Company Notice to the
Transfer Agent and shall cause a copy of
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such notice to be published in the Wall Street Journal or another
newspaper of national circulation. The Company intends not to treat for
tax purposes the Preferred Stock as having a redemption premium which
is required to be treated as distributed pursuant to Section 305(c) of
the Internal Revenue code.
(b) The Company Notice shall state
(i) that a Change in Control has occurred
and that each holder has the right to require the Company to repurchase
such holder's shares of Series I Preferred Stock for cash at a price
equal to 101% of the liquidation preference of the Series I Preferred
Stock, plus accrued and unpaid dividends, if any, to the Repurchase
Date and the amount of such repurchase price;
(ii) the circumstances and relevant facts
regarding the Change in Control;
(iii) the Repurchase Date and the
instructions a holder must follow in order to have such holder's
securities repurchased in accordance with this Section 9.
(iv) that any shares of Series I Preferred
Stock not tendered will continue to accrue dividends.
(v) that on the Repurchase Date any share of
Series I Preferred Stock tendered for payment pursuant to the terms
hereof and for which money sufficient to repurchase the shares of
Series I Preferred Stock has been deposited by the Company as required
by Section 9(c) hereof, shall cease to accrue dividends after the
Repurchase Date;
(vi) that holders electing to have shares of
Series I Preferred Stock repurchased pursuant to this Section 9 will be
required to surrender such shares, duly endorsed for transfer, together
with irrevocable notice of such holder's intent to exercise such
Repurchase Right, to the Company at the address specified in the
Company Notice on or prior to the close of business on the 35th day
after the date the Company's Notice is given; and
(vii) such other information as may be
required by applicable law or regulations;
PROVIDED that no failure of the Company to give the foregoing notices and no
defect therein shall limit the holder's Repurchase Right or affect the validity
of the proceedings for the repurchase of the shares of Series I Preferred Stock
pursuant to this Section 9.
(c) Following a Change in Control, the Company shall
accept for payment shares of Series I Preferred Stock properly tendered pursuant
to this Section 9. Prior to the Repurchase Date, the Company shall deposit with
a bank or trust company having a capital
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and surplus of at least $50,000,000, funds sufficient to pay the redemption
price for all shares of Series I Preferred Stock tendered and shall deliver, or
cause to be delivered to such bank or trust company, the shares of Series I
Preferred Stock properly tendered pursuant to this Section 9 and accepted
together with an officer's certificate describing the shares of Series I
Preferred Stock so tendered to and being purchased by the Company. On the
Repurchase Date, the bank or trust company shall, to the extent that monies
deposited with such bank or trust company are available therefor, give to the
holders of shares of Series I Preferred Stock so tendered and accepted payment
in an amount equal to the redemption price and, as soon as possible after such
payment, the bank or trust company shall cancel the shares of Series I Preferred
Stock so tendered and accepted. The Company will publicly announce the results
of the Change in Control tender offer as soon as practicable after the
Repurchase Date. The Company will issue to holders whose shares of Series I
Preferred Stock are purchased only in part new shares of Series I Preferred
Stock equal in principal amount to the unpurchased portion of the shares of
Series I Preferred Stock surrendered.
(d) Notwithstanding the foregoing, in repurchasing
the shares of Series I Preferred Stock pursuant to this Section 9, the Company
will comply with all applicable tender offer rules, including but not limited to
Sections 13(e) and 14(e) under the Exchange Act and Rules 13c-1 and 14c-1
thereunder.
10. RANKING. Any class or classes of stock of the Company
shall be deemed to rank:
(i) prior to the Series I Preferred Stock,
as to dividends or as to the distribution of assets upon liquidation,
dissolution or winding up, if the holders of such class shall be
entitled to the receipt of dividends or of amounts distributable upon
liquidation, dissolution winding up, as the case may be, in preference
or priority to the holders of Series I Preferred Stock.
(ii) on a parity with the Series I Preferred
Stock, as to dividends or as to the distribution of assets upon
liquidation, dissolution or winding up, whether or not the dividend
rates, dividend payment dates or redemption or liquidation prices per
share thereof be different from those of the Series I Preferred Stock,
if the holders of such class of stock and the Series I Preferred Stock
shall be entitled to the receipt of dividends or of amounts
distributable upon liquidation, dissolution or winding up, as the case
may be, in proportion to their respective amount of accrued and unpaid
dividends per share or liquidation prices, without preference or
priority of one over the other, and
(iii) junior to the Series I Preferred
Stock, as to dividends or as to the distribution of assets upon
liquidation, dissolution or winding up, if such stock shall be Common
Stock or if the holders of Series I Preferred Stock shall be entitled
to receipt of dividends or of amounts distributable upon liquidation,
dissolution or winding up, as the case may be, in preference or
priority to the holders of shares of such stock.
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11. VOTING.
(a)(i) Except as herein provided or as otherwise from
time to time required by law, holders of Series I Preferred Stock shall have one
vote per share of Common Stock issuable upon conversion thereof on all matters
submitted to the holders of the Common Stock, and shall vote with the Common
Stock as a single class. Whenever, at any time or times, dividends payable on
the shares of Series I Preferred Stock shall be cumulatively in arrears in an
amount equal to or greater than the amount payable in respect of six complete
Dividend Periods; the holders of Series I Preferred Stock shall have the
exclusive right, voting separately as a class to elect two directors of the
Company at the Company's next annual meeting of shareholders and at each
subsequent annual meeting of shareholders until such dividends have been paid.
If such voting rights shall become vested more than 90 days or less than 20 days
before the date prescribed for the annual meeting of shareholders, thereupon the
holders of the shares of Series I Preferred Stock shall be entitled to exercise
their voting rights at a special meeting of the holders of Series I Preferred
Stock as set forth in paragraphs (ii) and (iii) of this Section 11(a). At
elections for such directors, each holder of Series I Preferred Stock shall be
entitled to one vote for each share held by such holder. Upon the vesting of
such right of the holders of the Series I Preferred Stock, the maximum
authorized number of members of the Board of Directors shall automatically be
increased by two, the size of the Board of Directors shall automatically be
increased by two directors and the two vacancies so created shall be filled by
vote of the holders of outstanding Series I Preferred Stock as hereinabove set
forth. The right of holders of the Series I Preferred Stock, voting separately
as a class, to elect members of the Board of Directors as aforesaid shall
continue until such time as all dividends accumulated on the Series I Preferred
Stock shall have been paid, or declared and funds or additional shares of Series
I Preferred Stock set aside for payment in full, at which time such right shall
terminate, except as herein or by law expressly provided, subject to revesting
in the event of each and every such subsequent default. Notwithstanding the
foregoing, in the event the holders of Preferred Stock are entitled to elect a
director as provided in Section 11(b), the number of directors which the holders
of the Series I Preferred Stock may elect pursuant to this Section 11(a) shall
be one, and the number of directors which the holders of the Series I Preferred
Stock may elect pursuant to Section 11(b) shall be one.
(ii) Whenever such voting right shall have
vested, such right may be exercised initially either, as provided in
Section 11(a)(i) or 11(b), at a special meeting of the holders of
shares of the Series I Preferred Stock called as hereinafter provided,
or at any annual meeting of shareholders held for the purposes of
electing directors, and thereafter at such meetings or by the written
consent of such holders pursuant to the Business Corporation Act of the
State of New Jersey.
(iii) At any time when such voting rights
shall have vested in the holders of shares of the Series I Preferred
Stock and if such right shall not already have been initially
exercised, an officer of the Company shall, upon the written request of
holders of record of 10% or more of shares of the Series I Preferred
Stock then outstanding, addressed to the Chief Financial Officer of the
Company, call a special meeting of holders of shares of the Series I
Preferred Stock. Such meeting shall be held
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at the earliest practicable date upon the notice required for annual
meetings of shareholders at the place for holding annual meetings of
shareholders of the Company or, if none, at a place designated by the
Chief Financial Officer of the Company. If such meeting shall not be
called by the proper officers of the Company within 30 days after the
personal service of such written request upon the Chief Financial
Officer of the Company, or within 30 days after giving notice, then the
holders of record of 10% of the shares of the Series I Preferred Stock
then outstanding may designate in writing any person to call such
meeting at the expense of the Company, and such meeting may be called
by such person so designated upon the notice required for annual
meetings of shareholders and shall be held at the location requested by
the person calling the meeting. Any holder of shares of the Series I
Preferred Stock then outstanding that would be entitled to vote at such
meeting shall have access to the stock record books of the Company for
the purpose of causing a meeting of shareholders to be called pursuant
to the provisions of this paragraph. Notwithstanding the provisions of
this paragraph, however, no such special meeting shall be called or
held during a period within 45 days immediately preceding the date
fixed for the next annual meeting of shareholders.
(iv) The directors elected pursuant to this
Section 11(a) shall serve until the earlier of (A) the next annual
meeting or until their respective successors shall be elected and shall
qualify or (B) the date that the Company has paid all accrued and
unpaid dividends on the Series I Preferred Stock. Any director elected
by the holders of Series I Preferred Stock may be removed by, and shall
not be removed otherwise than by, the vote of the holders of a majority
of the outstanding shares of the Series I Preferred Stock, as
applicable, voting as a separate class, at a meeting called for such
purpose or by written consent as permitted by law and the Certificate
of Incorporation and By-laws of the Company; provided, that upon
payment of all accrued, but unpaid dividends, such person shall
automatically and without further action cease to be members of the
Company's Board of Directors. If the office of any director elected by
the holders of the Series I Preferred Stock, as applicable, voting as a
class, becomes vacant by reason of death, resignation, retirement,
disqualification or removal from office or otherwise, the remaining
director elected by the holders of the Series I Preferred Stock may
choose a successor who shall hold office for the unexpired term in
respect of which such vacancy occurred. Upon any termination of the
right of the holders of the Series I Preferred Stock to vote for
directors as herein provided, the term of office of all directors then
in office elected by the holders of the Series I Preferred Stock shall
terminate immediately. Whenever the terms of office of the directors
elected by the holders of the Series I Preferred Stock shall so
terminate and the special voting powers vested in the holders of the
Series I Preferred Stock shall have expired, the number of directors
shall be such number as may be provided for pursuant to the By-laws of
the Company irrespective of any increase made pursuant to the
provisions of this Section 11.
(b) Until such time as there are outstanding a number
of shares of Series I Preferred Stock less than that number of shares equal to
two-thirds of the number of shares of Series I Preferred Stock issued in
November 1998 to Hakuto Co., Ltd., Union Miniere, Inc. and Uniroyal Technology
Corporation (as adjusted for any stock combinations or splits with
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<PAGE> 35
respect to such shares) (the "Threshold Amount"), if the Company materially
breaches a substantive provision of one of the Strategic Agreements (as defined
below), the holders of Series I Preferred Stock who are a party to one or more
of the Strategic Agreements that have been breached by the Company shall
collectively have the right, voting separately as a class, to elect one director
of the Company at the Company's next annual meeting of the shareholders;
provided, however, that if such voting rights shall become vested more than 90
days or less than 20 days before the date of the prescribed annual meeting of
shareholders, such holders of the shares of Series I Preferred Stock shall be
entitled to exercise their voting rights at a special meeting of the holders of
the shares of Series I Preferred Stock as set forth in Sections 11(a)(ii) and
(iii). At such elections for directors, each such holder of Series I Preferred
Stock shall be entitled to one vote for each share held. Upon the vesting of
such right of the holders of Series I Preferred Stock, the maximum authorized
number of members of the Board shall automatically be increased by one, the size
of the Board of Directors shall automatically be increased by one director and
the one vacancy so created shall be filled by vote of the holders of Series I
Preferred Stock as hereinabove set forth. The right of holders of Series I
Preferred Stock, voting separately as a class, to elect a member of the Board of
Directors pursuant to this Section 11(b) shall continue until the earlier of (i)
the cure of each material breach giving rise such right or (ii) the date that
less than the Threshold Amount of shares of Series I Preferred Stock is
outstanding. As used herein the term "Strategic Agreements" shall mean the
following agreements as each may be amended and any material agreements related
thereto: distributorship agreements with Hakuto Co., Ltd.; the Joint-Venture
Agreement between the Company and Union Miniere Inc., the Limited Liability
Company Agreement of Umcore LLC, the Management and Services Agreement between
Umcore LLC and the Company, the Party IP License Agreement between the Company
and Umcore LLC, the New Application License Agreement between the Company and
Umcore LLC, the Amended and Restated Joint Venture Agreement, dated November
1998 among the Company, Uniroyal Technology Corporation and Uniroyal
Optoelectronics, Inc. and the Amended and Restated Technology License Agreement,
dated November 1998 among the Company, Uniroyal Technology Corporation and
Uniroyal Optoelectronics, Inc.
(c) So long as any shares of the Series I Preferred
Stock remain outstanding, the consent of the holders of at least two-thirds of
the shares of Series I Preferred Stock outstanding at the time, given in person
or by proxy either in writing (as permitted by law and the Certificate of
Incorporation and By-laws of the Company) or at any special or annual meeting,
shall be necessary to permit, effect or validate any one or more of the
following:
(i) the authorization, creation or issuance,
or any increase in the authorized or issued amount of any class or
series of stock, or any security convertible into stock of such class
or series, ranking prior to or on parity with the Series I Preferred
Stock (including the authorization or issuance of additional shares of
Series I Preferred Stock other than issuances of Series I Preferred
Stock as a dividend on any then outstanding shares of Series I
Preferred Stock) as to dividends or the distribution of assets upon
liquidation, dissolution or winding up;
(ii) the amendment, alteration or repeal,
whether by merger, consolidation or otherwise, of any of the provisions
of the Certificate of Incorporation
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<PAGE> 36
(including this Certificate) or the Bylaws of the Company which would
adversely affect any right, preference, privilege or voting power of
the Series I Preferred Stock or of the holders thereof; provided,
however, that the creation and issuance of other series of preferred
stock, or any increase in the amount of authorized shares of such
series or of any other series of preferred stock, in each case ranking
junior to the Series I Preferred Stock with respect to the payment of
dividends and the distribution of assets upon liquidation, dissolution
or winding up, shall not be deemed to adversely affect such rights,
preferences, privileges or voting powers; or
(iii) the authorization of any
reclassification of the Series I Preferred Stock.
The unanimous consent of the Series I Preferred Stock is required to
modify or eliminate the mandatory redemption provisions in Section 5(b) hereof.
The foregoing voting provisions shall not apply if, at or prior to the time when
the act with respect to which such vote would otherwise be required shall be
effected, all outstanding shares of Series I Preferred Stock shall have been
redeemed or sufficient funds shall have been deposited in trust to effect such
redemption, scheduled to be consummated within three months after such time.
12. PREEMPTIVE RIGHTS. Subject to Section 12(d), for so long
as at least the Threshold Amount of shares of Series I Preferred Stock is
outstanding, each time the Company proposes to sell shares of its capital stock
or options, warrants or other rights to buy capital stock for cash, the Company
shall also make an offering of such securities to the holders of Series I
Preferred Stock in accordance with the following provisions:
(a) The Company shall deliver a notice to each holder
of Series I Preferred Stock stating the number of securities to be offered and
the price and the terms on which it proposes to offer such securities. Such
notice shall be sent to the addresses set forth in the records of the Company.
(b) Each holder of Series I Preferred Stock may elect
to purchase, at the price and on the terms specified in the notice, up to its
Pro Rata Portion of such securities by delivering written notice of such
election to the Company within 14 calendar days of the giving of such notice.
Such election to purchase shall state that it is a binding commitment to
purchase the securities. "Pro Rata Portion" shall mean the number of securities
determined by multiplying the number of securities subject to the notice in
Section 12(a) above by a fraction the numerator of which is the number of shares
of Series I Preferred Stock held by such holder and the denominator of which is
the number of shares of Series I Preferred Stock held by all holders provided,
however, that if any of the holders of Series I Preferred Stock shall not elect
to purchase their full Pro Rata Portion, the Pro Rata Portion of each holder
electing to purchase its full Pro Rata Portion (without giving effect to this
oversubscription adjustment) shall be increased by a proportionate amount of
such unsubscribed shares.
(c) Any shares referred to in the notice that are not
elected to be purchased as provided in subsection (b) above may, during the
180-day period thereafter, be
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<PAGE> 37
offered by the Company to any other person or persons at a price not less than,
and on terms not materially more favorable to the offeree than, those specified
in the notice.
(d) The preemptive rights set forth in this Section
12 shall not be applicable to the issuance of (i) securities to directors,
officers, or employees of the Company as a form of compensation or in connection
with their initial employment, (ii) shares of common stock issuable upon
exercise of any options or warrants, (iii) capital stock in connection with a
merger, acquisition, plan of exchange or consolidation of another company, (iv)
capital stock in connection with a joint venture, (v) securities pursuant to a
registration statement filed pursuant to the Securities Act with the Securities
and Exchange Commission, (vi) Common Stock or other securities issued upon
conversion of the Series I Preferred Stock or (vii) Series I Preferred Stock
issued as a dividend on the Series I Preferred Stock.
13. RECORD HOLDERS. The Company and the Transfer Agent may
deem and treat the record holder of any shares of Series I Preferred Stock as
the true and lawful owner thereof for all purposes, and neither the Company nor
the Transfer Agent shall be affected by any notice to the contrary.
14. NOTICE. Except as may otherwise be provided for herein,
all notices referred to herein shall be in writing, and all notices hereunder
shall be deemed to have been given upon receipt, in the case of a notice of
conversion given to the Company as contemplated in Section 7(b) hereof, or, in
all other cases, upon the earlier of receipt of such notice or three Business
Days after the giving of such notice if sent by registered mail (unless
first-class mail shall be specifically permitted for such notice under the terms
of this Certificate) with postage prepaid, addressed: if to the Company, to its
offices at 394 Elizabeth Avenue, Somerset, New Jersey 08873, Attention: Chief
Financial Officer, or other agent of the Company designated as permitted by this
Certificate, or, if to any holder of the Series I Preferred Stock, to such
holder at the address of such holder of the Series I Preferred Stock as listed
in the stock record books of the Company (which may include the records of any
Transfer Agent for the Series I Preferred Stock); or to such other address as
the Company or holder, as the case may be, shall have designated by notice
similarly given, provided, that, any notice given to Hakuto Co., Ltd. shall be
given by facsimile at the facsimile number provided to the Company followed by a
confirmation copy by mail, postage prepaid.
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<PAGE> 1
Exhibit 10.22
EXECUTION
COPY
THIRD AMENDMENT TO REVOLVING LOAN AND SECURITY AGREEMENT
THIS THIRD AMENDMENT TO REVOLVING LOAN AND SECURITY AGREEMENT
(this "Third Amendment"), dated as of December 1, 1999, is entered into by and
between EMCORE CORPORATION, a New Jersey corporation (the "Borrower") and FIRST
UNION NATIONAL BANK (the "Bank").
RECITALS:
A. The Borrower and the Bank are parties to a certain Revolving Loan
and Security Agreement, dated as of March 31, 1997, as amended by a certain
Consent and Amendment Agreement, dated as of December 5, 1997 (the "First
Amendment"), as further modified pursuant to a certain Extension Letter dated
September 29, 1998 issued by the Bank and accepted by the Borrower (the "First
Extension Letter"), as further amended pursuant to a certain Second Amendment to
Revolving Loan and Security Agreement dated as of November 30, 1998 (the "Second
Amendment"), as further amended pursuant to a certain Waiver and Amendment
Letter Agreement dated as March 8, 1999 (the "First Amendment Letter"), as
further amended pursuant to a certain Acknowledgment, Consent and Amendment
Letter dated as of May 26, 1999 (the "Second Amendment Letter") and as further
modified pursuant to a certain letter of the Bank dated September 22, 1999 (the
"Second Extension Letter"). Said loan agreement, as amended by the First
Amendment, the First Extension Letter, the Second Amendment, First Amendment
Letter, the Second Amendment Letter and the Second Extension Letter is
hereinafter referred to as the "Loan Agreement".
B. The Revolving Loan Commitment (as defined in the Loan Agreement) is
due to expire on January 1, 2000 and, therefore, the Borrower has requested a
renewal and extension thereof to January 31, 2001.
C. The Bank is willing to amend the Loan Agreement to reflect the
parties understanding with respect to the renewal and extension of the Revolving
Loan Commitment to January 31, 2001 subject to, and in accordance with, the
terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and the covenants and
agreements set forth herein, and for value received by each party, the parties
hereto agree as follows:
<PAGE> 2
SECTION 1. DEFINITIONS
1.1. EXISTING DEFINITIONS. Unless otherwise defined herein, capitalized
terms used herein shall have the meanings set forth in the Loan Agreement. Upon
the effectiveness of this Third Amendment, the following defined terms shall be
amended as set forth herein and such amended definitions shall apply wherever
such defined terms are used in the Loan Documents.
(a) The defined term "Commitment Expiration Date" is hereby
amended and restated to read as follows:
"Commitment Expiration Date" means January 31, 2001,
unless extended in accordance with Section 2.5
hereof."
(b) The defined term "EBIT" is hereby amended and restated to
read as follows:
"EBIT" means, with respect to the Borrower, for any
period, the sum of (i) Net Income, (ii) Interest
Expense, (iii) depreciation and amortization, and
(iv) provisions for Federal, state and local income
taxes, of the Borrower, based on income, computed in
accordance with GAAP."
(c) The defined term "Eligible Accounts" is hereby amended and
restated to read as follows:
"Eligible Accounts" means, without limiting the Bank's sole
discretion to determine Eligible Accounts, those Accounts
created by the Borrower:
(i) which are genuine and not fraudulent;
(ii) which arise from undisputed, bona fide sales of goods
and/or services in the ordinary course of business completed
in accordance with the terms and provisions contained in any
documents related thereto;
(iii) as to which the amounts of such Accounts shown on any
schedule of Accounts provided to the Bank are actually and
absolutely owing to Borrower, are not contingent for any
reason and have not remained unpaid for more than 90 days
after the invoice date thereof;
(iv) which do not arise from sales on consignment, guaranteed
sale or other terms under which payment by the Account debtor
may be conditional;
(v) which, in the case of Accounts where the Account debtor is
a non-resident of the
2
<PAGE> 3
United States or Canada, are secured by a letter of credit
issued by a bank that is reasonably acceptable to Bank,
provided, however, that Accounts where the Account Debtor is
any one of Hakuto Co., Ltd., S&T Enterprises, Ltd., a
wholly-owned subsidiary of Hakuto Co., Ltd., Siemens AG, D.I.
Systems, Philips AG, Thomson, L.M. Ericsson AB, Samsung Co.,
L.G. Semiconductor Corporation, Hyundai Electronics, Daewoo
Co. or Azea, Brown and Bavari (ABB) need not be secured by a
letter of credit;
(vi) which do not consist of "bill and hold" invoices or
retainage invoices;
(vii) with respect to which there are no set-offs,
counterclaims or disputes existing and there are no facts,
events or occurrences which in any manner would impair the
validity or enforceability or collectibility of such Accounts
or reduce the amount payable or delay payment thereunder;
(viii) as to which goods giving rise thereto are not, and were
not, at the time of the sale thereof, subject to any Liens
except those permitted by the Bank under this Agreement;
(ix) which are not Accounts with respect to which the Account
debtor is:
i. an officer, employer or agent of the
Borrower;
ii. the United States or any of its departments
or instrumentalities unless the Assignment
of Claims Act has been complied with;
iii. a Subsidiary or an Affiliate of the
Borrower;
iv. a Division of the Borrower (including, but
not limited to, the so-called "EMCORE West"
division); or
v. an Unconsolidated Affiliate;
(x) as to which there are no proceedings or actions which are
threatened or pending against the Account debtor of any such
Account which is reasonably likely to result in any material
adverse change in the Account debtor's financial condition;
(xi) which are owed by Account debtors deemed creditworthy and
acceptable at all times by the Bank in exercise of its
reasonable discretion; and
(xii) which otherwise constitute Collateral acceptable for
lending purposes in the sole discretion of the Bank."
3
<PAGE> 4
(d) The defined term "Eligible Inventory" is hereby amended
and restated to read as follows:
""Eligible Inventory" means Inventory located at
Borrower's facilities at 394 Elizabeth Avenue,
Somerset, New Jersey and the NM Facility and
comprising only raw materials. Specifically excluded
from the term "Eligible Inventory" shall be
work-in-process, finished goods, supplies, packing
materials, Inventory in transit and Inventory located
in any location other than the locations specified
above (unless the Bank is satisfied it has a
perfected first priority security interest in such
Inventory)."
(e) The defined term "Fixed Charge Coverage Ratio" is hereby
amended and restated to read as follows:
"Fixed Charge Coverage Ratio" shall mean, with
respect to the Borrower for the applicable period of
determination, the ratio of (A) the sum of (i) EBIT
for the period of determination, PLUS (ii) Imputed
Warrant Interest Expense for the period of
determination, PLUS Net Loss In Unconsolidated
Affiliates determined as of the end of the period of
determination TO (B) the sum of (i) the aggregate of
payment of principal with respect to Indebtedness of
the Borrower during the period of determination, PLUS
(ii) Capitalized Lease obligations during the period
of determination, PLUS (iii) Interest Expense during
the period of determination."
(f) The defined term "Imputed Warrant Interest Expense" is
hereby amended and restated to read as follows:
""Imputed Warrant Interest Expense" means, for any
period of determination, the non-cash interest
expense of the Borrower in respect of the Warrants
determined in accordance with GAAP."
(g) The defined term "Warrants" is hereby amended and restated
to read as follows:
"Warrants" means collectively, (i) the warrants
listed on SCHEDULE A attached to the Third Amendment
hereto dated as of December 1, 1999, and (ii) up to
300,000 warrant having exercise price of at least $15
per share to be issued to Thomas J. Russell in
consideration for his past guaranty of the Revolving
Loans.
1.2. ADDITIONAL DEFINITIONS. For purposes of the Loan
Agreement and the other Loan Documents, the following terms are hereby
incorporated into Section 1 of the Loan Agreement in their respective
appropriate alphabetical order:
4
<PAGE> 5
"Net Loss In Unconsolidated Affiliates" means, with respect to
the Borrower, for the relevant period the net loss appearing
as an expense on an income statement of the Borrower prepared
in accordance with GAAP, consistently applied, attributable to
its investment in Unconsolidated Affiliates.
"Unconsolidated Affiliates" means UMcore LLC, the Borrower's
joint venture with Union Miniere Inc., GELCORE LLC, the
Borrower's joint venture with General Electric Company, and
Uniroyal Optoelectronics LLC, the Borrower's joint venture
with Uniroyal Technology Corporation, in each case so long as
the Borrower's investment in each such joint venture can be
accounted for using the equity method of accounting as a
result of the Borrower's inability to directly or indirectly
control economic and voting interests in said joint ventures.
SECTION 2. EXISTING OBLIGATIONS
2.1. ACKNOWLEDGMENT OF EVENTS OF DEFAULT, WAIVER, AMOUNTS OUTSTANDING.
(a) The Borrower acknowledges that it has failed to comply
with certain of the terms and conditions of the Loan Agreement, specifically the
Fixed Charge Ratio set forth in Section 10.14(a) of the Loan Agreement (all as
more particularly described on SCHEDULE I annexed hereto (the "Specified
Default") and that, as a result of the Borrower's failure to perform and satisfy
its obligations under the Loan Agreement, an Event of Default existed
thereunder. The Borrower represents and warrants to the Bank that no Events of
Default or Unmatured Events of Default (other than the Specified Default) have
occurred and are continuing.
(b) The Bank agrees that, upon the satisfaction of the
conditions precedent set forth in Section 4 of this Third Amendment and the
execution of this Third Amendment by all parties, the Specified Default shall be
waived. Such waiver shall be effective only with respect to the Specified
Default and only as said default relates to the Borrower's failure to comply
with the provisions related to such default as of September 30, 1999 and shall
not affect or be deemed to relate to any other Events of Default which have
occurred and are continuing as of the date hereof or which may occur after the
date hereof. No course of dealing or custom shall be implied or construed with
respect to any other instance of non-compliance with any term or provision of
the Loan Documents occurring in the past, existing at present, or arising in the
future by virtue of the waiver contained herein. This waiver shall not
constitute a waiver of any of the rights and remedies available to the Bank
elsewhere in the Loan Documents, all of which are specifically reserved.
(c) The Borrower further acknowledges that, as of the date
hereof, the aggregate principal amount outstanding under the Revolving Loans is
$0.
5
<PAGE> 6
2.2. WAIVER OF CLAIMS AND DEFENSES; RELEASE.
(a) The Borrower agrees that, as of the date hereof, it has no
claim, counterclaim, cause of action or defense of any kind by way of offset or
otherwise to the payment and satisfaction in full of the Revolving Loans. The
foregoing notwithstanding, to the extent that any such a claim or defense may or
does exist, as of the date hereof, the Borrower waives and releases any and all
such claims, counterclaims, causes of action and defenses.
(b) The Borrower further waives and releases and affirmatively
agrees not to allege or otherwise pursue, in any manner, any and all defenses,
affirmative defenses, counterclaims, claims, causes of action, set-offs or other
rights that it may have as of the date hereof to contest: (i) the Specified
Default; (ii) any provisions of the Loan Agreement and other Loan Documents;
(iii) the rights of the Bank to all rents, issues, profits, products and
proceeds of the Collateral for the Revolving Loans; (iv) the liens for the
benefit of the Bank in any property (whether real or personal, tangible or
intangible), right or other interest, now or hereafter arising in connection
with the Collateral for the Revolving Loans; and (v) any and all acts or
omissions of the Bank in administering the amounts outstanding under the Loan
Agreement or otherwise; and the Borrower fully and forever releases and
discharges the Bank from any and all claims or liability of any kind or nature
with respect to the foregoing.
2.3 REAFFIRMATION OF SECURITY INTEREST AND LIENS. The Borrower
acknowledges and agrees that the security interests and other liens granted to
the Bank in the Collateral described in Section 7 of the Loan Agreement are and
remain valid and first priority liens on the assets subject thereto. The
Borrower further represents and warrants that (i) such collateral includes, but
is not limited to, all such Collateral located, or arising as a result of
operations, at the NM Facility and (ii) there are no claims, set-offs or
defenses to the Bank's exercise of any rights or remedies available to it as a
creditor in realizing upon such collateral under the terms and conditions of the
Loan Documents. The Borrower further acknowledges that the obligations secured
by and under the Loan Agreement include, but are not limited to, all such
obligations of the Borrower related to the Revolving Loans as modified hereby.
SECTION 3. LOANS
3.1 RENEWAL OF REVOLVING LOAN COMMITMENT. Upon satisfaction of the
conditions to effectiveness set forth in Section 4 of this Third Amendment, the
Revolving Loan Commitment made available by the Bank to the Borrower pursuant to
the Loan Agreement shall be extended and renewed through and including January
31, 2001. The Borrower and the Bank hereby acknowledge that interest shall
accrue on the unpaid principal amount of each Revolving Credit Loan at a PER
ANNUM ratio equal to the Prime Rate PLUS fifty basis points (.50%), subject to
increase to the Default Rate in accordance with the terms of the Loan Documents.
In consideration of the renewal and extension of the Revolving Loan Commitment,
the Borrower shall pay to the Bank a non-refundable renewal fee in the amount of
$50,000 of which shall be due and payable upon execution and delivery of this
Third Amendment.
SECTION 4. CONDITIONS PRECEDENT
4.1. CONDITIONS TO THIS THIRD AMENDMENT. This Third Amendment shall
become effective
6
<PAGE> 7
as of the date first written above upon fulfilment of the following conditions
precedent, all as determined by the Bank, in its sole and absolute discretion:
(a) The Borrower shall have paid and/or reimbursed the Bank for all
costs and expenses incurred in connection with the extension herein
contemplated, including, without limitation, the reasonable fees and
disbursements of the Bank's outside counsel, Windels, Marx, Davies & Ives;
(b) The Borrower shall have caused to be delivered by the Guarantor a
Guarantor Agreement, in substantially the form of EXHIBIT "A" attached hereto,
duly executed and delivered by the Guarantor to the Bank;
(c) The Borrower shall have provided to the Bank resolutions of the
boards of directors of the Borrower and the Guarantor, certified by the
secretary of each of them as of the date hereof to be duly adopted and in full
force and effect on such date, authorizing the consummation of each of the
transactions contemplated by this Third Amendment;
(d) The Borrower shall have provided to the Bank certificates of the
appropriate governmental authorities, dated the most recent practicable date
prior to the date hereof, showing that Borrower and the Guarantor are in good
standing in the States of New Jersey and New Mexico, and in such other
jurisdictions as the Bank shall reasonably request;
(e) The Borrower shall have caused to be delivered to the Bank an
opinion of counsel to the Borrower and the Guarantor, in form and substance
satisfactory to the Bank and its counsel, regarding such matters as the Bank may
reasonable request in connection with the transactions contemplated in this
Third Amendment;
(f) The Borrower shall have caused to be delivered to the Bank evidence
that the insurance policies provided for in Section 10.7 of the Loan Agreement
are in full force and effect, with appropriate loss payee and additional insured
clauses in favor of the Bank, certified by the insurer;
(g) The Borrower shall have caused to be delivered to the Bank payment
of the renewal fee referenced in Section 3.1 hereof; and
(h) Such additional information and documents as the Bank may request.
SECTION 5. RATIFICATION AND AMENDMENT OF REPRESENTATIONS, WARRANTIES AND
COVENANTS
5.1. RATIFICATION. Borrower hereby ratifies, confirms and restates, as
if set forth herein in their entirety, all representations, warranties,
covenants, acknowledgments and agreements set forth in Section 8 of the Loan
Agreement, as amended prior the date hereof, at and as of the date hereof (other
than representations, warranties and covenants which expressly speak only as of
a different date), and
7
<PAGE> 8
affirmatively states that all of the same are true and accurate and shall be and
remain in full force and effect, subject only to changes effected by this Third
Amendment and/or changes previously disclosed to the Bank in writing. In
addition, Borrower represents and warrants to the Bank that:
(a) the Borrower has the power and authority to enter into
this Third Amendment;
(b) the Borrower's unaudited consolidated financial statements
as of June 30, 1999, which were furnished previously to the Bank, were prepared
in accordance with GAAP consistently applied throughout the period involved, and
present fairly the financial position of the Borrower as at the date thereof and
the results of operations and cash flows of the Borrower for the period then
ended;
(c) no changes having a material adverse effect have occurred
since the date of such financial statements referred to in Section 5.1(b) above;
(d) the execution, delivery and performance of this Third
Amendment and the instruments and agreements executed and delivered in
connection herewith by the Borrower have been duly authorized by all requisite
corporate action and this Third Amendment and the instruments and agreements
executed and delivered in connection herewith constitute the legal, valid and
binding obligations of the Borrower, enforceable against it in accordance with
their terms;
(e) the Borrower is not in default with respect to any
judgment, writ, injunction, decree, rule or regulation of any court or other
governmental authority which would have a material adverse effect;
(f) there have been no changes to the certificate of
incorporation or by-laws of any of the Borrower or the Guarantor since March 31,
1999; and
(g) no Event of Default or Unmatured Event of Default has
occurred and is continuing or will result from the execution, delivery and
performance of this Third Amendment and the instruments and agreements executed
and delivered in connection herewith.
5.2. AMENDMENT OF CERTAIN PROVISIONS OF LOAN AGREEMENT.
(a) The last paragraph of Section 2.2 of the Loan Agreement
(which was added to the Loan Agreement pursuant to Section 1(d) of the First
Amendment) is hereby deleted in its entirety.
(b) Section 6.2 of the Loan Agreement is hereby deleted in its
place there shall appear the following:
"6.2 COMMITMENT FEE. [INTENTIONALLY DELETED]"
(c) There shall be added to Section 10.1 of the Loan
Agreement, the following new reporting requirements:
8
<PAGE> 9
"(i) In addition to, and not in lieu of, the
information required pursuant to clauses (d) and (f) above, by
no later than the date that is 7 Business Days following the
end of the Borrower's fiscal quarter ending March 31, 2000,
(x) a completed Borrowing Base Certificate (in the form
annexed hereto as Exhibit 10.1 (E)) for the quarter then
ended, signed by the Chief Financial Officer of the Borrower,
detailing the Borrower's availability under the Borrowing Base
and (y) a certificate of the Chief Financial Officer or
President of the Borrower stating that such officer has
obtained no knowledge of any Unmatured Event of Default or
Event of Default except as specified in such certificate and
showing in detail the calculations supporting such statement
in respect of Section 10.14."
"(j) By no later than 15 Business Days following the
end of each fiscal quarter of the Borrower, commencing with
the fiscal quarter ending December 31, 1999, detailed
management-prepared financial projections for the next four
(4) succeeding fiscal quarters, in substantially the same
format previously furnished to the Bank."
(d) Clause (b) of Section 10.14 of the Loan Agreement is
hereby amended and restated in its entirety to read as follows:
"(b) EFFECTIVE TANGIBLE NET WORTH. The Borrower shall
maintain an Effective Tangible Net Worth all times of not
less than $65,000,000.00. "Effective Tangible Net Worth"
means total assets MINUS total liabilities, PLUS the
accumulated Net Loss In Unconsolidated Affiliates from
October 1, 1999 through the time of computation of Effective
Tangible Net Worth (to the extent that such accumulated Net
Loss. In Unconsolidated Affiliates has been substracted from
the retained earnings of the Borrower's for the purpose of
calculation of said Effective Tangible Net Worth) in each case
determined in accordance with GAAP, applied on a consistent
basis. For purposes of this computation, the aggregate amount
of any assets classified as Intangibles shall be subtracted
from total assets and total liabilities shall not include the
Borrower's obligations with respect to the New Preferred Stock
to the extent that such obligations are otherwise classified
as liabilities of the Borrower in accordance with GAAP. "
9
<PAGE> 10
(e) Section 10.17 of the Loan Agreement is hereby amended and
restated in its entirety to read as follows:
"LIMITATION ON INVESTMENTS. The Borrower shall not
purchase any stock, bonds, notes, debentures or other
securities of or any assets constituting a business
unit of any Person, except (i) investments in direct
Obligations of the United States government and
certificates of deposit of United States commercial
banks having a tier 1 capital ratio of not less than
6%, and then in an amount not to exceed 10% of the
issuing bank's unimpaired capital and surplus and
(ii) investments in the form of capital contributions
in the amount of $6,000,000 to Uniroyal
Optoelectronics LLC, a capital contribution of
$600,000 to UMCORE LLC and the initial capital
contribution of $15,680,00 to GELCORE LLC". The
foregoing shall not, however, be construed as an
express or implied consent by the Bank to any
transaction otherwise prohibited or restricted by
this Agreement undertaken by the Borrower to obtain
the funds for any such investment.
(f) Section 10.27 of the Loan Agreement (which was added to
the Loan Agreement pursuant to Section 1(q) of the First Amendment) is hereby
deleted and in its place there shall appear the following:
"10.27. [INTENTIONALLY DELETED]"
SECTION 6. MISCELLANEOUS.
6.1. CONTINUED EFFECTIVENESS. Except as specifically amended by and/or
inconsistent with this Third Amendment, all of the terms and conditions of the
Loan Agreement shall remain unchanged and in full force and effect and are
hereby ratified, adopted and confirmed in all respects. All references to the
Loan Agreement in any Loan Document shall hereafter be deemed to refer to the
Loan Agreement as amended prior to the date hereof and by this Third Amendment.
This Third Amendment is a Loan Document.
6.2. PAYMENT OF EXPENSES. Borrower shall pay the reasonable fees and
expenses (including, but not limited to, reasonable attorneys' fees and
expenses) incurred by the Bank in connection with the preparation, negotiation,
execution and delivery and enforcement of this Third Amendment and the documents
executed and delivered in connection herewith and any and all renewals,
modifications, amendments and waivers hereof and hereunder.
6.3. ENTIRE AGREEMENT. This Third Amendment, together with the other
Loan Documents, constitutes the entire agreement between the parties with
respect to the subject matter hereof and supersedes any prior agreements,
written or oral, with respect to such subject matter.
10
<PAGE> 11
6.4. COUNTERPARTS. This Third Amendment may be executed in one or more
counterparts, each of which shall be deemed to be an original and all of which
together shall constitute one and the same agreement, and any party may execute
this Third Amendment by signing any such counterpart.
6.5. GOVERNING LAW. This Third Amendment shall be interpreted, and the
rights and liabilities of the parties hereto, whether arising in contract or
tort and howsoever pertaining to the parties' relationship, shall be determined
in accordance with the laws of the State of New Jersey.
6.6. HEADINGS. The section titles contained in this Third Amendment
shall be without substantive meaning or content of any kind whatsoever and are
not a part of the agreement between the parties.
SECTION 7. RELEASE OF GUARANTY OF THOMAS J. RUSSELL AND TJR HOLDING TRUST.
7.1 RELEASE. Upon the satisfaction of the condition precedent to the
effectiveness of this Third Amendment set forth in Section 4 hereof, the
unconditional guaranty of Thomas J. Russell and TJR Holding Trust (together, the
"Guarantors") as provided in that certain Amended and Restated Unconditional
Guaranty dated April 29, 1999 (the "Guaranty") and the collateral securing such
Guarantors' obligations thereunder provided in that certain Amended and Restated
Pledge and Assignment Agreement dated April 29, 1999 (the "Pledge") are hereby
released, terminated and of no further in force and effect. The release herein
provided is intended to be self-operative and the Guarantors may present this
Third Amendment to any interested party to evidence the Guarantors' complete
release from all obligations to guaranty and provide collateral for the
Revolving Loans under the Loan Documents pursuant to the Guaranty and the
Pledge, respectively. The Bank shall execute any further instruments of release
or termination statements as the Guarantors may reasonably request, all at
Guarantors' sole cost and expense.
IN WITNESS WHEREOF, the parties have executed this Third Amendment the day and
year first above-written.
EMCORE CORPORATION,
a New Jersey corporation
By: /s/ Thomas G. Werthan
------------------------------
Name: Thomas G. Werthan
Title: CFO & Vice President
FIRST UNION NATIONAL BANK
By: /s/ Robert G. Murphy, Jr.
------------------------------
Name: Robert G. Murphy, Jr.
Title: Vice President
11
<PAGE> 12
SCHEDULE I
SPECIFIED DEFAULT
1. Failure to comply with the Fixed Charge Ratio covenant set forth in
Section 10.14(a) of the Loan Agreement for the fiscal period ending September
30, 1999.
<PAGE> 13
EXHIBIT A
GUARANTOR AGREEMENT OF
MICROOPTICAL DEVICES, INC.
<PAGE> 1
Exhibit 21
SUBSIDIARY OF THE REGISTRANT
MicroOptical Devices, Inc., a Delaware corporation
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in Registration Statements
Nos. 333-27507, 333-36445, 333-39547 and 333-45827 of EMCORE Corporation on Form
S-8 and Registration No. 333-87753 of EMCORE Corporation on Form S-3 of our
report dated November 10, 1999 appearing in this Annual Report on Form 10-K of
EMCORE Corporation for the year ended September 30, 1999.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
December 28, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF EMCORE CORPORATION FOR THE FISCAL YEAR
ENDED SEPTEMBER 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 7,165
<SECURITIES> 0
<RECEIVABLES> 14,466
<ALLOWANCES> (563)
<INVENTORY> 13,990
<CURRENT-ASSETS> 35,447
<PP&E> 69,241
<DEPRECIATION> (22,959)
<TOTAL-ASSETS> 99,611
<CURRENT-LIABILITIES> 14,757
<BONDS> 0
14,193
0
<COMMON> 152,426
<OTHER-SE> (90,803)
<TOTAL-LIABILITY-AND-EQUITY> 99,611
<SALES> 58,341
<TOTAL-REVENUES> 58,341
<CGS> (33,158)
<TOTAL-COSTS> (33,158)
<OTHER-EXPENSES> (44,921)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,617)
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</TABLE>
