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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 9, 1999
REGISTRATION NO. 333-71791
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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EMCORE CORPORATION
(Exact name of Registrant as specified in its charter)
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NEW JERSEY 22-2746503
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
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394 ELIZABETH AVENUE, SOMERSET, NEW JERSEY 08873
(732) 271-9090
(Address, including zip code, and telephone number, including
area code, of registrant's agent for service and principal executive offices)
------------------------------
THOMAS G. WERTHAN
EMCORE CORPORATION
394 ELIZABETH AVENUE
SOMERSET, NEW JERSEY 08873
(732) 271-9090
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------------
WITH COPIES TO:
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JORGE L. FREELAND, ESQ. ELLEN B. CORENSWET, ESQ.
WHITE & CASE LLP KENNETH R. MCVAY, ESQ.
200 SOUTH BISCAYNE BLVD. BROBECK, PHLEGER & HARRISON, LLP
MIAMI, FLORIDA 33131 1633 BROADWAY, 47TH FLOOR
TEL: (305) 371-2700 NEW YORK, NEW YORK 10019
FAX: (305) 358-5744 TEL: (212) 581-1600
FAX: (212) 586-7878
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: as soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act of 1933 registration statement number
of the earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act of 1933 registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
SUBJECT TO COMPLETION -- JUNE 9, 1999
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PROSPECTUS
, 1999
(EMCORE LOGO) EMCORE CORPORATION
3,897,441 SHARES OF COMMON STOCK
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EMCORE CORPORATION:
- EMCORE Corporation
394 Elizabeth Avenue
Somerset, New Jersey 08873
(732) 271-9090
- NASDAQ SYMBOL: EMKR
THE OFFERING:
- - EMCORE is offering 3,000,000 of the shares and existing shareholders are
offering 897,441 of the shares.
- - The underwriters have an option to purchase an additional 584,616 shares
from EMCORE to cover over-allotments.
- - There is an existing trading market for these shares. The reported last
sale price on June 7, 1999 was $21 3/8 per share.
- - We plan to use the proceeds from this offering to repay debt and for
general corporate purposes. We will not receive any proceeds from the
shares sold by the selling shareholders.
- - Closing: , 1999.
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Per Share Total
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Public offering price: $ $
Underwriting fees:
Proceeds to EMCORE:
Proceeds to selling shareholders:
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THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 8.
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Neither the SEC nor any state securities commission has determined whether this
prospectus is truthful or complete. Nor have they made, nor will they make, any
determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
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DONALDSON, LUFKIN & JENRETTE
PRUDENTIAL SECURITIES
NEEDHAM & COMPANY, INC.
SOUNDVIEW TECHNOLOGY GROUP
THE UNDERSIGNED IS FACILITATING INTERNET DISTRIBUTION.
DLJDIRECT INC.
WE WILL AMEND AND COMPLETE THE INFORMATION IN THIS PROSPECTUS. ALTHOUGH WE ARE
PERMITTED BY US FEDERAL SECURITIES LAWS TO OFFER THESE SECURITIES USING THIS
PROSPECTUS, WE MAY NOT SELL THEM OR ACCEPT YOUR OFFER TO BUY THEM UNTIL THE
DOCUMENTATION FILED WITH THE SEC RELATING TO THESE SECURITIES HAS BEEN DECLARED
EFFECTIVE BY THE SEC. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES
OR OUR SOLICITATION OF YOUR OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION
WHERE THAT WOULD NOT BE PERMITTED OR LEGAL.
<PAGE> 3
[Artwork depicts a cellular relay station antenna, fiber optics, an automobile
line drawing showing engine components, a cellular phone handset, a bar code, a
satellite, light-emitting diodes, Cds, and, the lights of Times Square at night.
Text of artwork states "Leading manufacturers throughout the world use EMCORE's
production systems and process technology, wafers and devices for a variety of
advanced electronic applications. Below the artwork text states "Illustrated
above are examples of current and future end-use product applications that
incorporate the compound semiconductor process, technology or equipment
developed and sold by EMCORE Corporation. This illustration contains products
of companies other then EMCORE Corporation. (EMCORE logo).]
[Fold out artwork depicts a diagram of flow and heat patterns inside a
TurboDisc reactor under heading Technology with text stating EMCORE has
developed its compound semiconductor processes and higher performance production
systems through substantial investments in research and development. EMCORE
works closely with its customers to identify specific performance criteria in
its production systems, wafers and devices.
Surrounding the EMCORE logo and "Integrated Compound Semiconductor Solutions"
TECHNOLOGY
EMCORE has developed its compound semiconductor processes and higher performance
production systems through substantial investments in research and development.
EMCORE works closely with its customers to identity specific performance
criteria in its production systems, wafers, and devices.
WAFERS AND DEVICES
EMCORE provides its customers with materials science expertise, process
technology and metal-organic chemical vapor deposition (MOCVD) systems that
enable the manufacture of commercial volumes of high-performance compound
semiconductor wafers and devices. (Pictures of MR Sensors, VCSELs, Solar
Cells, 3 LEDs and RF Materials.)
The Company is working with its customers and JV partners to design, engineer
and manufacture commercial quantities of compound semiconductor devices and
materials. The devices are fabricated from materials grown in our production
equipment; and then tested according to specifications worked out in
partnership with customers or JV partners.
SYSTEMS
EMCORE provides production-scale metal organic chemical vapor deposition,
MOCVD, equipment using its proprietary TURBODISC technology. By combining
material science expertise and proven process technology, EMCORE offers key
enabling technology for the low cost, high-volume production of a variety of
compound semiconductor wafers and devices. (Picture of TurboDisc System)]
<PAGE> 4
TABLE OF CONTENTS
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Page
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Prospectus Summary.............. 4
Risk Factors.................... 8
Use of Proceeds................. 18
Price Range of Common Stock and
Dividend Policy............... 19
Capitalization.................. 20
Selected Consolidated Financial
Data.......................... 21
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations.................... 23
Business........................ 42
Management...................... 60
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Page
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Certain Relationships and
Related Transactions.......... 64
Principal and Selling
Shareholders.................. 66
Underwriting.................... 68
Legal Matters................... 70
Experts......................... 70
Pro Forma Consolidated Statement
of Operations (Unaudited)..... 71
Incorporation of Certain
Documents by Reference........ 73
Available Information........... 74
Index to Financial Statements... F-1
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3
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PROSPECTUS SUMMARY
This summary is qualified by more detailed information appearing in other
sections of this prospectus. The other information is important, so please read
this entire prospectus carefully. Unless otherwise indicated, all information in
this prospectus: (a) gives effect to a 3.4-for-1 reverse stock split that was
completed on February 3, 1997 and (b) assumes that the underwriters do not
exercise their over-allotment option. References to EMCORE's fiscal years refer
to fiscal years ended on September 30.
EMCORE CORPORATION
EMCORE designs, develops and manufactures compound semiconductor wafers and
devices and is a leading developer and manufacturer of the tools and
manufacturing processes used to fabricate compound semiconductor wafers and
devices. Our products and technology enable our customers, both in the United
States and internationally, to manufacture commercial volumes of
high-performance electronic devices using compound semiconductors. Our products
are used in a wide variety of applications in the communications (satellite,
data, telecommunications and wireless), consumer and automotive electronics,
computers and peripherals, and lighting markets. EMCORE's customers include AMP
Incorporated, Hewlett Packard, General Motors, Hughes-Spectrolab, Lucent
Technologies, Inc., Siemens AG and 12 of the largest electronics manufacturers
in Japan.
Compound semiconductors are the key components of electronic systems and
electronic circuits and are now used in today's most advanced information
systems. 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, phosphorus or nitrogen. These elements are combined in our
proprietary manufacturing process to create a round disk, or wafer, that has
multiple layers of thin films of semiconductors on it. The wafers are further
processed to create devices that are ready to be packaged by our customers for
use in their products, such as solar cells, lasers and transistors. Many
compound semiconductor materials have unique physical properties that allow
electrons to move at least four times faster than through semiconductors based
on silicon. Advantages of compound semiconductor devices over silicon devices
include:
- operation at higher speeds;
- lower power consumption;
- less noise and distortion; and
- the ability to emit and detect light, known as optoelectronic properties.
Although compound semiconductors are more expensive to manufacture than the
more traditional silicon-based semiconductors that are used in most computers,
electronics manufacturers are increasingly integrating compound semiconductors
into their products in order to achieve higher performance.
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<PAGE> 6
We manufacture and sell, either alone or with our joint venture partners,
the following products:
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PRODUCT CURRENT AND POTENTIAL APPLICATIONS
Solar cells Solar panels in communications
satellite power systems
Compound semiconductor devices that Traffic lights
emit light,
called high-brightness light-emitting Miniature lamps
diodes
(HB LEDs)* Automotive lighting
Flat panel displays
Compound semiconductor lasers that emit High performance data and
light in a cylindrical beam, called telecommunications lines including
vertical cavity surface emitting fiber optic cables and other network
lasers (VCSELs) applications
Compound semiconductor sensor devices Cam and crank shaft sensors for
that can automobiles
detect a magnetic field and sense the Antilock brake systems
position of
a metal object called magneto Brushless motors
resistive sensors
(MR sensors) Engine timing sensors
Compound semiconductor materials that Cellular phone handsets
transmit
and receive communications called Fiber optics
radio
frequency materials (RF materials) Satellite transmitters and receivers
TurboDisc production systems Platform technology for all of the
above
* Products under development
</TABLE>
Our objective is to capitalize on our position as a leading developer and
manufacturer of compound semiconductor tools and manufacturing processes to
become the leading supplier of compound semiconductor wafers and devices. The
key elements of our strategy are to:
- apply our core scientific and manufacturing technology across multiple
product applications;
- target high growth opportunities;
- partner with key industry participants; and
- continue our investment to maintain technology leadership.
We have recently established a number of strategic relationships through
joint ventures and long-term supply agreements including:
- a joint venture with General Electric Lighting to develop and market
white light and colored HB LED lighting products.
- a long-term purchase agreement for solar cells with Space Systems/Loral,
a wholly-owned subsidiary of Loral Space & Communications.
- a cooperative development agreement and a three-year purchase agreement
with Sumitomo Electric to provide certain RF materials for use in
cellular handsets.
We were incorporated in the State of New Jersey in September 1986. Our
World Wide Web site is www.emcore.com. Our web site is not part of this
prospectus. EMCORE and TurboDisc are registered trademarks of EMCORE and
Gigalase, Gigarray and the EMCORE logo are trademarks of EMCORE. Each trademark,
trade name or service mark of any other company appearing in this prospectus
belongs to its holder.
5
<PAGE> 7
THE OFFERING
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Common stock offered:
By EMCORE............................ 3,000,000 shares
By the selling shareholders.......... 897,441 shares
-----------
Total........................... 3,897,441 shares
Common stock to be outstanding after this 13,226,014 shares
offering................................
Use of proceeds by EMCORE................. To repay approximately $36.8 million of debt and for
general corporate purposes. See "Use of Proceeds."
Nasdaq National Market symbol............. EMKR
</TABLE>
The number of shares of common stock to be outstanding after this offering
is based on the 9,500,086 shares outstanding as of May 1, 1999, as further
described under "Capitalization."
6
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
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FISCAL YEARS SIX MONTHS ENDED
ENDED SEPTEMBER 30, MARCH 31,
---------------------------- -------------------
1996 1997 1998(*) 1998(*) 1999
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues....................... $27,779 $47,753 $ 43,760 $ 26,165 $ 26,197
Gross profit................... 9,172 17,659 19,084 12,255 10,978
Operating loss................. (2,753) (689) (34,647) (20,332) (7,859)
Net loss....................... (3,176) (5,619) (36,419) (20,661) (10,856)
Net loss per basic and diluted
share(1).................... $ (1.06) $ (1.20) $ (4.15) $ (2.52) $ (1.17)
Weighted average shares used in
calculating net loss per
share....................... 2,994 4,669 8,775 8,189 9,409
</TABLE>
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(*) As restated -- See Note 20 to the consolidated financial statements
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AS OF MARCH 31, 1999
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ACTUAL AS ADJUSTED(2)
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BALANCE SHEET DATA:
Working capital....................................... $ 6,663 $ 31,336
Total assets.......................................... 85,071 109,744
Long-term liabilities................................. 32,570 1,567
Redeemable convertible preferred stock................ 21,369 14,089
Shareholders' equity.................................. 8,967 71,191
</TABLE>
- ------------------------------
(1) Basic and diluted earnings per share have been restated for all periods
presented to give effect to the Commission's Staff Accounting Bulletin No.
98, which eliminated certain computational requirements of the Commission's
Staff Accounting Bulletin No. 64.
(2) Reflects the sale by EMCORE of 3,000,000 shares of common stock offered by
this prospectus, repayment of all long-term debt, the conversion of 520,000
shares of convertible preferred stock into 520,000 shares of common stock
and the exercise of 19,898 warrants at $4.08 per share and 186,030 warrants
at $10.20 per share for 205,928 shares of common stock.
7
<PAGE> 9
RISK FACTORS
You should carefully consider the following risks, together with the other
information contained in this prospectus, before you decide whether to purchase
shares of our common stock. If any of the following risks actually occur, our
business, financial condition or results of operations would likely suffer. In
such case, the trading price of our common stock could decline, and you may lose
all or part of the money you paid to buy our common stock.
This prospectus contains forward-looking statements based on our current
expectations, assumptions, estimates and projections about EMCORE and our
industry. These forward-looking statements involve numerous risks and
uncertainties. Our actual results could differ materially from those anticipated
in such forward-looking statements as a result of certain factors, as more fully
described in this section and elsewhere in this prospectus. We undertake no
obligation to update publicly any forward-looking statements for any reason,
even if new information becomes available or other events occur in the future.
WE EXPECT TO CONTINUE TO INCUR OPERATING LOSSES.
We started operations in 1984 and as of March 31, 1999 had an accumulated
deficit of $71.2 million. We incurred net losses of $3.2 million in fiscal 1996,
$5.6 million in fiscal 1997, $36.4 million in fiscal 1998 and $10.9 million in
the first six months of fiscal 1999. We expect to continue to incur losses. To
support our growth, we have increased our expense levels and our investments in
inventory and capital equipment. As a result, we will need to significantly
increase revenues and profit margins to become and stay profitable. If our sales
and profit margins do not increase to support the higher levels of operating
expenses and if our new product offerings are not successful, our business,
financial condition and results of operations will be materially and adversely
affected. Please see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Financial Statements and the Notes
thereto for detailed information on our history of losses.
OUR RAPID GROWTH PLACES A STRAIN ON OUR RESOURCES.
We are experiencing rapid growth, having added a significant number of new
employees, acquired MicroOptical Devices, Inc., or MODE, and entered into joint
ventures with General Electric Lighting (pending), Uniroyal Technology
Corporation, Optek Technology, Inc. and Union Miniere Inc. We have expanded our
facilities to include two manufacturing facilities in Albuquerque, New Mexico in
addition to our original facility in Somerset, New Jersey. Our joint venture
with Uniroyal Technology Corporation has leased a manufacturing facility in
Tampa, Florida. This growth has placed and will continue to place a significant
strain on our management, financial, sales and other employees and on our
internal systems and controls. If we are unable to effectively manage multiple
facilities and multiple joint ventures in geographically distant locations, our
business, financial condition and results of operations will be materially and
adversely affected. We are also in the process of installing new manufacturing
software for all of our facilities and are evaluating replacing our accounting
and purchasing systems. Most of the new manufacturing software is
8
<PAGE> 10
customized to our particular business and manufacturing processes. It will take
time and require evaluation to eliminate all of the bugs in the software and to
train personnel to use the new software. In this transition we may experience
delays in production, cost overruns and disruptions in our operations.
Please see "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for more information.
SINCE THE TECHNOLOGY IN THE COMPOUND SEMICONDUCTOR INDUSTRY RAPIDLY CHANGES, WE
MUST CONTINUALLY IMPROVE EXISTING PRODUCTS, DESIGN AND SELL NEW PRODUCTS AND
MANAGE THE COSTS OF RESEARCH AND DEVELOPMENT IN ORDER TO EFFECTIVELY COMPETE.
We compete in markets characterized by rapid technological change, evolving
industry standards and continuous improvements in products. Due to constant
changes in these markets, our future success depends on our ability to improve
our manufacturing processes and tools and our products. For example, our
TurboDisc production systems must remain competitive on the basis of cost of
ownership and process performance. To remain competitive we must continually
introduce manufacturing tools with higher capacity and better production yields.
We have recently introduced a number of new products and, in connection
with recent joint ventures and internal development, we will be introducing
additional new products in the near future. The commercialization of new
products involves substantial expenditures in research and development,
production and marketing. We may be unable to successfully design or manufacture
these new products and may have difficulty penetrating new markets. In addition,
many of our new products are being incorporated into our customers' new products
for new applications, such as high speed computer networks.
Because it is generally not possible to predict the amount of time required
and the costs involved in achieving certain research, development and
engineering objectives, actual development costs may exceed budgeted amounts and
estimated product development schedules may be extended. Our business, financial
condition and results of operations may be materially and adversely affected if:
- we are unable to improve our existing products on a timely basis;
- our new products are not introduced on a timely basis;
- we incur budget overruns or delays in our research and development
efforts; or
- our new products experience reliability or quality problems.
FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS MAY NEGATIVELY IMPACT OUR STOCK
PRICE.
Our revenues and operating results may vary significantly from quarter to
quarter due to a number of factors particular to EMCORE and the compound
semiconductor industry. Not all of these factors are in our control. These
factors include:
- the volume and timing of orders for our products, particularly TurboDisc
systems, which have an average selling price in excess of $1 million;
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<PAGE> 11
- the timing of our announcement and introduction of new products and of
similar announcements by our competitors;
- downturns in the market for our customers' products;
- regional economic conditions, particularly in Asia where we derive a
significant portion of our revenues; and
- price volatility in the compound semiconductor industry.
These factors may cause our operating results for future periods to be
below the expectations of analysts and investors. This may cause a decline in
the price of our common stock. Please see "Management's Discussion and Analysis
of Financial Condition and Results of Operations" for detailed information on
our annual and quarterly operating results.
OUR JOINT VENTURE PARTNERS, WHO HAVE CONTROL OF THESE VENTURES, MAY MAKE
DECISIONS THAT WE DO NOT AGREE WITH AND THAT ADVERSELY AFFECT OUR NET INCOME.
Since December 1997, we have established four joint ventures (with Optek
Technology, Inc., Union Miniere, Inc., Uniroyal Technology Corporation and
General Electric Lighting). Each of our joint ventures involves the creation of
a separate company, and we do not have a majority interest in any of these
entities. Each of these joint ventures is governed by a board of managers with
representatives from both the strategic partner and us. Many fundamental
decisions must be approved by both parties to the joint venture, which means we
will be unable to direct the operation and direction of these joint ventures
without the agreement of our joint venture partners. If we are unable to agree
on important issues with a joint venture partner, the business of that joint
venture may be delayed or interrupted, which may, in turn, materially and
adversely affect our business, financial condition and results of operations.
We have devoted and we will be required to continue to devote significant
funds and technologies to our joint ventures to develop and enhance their
products. In addition, our joint ventures will require that some of our
employees devote much of their time to joint venture projects. This will place a
strain on our management, scientific, financial and sales employees. If our
joint ventures are unsuccessful in developing and marketing their products, our
business, financial condition and results of operations will be materially and
adversely affected.
General Electric Lighting and we have agreed that our joint venture will be
the sole vehicle for each party's participation in the solid state lighting
market. We and General Electric Lighting have also agreed to several limitations
during the life of the venture and thereafter relating to use that each of us
can make of the joint venture's technology. One consequence of these limitations
is that in certain circumstances, such as a material default by us, we would not
be permitted to use the joint venture's technology to compete against General
Electric Lighting in the solid state lighting market.
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SINCE A LARGE PERCENTAGE OF OUR REVENUES ARE FROM FOREIGN SALES, CERTAIN EXPORT
RISKS MAY DISPROPORTIONATELY AFFECT OUR REVENUES.
Sales to customers located outside the United States accounted for
approximately 42.5% of our revenues in fiscal 1996, 42.0% of our revenues in
fiscal 1997, 39.1% of our revenues in fiscal 1998 and 44.5% of our revenues in
the first six months of fiscal 1999. Sales to customers in Asia represent the
majority of our international sales. We believe that international sales will
continue to account for a significant percentage of our revenues. Because of
this, the following export risks may disproportionately affect our revenues:
- political and economic instability may inhibit export of our systems and
devices and limit potential customers' access to dollars;
- shipping and installation costs of our systems may increase;
- we have experienced and may continue to experience difficulties in the
timeliness of collection of foreign accounts receivable and have been
forced to write off receivables from a foreign customer;
- a strong dollar may make our systems less attractive to foreign
purchasers who may decide to postpone making the capital expenditure;
- tariffs and other barriers may make our systems and devices less cost
competitive;
- we may have difficulty in staffing and managing our international
operations;
- the laws of certain foreign countries may not adequately protect our
trade secrets and intellectual property; and
- potentially adverse tax consequences to our customers may make our
systems and devices not cost competitive.
WE WILL LOSE SALES IF WE ARE UNABLE TO OBTAIN GOVERNMENT AUTHORIZATION TO EXPORT
OUR PRODUCTS.
Exports of our products to certain destinations, such as the People's
Republic of China, Malaysia and Taiwan, may require pre-shipment authorization
from U.S. export control authorities, including the U.S. Departments of Commerce
and State. Authorization may be conditioned on end-use restrictions. On certain
occasions, we have been denied authorization, particularly with respect to the
People's Republic of China. Failure to receive these authorizations may
materially and adversely affect our revenues and in turn our business, financial
condition and results of operations from international sales. Beginning April
1999, exports of all satellites and associated components require a license from
the Department of State. This may cause delays in shipping solar cells abroad.
Delays in receiving export licenses for solar cells may materially and adversely
affect our revenues and in turn our business, financial condition and results of
operations.
THE LOSS OF SALES TO GENERAL MOTORS OR OUR OTHER LARGE CUSTOMERS WOULD BE
DIFFICULT TO REPLACE.
We derive a substantial portion of our revenues from a limited number of
customers. Sales to Hughes-Spectrolab, primarily of TurboDisc systems and solar
cells,
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accounted for approximately 23.6% of our revenues in fiscal 1996, 10.2% of our
revenues in fiscal 1997, 17.3% of our revenues in fiscal 1998, but only 3.8% of
our revenues for the first six months of fiscal 1999. We believe that, at least
in the short-term, Hughes-Spectrolab will produce most of its material
requirements in-house using TurboDisc systems purchased from us. Consequently,
we do not expect sales to Hughes-Spectrolab to continue to be significant in the
short term. General Motors, our main customer for MR sensors, accounted for
approximately 15.1% of our revenues in fiscal 1997, 12.8% of our revenues in
fiscal 1998 and 10.8% of our revenues for the first six months of fiscal 1999.
General Motors' three month strike in 1998 adversely affected our operating
performance because during that time shipments of sensors to General Motors were
halted. In addition to the lost revenues, we incurred the expense of paying
salaries to the part of our workforce dedicated to producing sensors. If General
Motors, or any of our other significant customers, stops ordering our products,
significantly reduces the volume of these orders, or cancels, delays or
reschedules any orders, and we are unable to replace these orders, our business,
financial condition and results of operations could be materially and adversely
affected. Please see "Business -- Customers" for more information on our
significant customers.
OUR PRODUCTS ARE DIFFICULT TO MANUFACTURE AND SMALL MANUFACTURING DEFECTS CAN
ADVERSELY AFFECT OUR PRODUCTION YIELDS AND OUR OPERATING RESULTS.
The manufacture of our TurboDisc systems is a highly complex and precise
process. We increasingly outsource the fabrication of certain components and
sub-assemblies of our systems, often to sole source suppliers or a limited
number of suppliers. We have experienced occasional delays in obtaining
components and subassemblies because the manufacturing process for these items
is very complex and requires long lead times. The revenues derived from sales of
our TurboDisc systems will be materially and adversely affected if we are unable
to obtain a high quality, reliable and timely supply of these components and
subassemblies. In addition, any reduction in the precision of these components
will result in sub-standard end products and will cause delays and interruptions
in our production cycle.
We manufacture all of our wafers and devices in our manufacturing
facilities and our joint venture with Uniroyal Technology Corporation plans to
manufacture HB LED wafers and package-ready devices at its facility. Minute
impurities, difficulties in the production process, defects in the layering of
the devices' constituent compounds, wafer breakage or other factors can cause a
substantial percentage of wafers and devices to be rejected or numerous devices
on each wafer to be non-functional. These factors can result in lower than
expected production yields, which would delay product shipments and may
materially and adversely affect our operating results. Because the majority of
our costs of manufacture are relatively fixed, the number of shippable devices
per wafer for a given product is critical to our financial results.
Additionally, because we manufacture all of our products at our facilities in
Somerset, New Jersey and Albuquerque, New Mexico, and our joint venture with
Uniroyal Technology Corporation will manufacture HB LED wafers and package-ready
devices at its sole facility in Tampa, Florida, any interruption in
manufacturing resulting from fire, natural disaster, equipment failures or
otherwise would materially and adversely affect our business, financial
condition and results of operations. Please see "Business -- Manufacturing" for
a more detailed description of our manufacturing processes.
12
<PAGE> 14
WE FACE LENGTHY SALES AND QUALIFICATIONS CYCLES FOR OUR PRODUCTS AND, IN MANY
CASES, MUST INVEST A SUBSTANTIAL AMOUNT OF TIME AND FUNDS BEFORE WE RECEIVE
ORDERS.
Sales of our TurboDisc systems primarily depend upon the decision of a
prospective customer to increase its manufacturing capacity, which typically
involves a significant capital commitment by the customer. Customers usually
place orders with us on average two to nine months after our initial contact
with them. We often experience delays in obtaining system sales orders while
customers evaluate and receive internal approvals for the purchase of these
systems. These delays may include the time necessary to plan, design or complete
a new or expanded compound semiconductor fabrication facility. Due to these
factors, we expend substantial funds and sales, marketing and management efforts
to sell our compound semiconductor production systems. These expenditures and
efforts may not result in sales.
In order to expand our materials production capabilities, we have dedicated
a number of our TurboDisc systems to the manufacture of wafers and devices.
Several of our products are currently being tested to determine whether they
meet customer or industry specifications. During this qualification period, we
invest significant resources and dedicate substantial production capacity to the
manufacture of these new products, prior to any commitment to purchase by the
prospective customer and without generating significant revenues from the
qualification process. If we are unable to meet these specifications or do not
receive sufficient orders to profitably use the dedicated production capacity,
our business, financial condition and results of operations would be materially
and adversely affected. Please see "Business -- Products," "Business --
Marketing and Sales" and "Business -- Competition" for more information on our
products and our marketing and sales efforts.
INDUSTRY DEMAND FOR SKILLED EMPLOYEES, PARTICULARLY SCIENTIFIC AND TECHNICAL
PERSONNEL WITH COMPOUND SEMICONDUCTOR EXPERIENCE, EXCEEDS THE NUMBER OF SKILLED
PERSONNEL AVAILABLE.
Our future success depends, in part, on our ability to attract and retain
certain key personnel, including scientific, operational and management
personnel. We anticipate that we will need to hire additional skilled personnel
to continue to expand all areas of our business. The competition for attracting
and retaining these employees, especially scientists, is intense. Because of
this intense competition for these skilled employees, we may be unable to retain
our existing personnel or attract additional qualified employees in the future.
If we are unable to retain our skilled employees and attract additional
qualified employees to keep up with our expansion, our business, financial
condition and results of operations will be materially and adversely affected.
PROTECTING OUR TRADE SECRETS IS CRITICAL TO OUR ABILITY TO EFFECTIVELY COMPETE
FOR BUSINESS.
Our success and competitive position depend on protecting our trade secrets
and other intellectual property. Our strategy is to rely more on trade secrets
than patents to protect our manufacturing and sales processes and products, but
reliance on trade secrets is only an effective business practice insofar as
trade secrets remain undisclosed and a proprietary product or process is not
reverse engineered or independently developed. We take certain measures to
protect our trade secrets, including executing non-disclosure agreements with
our employees, joint venture partners, customers and suppliers. If parties
breach these agreements or the measures we take are not properly
13
<PAGE> 15
implemented, we may not have an adequate remedy. Disclosure of our trade secrets
or reverse engineering of our proprietary products, processes or devices would
materially and adversely affect our business, financial condition and results of
operations.
Although we currently hold 11 U.S. patents, these patents do not protect
any material aspects of the current or planned commercial versions of our
systems, wafers or devices. We are actively pursuing patents on some of our
recent inventions, but these patents may not be issued. Even if these patents
are issued, they may be challenged, invalidated or circumvented. In addition,
the laws of certain other countries may not protect our intellectual property to
the same extent as U.S. laws. Please see "Business -- Intellectual Property and
Licensing" for more information regarding our trade secrets, patents and other
intellectual property.
WE MAY REQUIRE LICENSES TO CONTINUE TO MANUFACTURE AND SELL CERTAIN OF OUR
COMPOUND SEMICONDUCTOR WAFERS AND DEVICES, THE EXPENSE OF WHICH MAY ADVERSELY
AFFECT OUR RESULTS OF OPERATIONS.
We may require licenses from Rockwell International Corporation to continue
to sell our compound semiconductor wafers and devices to current customers who
do not hold licenses from Rockwell International Corporation. In addition, we
may be required to pay royalties for certain of our past sales of wafers and
devices to these customers. If we are required to pay significant royalties in
connection with these sales, our business, financial condition and results of
operations may be materially and adversely affected. The failure to obtain or
maintain these licenses on commercially reasonable terms may materially and
adversely affect our business, financial condition and results of operations.
Please see "Business -- Intellectual Property and Licensing" for more details
regarding our patents and licenses.
INTERRUPTIONS IN OUR BUSINESS AND A SIGNIFICANT LOSS OF SALES TO ASIA MAY RESULT
IF OUR PRIMARY ASIAN DISTRIBUTOR FAILS TO EFFECTIVELY MARKET AND SERVICE OUR
PRODUCTS.
We rely on a single marketing, distribution and service provider, Hakuto
Co. Ltd. to market and service many of our products in Japan, China and
Singapore. Hakuto is one of our shareholders and Hakuto's president is a member
of our Board of Directors. We have distributorship agreements with Hakuto which
expire in March 2008 and give Hakuto exclusive distribution rights for certain
of our products in Japan. Hakuto's failure to effectively market and service our
products or termination of our relationship with Hakuto would result in
significant delays or interruption in our marketing and service programs in
Asia. This would materially and adversely affect our business, financial
condition and results of operations.
YEAR 2000 PROBLEMS MAY DISRUPT OUR BUSINESS AND THE COSTS TO CORRECT THESE
PROBLEMS MAY BE MATERIAL.
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.
14
<PAGE> 16
We have made a preliminary assessment of our Year 2000 readiness. We plan
to perform a Year 2000 simulation on our software during the second and third
calendar quarter of 1999. We are also in the process of contacting certain
third-party vendors, licensors and providers of software, hardware and services
regarding their Year 2000 readiness. Following this testing and after contacting
these vendors and licensors, we will be better able to make a complete
evaluation of Year 2000 readiness, to determine what costs will be necessary to
be Year 2000 compliant and to determine whether contingency plans need to be
developed. We may discover Year 2000 compliance problems in our TurboDisc
systems that will require substantial modifications. In addition, we may
discover that third-party software or hardware incorporated into EMCORE's
TurboDisc systems will need to be revised or replaced, all of which could be
time-consuming and expensive.
Any failure on our part to fix or replace our internally developed
proprietary software or third-party software or hardware or services on a timely
basis could result in lost revenues, increased operating costs, the loss of
customers and other business interruptions. Moreover, we could be subject to
lawsuits which could be costly and time-consuming to defend. The failure of
governmental agencies, utility companies, third party service providers and
others outside of our control to be Year 2000 compliant could result in systemic
failure such as telecommunications or electrical failure, which could have a
material adverse effect on our business, results of operations and financial
condition. Please see "Management's Discussion and Analysis of Financial
Condition" for detailed information on our state of readiness, potential risks
and contingency plans regarding the Year 2000 issue.
OUR MANAGEMENT'S STOCK OWNERSHIP GIVES THEM THE POWER TO CONTROL BUSINESS
AFFAIRS AND PREVENT A TAKEOVER THAT COULD BE BENEFICIAL TO UNAFFILIATED
SHAREHOLDERS.
Certain members of our management, specifically Thomas J. Russell, Chairman
of our Board, Reuben F. Richards, President, Chief Executive Officer and a
director, and Robert Louis-Dreyfus, a director, are former members of Jesup &
Lamont Merchant Partners, L.L.C. They collectively beneficially own
approximately 45.9% of our common stock immediately prior to this offering and
will own approximately 34.1% of our common stock after the offering.
Accordingly, such persons will continue to hold sufficient voting power to
control our business and affairs for the foreseeable future. This concentration
of ownership may also have the effect of delaying, deferring or preventing a
change in control of our company, which could have a material adverse effect on
our stock price.
UNSUCCESSFUL CONTROL OF THE HAZARDOUS RAW MATERIALS USED IN OUR MANUFACTURING
PROCESS COULD RESULT IN COSTLY REMEDIATION FEES, PENALTIES OR DAMAGES UNDER
ENVIRONMENTAL AND SAFETY REGULATIONS.
The production of wafers and devices involves the use of certain hazardous
raw materials, including, but not limited to, ammonia, phosphine and arsene. If
our control systems are unsuccessful in preventing a release of these materials
into the environment or other adverse environmental conditions occur, we could
experience interruptions in our operations and incur substantial remediation and
other costs. Failure to comply with environmental and health and safety laws and
regulations may materially and adversely affect our business, financial
condition and results of operations.
15
<PAGE> 17
OUR BUSINESS OR OUR STOCK PRICE COULD BE ADVERSELY AFFECTED BY REDEMPTION OF
OUTSTANDING CONVERTIBLE PREFERRED STOCK OR ISSUANCE OF ADDITIONAL PREFERRED
STOCK.
We have 1,550,000 shares of convertible preferred stock issued and
outstanding, all of which are subject to mandatory redemption by us on November
17, 2003. If we do not have the funds available to redeem the convertible
preferred stock at that time, we will need to raise additional funds to finance
this redemption or we will be in default under the terms of the convertible
preferred stock. We may be unable to obtain adequate financing on acceptable
terms, which may adversely affect our business and financial condition.
Our board of directors is authorized to issue up to an additional 4,332,353
shares of preferred stock with such dividend rates, liquidation preferences,
voting rights, redemption and conversion terms and privileges as our board of
directors, in its sole discretion, may determine. The issuance of additional
shares of preferred stock may result in a decrease in the value or market price
of our common stock, or our board of directors could use the preferred stock to
delay or discourage hostile bids for control of us in which shareholders may
receive premiums for their common stock or to make the possible sale of the
company or the removal of our management more difficult. The issuance of
additional shares of preferred stock could adversely affect the voting and other
rights of the holders of common stock.
CERTAIN PROVISIONS OF NEW JERSEY LAW AND OUR CHARTER MAY MAKE A TAKEOVER OF OUR
COMPANY DIFFICULT EVEN IF SUCH TAKEOVER COULD BE BENEFICIAL TO SOME OF OUR
SHAREHOLDERS.
New Jersey law contains and our certificate of incorporation, as amended,
contains certain provisions that could delay or prevent a takeover attempt that
our shareholders may consider in their best interests. Our board of directors is
divided into three classes. Directors are elected to serve staggered three-year
terms and are not subject to removal except for cause by the vote of the holders
of at least 80% of our capital stock. In addition, if these amendments are
adopted, approval by the holders of 80% of our voting stock is required for
certain business combinations unless these transactions meet certain fair price
criteria and procedural requirements or are approved by two-thirds of our
continuing directors. We may in the future adopt other measures that may have
the effect of delaying or discouraging an unsolicited takeover, even if the
takeover were at a premium price or favored by a majority of unaffiliated
shareholders. Certain of these measures may be adopted without any further vote
or action by our shareholders.
FUTURE SALES BY EXISTING SHAREHOLDERS COULD DEPRESS THE MARKET PRICE OF OUR
COMMON STOCK AND MAKE IT MORE DIFFICULT FOR US TO SELL STOCK IN THE FUTURE.
If our shareholders sell substantial amounts of our common stock in the
public market following this offering, the market price of our common stock
could fall. These sales also might make it more difficult for us to sell equity
or equity-related securities in the future at a time and price that we deem
appropriate. Upon completion of this offering, we will have 13,226,014 shares of
common stock outstanding (based on the number of shares outstanding as of May 1,
1999 and assuming no exercise of outstanding options or warrants). Of these
shares, 5,600,226 shares are freely tradeable. This leaves 5,887,883 shares
eligible for sale in the public market at various times after the date of this
prospectus pursuant to Rule 144.
In addition, as of May 1, 1999, stock options to purchase 1,143,293 shares
of our common stock, warrants to purchase 1,371,262 shares of our common stock
and 1,550,000 shares of our convertible preferred stock, which are convertible
into shares of common stock on a one-for-one basis, were outstanding. In
connection with our joint
16
<PAGE> 18
venture with General Electric Lighting, we have issued General Electric common
stock purchase warrants at an exercise price of $22.875 to acquire 282,010
shares of common stock, and a $7.8 million subordinated convertible debenture
with an interest rate of 4.75% per annum due in seven years. The debenture is
convertible into 340,984 shares of common stock at a conversion price equal to
$22 7/8.
Certain shareholders, representing approximately 6,863,579 shares of our
common stock (including shares of common stock issuable upon conversion of our
convertible preferred stock, convertible debenture and warrants) have the right
to require us to register their shares. We agreed to file a shelf registration,
for the benefit of the holders of our convertible preferred stock and those
holders of up to 5,210,585 shares of common stock who choose to participate, 90
days after completion of this offering. This shelf registration will remain
effective until November 17, 2003 or such earlier time as all of the shares of
our convertible preferred stock and the common stock issued upon conversion
thereof are no longer restricted under Rule 144.
17
<PAGE> 19
USE OF PROCEEDS
The net proceeds to EMCORE from the sale of the 3,000,000 shares of common
stock being offered by EMCORE are estimated to be $54.5 million ($66.0 million
if the underwriters' over-allotment option is exercised in full), assuming a
public offering price of $19.63 per share and after deducting the underwriting
discounts and commissions and estimated offering expenses. EMCORE will not
receive any proceeds from the sale of shares of common stock by the selling
shareholders. EMCORE intends to use $27.5 million to repay outstanding bank
indebtedness to First Union National Bank under two credit facilities,
approximately $8.8 million to repay subordinated notes to an affiliate and other
investors, and the balance for general corporate purposes, including working
capital.
The two credit facilities have the following principal amounts, interest
rates, maturity dates and use of proceeds:
<TABLE>
<CAPTION>
CREDIT FACILITIES INTEREST RATE MATURITY DATE PROCEEDS USED TO:
<S> <C> <C> <C>
$10.0 million October 1, 1999 Purchase and equip a new facility in
Prime plus 50 basis points Albuquerque, New Mexico, and for
(8.25% at May 1, 1999) working capital purposes.
$19 million October 1, 1999 Purchase and equip a new facility in
($18 million Albuquerque, New Mexico, repay
outstanding) amounts advanced by Thomas Russell,
One month LIBOR plus 75 the Chairman of the Board of EMCORE,
basis points and for working capital purposes.
(5.62% at May 1, 1999)
</TABLE>
When the debt is extinguished, there will be an extraordinary charge in
1999 of approximately $1.3 million related to the early extinguishment of debt.
The subordinated notes were issued in May and September of 1996, bear
interest at 6.0% and mature on May 1, 2001. Thomas Russell holds approximately
$8.4 million of the subordinated notes that are being repaid. The balance of the
subordinated notes being repaid are held by approximately ten other
non-affiliated investors.
We may also use a portion of the net proceeds to fund acquisitions of
complementary businesses, products or technologies in the semiconductor sector.
Although we periodically review potential acquisition opportunities, we have not
reached any agreements, commitments or understanding for any future
acquisitions. Pending such uses, the net proceeds of this offering will be
invested in short-term, investment-grade, income producing investments.
We believe that the remaining net proceeds from this offering will be
sufficient to fund our anticipated capital expenditures and to provide adequate
working capital at least through July 2000. However, future events may require
EMCORE to seek additional capital which may not be available on terms acceptable
to us.
18
<PAGE> 20
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
EMCORE's common stock has traded on the Nasdaq National Market under the
symbol "EMKR" since March 6, 1997, the date of EMCORE's initial public offering.
The following table sets forth, for the periods indicated, the high and low sale
prices per share of common stock, as reported on the Nasdaq National Market:
<TABLE>
<CAPTION>
PRICE RANGE OF
COMMON STOCK
----------------
HIGH LOW
<S> <C> <C>
FISCAL YEAR ENDED SEPTEMBER 30, 1997:
Second Quarter (from March 6, 1997)....................... $12 3/4 $ 9 1/4
Third Quarter............................................. 19 1/2 11
Fourth Quarter............................................ 25 1/4 16
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 ENDING SEPTEMBER 30, 1999:
First Quarter............................................. $18 3/8 $ 7 1/4
Second Quarter............................................ 28 3/4 13 7/8
Third Quarter (through June 7, 1999)...................... 23 12 7/8
</TABLE>
The reported last sale price of the common stock on the Nasdaq National
Market on June 7, 1999 was $21 3/8 per share. As of May 1, 1999, EMCORE had
approximately 1,742 shareholders of record.
EMCORE has not declared or paid dividends on its common stock since its
formation. EMCORE currently does not intend to pay dividends on its common stock
in the foreseeable future so that it may reinvest its earnings in its business.
The shares of EMCORE's convertible preferred stock are entitled to receive
cumulative quarterly dividends at the annual rate of 2% of their liquidation
preference ($.28 per annum per share). The payment of dividends, if any, on the
common stock in the future will be at the discretion of EMCORE's board of
directors.
19
<PAGE> 21
CAPITALIZATION
The following table sets forth the capitalization of EMCORE as of March 31,
1999, and as adjusted to reflect the sale by EMCORE of 3,000,000 shares of
common stock being offered hereby (at an assumed offering price of $19.63 per
share), the conversion of 520,000 shares of convertible preferred stock into
520,000 shares of common stock and the exercise of 19,898 warrants at $4.08 per
share and 186,030 warrants at $10.20 per share into 205,928 shares of common
stock and the application of the estimated net proceeds therefrom.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
-----------------------
ACTUAL AS ADJUSTED
(IN THOUSANDS)
<S> <C> <C>
Long-term debt........................................... $ 31,003 $ --
Convertible preferred stock; 1,550,000 issued and
outstanding; as adjusted 1,030,000..................... 21,369 14,089
Shareholders' equity:
Preferred stock; 5,882,353 shares authorized; none
issued and outstanding.............................. -- --
Common stock, 23,529,411 shares authorized; 9,446,347
shares issued and outstanding; 13,226,014 shares
issued and outstanding as adjusted.................. 87,855 151,656
Notes receivable from warrant issuances and stock
sales............................................... (7,667) (7,547)
Accumulated deficit.................................... (71,221) (72,918)
-------- --------
Total shareholders' equity..................... 8,967 71,191
-------- --------
Total capitalization..................................... $ 61,339 $ 85,279
======== ========
</TABLE>
- ------------------------------
The 13,226,014 shares of common stock as adjusted for this offering
exclude:
(1) 1,372,059 shares of common stock reserved for issuance under EMCORE's
stock option plan, of which 1,078,399 shares are subject to outstanding options
at exercise prices varying from $3.03 per share to $24.75 per share;
(2) warrants to purchase 365,171 shares of common stock at an exercise
price of $4.08 per share, exercisable until May 1, 2001;
(3) warrants to purchase 1,039,460 shares of common stock at an exercise
price of $10.20 per share, exercisable until September 1, 2001;
(4) options to purchase 149,968 shares of common stock issued in connection
with EMCORE's acquisition of MODE at exercise prices ranging from $0.43 to
$0.60;
(5) warrants to purchase 47,118 shares of common stock at exercise prices
ranging from $4.32 to $5.92 per share, exercisable until September 2000;
(6) shares reserved for issuance pursuant to warrants to purchase 284,684
shares of common stock at an exercise price of $11.375 per share, exercisable
until May 1, 2001; and
(7) 282,010 common stock purchase warrants with an exercise price of
$22 7/8 and a subordinated convertible debenture that will be convertible into
340,984 shares of stock at a price of $22 7/8.
Please see Notes 11, 12, 17 and 18 of the Notes to Financial Statements
included elsewhere in this prospectus for more information.
20
<PAGE> 22
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for the six months ended
March 31, 1998 and 1999 and the five fiscal years ended September 30, 1998 of
EMCORE is qualified by reference to and should be read in conjunction with the
Financial Statements and the Notes thereto, and Management's Discussion and
Analysis of Financial Condition and Results of Operations included elsewhere in
this prospectus. The Statement of Income Data set forth below with respect to
fiscal 1996, 1997 and 1998 and the Balance Sheet Data as of September 30, 1997
and 1998 are derived from EMCORE's audited financial statements included
elsewhere in this prospectus. The Statement of Income Data for fiscal 1994 and
1995 and the Balance Sheet Data as of September 30, 1994, 1995 and 1996 are
derived from audited financial statements not included herein. The financial
data as of March 31, 1999 and for the six months ended March 31, 1998 and 1999
are derived from unaudited consolidated financial statements that, in the
opinion of EMCORE's management, reflect all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of the financial
position and results of operations for these periods. Operating results for the
six months ended March 31, 1999 are not necessarily indicative of the results
that may be expected for the entire fiscal year ending September 30, 1999.
On December 5, 1997, the Company 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, the Company recorded a
non-recurring, non-cash charge of $19.5 million for acquired in-process research
and development, which affects the comparability of the Company's operating
results and financial condition.
21
<PAGE> 23
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEARS ENDED SEPTEMBER 30, MARCH 31,
----------------------------------------------- -------------------
1994 1995 1996 1997 1998(*) 1998(*) 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................... $9,038 $18,137 $27,779 $47,753 $ 43,760 $ 26,165 $ 26,197
Cost of sales............... 5,213 9,927 18,607 30,094 24,676 13,910 15,219
------ ------- ------- ------- -------- -------- --------
Gross profit................ 3,825 8,210 9,172 17,659 19,084 12,255 10,978
Operating expenses:
Selling, general, and
administrative.......... 2,645 4,452 6,524 9,347 14,082 5,753 6,368
Goodwill amortization..... -- -- -- -- 3,638 1,442 2,197
Research and development:
Recurring............... 1,064 1,852 5,401 9,001 16,495 5,876 10,272
One-time acquired in-
process.............. -- -- -- -- 19,516 19,516 --
------ ------- ------- ------- -------- -------- --------
Total operating
expenses........... 3,709 6,304 11,925 18,348 53,731 32,587 18,837
------ ------- ------- ------- -------- -------- --------
Operating income (loss)....... 116 1,906 (2,753) (689) (34,647) (20,332) (7,859)
Stated interest expense,
net....................... 286 255 297 519 973 117 693
Imputed warrant interest
expense, non-cash......... -- -- 126 3,988 601 192 633
Equity in net loss of
unconsolidated
affiliate................. -- -- -- -- 198 -- 1,671
Other expense............... -- 10 -- -- -- -- --
------ ------- ------- ------- -------- -------- --------
Total other expense........... 286 265 423 4,507 1,772 309 2,997
(Loss) income before income
taxes....................... (170) 1,641 (3,176) (5,196) (36,419) (20,641) (10,856)
Provision for income taxes.... -- 125 -- 137 -- 20 --
------ ------- ------- ------- -------- -------- --------
(Loss) income before
extraordinary item.......... (170) 1,516 (3,176) (5,333) (36,419) (20,661) (10,856)
Extraordinary loss............ -- -- -- 286 -- -- --
------ ------- ------- ------- -------- -------- --------
Net (loss) income............. $ (170) $ 1,516 $(3,176) $(5,619) $(36,419) $(20,661) $(10,856)
====== ======= ======= ======= ======== ======== ========
PER SHARE DATA:
Weighted average shares used
in calculating diluted per
share data.................. 58 1,701 2,994 4,669 8,775 8,189 9,409
Net (loss) income per basic
and diluted shares before
extraordinary item.......... $(2.93) $ 0.89 $ (1.06) $ (1.14) $ (4.15) $ (2.52) $ (1.17)
====== ======= ======= ======= ======== ======== ========
Net (loss) income per basic
and diluted shares.......... $(2.93) $ 0.89 $ (1.06) $ (1.20) $ (4.15) $ (2.52) $ (1.17)
====== ======= ======= ======= ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, AS OF
----------------------------------------------- MARCH 31,
1994 1995 1996 1997 1998(*) 1999
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital
(deficiency).......... $ 1,041 $ 2,208 $ 1,151 $12,156 $(2,017) $ 6,663
Total assets............. 5,415 10,143 20,434 39,463 73,220 85,071
Long-term liabilities.... 3,000 3,000 8,947 7,577 26,514 32,570
Redeemable convertible
preferred stock....... 16,274 -- -- -- -- 21,369
Shareholders' (deficit)
equity................ (96) 1,509 522 21,831 19,580 8,967
- -------------------------
(*) As restated -- See Note 20 to consolidated financial statements.
</TABLE>
22
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Subsequent to the issuance of EMCORE's Annual Report on Form 10-K for the
year ended September 30, 1998, EMCORE's management revised the amount of the
purchase price which was allocated to in-process research and development in
accounting for the acquisition of MicroOptical Devices, Inc., MODE, in December
1997. The revised allocation is based upon methods prescribed in a letter from
the SEC sent to the American Institute of Certified Public Accountants. The
letter sets forth the SEC's views regarding the valuation methodology to be used
in allocating a portion of the purchase price to acquired in-process research
and development, IPR&D, at the date of acquisition.
The revised valuation is based on management's estimates of the net cash
flows associated with expected operations of MODE and gives explicit
consideration to the SEC's views on acquired IPR&D as set forth in its letter to
the American Institute of Certified Public Accountants.
As a result of the revised allocation, EMCORE's financial statements for
the year ended September 30, 1998 have been restated from amounts previously
reported to reduce the amount of the acquired in-process research and
development expensed by $9.8 million and to increase goodwill by $9.8 million.
The amount allocated to goodwill includes approximately $0.5 million related to
the value of MODE's workforce. The change had no impact on net cash flows used
by operations.
The information included in "Selected Financial Data," and in the
discussion following reflect the effects of this restatement. Refer to Note 20
to the consolidated financial statements for further discussion.
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. Prior to
fiscal 1997, EMCORE's revenues consisted primarily of the sales of compound
semiconductor production systems. In fiscal 1997, EMCORE expanded its product
offerings to include the design and high-volume production of compound
semiconductor wafers and package-ready 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 production systems.
Systems-related revenues include sales of EMCORE's TurboDisc production
systems as well as spare parts and services. The book-to-ship time period on
systems is approximately four to six months, and the average selling price is in
excess of $1.0 million. Materials revenues include wafers, devices and process
development technology. The materials sales cycle is generally shorter than for
systems and average selling prices vary significantly based on the products and
services provided. Generally, EMCORE achieves a higher gross profit on its
materials related products.
23
<PAGE> 25
EMCORE recognizes revenue upon shipment. For systems, EMCORE incurs certain
installation and warranty costs subsequent to shipment which are estimated and
accrued at the time the sale is recognized. EMCORE reserves for estimated
returns and allowances at the time of shipment. For research contracts with the
U.S. government and commercial enterprises with durations greater than six
months, EMCORE recognizes revenue to the extent of costs incurred plus a pro
rata portion of estimated gross profit as stipulated in these contracts, based
on contract performance. EMCORE's research contracts require the development or
evaluation of new materials applications and have a duration of six to 36
months. Contracts with a duration of six months or less are accounted for on the
completed contract method. A contract is considered complete when all costs have
been incurred and the research reporting requirements to the customer have been
met.
EMCORE has recently established a number of strategic relationships through
joint ventures, long-term supply agreements and an acquisition as summarized
below.
- In the last week of May 1999, EMCORE and General Electric Lighting formed
GELcore, a joint venture to develop and market white light and colored HB
LED lighting products. GELcore's long-term goal is to develop HB LED
products to replace traditional lighting. We invested $7.8 million in
GELcore upon formation of the joint venture and will second various
personnel to the joint venture to assist in the development and marketing
of its products. These personnel and the related costs will be charged to
the joint venture. In addition, GELcore will hire its own administrative
and management personnel. As such, the impact on EMCORE's operations will
be limited to the seconded employees who will continue to be managed by
EMCORE personnel.
- In May 1999, Sumitomo Electric and EMCORE entered into a long-term
agreement to jointly develop and produce certain RF materials for use in
digital wireless and cellular applications. EMCORE will manufacture these
RF materials at our Somerset, New Jersey manufacturing facility. Sumitomo
Electric will market them in Japan. Sumitomo Electric is one of the
world's leading electronics manufacturers. Shipments of these RF
materials are expected to begin in June 1999.
- In November 1998, EMCORE signed a long term purchase agreement with Space
Systems/Loral, a wholly owned subsidiary of Loral Space & Communications.
Under this agreement, which is contingent upon EMCORE's compliance with
Loral's product specification requirements, EMCORE will supply compound
semiconductor high-efficiency gallium arsenide solar cells for Loral's
satellites. EMCORE anticipates completing this qualification in June
1999. Subject to the product qualification, EMCORE received an initial
purchase order for $5.25 million of solar cells. EMCORE expects to
service this agreement through our newly completed facility in
Albuquerque, New Mexico. This facility presently employs approximately 40
people, including sales, marketing, administrative and manufacturing
personnel.
- 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 invested $600,000 in UMCore which,
together with
24
<PAGE> 26
an equal amount funded by Union Miniere, is expected to fund the
operations of UMCore through fiscal 1999. EMCORE will second various
personnel to the joint venture to assist in the development of products.
Thereafter, any additional funding will be contributed equally.
- 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.
- 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.
- 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.
- In February 1998, EMCORE and Uniroyal Technology Corporation formed
Uniroyal Optoelectronics, a joint venture to manufacture, sell and
distribute HB LED wafers and package-ready devices. This joint venture
commenced operations in July 1998. EMCORE has invested $5.5 million in
Uniroyal Optoelectronics. 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.
- To expand its technology base into the data communications and
telecommunications markets, 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. These operations are located in
Albuquerque, New Mexico and currently employ approximately 40 people
including sales, marketing, administrative and manufacturing personnel.
Because we do not have a controlling economic and voting interest in the
Uniroyal, Union Miniere, Optek and General Electric Lighting joint ventures,
EMCORE will account for these joint ventures under the equity method of
accounting and, as such, our share of profits and losses will be included below
the operating income line in our statement of operations.
EMCORE sells its products and has generated a significant portion of its
sales to customers outside the United States. In fiscal 1996, 1997, 1998 and the
first six months of fiscal 1999, international sales constituted 42.5%, 42.0%,
39.1% and 44.5%,
25
<PAGE> 27
respectively, of revenues. In fiscal 1998, the majority of EMCORE's
international sales were made to customers in Asia, particularly in Japan.
EMCORE's sales revenues from Europe have f luctuated because most of our sales
of TurboDisc systems are to a limited number of customers, who do not purchase
these 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.
The information below summarizes EMCORE's export sales by geographic area.
EMCORE's export sales to the Far East and Europe are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, ASIA EUROPE TOTAL
<S> <C> <C> <C>
1996........................................... $ 8,209,309 $3,588,066 $11,797,375
1997........................................... 14,583,981 5,478,186 20,062,167
1998........................................... 15,527,169 1,584,851 17,112,020
1999 (6 months)................................ 7,967,184 145,919 8,113,103
</TABLE>
As of March 31, 1999, EMCORE had an order backlog of $38.3 million
scheduled to be shipped through March 31, 2000. This represented an increase of
69% since September 30, 1998 which primarily relates to increased systems
bookings in Asia and an initial order for solar cells from Loral, which is
subject to product qualification. EMCORE includes in backlog only customer
purchase orders that have been accepted by EMCORE and for which shipment dates
have been assigned within the 12 months to follow and research contracts that
are in process or awarded. Wafer and device agreements extending longer than one
year in duration are included in backlog only for the ensuing 12 months. EMCORE
receives partial advance payments or irrevocable letters of credit on most
production system orders.
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<PAGE> 28
RESULTS OF OPERATIONS
The following table sets forth the statement of operations data of EMCORE
expressed as a percentage of total revenues for the fiscal years ended September
30, 1996, 1997 and 1998 and the six months ended March 31, 1998 and 1999.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SIX MONTHS
SEPTEMBER 30, ENDED MARCH 31,
--------------------------- -------------------
1996 1997 1998(*) 1998(*) 1999
<S> <C> <C> <C> <C> <C>
Revenues........................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................... 67.0 63.0 56.4 53.2 58.1
----- ----- ----- ------ -----
Gross profit.................. 33.0 37.0 43.6 46.8 41.9
Operating expenses:
Selling, general and
administrative............. 23.5 19.6 32.2 22.0 24.3
Goodwill amortization......... 8.3 5.5 8.4
Research and development......
Recurring.................. 19.4 18.8 37.7 22.4 39.2
One-time acquired
in-process............... -- -- 44.6 74.6 --
----- ----- ----- ------ -----
Operating loss.................. (9.9) (1.4) (79.2) (77.7) (30.0)
Stated interest expense, net.... 1.1 1.1 2.2 0.5 2.6
Imputed warrant interest
expense, non-cash............. 0.4 8.4 1.4 0.7 2.4
Equity in net loss of associated
companies..................... -- -- 0.4 -- 6.4
----- ----- ----- ------ -----
Loss before income taxes and
extraordinary item............ (11.4) (10.9) (83.2) (78.9) (41.4)
Provision for income taxes...... -- 0.3 -- 0.1 --
----- ----- ----- ------ -----
Net loss before
extraordinary item.... (11.4) (11.2) (83.2) (79.0) (41.4)
Extraordinary loss.............. -- (0.6) -- -- --
----- ----- ----- ------ -----
Net loss................. (11.4)% (11.8)% (83.2)% (79.0)% (41.4)%
===== ===== ===== ====== =====
</TABLE>
(*) as restated, see Note 20 to the financial statements.
COMPARISON OF SIX MONTHS ENDED MARCH 31, 1998 AND 1999
RESULTS OF OPERATIONS:
Revenues. For both the six-month periods ended March 31, 1998 and 1999,
revenues were $26.2 million. Revenues from systems-related sales and
materials-related sales were $14.4 million and $11.7 million, respectively, for
the six months ended March 31, 1998 and $20.6 million and $5.6 million,
respectively, for the six months ended March 31, 1999. As a percentage of
revenues, production systems and wafers and devices accounted for 55.2% and
44.8%, respectively, for the six months ended March 31, 1998 and 78.8% and
21.2%, respectively, for the six months ended March 31, 1999. EMCORE expects
these percentages to approach 50% in each category as its new products such as
solar cells, VCSELS and HBT's are introduced and production ramps. International
sales accounted for 43.5% of revenues for the six months ended March 31, 1998
and 44.5% of revenues for the six months ended March 31, 1999.
27
<PAGE> 29
Cost Of Sales/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 decreased 10.4% from $12.3 million for the
six months ended March 31, 1998, to $11.0 million for the six months ended March
31, 1999. The decrease was due principally to EMCORE's sale of three compound
semiconductor production systems for approximately $5.3 million to a joint
venture in which it has a 49% minority interest. EMCORE eliminated $1.2 million
of gross profit on these sales, which 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 10.7% from $5.8 million for the six months ended March 31,
1998 to $6.4 million in the six months ended March 31, 1999. As a percentage of
revenue, selling, general and administrative expenses increased from 22.0% for
the six months ended March 31, 1998 to 24.3% for the six months ended March 31,
1999. A significant portion of the increase was due to increases in sales
personnel headcount to support both domestic and foreign markets and general
headcount additions to sustain internal administrative support.
Goodwill Amortization. EMCORE recognized approximately $2.2 million of
goodwill amortization for the six months ended March 31, 1999 in connection with
the acquisition of MODE on December 5, 1997. As of March 31, 1999, EMCORE had
approximately $7.3 million of goodwill remaining, which will be fully amortized
by December 2000.
Research and Development. Research and development expenses increased
74.8% from $5.9 million in the six months ended March 31, 1998 to $10.3 million
in the six months ended March 31, 1999. As a percentage of revenue, recurring
research and development expenses increased from 22.5% for the six months ended
March 31, 1998 to 39.2% for the six months ended March 31, 1999. The increase
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 production systems, VCSELs, RF materials and
other optoelectronic devices. During the six months ended March 31, 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 an operating loss of $7.9 million for the
six months ended March 31, 1999, as compared to an operating loss of $20.3
million for the six months ended March 31, 1998. 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, offset by the elimination of $1.2 million of
gross profit in 1999 on the three compound semiconductor production systems sold
to a joint venture in which it has a 49% minority interest. In addition,
EMCORE's 1999 operating loss was impacted by increased research and development
spending, the loss generated from the
28
<PAGE> 30
operations of MODE and the startup expenses associated with the opening of
EMCORE's new Albuquerque, New Mexico facility.
Other Expense. During fiscal 1996, EMCORE issued detachable warrants along
with subordinated notes to certain of its existing shareholders. 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 these warrant accretion amounts is charged to "Imputed warrant
interest, non-cash" and equals approximately $192,000 and $633,000 for the six
months ended March 31, 1998 and March 31, 1999, respectively.
For the six months ended, March 31, 1999, stated interest expense, net
increased by $577,000 to $693,000 due to additional borrowing.
Because EMCORE does not have a controlling economic and voting interest in
the Uniroyal, Union Miniere, and General Electric Lighting joint ventures,
EMCORE accounts for these joint ventures under the equity method of accounting.
For the six months ended March 31, 1999, EMCORE incurred a net loss of $1.0
million related to the Uniroyal joint venture, a $497,000 net loss related to
the GELCore joint venture and a $141,000 net loss related to the UMCore joint
venture.
Net Loss. For the six months period March 31, 1999, EMCORE reported net
loss of $10.9 million, a decrease of 47.5% from a $20.7 million net loss for the
six months ended March 31, 1998. 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 research and development expenses and the net
loss from unconsolidated affiliates.
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30, 1997 AND 1998
Revenues. EMCORE's revenues decreased 8.4% from $47.8 million for the
fiscal year ended September 30, 1997 to $43.8 million for the fiscal year ended
September 30, 1998. The revenue decrease represented a shift in product mix
during the year. Equipment related revenues decreased approximately 22.3% while
materials related revenues increased approximately 26.5%. The decrease in
equipment revenues was primarily attributable to the financial issues in the
Asian economies as well as a general slowdown in the semiconductor equipment
market overall. While materials related revenues did experience a 26.5%
increase, the General Motors three month strike adversely affected revenue, as
shipments to General Motors were halted during the strike. Revenues relating to
TurboDisc systems were $34.1 million for the fiscal year ended September 30,
1997 and $26.5 million for the fiscal year ended September 30, 1998. Revenues
relating to wafers and devices were $13.7 million for the fiscal year ended
September 30, 1997 and $17.3 million for the fiscal year ended September 30,
1998. As a percentage of revenues, TurboDisc systems accounted for 71.4% for the
fiscal year ended September 30, 1997 and 60.5% for the fiscal year
29
<PAGE> 31
ended September 30, 1998. As a percentage of revenues, wafers and devices
accounted for 28.6% for the fiscal year ended September 30, 1997 and 39.5% 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 Sales/Gross Profit. Cost of sales includes direct material and
labor costs, allocated manufacturing and service overhead, and installation and
warranty costs. Gross profit increased from 37.0% of revenue to 43.6% of revenue
for the fiscal years ended September 30, 1997 and 1998, respectively. The gross
profit percentage increase was attributable to a shift in product mix towards
higher gross margin materials related revenues.
Selling, General and Administrative. Selling, general and administrative
expenses increased by 50.7% from $9.3 million for the year ended September 30,
1997, to $14.1 million for the year ended September 30, 1998. The increase was
largely due to sales personnel headcount increases to support both domestic and
foreign markets and general headcount additions to sustain the internal
administrative support necessary for EMCORE's expanded product lines and new
locations. During fiscal 1998, EMCORE wrote-off a $1.0 million receivable due
from an Asian customer which was deemed to be uncollectible. As a percentage of
revenue, selling, general and administrative expenses increased from 19.6% of
revenue during fiscal 1997 to 32.2% of revenue for fiscal 1998.
Goodwill Amortization. In connection with the purchase of MODE, EMCORE
recorded goodwill of $13.2 million which 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 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
30
<PAGE> 32
applications. As of the date of acquisition, MODE was engaged in the following
six significant VCSEL research and development projects:
- Gigalase -- a high speed (modulation), near-infrared single optical
laser component for serial selica fiber optic applications.
- Visilase -- a visible, red light, single optical laser component to
be used for fiber optic links and optical storage and identification.
- Gigarray -- an array of optical lasers to be used in transmission in
parallel optical interconnects.
- Microscan -- an integrated near-infrared optical laser, visible laser
and focusing element.
- Optical Laser Source Module (OLSM) -- incorporates optical lasers and
fast detector specialized circuitry and electronics.
- Optical Laser Array Source Module (OLASM) -- incorporates optical
lasers, array detection and specialized circuitry and electronics.
The value assigned to each project and the estimated time and cost to reach
technological feasibility was as follows (in $000's):
<TABLE>
<CAPTION>
GIGALASE VISILASE GIGARRAY MICROSCAN OLSM OLASM
<S> <C> <C> <C> <C> <C> <C>
Value Assigned $6,509 $2,004 $7,214 $2,691 $934 $639
Original estimated 1.5 man* 3 man 1 man 3.5 man 8 man 4 man
time to years years year years years years
complete
Original estimated $124 $249 $83 $290 $663 $332
cost to complete
Revised estimated Completed Completed Completed 3.5 man 8 man 4 man
time to 2/98 5/98 12/98 years years years
complete practical (in (not in (in
application of production) production) production)
research
Revised cost to Completed Completed Completed $314 $717 $358
complete
Estimated time Completed Completed Completed Began 10/99 11/99
development efforts 02/99
will begin
Reason for -- *** -- ** ** **
development/
commercialization/
production efforts
delay
</TABLE>
* one "man year" is defined as approximately 2,000 hours of effort (including
training, holiday, etc.) by one individual, which is an approximation of a
year of effort.
** development efforts curtailed as a result of EMCORE's redirection of its
resources.
*** commercialization and production efforts curtailed as a result of EMCORE's
redirection of its resources to other products due to market demand forces.
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. In developing EMCORE's future
estimated revenues and costs, new product introductions were expected to
commence in calendar 1998 and net cash flows were expected to commence in
calendar 1999 and 2000. In determining fair value of the acquired projects, a
risk-adjusted discount rate of 20%
31
<PAGE> 33
was utilized. EMCORE has capitalized approximately $0.5 million for MODE's
workforce, which is included in goodwill and is offset against the values
assigned in the table above.
If all of MODE's in-process projects are not successfully completed and if
management's estimated product pricing and growth rates are not achieved, EMCORE
may not realize the product, market and financial benefits expected from the
MODE acquisition.
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 year 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. As a result, EMCORE will record imputed warrant interest,
non-cash of approximately $1.3 million over the life of the credit facility.
Income Taxes. EMCORE's effective income tax rate was 0.0% in fiscal 1998,
2.6% in fiscal 1997 and 0.0% in fiscal 1996. The lower effective rate in fiscal
1998 and 1996, relative to fiscal 1997, was attributable to a federal income tax
benefit offset by net operating loss and expenses not utilized or deductible for
tax purposes.
As of September 30, 1998, EMCORE has net operating loss carryforwards for
regular tax purposes of approximately $22.0 million which expire in the years
2003 through 2013. EMCORE believes that the consummation of certain equity
transactions
32
<PAGE> 34
and a significant change in the ownership during fiscal year 1995 has
constituted a change in control under Section 382 of the Internal Revenue Code.
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 Section 382 and 383.
EMCORE believes that the acquisition of MODE and the consummation of
certain other equity transactions has constituted a change in control in fiscal
1998 under Section 382 of the Internal Revenue Code. As such, federal net
operating loss carryovers and research credit carryovers incurred subsequent to
EMCORE's fiscal 1995 change in control (as described above) will also be subject
to annual limitations under Internal Revenue Code Sections 382 and 383.
Extraordinary Item. In the fiscal year ended September 30, 1997, EMCORE
repaid $2.0 million of its outstanding subordinated notes due May 1, 2001. In
connection with this discharge of EMCORE's subordinated notes, an extraordinary
loss of $286,000 was recognized in fiscal 1997 relating to such early
extinguishment of debt.
Net Loss. Net loss increased from $5.6 million for the fiscal year ended
September 30, 1997 to $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.
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30, 1996 AND 1997
Revenues. EMCORE's revenues for fiscal 1997 increased 71.9% from $27.8
million for the fiscal year ended September 30, 1996 to $47.8 million. The
revenue increase was primarily attributable to increased demand for compound
semiconductor production systems and package-ready devices, as well as the
introduction of compound semiconductor wafer products. Revenues relating to
TurboDisc systems were $23.8 million for the fiscal year ended September 30,
1996 and $34.1 million for the fiscal year ended September 30, 1997. Revenues
relating to wafers and devices were $4.0 million for the fiscal year ended
September 30, 1996 and $13.7 million for the fiscal year ended September 30,
1997. As a percentage of revenues, TurboDisc systems accounted for 85.6% for the
fiscal year ended September 30, 1996 and 71.4% for the fiscal year ended
September 30, 1997. As a percentage of revenues, wafers and devices accounted
for 14.4% for the fiscal year ended September 30, 1996 and 28.6% for the fiscal
year ended September 30, 1997. International sales accounted for approximately
42.5% and 42.0% of revenues for the fiscal years ended September 30, 1996 and
1997, respectively.
Cost Of Sales/Gross Profit. Cost of sales includes direct material and
labor costs, allocated manufacturing and service overhead, and installation and
warranty costs. Gross profit increased from 33.0% of revenue to 37.0% of revenue
for the fiscal years ended September 30, 1996 and 1997, respectively. The gross
profit percentage increase was attributable to higher margins on wafer, device
and licensing revenues.
33
<PAGE> 35
Selling, General And Administrative. Selling, general and administrative
expenses increased by 43.3% from $6.5 million for the year ended September 30,
1996, to $9.3 million for the year ended September 30, 1997. The increase was
largely due to increases in sales personnel headcount to support both domestic
and foreign markets and general headcount additions to sustain the internal
administrative support necessary for EMCORE's increased business as well as
higher expenses attributable to increased revenues. As a percentage of revenue,
selling, general and administrative expenses decreased from 23.5% of revenue
during fiscal 1996 to 19.6% of revenue for fiscal 1997.
Research And Development. Research and development expenses increased by
66.6% from $5.4 million for the year ended September 30, 1996, to $9.0 million
for the year ended September 30, 1997. The increase was primarily attributable
to increased staffing and equipment costs necessary to enhance current products
and research and development activities related to wafers and package-ready
devices. As a percentage of revenue, research and development expenses decreased
from 19.4% of revenue during fiscal 1996 to 18.8% of revenue for fiscal 1997. To
maintain growth and market leadership in epitaxial technology, EMCORE expects to
continue to invest a significant amount of its resources in research and
development.
Operating Loss. Operating loss decreased $2.1 million from a loss of $2.8
million for the fiscal year ended September 30, 1996, to a loss of $0.7 million
for the year ended September 30, 1997. The change in operating loss was
primarily due to higher revenues generating greater overall gross profit.
Other Expense. During fiscal 1996, EMCORE issued detachable warrants along
with subordinated notes to certain of its existing shareholders. In the first
quarter of fiscal year 1997, EMCORE also issued detachable warrants in return
for the $10.0 million facility guarantee by the Chairman of the Board of EMCORE,
who provided collateral for the Facility. EMCORE subsequently assigned a value
to these detachable warrants issued using the Black-Scholes option pricing
model. EMCORE recorded the subordinated notes at a carrying value that is
subject to periodic accretions, using the interest method, and reflected the
facility's detachable warrant value as debt issuance cost. The consequent
expense of these subordinated note accretion amounts and the now terminated
facility's debt issuance cost is charged to "Imputed warrant interest,
non-cash," related to the warrant issuances in connection with the $10.0 million
facility, and amounted to approximately $126,000 and $4.0 million for the fiscal
years ended September 30, 1996 and 1997.
Borrowings totaling $8.0 million under the facility were utilized to fund
capital expenditures in connection with the build-out of EMCORE's manufacturing
facility during the six months ended March 31, 1997. The resultant interest
expense was the primary reason for the increase in "Stated interest expense" for
the year ended September 30, 1997. The outstanding $8.0 million under this
demand note facility was repaid in March 1997.
Extraordinary Item. EMCORE repaid $10.0 million of its outstanding debt
with proceeds from its initial public offering. The entire $8.0 million
outstanding of its credit facility was repaid and $2.0 million was used to repay
a portion of EMCORE's outstanding subordinated notes due May l, 2001. In
connection with this discharge of EMCORE's subordinated notes, an extraordinary
loss of $286,000 was recognized in fiscal 1997 relating to such early
extinguishment of debt.
34
<PAGE> 36
Net Loss. Net loss increased $2.4 million from $3.2 million for the fiscal
year ended September 30, 1996 to $5.6 million for the fiscal year ended
September 30, 1997. This increase was primarily attributable to the $4.0 million
of non-cash imputed warrant interest associated with certain financing
transactions.
QUARTERLY RESULTS OF OPERATIONS
The following tables present EMCORE's unaudited results of operations
expressed in dollars and as a percentage of revenues for the ten 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 prospectus. EMCORE's results from operations may vary
substantially from quarter to quarter. Accordingly, the operating results for a
quarter are not necessarily indicative of results for any subsequent quarter or
for the full year.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,* MAR. 31,* JUNE 30,*
1996 1997 1997 1997 1997 1998 1998
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues............. $ 8,591 $12,929 $14,106 $12,127 $12,357 $13,808 $ 9,074
Cost of sales........ 6,724 8,855 8,208 6,307 6,376 7,534 5,448
------- ------- ------- ------- ------- ------- -------
Gross profit......... 1,867 4,074 5,898 5,820 5,981 6,274 3,626
Operating expenses:
Selling, general and
administrative.... 2,202 1,940 2,573 2,632 3,003 2,901 4,596
Goodwill
amortization...... -- -- -- -- 343 1,099 1,098
Research and
development:
Recurring......... 2,250 1,987 2,418 2,346 2,836 2,889 5,887
One-time acquired
in process...... -- -- -- -- 19,516 -- --
------- ------- ------- ------- ------- ------- -------
Total operating
expenses............ 4,452 3,927 4,991 4,978 25,698 6,889 11,581
------- ------- ------- ------- ------- ------- -------
Operating (loss)
income.............. (2,585) 147 907 842 (19,717) (615) (7,955)
Stated interest
expense, net........ 197 249 (8) 82 70 47 211
Imputed warrant
interest,
non-cash............ 1,016 2,792 85 94 96 96 94
Equity in net loss of
unconsolidated
affiliate........... -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Total other
expense............. 1,213 3,041 77 176 166 143 305
(Loss) income before
income taxes........ (3,798) (2,894) 830 666 (19,883) (758) (8,260)
Provision for income
taxes............... -- -- -- 137 -- 20 --
------- ------- ------- ------- ------- ------- -------
(Loss) income before
extraordinary
item................ (3,798) (2,894) 830 529 (19,883) (778) (8,260)
Extraordinary loss... -- 256 -- 30 -- -- --
Net (loss) income.... $(3,798) $(3,150) $ 830 $ 499 (19,883) $ (778) $(8,260)
======= ======= ======= ======= ======= ======= =======
<CAPTION>
THREE MONTHS ENDED
---------------------------------
SEPT. 30,* DEC. 31,* MAR. 31,
1998 1998 1999
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues............. $ 8,521 $10,125 $16,072
Cost of sales........ 5,317 6,016 9,203
------- ------- -------
Gross profit......... 3,204 4,109 6,869
Operating expenses:
Selling, general and
administrative.... 3,582 3,143 3,225
Goodwill
amortization...... 1,098 1,099 1,098
Research and
development:
Recurring......... 4,883 5,924 4,348
One-time acquired
in process...... -- -- --
------- ------- -------
Total operating
expenses............ 9,563 10,166 8,671
------- ------- -------
Operating (loss)
income.............. (6,359) (6,057) (1,802)
Stated interest
expense, net........ 626 230 463
Imputed warrant
interest,
non-cash............ 315 316 317
Equity in net loss of
unconsolidated
affiliate........... 198 276 1,395
------- ------- -------
Total other
expense............. 1,139 822 2,175
(Loss) income before
income taxes........ (7,498) (6,879) (3,977)
Provision for income
taxes............... -- -- --
------- ------- -------
(Loss) income before
extraordinary
item................ (7,498) (6,879) (3,977)
Extraordinary loss... -- -- --
Net (loss) income.... $(7,498) $(6,879) $(3,977)
======= ======= =======
</TABLE>
35
<PAGE> 37
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,* MAR. 31,*
1996 1997 1997 1997 1997 1998
(AS A PERCENTAGE OF REVENUES)
<S> <C> <C> <C> <C> <C> <C>
Revenues.............. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales......... 78.3 68.5 58.2 52.0 51.6 54.6
------- ------- ------- ------- ------- -------
Gross profit.......... 21.7 31.5 41.8 48.0 48.4 45.4
Operating expenses:
Selling, general and
administrative..... 25.6 15.0 18.2 21.7 24.3 21.0
Goodwill
amortization....... -- -- -- -- 2.8 7.9
Research and
development:
Recurring.......... 26.2 15.4 17.1 19.3 23.0 20.9
One-time acquired
in process....... -- -- -- -- 157.9 --
------- ------- ------- ------- ------- -------
Total operating
expenses............. 51.8 30.4 35.3 41.0 208.0 49.8
------- ------- ------- ------- ------- -------
Operating (loss)
income............... (30.1) 1.1 6.5 7.0 (159.6) (4.4)
Stated interest
expense, net......... 2.3 1.9 (0.1) 0.7 0.6 0.3
Imputed warrant
interest, non-cash... 11.8 21.6 0.6 0.8 0.8 0.7
Equity net loss of
unconsolidated
affiliate............ -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Other expense......... 14.1 23.5 0.5 1.5 1.4 1.0
------- ------- ------- ------- ------- -------
(Loss) income before
income taxes......... (44.2) (22.4) 6.0 5.5 (161.0) (5.4)
Provision for income
taxes................ -- -- -- 1.1 -- 0.2
------- ------- ------- ------- ------- -------
(Loss) income before
extraordinary item... (44.2) (22.4) 6.0 4.4 (161.0) (5.6)
------- ------- ------- ------- ------- -------
Extraordinary loss.... -- 2.0 -- 0.2 -- --
Net (loss) income..... (44.2)% (24.4)% 6.0% 4.2% (161.0)% (5.6)%
======= ======= ======= ======= ======= =======
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------
JUNE 30,* SEPT. 30,* DEC. 31,* MAR. 31,
1998 1998 1998 1999
(AS A PERCENTAGE OF REVENUES)
<S> <C> <C> <C> <C>
Revenues.............. 100.0% 100.0% 100.0% 100.0%
Cost of sales......... 60.0 62.4 59.4 57.3
------- ------- ------- -------
Gross profit.......... 40.0 37.6 40.6 42.7
Operating expenses:
Selling, general and
administrative..... 50.7 42.0 31.0 20.1
Goodwill
amortization....... 12.1 12.9 10.9 6.8
Research and
development:
Recurring.......... 64.9 57.3 58.5 27.0
One-time acquired
in process....... -- -- -- --
------- ------- ------- -------
Total operating
expenses............. 127.7 112.2 100.4 53.9
------- ------- ------- -------
Operating (loss)
income............... (87.7) (74.6) (59.8) (11.2)
Stated interest
expense, net......... 2.3 7.3 2.3 2.9
Imputed warrant
interest, non-cash... 1.0 3.7 3.1 2.0
Equity net loss of
unconsolidated
affiliate............ -- 2.3 2.7 8.6
------- ------- ------- -------
Other expense......... 3.3 13.3 8.1 13.5
------- ------- ------- -------
(Loss) income before
income taxes......... (91.0) (87.9) (67.9) (24.7)
Provision for income
taxes................ -- -- -- --
------- ------- ------- -------
(Loss) income before
extraordinary item... (91.0) (87.9) (67.9) (24.7)
------- ------- ------- -------
Extraordinary loss.... -- -- -- --
Net (loss) income..... (91.0)% (87.9)% (67.9)% (24.7)%
======= ======= ======= =======
</TABLE>
* As restated -- see Notes 15 and 20 to consolidated financial statements.
From inception through December 31, 1996, EMCORE derived the majority of
its revenues from the sale of TurboDisc production systems. Beginning in January
1997, EMCORE expanded its product line to offer wafers and devices. Throughout
fiscal 1997 and the first half of fiscal 1998, EMCORE benefited from the
expanded product offerings. Early in fiscal 1998, the capital equipment market
experienced a downturn and bookings of TurboDisc systems decreased
substantially. The result was lower revenues for the last two quarters of fiscal
1998 and the first quarter of fiscal 1999.
Cost of sales was also affected by revenue shifts. Gross profit improved
consistently from the introduction of the new product lines through the second
quarter of fiscal 1998. Thereafter, gross profit was affected primarily by
reduced revenues and the resulting under-absorbed overhead.
Operating expenses have generally increased both in absolute dollars and as
a percentage of revenues, due to increased staffing in research and development,
sales and marketing, and general and administrative functions. The increase in
research expenditures was related to the development of systems for the
processing of gallium nitride materials used in the production of blue HB LEDs,
enhancement of production systems, and the introduction of wafers and devices,
in particular, MR sensors,
36
<PAGE> 38
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 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 decreased by $2.8 million from $4.5 million at
September 30, 1998 to $1.6 million at March 31, 1999. For the six months ended
March 31, 1999, net cash used for operations amounted to $5.9 million, primarily
due to EMCORE's net losses and an increase in accounts receivable which was
partially offset by EMCORE's non-cash depreciation and amortization charges and
an increase in advance billings.
For the six months ended March 31, 1999, net cash used for investment
activities amounted to $16.2 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
$10.4 million, as well as investments in unconsolidated affiliates of
approximately $5.8 million.
Net cash provided by financing activities for the six months ended March
31, 1999 amounted to approximately $19.2 million, primarily due to the $21.2
million of net proceeds from the private placement of preferred stock in
November 1998 and short-term related party borrowings of $5.1 million. This was
offset by debt repayments of $7.0 million on short-term related party debt.
EMCORE's Chairman has committed to provide up to $30.0 million of long-term
financing to EMCORE through July 1, 2000. This commitment terminates upon
completion of any public offering of EMCORE's common stock, subject to a minimum
offering size requirement of $40.0 million.
On January 27, 1999 EMCORE borrowed $3.0 million from its Chairman, Thomas
J. Russell. This loan bears interest at 8% per annum. On February 1, 1999,
EMCORE repaid this loan from borrowings under a new loan from First Union
National Bank. On February 1, 1999, EMCORE entered into a $5.0 million short-
term note with First Union that matures in May 1999. This note bears interest at
a rate equal to one-month LIBOR plus three quarters of one percent per annum.
37
<PAGE> 39
On April 29, 1999, EMCORE borrowed $2.5 million from its Chairman. The loan
bears interest at prime rate plus 2% per annum. On May 7, 1999, the loan was
repaid from borrowings under EMCORE's $19.0 million short-term note, as
discussed below.
On April 29, 1999, EMCORE entered into a $19.0 million short-term loan
agreement with First Union. This loan agreement represented a consolidation of
the $8.0 million loan agreement dated June 22, 1998 and $5.0 million short-term
loan agreements dated February 1, 1999, and an additional note of $6.0 million.
This new loan agreement is due and payable on October 1, 1999 and bears interest
at a rate equal to one-month LIBOR plus three-quarters of one percent per annum
(5.75% at May 14, 1999). On May 7, 1999, EMCORE used borrowings under this new
loan agreement to repay the $2.5 million short-term note from EMCORE's Chairman.
As of May 14, 1999, EMCORE had borrowed approximately $17.5 million under this
new loan agreement. This new loan agreement is guaranteed by EMCORE's Chairman
and Chief Executive Officer.
EMCORE's planned capital expenditures are expected to total approximately
$26 million during fiscal 1999, including approximately $13.4 million in
expenditures related to investments in our joint ventures. Capital spending in
1999 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
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 July
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 connection with the GELcore joint venture, EMCORE issued to General
Electric common stock purchase warrants to purchase 282,010 shares of EMCORE's
common stock at an exercise price of $22.875, which will expire in 2006. The
number of common stock purchase warrants was determined based on the market
price of EMCORE's common stock on March 31, 1999. General Electric purchased a
$7.8 million subordinated convertible debenture bearing interest at 4.75% per
annum and maturing in 2006. The debenture's interest rate is subject to
adjustment in the event EMCORE does not complete a public offering by June 30,
1999. The debenture is convertible into 340,984 shares of common stock at a
conversion price equal to $22.875. Proceeds from the debenture were used to fund
EMCORE's investment in GELcore.
In January 1999, Rockwell settled litigation which 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
38
<PAGE> 40
TurboDisc 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 March 31, 1999.
The Rockwell patent expires in January 2000 and we may require additional
licenses from Rockwell in order to continue to manufacture and sell wafers and
devices. 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.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept or recognize only two digit entries in the date code field. These
systems and software products will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and/or software used by many companies and governmental agencies may
need to be upgraded to comply with such Year 2000 requirements or risk system
failure or miscalculations causing disruptions of normal business activities.
State Of Readiness. EMCORE has made a preliminary assessment of the Year
2000 readiness of its operating financial and administrative systems, including
the hardware and software that support such systems. EMCORE's assessment plan
consists of
(1) quality assurance testing of its internally developed proprietary
software;
(2) contacting third-party vendors and licensors of material hardware,
software and services that are both directly and indirectly
related to EMCORE's business;
(3) contacting vendors of third-party systems;
(4) assessing repair or replacement requirements;
(5) implementing repair or replacement; and
(6) creating contingency plans in the event of Year 2000 failures.
Our compound semiconductor wafers and devices are date insensitive and,
therefore, do not have any Year 2000 issues associated with them. Our TurboDisc
production systems have several components that could give rise to Year 2000
compliance concerns. We have preliminarily 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, MODE and EmcoreWest facilities. All software has
been certified as Year 2000 compliant by the vendors, except our New Jersey
office's
39
<PAGE> 41
accounting software. However, the software's manufacturer has a new version of
the software that is Year 2000 compliant. We are planning this upgrade. The
upgrade will be installed and tested by June 1999.
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.
We are continuing the evaluation of the Year 2000 compliance of all our
systems and have developed an enterprise-wide database that we will use to
document these Year 2000 issues. EMCORE plans to complete its evaluation by
September 30, 1999 including Year 2000 simulation on its systems during the
second and third quarter of calendar 1999 to test systems readiness.
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.
Several known costs relating to our information technology systems are:
- Updating New Jersey's accounting system, 2 man-weeks or $4,000, and
- Reviewing software and completing Year 2000 database, 1 man-month or
$8,000.
We will be able to make a reasonable determination of the remediation costs
for Year 2000 compliance after we have completed our Year 2000 evaluation. At
present EMCORE believes that the 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, upon completion of its evaluation, EMCORE will not discover Year
2000 compliance problems in its systems that will require substantial revision.
In addition, there can be no assurance that third-party software, hardware or
services incorporated into EMCORE's material systems will not need to be revised
or replaced, all of which could be time-consuming and expensive. The failure of
EMCORE to fix or replace its internally developed proprietary software or
third-party software, hardware or services on a timely basis could result in
lost revenues, increased operating costs, the loss of customers and other
business interruptions, any of which could have a material adverse effect on
EMCORE's business, result of operations and financial condition. Moreover, the
failure to adequately address Year 2000 compliance issues in its internally
40
<PAGE> 42
developed proprietary software could result in claims of mismanagement,
misrepresentation or breach of contract and related litigation, which could be
costly and time-consuming to defend. In addition, the failure of governmental
agencies, utility companies, third-party service providers and others outside of
EMCORE's control to be Year 2000 compliant could result in systemic failure
beyond EMCORE's control such as a telecommunications or electrical failure,
which could have a material adverse effect on EMCORE's business, results of
operations and financial condition.
Contingency Plan. As discussed above, EMCORE is engaged in an ongoing Year
2000 assessment and has not yet developed any contingency plans. The results of
EMCORE's Year 2000 simulation testing and the responses received from
third-party vendors and service providers will be taken into account in
determining the nature and extent of any contingency plans.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS No. 131"), which
establishes standards for reporting information about operating segments in
annual financial statements. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS No. 131 is effective for fiscal years beginning after December 15, 1997.
EMCORE will be required to adopt this standard in its fiscal year ending
September 30, 1999. The adoption of SFAS No. 131 is not expected to have an
impact on EMCORE's results of operations, financial position or cash flows.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-l, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-
1 is effective for financial statements for years beginning after December 14,
1998. SOP 98-l provides guidance over accounting for computer software developed
or obtained for internal use including the requirement to capitalize specified
costs and amortization of such costs. EMCORE does not expect the adoption of
this standard to have a material effect on results of operations, financial
position or cash flows.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on
the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5, which is effective for
fiscal years beginning after December 15, 1998, provides guidance on the
financial reporting of start-up costs and organization costs. It requires costs
of start-up activities and organization costs to be expensed as incurred. As
EMCORE has expensed these costs historically, the adoption of this standard is
not expected to have a significant impact on EMCORE's results of operations,
financial position or cash flows.
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 is effective for
fiscal years beginning after June 15, 1999. Management believes that adopting
this statement will not have a material impact on the financial position,
results of operations, or cash flows of EMCORE.
41
<PAGE> 43
BUSINESS
EMCORE CORPORATION
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
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. EMCORE's customers
include AMP Incorporated, Hewlett Packard, General Motors, Hughes-Spectrolab,
Lucent Technologies, Inc., Siemens AG and 12 of the largest electronics
manufacturers in Japan.
INDUSTRY OVERVIEW
Recent advances in information technologies have created a growing need for
efficient, high-performance electronic systems that operate at very high
frequencies, have increased storage capacity and computational and display
capabilities, and can be produced cost-effectively in commercial volumes. In the
past, electronic systems manufacturers have relied on advances in silicon
semiconductor technology to meet many of these demands. However, the newest
generation of high-performance electronic and optoelectronic applications
require certain functions that are generally not achievable using silicon-based
components.
Compound semiconductors have emerged as an enabling technology to meet the
complex requirements of today's advanced information systems. Many compound
semiconductor materials have unique physical properties that allow electrons to
move at least four times faster than through silicon-based devices. Advantages
of compound semiconductor devices over silicon devices include:
- operation at higher speeds;
- lower power consumption;
- less noise and distortion; and
- optoelectronic properties that enable these devices to emit and detect
light.
Compound semiconductor devices can be used to perform individual functions
as discrete devices, such as 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 alpha-numeric displays. Although
compound semiconductors are more expensive to manufacture than silicon-based
devices, electronics manufacturers are increasingly integrating compound
semiconductor devices into their products in order to achieve higher performance
in applications targeted for a wide variety of markets. These include satellite
communica-
42
<PAGE> 44
tions, 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:
- rapid build-out of satellite communications systems;
- widespread deployment of fiber optic networks and the increasing use of
optical systems within these networks;
- launch of new wireless services and wireless high speed data systems;
- increasing use of infrared emitters and optical detectors in computer
systems;
- emergence of advanced consumer electronics applications, such as DVDs and
flat panel displays;
- increasing use of high-performance electronic devices in automobiles; and
- the anticipated conversion to HB LEDs from incandescent, halogen and
compact fluorescent lighting.
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The following chart summarizes the principal markets, examples of
applications for compound semiconductor devices, products incorporating these
devices and certain benefits and characteristics of these devices.
<TABLE>
<CAPTION>
REPRESENTATIVE
MARKET APPLICATIONS PRODUCTS BENEFITS/CHARACTERISTICS
<S> <C> <C> <C>
Satellite Power modules for Solar cells Radiation tolerance
communications satellites RF materials Conversion of more light
Satellite to ground to
communication power than silicon
Reduced launch costs
Increased bandwidth
- --------------------------------------------------------------------------------------------------------
Data communications High-speed fiber optic VCSEL components Increased network capacity
networks and and arrays Increased data
optical links HB LEDs transmission
(including Lasers speeds
Gigabit Ethernet, RF materials Increased bandwidth
asynchronous
transfer mode,
or ATM, and
FibreChannel networks)
- --------------------------------------------------------------------------------------------------------
Telecommunications High capacity fiber VCSEL components Increased data
optic trunk lines and arrays transmission
Lasers speeds
RF materials Increased bandwidth
- --------------------------------------------------------------------------------------------------------
Wireless Cellular telephones HB LEDs Improved display
communications Pagers RF materials visibility
PCS handsets Improved signal to noise
Direct broadcast systems performance
Lower power consumption
Increased network capacity
Reduced network congestion
Extended battery life
- --------------------------------------------------------------------------------------------------------
Consumer electronics DVDs HB LEDs Improved display
Radios VCSEL components visibility
Telephones and arrays High-speed data
Calculators Integrated circuits transmission
CD-Roms Lasers Low power
requirements
- --------------------------------------------------------------------------------------------------------
Automotive Engine sensors MR sensors Reduced weight
electronics Dashboard displays HB LEDs Lower power consumption
Indicator lights Lower emissions
Antilock brake systems
- --------------------------------------------------------------------------------------------------------
Computers and Local area networks VCSEL components Increased data
peripherals Chip-to-chip and and arrays transmission
board-to-board Transceivers speeds
optical links Increased bandwidth
- --------------------------------------------------------------------------------------------------------
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
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<PAGE> 46
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 conversion of electricity into
light.
Accordingly, the composition and properties of each layer and the control
of the layering process, or epitaxy, are fundamental to the performance of
advanced electronic and optoelectronic compound semiconductor devices. The
variation of thickness and composition of layers determines the intensity and
color of the light emitted or detected and the efficiency of power conversion.
The ability to vary the intensity, color and efficiency of light generation and
detection enables compound semiconductor devices to be used in a broad range of
advanced information systems.
Compound semiconductor device manufacturers predominantly use four methods
to deposit compound materials: molecular beam epitaxy, vapor phase epitaxy,
liquid phase epitaxy and metal organic chemical vapor deposition (MOCVD). The
use of molecular beam epitaxy technology can yield wafers having high thickness
uniformity. Compound semiconductor materials fabricated using liquid phase
epitaxy or vapor phase epitaxy technologies often have high electronic and
optical properties. However, due to the nature of the underlying processes,
these methods are not easily scaled up to high volume production, which is
necessary for the commercial viability of compound semiconductor devices. All of
the methods used to manufacture compound semiconductor devices pose technical,
training and safety challenges that are not present in the manufacture of
silicon devices. These production systems typically require expensive reactant
materials, the use of certain toxic chemicals, and tight control over numerous
manufacturing parameters. The key differences between MOCVD and the three other
methods is that compound semiconductor wafers fabricated using MOCVD generally
possess a better combination of uniformity and optical and electronic properties
and are easier to produce in high volumes than wafers manufactured by the three
more traditional methods. Currently, MOCVD technology is being used to
manufacture a broad range of compound semiconductor devices.
Historically, manufacturers who use compound semiconductor devices in their
products have met research, pilot production and capacity needs with in-house
systems and technologies. However, as the need for the production of commercial
volumes of high-performance compound semiconductor devices and the variety of
these devices grows, manufacturers are often unable to meet these requirements
using in-house solutions. In response to these growing demands for higher
volumes of a broad range of higher performance devices, manufacturers are
increasingly turning to outside vendors to meet their needs for compound
semiconductor wafers and devices.
THE EMCORE SOLUTION
EMCORE provides its customers with a broad range of compound semiconductor
products and services intended to meet its customers' diverse technology
requirements. EMCORE has developed extensive materials science expertise,
process technology and MOCVD production systems to address these needs and
believes that its proprietary TurboDisc deposition technology makes possible one
of the most cost-effective production processes for the commercial volume
manufacture of high-performance compound semiconductor wafers and devices. This
platform technology provides the
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<PAGE> 47
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:
- materials and process development;
- design and development of devices;
- MOCVD production systems; and
- manufacture of wafers and devices in high volumes.
Customers can take advantage of EMCORE's vertically integrated approach by
purchasing custom-designed wafers and devices from EMCORE or manufacturing their
own devices in-house using a TurboDisc production system configured to their
specific needs.
STRATEGY
EMCORE's objective is to capitalize on its position in MOCVD process
technology and production systems to become the leading supplier of compound
semiconductor wafers, devices and production systems. The key elements of
EMCORE's strategy include:
Apply Core Technology Across Multiple Applications. EMCORE continually
leverages its proprietary core technology to develop compound semiconductor
products for multiple applications in a variety of markets. These activities
include developing new products for targeted applications as well as expanding
existing products into new applications. For example, EMCORE's MR sensors,
currently used by General Motors as crank shaft sensors, also have other
potential product applications, including as sensors in brushless motors and
antilock brakes. Other existing products which EMCORE intends to introduce in
new applications include VCSELs for communications products and HB LEDs for
broader lighting applications.
Target High Growth Opportunities. EMCORE's strategy is to target high
growth opportunities where performance characteristics and high volume
production efficiencies can give compound semiconductors a competitive advantage
over other devices. Historically, while technologically superior, compound
semiconductors have not been widely deployed because they are more expensive to
manufacture than silicon-based semiconductors and other existing solutions.
EMCORE believes that as compound semiconductor production costs are reduced, new
customers will be compelled to use these solutions because of their higher
performance characteristics. For example, EMCORE has reduced the average cost of
compound semiconductor solar cells to the point that they are replacing
silicon-based solar cells because of the compound semiconductor solar cells'
higher overall efficiency and lower weight.
Partner with Key Industry Participants. EMCORE seeks to identify and
develop long-term relationships with leading companies in targeted industries.
EMCORE develops these relationships in a number of ways including through
long-term high-volume supply agreements, joint ventures, and distribution and
other arrangements. For example, EMCORE has agreed to enter into, subject to
certain conditions, a joint
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<PAGE> 48
venture with General Electric Lighting for the development and marketing of
white light and colored HB LED products for automotive, traffic, flat panel
display and other lighting applications, and has entered into a long term supply
agreement with AMP Incorporated for VCSELs to be used in its transceivers for
Gigabit Ethernet and other applications. EMCORE intends to actively seek similar
strategic relationships with other key customers and industry participants in
order to further expand its technological and production base.
Continue Investment to Maintain Technology Leadership. Through substantial
investment in research and development, EMCORE seeks to expand its leadership
position in compound semiconductor production systems, wafers and devices.
EMCORE works with its customers to identify specific performance criteria and
uses this information to enhance the performance of its production systems and
to further expand its process and materials science expertise, including the
development of new low cost, high-volume wafers and devices for its customers.
In addition, EMCORE's development efforts are focused on continually lowering
the production costs of its solutions. EMCORE's joint venture with Union Miniere
Inc. represents an initiative to explore means to use germanium to improve
product performance, identify new product applications and lower the cost and
complexity of production of EMCORE's wafers and devices.
PRODUCTS
PRODUCTION SYSTEMS
EMCORE is a leading supplier of MOCVD compound semiconductor production
systems, with more than 230 systems shipped as of March 31, 1999. According to
VLSI Research, Inc., in 1997 EMCORE's share of the MOCVD production systems
market was over 25%. EMCORE believes that its TurboDisc systems offer
significant ownership advantages over competing systems and that the high
throughput capabilities of its TurboDisc systems make possible superior
reproducibility of thickness, composition, electronic properties and layer
accuracy required for electronic and optoelectronic devices. Each system can be
customized for the customer's throughput, wafer size and process chemistry
requirements. EMCORE's production systems also achieve a high degree of
reliability with an average time available for production, based on customer
data, of approximately 95%.
EMCORE believes its TurboDisc systems enable the lowest cost of ownership
for the manufacture of compound semiconductor materials. The major components of
the cost of ownership include yield, throughput, direct costs and capital costs.
Yield primarily relates to material uniformity, which is a function of the
precision of the physical and chemical processes by which atomic layers are
deposited. Throughput, the volume of wafers produced per unit of time, includes
both the time required for a process cycle and the handling time between process
steps. Direct costs include consumables used in manufacturing and processing and
the clean room space required for the equipment. Capital costs include the cost
of acquisition and installation of the process equipment.
EMCORE's proprietary TurboDisc technology utilizes a unique high speed
rotating disk in a stainless steel growth chamber with integrated
vacuum-compatible loading chambers. To produce a wafer, a bare substrate, such
as gallium arsenide,
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<PAGE> 49
sapphire or germanium, is placed on a wafer carrier in the TurboDisc growth
chamber and subjected to high temperatures. Based on a predetermined formula,
metal organic gases are released into the growth chamber. These gases decompose
on the hot, rapidly spinning wafer. Semiconductor materials are then deposited
on the substrate in a highly uniform manner. The resulting wafer thus carries
one or more ultra-thin layers of compound semiconductor material such as gallium
arsenide, gallium nitride, or indium aluminum phosphide. The TurboDisc
technology not only produces uniformity of deposition across the wafer, but also
offers flexibility for diverse applications with improved material results and
increased production rates. The unique precision control of reactant gas flow in
the TurboDisc technology platform allows users to scale easily from research to
commercial volumes with substantially reduced time and effort. Upon removal from
the growth chamber, the wafer is transferred to a device processing facility for
various steps such as photolithography, etching, masking, metallization and
dicing. Upon completion of these steps, the devices are then sent for packaging
by the customer or other third parties and inclusion in the customer's product.
(Turbodisc Diagram)
Wafers are loaded on a multiple wafer platter into the growth chamber,
where they are subjected to high-temperature vacuum conditions and spun at high
speeds. Gases are then introduced into the vacuum growth chamber, and
semiconductor materials become deposited onto the substrate in a highly uniform
manner.
EMCORE offers the following family of TurboDisc systems:
<TABLE>
<CAPTION>
MODEL LIST PRICE APPLICATION
<S> <C> <C>
Explorer $350,000 -- $450,000 Research
- ---------------------------------------------------------------------------------
Discovery $600,000 -- $1,300,000 Development/Pilot Production
- ---------------------------------------------------------------------------------
Enterprise $1,300,000 -- $2,500,000 Volume Production
</TABLE>
48
<PAGE> 50
EMCORE's next generation of TurboDisc products is being designed to provide
a number of innovations including:
- new reactor design to improve efficiency;
- cassette-to-cassette wafer handling to increase automation;
- digital control system to reduce noise;
- real-time process control and data acquisition on WindowsNT platform;
- modular component design to ease outsourcing and upgrading; and
- improved temperature control.
WAFERS AND DEVICES
Since its inception, EMCORE has worked closely with its customers to design
and develop materials processes for use in production systems for its customers'
end-use applications. EMCORE has leveraged its process and materials science
knowledge base to manufacture a broad range of compound semiconductor wafers and
devices such as solar cells, HB LEDs, VCSELs, MR sensors and RF materials.
49
<PAGE> 51
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
NATURE OF
PRODUCT LINE COMPANY RELATIONSHIP APPLICATION
<S> <C> <C> <C>
Solar Cells Space Systems/Loral Long-term supply Solar panels in
agreement communications
Lockheed Martin Strategic partner satellite power
Missiles and Space systems.
Union Miniere Inc. Long-term germanium
sourcing agreement
from Union Miniere
HB LEDs General Electric GELcore joint Traffic lights
Lighting venture for the
development, Miniature lamps
marketing and
distribution of Automotive lighting
white
light and colored HB Flat panel displays
LED products
Other lighting
applications
Uniroyal Technology Uniroyal
Corporation Optoelectronics
Joint
venture for the
manufacture of HB
LED wafers and
package-ready
devices
VCSELs AMP Incorporated Strategic alliance Optical links
and (including Gigabit
long-term supply Ethernet ATM, and
agreement FibreChannel
networks)
Micro Optical Acquisition
Devices, Inc.
MR sensors Optek Technology, Emtech joint venture Antilock brake
Inc. for packaging and systems
marketing of MR
sensors Brushless motors
Engine timing
sensors
General Motors Long-term supply Cam and crank shaft
agreement sensors
Germanium research Union Miniere Inc. UMCore joint Exploring
and development venture alternative
uses for germanium
substrates
RF materials Sumitomo Electric Cooperative Digital wireless
Industries, Ltd. development and cellular
agreement applications
Long-term supply
agreement
</TABLE>
50
<PAGE> 52
Solar Cells. Compound semiconductor solar cells are used to power
satellites because they are more resistant to radiation levels in space, convert
substantially more light to power and therefore weigh less per unit of power
than silicon-based solar cells. These characteristics increase satellite life,
increase payload capacity and reduce launch costs. EMCORE is currently involved
in four solar cell projects:
- In November 1998, EMCORE signed a four-year purchase agreement with Space
Systems/Loral, a wholly owned subsidiary of Loral Space & Communications.
Under this agreement, which is contingent upon our compliance with
Loral's product specification requirements, EMCORE will supply compound
semiconductor high efficiency gallium arsenide solar cells for Loral's
satellites. EMCORE anticipates completing this qualification in June
1999. Subject to satisfactorily completing these product qualification
requirements, EMCORE has received an initial purchase order from Space
Systems/Loral.
- In August 1998, EMCORE and Union Miniere Inc., a mining and materials
company, entered into a long term supply agreement for germanium, which
EMCORE uses to fabricate solar cells. In addition to their solar cell
relationship, in November 1998, EMCORE formed UMCore, a joint venture
with Union Miniere to explore and develop alternate uses for germanium
using EMCORE's material science and production platform expertise and
Union Miniere's access to and experience with germanium. UMCore commenced
research and development operations in January 1999.
- In September 1998, EMCORE entered into an agreement with Lockheed Martin
Missiles and Space, a strategic business unit of Lockheed Martin
Corporation, to provide technical management and support of a Cooperative
Research and Development Agreement 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.
- In the summer of 1998, EMCORE received a $2.2 million contract under the
U.S. Air Force's Broad Agency Announcement Program for the development of
high-efficiency advanced solar cells.
HB LEDs. High-brightness light-emitting diodes (HB LEDs) are solid state
compound semiconductor devices that emit light. The global demand for HB LEDs is
experiencing rapid growth because LEDs have a long useful life (approximately 10
years), consume approximately 10% of the power consumed by incandescent or
halogen lighting and improve display visibility. In February 1998, EMCORE and
Uniroyal Technology Corporation formed Uniroyal Optoelectronics, a joint venture
to manufacture, sell and distribute HB LED wafers and package-ready devices.
In 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
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<PAGE> 53
and extensive marketing and distribution capabilities. GELcore's long-term goal
is to develop products to replace traditional lighting.
VCSELs. 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:
- greater control over beam size and wavelength;
- reduced manufacturing complexity and packaging costs;
- lower power consumption; and
- higher frequency performance.
In December 1997, EMCORE acquired 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 Incorporated to provide VCSELs for a family of optical
transceivers for the Gigabit Ethernet, FibreChannel and ATM markets. In December
1998, EMCORE announced its second VCSEL product, Gigarray, a micro-optical laser
array.
MR Sensors. 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 March 31, 1999 EMCORE has
delivered over five million devices to General Motors Powertrain for crank and
cam speed and position sensing applications for three engine builds.
In October 1998, EMCORE formed Emtech, a joint venture with Optek
Technology, Inc., a packager and distributor of optoelectronic devices, to
market an expanded line of MR sensors to the automotive and related industries.
This joint venture seeks to combine EMCORE's strength in producing devices with
Optek's strength in packaging and distributing devices to offer off-the-shelf
products and expand market penetration.
RF materials. Radio frequency materials are compound semiconductor
materials which 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, Sumitomo Electric and EMCORE announced a long-term agreement
to jointly develop and produce certain RF materials for use in digital
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<PAGE> 54
wireless and cellular applications. EMCORE will manufacture these RF materials
at our Somerset, New Jersey manufacturing facility and Sumitomo Electric will
market them in Japan. Sumitomo Electric is one of the world's leading
electronics manufacturers. Shipments of sample volumes of materials commenced in
June 1999.
CUSTOMERS
EMCORE's customers include many of the largest semiconductor,
telecommunications, consumer goods and computer manufacturing companies in the
world. Sales to Hughes-Spectrolab accounted for 17.3% of EMCORE's revenues in
fiscal 1998 and 3.8% of EMCORE's revenues in the first six months of 1999. Sales
to General Motors accounted for 12.8% of EMCORE's revenues in fiscal 1998 and
10.8% of EMCORE's revenues in the first six months of 1999. A number of EMCORE's
customers are listed below. In addition, EMCORE has sold its products to 12 of
the largest electronics manufacturers in Japan.
AMP Incorporated
The Boeing Company
General Motors
Hewlett Packard
Honeywell
Hughes-Spectrolab
Hyundai Electronics
IBM
LG Semiconductor
L.M. Ericsson AB
Lucent Technologies
Motorola
Northrop Grumman
Philips AG
Polaroid
Rockwell International
Samsung
Sharp U.S.A.
Siemens AG
Texas Instruments
Thomson CSF
Westinghouse Electric
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
March 31, 1999, EMCORE employed 27 field service engineers who install EMCORE
systems and provide on-site support.
MARKETING AND SALES
EMCORE markets and sells its wafers, devices and systems through its direct
sales force in Europe, North America and Taiwan and through representatives and
distributors elsewhere in Asia. To market and service its products in China,
Japan and Singapore, EMCORE relies on a single marketing, distribution and
service provider, Hakuto. EMCORE's agreements with Hakuto have a term of 10
years, expiring March 2008. Hakuto has exclusive distribution rights for certain
of EMCORE's products in Japan. Hakuto has marketed and serviced EMCORE's
products since 1988, is a minority shareholder in EMCORE, and the President of
Hakuto is a member of EMCORE's board of directors. EMCORE recently opened sales
offices in Taiwan and California in order to be closer to its customers. As of
March 31, 1999, EMCORE employed 26 persons in sales and marketing.
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<PAGE> 55
EMCORE's sales and marketing staff, senior management and technical staff
work closely with existing and potential customers to provide compound
semiconductor solutions for its customers' needs. The sales process begins by
understanding the customer's requirements and then attempting to match these
requirements with the optimal solution. EMCORE seeks to match the customer's
requirements to an existing design or a modification of a standard design, such
as a change in platform or process design. When necessary, EMCORE will work with
the customer to develop the appropriate design process and to configure and
manufacture the production system to meet the customer's needs. Also, EMCORE
will produce samples to demonstrate conformance to the customer's
specifications. For production systems, the amount of time from the initial
contact with the customer to the customer's placement of an order is typically
two to nine months or longer. EMCORE's sales cycle for wafers and devices
usually runs three to nine months, during which time EMCORE develops the formula
of materials necessary to meet the customer's specifications and qualifies the
materials, which may also require the delivery of samples. EMCORE believes that
the high level of marketing, management and engineering support involved in this
process is beneficial in developing competitive differentiation and long-term
relationships with its customers.
The following chart contains a breakdown of EMCORE's worldwide revenues and
percentages by geographic region. Historically, EMCORE has received all payments
for products and services in U.S. dollars.
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEARS ENDED SEPTEMBER 30, ENDED
----------------------------------------------- MARCH 31,
1996 1997 1998 1999
------------- ------------- ------------- -------------
REGION ($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
United States........ $16.0 57.6% $27.7 57.9% $26.7 61.0% $18.1 69.1%
Asia................. 8.2 29.5 14.6 30.6 15.5 35.4 8.0 30.5
Europe............... 3.6 12.9 5.5 11.5 1.6 3.6 0.1 0.4
----- ----- ----- ----- ----- ----- ----- -----
Total.............. $27.8 100.0% $47.8 100.0% $43.8 100.0% $26.2 100.0%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
SERVICE AND SUPPORT
EMCORE maintains a worldwide service and support network responsible for
on-site maintenance and process monitoring on either a contractual or
time-and-materials basis. Customers may purchase annual service contracts under
which EMCORE is required to maintain an inventory of replacement parts and to
service the equipment upon the request of the customer. EMCORE also sells
replacement parts from inventory for customer needs. EMCORE pursues a program of
system upgrades for customers to increase the performance of older systems.
EMCORE generally does not offer extended payment terms to its customers and
generally adheres to a warranty policy of one year. Consistent with industry
practice, EMCORE maintains an inventory of components for servicing systems in
the field and it believes that its inventory is sufficient to satisfy
foreseeable short-term customer requirements. EMCORE recently opened a warehouse
depot in Taiwan to provide improved service to its Asian customers.
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<PAGE> 56
RESEARCH AND DEVELOPMENT
To maintain and improve its competitive position, EMCORE's research and
development efforts are focused on designing new proprietary processes and
products, improving the performance of existing systems, wafers and devices and
reducing costs in the product manufacturing process. EMCORE has dedicated 16
TurboDisc systems for both research and production which are capable of
processing virtually all compound semiconductor materials. The research and
development staff utilizes x-ray, optical and electrical characterization
equipment which provide instant data allowing for shortened development cycles
and rapid customer response. EMCORE's recurring research and development
expenses were approximately $10.3 million in the first six months of fiscal
1999, $16.5 million in fiscal 1998, $9.0 million in fiscal 1997 and $5.4 million
in fiscal 1996. EMCORE also incurred a one-time, non-cash research and
development expense in fiscal 1998 in the amount of $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 March 31, 1999, EMCORE
employed 50 persons in research and development, 14 of whom held Ph.D.s in
materials science or related fields.
EMCORE also competes for research and development funds. In view of the
high cost of development, EMCORE solicits research contracts that provide
opportunities to enhance its core technology base or promote the
commercialization of targeted products. EMCORE presently has three contracts
under the Small Business Innovative Research programs or similar government
sponsored programs. From inception until March 31, 1999, government and other
external research contracts have provided approximately $13.3 million to support
EMCORE's research and development efforts. EMCORE is also positioned to market
technology and process development expertise directly to customers who require
it for their own product development efforts.
INTELLECTUAL PROPERTY AND LICENSING
EMCORE's success and competitive position both for production systems and
wafers and devices depend significantly on its ability to maintain trade secrets
and other intellectual property protections. Our strategy is to rely more on
trade secrets than patents. A "trade secret" is information that has value to
the extent it is not generally known, not readily ascertainable by others
through legitimate means, and protected in a way that maintains its secrecy.
Reliance on trade secrets is only an effective business practice insofar as
trade secrets remain undisclosed and a proprietary product or process is not
reverse engineered or independently developed. In order to protect its trade
secrets, EMCORE takes certain measures to ensure their secrecy, such as
executing non-disclosure agreements with its employees, joint venture partners,
customers and suppliers.
To date, EMCORE has been issued 11 U.S. patents and others are either
pending or under review. These U.S. patents will expire between 2005 and 2013.
None of these U.S. patents claim any material aspect of the current or planned
commercial versions of EMCORE's systems, wafers or devices. EMCORE relies on
trade secrets rather than patents to protect its intellectual property because
it believes publishing patents would make it easier for others to reverse
engineer EMCORE's proprietary processes.
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<PAGE> 57
EMCORE is a licensee of certain VCSEL technology and associated patent
rights owned by Sandia Corporation. The Sandia license grants EMCORE:
- 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;
- nonexclusive rights with respect to all other applications of these
patents; and
- 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 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 March 31, 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. 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
operations. EMCORE has retained an environmental consultant to advise it in
complying with applicable environmental and health and safety laws and
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<PAGE> 58
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 March 31, 1999, EMCORE had an order backlog of $38.3 million,
scheduled to be shipped through March 31, 2000. This represented an increase of
69% since September 30, 1998. This increase primarily relates to increased
production systems bookings in Asia and an initial order for solar cells from
Loral, which is subject to product qualification. EMCORE includes in backlog
only customer purchase orders that have been accepted by EMCORE and for which
shipment dates have been assigned within the 12 months to follow and research
contracts that are in process or awarded. Wafer and device agreements extending
longer than one year in duration are included in backlog only for the ensuing 12
months. EMCORE receives partial advance payments or irrevocable letters of
credit on most production system orders. 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 March 31, 1998, EMCORE had 158
employees involved in manufacturing. EMCORE fabricates wafers and devices at its
facilities in Somerset, New Jersey and Albuquerque, New Mexico and has a
combined clean room area totaling approximately 12,000 square feet. EMCORE's
joint venture with Uniroyal Technology Corporation expects to begin
manufacturing HB LED wafers and package-ready devices at its Tampa, Florida
manufacturing facility by summer of 1999. In May 1998, EMCORE received ISO 9001
and QS 9002 quality certification for its Somerset, New Jersey facility. EMCORE
is pursuing ISO 9001 quality certification for its Albuquerque, New Mexico
facilities.
Outside contractors and suppliers are used to supply raw materials and
standard components and to assemble portions of end systems from EMCORE
specifications. EMCORE depends on sole, or a limited number of, suppliers of
components and raw materials. EMCORE generally purchases these single or limited
source products through standard purchase orders. EMCORE also seeks to maintain
ongoing communications with its suppliers to guard against interruptions in
supply and has, to date, generally been able to obtain sufficient supplies in a
timely manner and maintains inventories it believes are sufficient to meet its
near term needs. EMCORE implemented a vendor program through which it inspects
quality and reviews suppliers and prices in order to standardize purchasing
efficiencies and design requirements to maintain as low a cost of sales as
possible. However, operating results could be materially and adversely affected
by a stoppage or delay of supply, receipt of defective
57
<PAGE> 59
parts or contaminated materials, and increase in the pricing of such parts or
EMCORE's inability to obtain reduced pricing from its suppliers in response to
competitive pressures.
COMPETITION
The markets in which EMCORE competes are highly competitive. EMCORE
competes with several companies for sales of MOCVD systems including Aixtron
GmbH, Nippon-Sanso K.K. and Thomas Swann Ltd. The primary competitors for
EMCORE's wafer foundry include Epitaxial Products Inc., Kopin Corporation and
Quantum Epitaxial Designs, Inc. EMCORE's principal competitors for sales of
VCSEL-related products include Honeywell, Inc. and Mitel Corporation. The
principal competitors for MR sensors are Honeywell, Inc., Matshushita Electric
Industrial Co. Ltd., Siemens AG and Asahi. The principal competitors for HB LEDs
and EMCORE's joint venture with Uniroyal Technology Corporation and the pending
joint venture with General Electric Lighting include the Phillips Electronics
and Hewlett Packard Company joint venture, Siemens AG's Osram GmbH subsidiary,
Nichia Chemical Industries and Toshiba Corporation. EMCORE also faces
competition from manufacturers that implement in-house systems for their own
use. In addition, EMCORE competes with many research institutions and
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 March 31, 1999, EMCORE had 326 full-time employees. None of EMCORE's
employees is covered by a collective bargaining agreement. EMCORE considers its
relationship with its employees to be good.
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<PAGE> 60
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, New Headquarters, 75,900 Lease expires in 2000(1)
Jersey manufacturing of
systems, wafers and
MR sensors
- ---------------------------------------------------------------------------------------
Albuquerque, New Manufacturing of 50,000(2) Owned
Mexico solar cells
- ---------------------------------------------------------------------------------------
Albuquerque, New Manufacturing of 27,500 Leases expire in 1999(1)
Mexico VCSELs and 2001(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.
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.
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<PAGE> 61
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
EMCORE's executive officers and directors and their ages and positions are
as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Thomas J. Russell, Ph.D(1)(2)....... 67 Chairman of the Board
Reuben F. Richards, Jr.(2).......... 43 President, Chief Executive Officer
and Director
Thomas G. Werthan................... 42 Vice President--Finance, Chief
Financial Officer, Secretary, and
Director
Richard A. Stall(2)................. 42 Vice President--Technology, Chief
Technical Officer and Director
William J. Kroll.................... 54 Executive Vice President--Strategic
Planning
Paul Rotella........................ 44 Vice President
Louis A. Koszi...................... 54 Vice President
Thomas M. Brennan................... 45 Vice President
Robert P. Bryan..................... 33 Vice President
Craig W. Farley..................... 39 Vice President
David D. Hess....................... 37 Corporate Controller
Robert Louis-Dreyfus................ 52 Director
Hugh H. Fenwick(1)(3)............... 62 Director
Shigeo Takayama(3).................. 82 Director
Charles T. Scott(1)(3).............. 49 Director
John J. Hogan, Jr................... 54 Director
</TABLE>
- ------------------------------
(1) Member of Compensation Committee
(2) Member of Nominating Committee
(3) Member of Audit Committee
Thomas J. Russell, Ph.D. has been a director of EMCORE since May 1995 and
was elected Chairman of the Board in December 1996. Dr. Russell founded
Bio/Dynamics, Inc. in 1961 and managed the company until its acquisition by IMS
International in 1973, following which he served as President of that company's
Life Sciences Division. From 1984 until 1988, he served as Director, then as
Chairman of IMS International until its acquisition by Dun & Bradstreet in 1988.
From 1988 to 1992, he served as Chairman of Applied Biosciences, Inc. Since
1992, he has been an investor and director of several companies. Dr. Russell
currently serves as a director of Cordiant plc and Adidas AG. Dr. Russell is one
of three trustees of the AER 1997 Trust, and he was Chairman and a member of
Jesup & Lamont Merchant Partners, L.L.C. (JLMP).
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<PAGE> 62
Reuben F. Richards, Jr. joined EMCORE in October 1995 as its President and
Chief Operating Officer and became Chief Executive Officer in December 1996. Mr.
Richards has been a director of EMCORE since May 1995. From September 1994 to
December 1996, Mr. Richards was a Senior Managing Director of Jesup & Lamont
Capital Markets Inc. (JLCM), an affiliate of a registered broker-dealer. From
December 1994 to 1997, he was a member of and President of JLMP. From 1992 until
1994, Mr. Richards was a principal with Hauser, Richards & Co., a firm engaged
in corporate restructuring and management turnarounds. From 1986 until 1992, Mr.
Richards was a Director at Prudential-Bache Capital Funding in its Investment
Banking Division. Mr. Richards is on the management boards of Emtech, Uniroyal
Optoelectronics and GELcore.
Thomas G. Werthan joined EMCORE in 1992 as its Chief Financial Officer,
Vice President--Finance, Secretary and a director. Mr. Werthan is a Certified
Public Accountant and has over sixteen years experience in assisting high
technology, venture capital financed growth companies. Prior to joining EMCORE
in 1992, he was associated with The Russell Group, a venture capital
partnership, as Chief Financial Officer for several portfolio companies. The
Russell Group is affiliated with Thomas J. Russell, who was a member of and
Chairman of JLMP and is Chairman of the board of directors of EMCORE. From 1985
to 1989, Mr. Werthan served as Chief Operating Officer and Chief Financial
Officer for Audio Visual Labs, Inc., a manufacturer of multimedia and computer
graphics equipment.
Richard A. Stall, Ph.D became a director of EMCORE in December 1996. Dr.
Stall helped found EMCORE in 1984 and has been Vice President--Technology at
EMCORE since October 1984, except for a sabbatical year in 1993 during which Dr.
Stall acted as a consultant to EMCORE and his position was left unfilled. Prior
to 1984, Dr. Stall was a member of the technical staff of AT&T Bell Laboratories
and was responsible for the development of molecular beam expitaxy technologies.
He has co-authored more than 75 papers and holds four patents on MBE and MOCVD
technology and the characterization of compound semiconductor materials.
William J. Kroll joined EMCORE in 1994 as Vice President--Business
Development and in 1998 became Executive Vice President -- Strategic Planning.
Prior to 1994, Mr. Kroll served for seven years as Senior Vice President of
Sales and Marketing for Matheson Gas Products, Inc., a manufacturer and
distributor of specialty gases and gas control and handling equipment. In that
position, Mr. Kroll was responsible for $100 million in sales and 700 employees
worldwide. Prior to working at Matheson Gas Products, Mr. Kroll was Vice
President of Marketing for Machine Technology, Inc., a manufacturer of
semiconductor equipment for photoresistor applications, plasma strip, and
related equipment.
Paul Rotella joined EMCORE in 1996 as Director of Manufacturing and has
served as Vice President of TurboDisc Manufacturing since October 1997. Prior to
1996, Mr. Rotella served for three years as worldwide Manufacturing Operations
Manager for Datacolor International, a manufacturer of color measurement and
control instrumentation. Prior to working at Datacolor International, Mr.
Rotella spent 18 years with AlliedSignal Inc., where he held various positions
including Manufacturing Engineer, Manufacturing Engineering Manager and Program
Manager of Quality Improvement Systems.
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<PAGE> 63
Louis A. Koszi joined EMCORE in 1995 as Vice President--Device
Manufacturing and is presently on a 2 year assignment as Chief Operating Officer
of Uniroyal Optoelectronics, LLC the Company's joint venture with Uniroyal
Technology, Inc. Prior to 1995, Mr. Koszi was a member of AT&T Bell Laboratories
for 25 years. Mr. Koszi has experience in all phases of semiconductor device
design and manufacturing processes and associated quality programs. Mr. Koszi
holds 17 U.S. patents, five foreign patents, and is a co-author of 35
publications. He was named a Distinguished Member of Technical Staff in 1989. In
1992, he was presented with the Excellence in Engineering from the Optical
Society of America.
Thomas M. Brennan joined EMCORE as a result of EMCORE's acquisition of MODE
in December 1997 and now serves as a Vice President of EMCORE. Prior to
co-founding MODE, Mr. Brennan was a senior member of the technical staff at
Sandia National Laboratories from 1986 to 1996. At Sandia, he focused his
efforts on the material growth of III-V compound semiconductors, reactor design,
in-situ reactor diagnostics, and material characterization. His responsibilities
and activities included growth of some of the first VCSEL material at Sandia and
in the U.S., and development of new and unique manufacturing techniques for
VCSEL material growth. Prior to joining Sandia, Mr. Brennan was a member of the
technical staff at AT&T Bell Laboratories from 1980 to 1984. At both facilities,
he focused his efforts on expitaxial materials growth and characterization and
expitaxial reactor design.
Robert P. Bryan joined EMCORE as a Vice President as a result of EMCORE's
acquisition of MODE in December 1997. Prior to co-founding MODE in 1995, he was
a co-founder of Vixel Corporation in 1992, a company that develops and
manufactures VCSEL devices for data links. At Vixel, he was the executive in
charge of optoelectronic product development, including all engineering
management. From 1990 to 1992, he was a senior member of the technical staff at
Sandia National Laboratories where his research focused on the areas of VCSEL
design, fabrication and characterization.
Craig W. Farley joined EMCORE in June 1998 as Vice President--Wafer
Manufacturing and is presently Vice President of Electronic Materials which
includes responsibility for antimonide sensors, RF materials, optoelectronic
devices, and EMCORE's Research and Applications laboratory. Dr. Farley has
experience in all phases of compound semiconductor device design and
manufacturing. Prior to joining EMCORE, he spent 11 years at Rockwell
International Corporation where he served as a member of the technical staff at
Rockwell's Science Center from 1987 to 1994 and as Manager of Advanced Device
Technology for Rockwell's Gallium Arsenide Manufacturing facility from 1994 to
1998.
David D. Hess joined EMCORE in 1989 as General Accounting Manager. He was
named Corporate Controller in 1990. Mr. Hess is a Certified Public Accountant
and has more than fifteen years experience in monitoring and controlling all
phases of product and process cost and general accounting systems. Prior to his
employment at EMCORE, he held several positions as cost accounting manager,
divisional accountant and inventory control supervisor in manufacturing firms
such as Emerson Quiet Kool (air conditioner manufacturers), Huls North America
(paint/solvent processors), and Brintec Corporation (screw machine part
manufacturers).
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<PAGE> 64
Robert Louis-Dreyfus has been a director of EMCORE since March 1997. Mr.
Louis-Dreyfus has been the Chairman of the Board and Chief Executive Officer of
Adidas AG since April 1993. Prior to that time, he had been from 1990 until 1993
the Chief Executive Officer of Saatchi & Saatchi plc (now Cordiant plc) and a
Director of Saatchi & Saatchi plc from January 1990 until December 1994. Since
1992, he has been an investor and a Director of several other companies. From
1982 until 1988, he served as Chief Operating Officer (1982 to 1983) and then as
Chief Executive Officer (from 1984 to 1988) of IMS International until its
acquisition by Dun & Bradstreet in 1988. Mr. Louis-Dreyfus controls Gallium
Enterprises Inc., and he was a member of JLMP.
Hugh H. Fenwick served as a director of EMCORE from 1990 until 1995, and
was again elected to serve on EMCORE's board of directors in June 1997. Since
1992, Mr. Fenwick has been a private investor and he currently holds the office
of Mayor of Bernardsville, New Jersey, to which he was elected in 1994. From
1990 until 1992, Mr. Fenwick was the Executive Director of the Alliance for
Technology Management at the Stevens Institute in Hoboken, New Jersey. Prior to
that time, Mr. Fenwick worked as a marketing executive with Lockheed Electronics
and with Alenia (formerly Selenia), an Italian subsidiary of Raytheon.
Shigeo Takayama became a director of EMCORE in July 1997. Mr. Takayama is
the Chairman, President and founder of Hakuto, EMCORE's distributor of EMCORE's
products in Japan, China and Singapore. Mr. Takayama is a Director Emeritus of
Semiconductor Equipment & Material International (SEMI), Chairman of the Japan
Electronics Products Importers Association (JEPIA), and Director of the Japan
Machinery Importers' Association (JMIA). Mr. Takayama is also a director of
Temptronic Corp., a semiconductor test equipment manufacturer in Newton,
Massachusetts, and of Anatel Corp., a TOC high-purity water monitor manufacturer
in Boulder, Colorado.
Charles T. Scott became a director of EMCORE in February 1998. Mr. Scott is
presently Chairman of Cordiant Communications Group plc, the successor
corporation of the Saatchi & Saatchi Advertising Group. He joined Saatchi &
Saatchi Company in 1990 and served as Chief Financial Officer until 1992 when he
was appointed Chief Operating Officer. In 1993, he became Chief Executive
Officer and held that position until 1996 when he assumed the title of Chairman.
John J. Hogan, Jr. became a director of EMCORE in February 1999. Mr. Hogan
has been President of a private investment management company since October
1997. Prior to that time, he had been with the law firm of Dewey Ballentine
since 1969. He also serves as a director of several other corporations and is a
former executive officer and/or director of various subsidiaries of S.A. Louis
Dreyfus en Cie.
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<PAGE> 65
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In the last week of May 1999, EMCORE and General Electric Lighting formed a
joint venture to develop and market HB LED lighting products. In connection with
consummation of this joint venture, EMCORE issued to General Electric warrants
to purchase 282,010 shares of EMCORE common stock, which will expire in 2006 and
have an exercise price of $22.875. In addition, General Electric purchased a
$7.8 million subordinated convertible debenture bearing interest at 4.75% per
annum and maturing in 2006. The debenture is convertible into 340,984 shares of
common stock at General Electric's option.
On April 29, 1999, EMCORE borrowed $2.5 million from its Chairman at an
interest rate of prime plus two percent. On May 7, 1999, EMCORE repaid the loan
from borrowings from First Union.
In January 1999, EMCORE's Chairman advanced $3.0 million to EMCORE. These
funds were repaid with borrowings under a new $5.0 million credit facility with
First Union National Bank. The Chairman has also committed to provide up to
$30.0 million of long-term financing to EMCORE through July 1, 2000. This
commitment terminates upon completion of this offering, subject to a minimum
offering size requirement of $40.0 million.
On November 30, 1998, EMCORE completed a private placement of an aggregate
of 1,550,000 shares of Series I Preferred Stock to Hakuto, Union Miniere Inc.
and Uniroyal Technology Corporation. The net proceeds to EMCORE from the private
placement were approximately $21.2 million which has been used (1) to repay $8.5
million of debt, plus interest, to EMCORE's Chairman of the Board, Dr. Thomas
Russell, (2) to fund EMCORE's $5.0 million portion of a joint venture between
EMCORE and Uniroyal Technology Corporation to develop and manufacture HB LEDs
and (3) to fund EMCORE's $600,000 portion of its joint venture with Union
Miniere Inc. The remaining net proceeds from the private placement of
convertible preferred stock were used to acquire capital equipment for EMCORE's
new Albuquerque, New Mexico manufacturing facility and for working capital
purposes.
In September and October 1998, EMCORE borrowed an aggregate of $8.5 million
from its Chairman, Thomas J. Russell. The loan bears interest at 9.75% per
annum. The entire $8.5 million borrowed from Mr. Russell was repaid from the
proceeds of the private placement of preferred stock.
On June 22, 1998, EMCORE entered into the 1998 Agreement with First Union
National Bank. The 1998 Agreement was guaranteed by the Chairman and the Chief
Executive Officer of EMCORE. In return for guaranteeing the facility, EMCORE
granted the Chairman and the Chief Executive Officer an aggregate of 284,684
common stock purchase warrants at an exercise price of $11.375 per share which
expire May 1, 2001. These warrants are callable at EMCORE's option at $0.85 per
warrant if EMCORE's common stock has traded at or above 150% of the exercise
price for a period of 30 days. The warrant exercise price was equal to the
market price of the Company's common stock on the date of grant. An accounting
value of $1.3 million was assigned to these warrants based upon the EMCORE's
application of the Black-Scholes option pricing model.
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<PAGE> 66
The President of Hakuto Co., Ltd., EMCORE's Asian distributor, is a member
of EMCORE's board of directors and Hakuto Co., Ltd. is a minority shareholder of
EMCORE. During the year ended September 30, 1998, sales made through Hakuto Co.,
Ltd. approximated $9.2 million.
In February 1998, EMCORE and Uniroyal Technology Corporation formed
Uniroyal Optoelectronics, a joint venture to produce and market compound
semiconductor products. EMCORE has a non-controlling minority interest in the
joint venture. During the first six months of fiscal 1999, EMCORE sold three
TurboDisc systems to the joint venture for a total of $5.3 million. As of March
31, 1999, EMCORE's investment in this venture amounted to $4.3 million.
In fiscal 1997, EMCORE signed a non-exclusive and non-refundable technology
licensing and royalty agreement with Uniroyal Technology Corporation for the
process technology to develop and manufacture HB LEDs. During fiscal 1998 and
1997, revenue associated with the Uniroyal Technology Corporation licensing
agreement amounted to $2.5 million and $2.5 million, respectively. At the time
the transaction was originally entered into, Uniroyal Technology Corporation's
Chairman and Chief Executive Officer was a member of EMCORE's board of directors
and EMCORE's Chairman was on the Board of Directors of Uniroyal Technology
Corporation.
All related party transactions were approved by a majority of the
disinterested members of EMCORE's board of directors.
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<PAGE> 67
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information known to EMCORE with
respect to beneficial ownership of its common stock as of May 1, 1999 and as
adjusted to reflect the sale of the shares offered pursuant to this prospectus
by: (1) each person who is known by EMCORE to be the beneficial owner of five
percent or more of the its common stock; (2) each of EMCORE's directors; (3)
each of EMCORE's executive officers; (4) all officers and directors of EMCORE as
a group (16 persons); and (5) each other selling shareholder. Except as
otherwise indicated, EMCORE believes, based on information furnished by such
persons, that each person listed below has the sole voting and investment power
over the shares of common stock shown as beneficially owned, subject to common
property laws, where applicable. Unless otherwise noted, the address for the
individuals listed below is c/o EMCORE Corporation, 394 Elizabeth Avenue,
Somerset, NJ 08873.
<TABLE>
<CAPTION>
SHARES
SHARES
SHARES BENEFICIALLY SHARES BENEFICIALLY
ISSUABLE UPON
ISSUABLE UPON
OWNED PRIOR TO OWNED AFTER
EXERCISE OF SHARES
EXERCISE OF
THE OFFERING THE OFFERING
------------------------- ---------------------
NAME OF BENEFICIAL OWNER: NUMBER PERCENT OPTIONS WARRANTS OFFERED NUMBER PERCENT
<S> <C> <C> <C> <C> <C> <C> <C>
Thomas J. Russell........ 2,459,991 24.0% -- 741,657(1) -- 2,459,991 17.9%
Reuben F. Richards,
Jr..................... 518,957 5.3 79,412 149,952 -- 518,957 3.9
Thomas G. Werthan........ 131,536 1.4 64,421 23,586 15,000 116,536 *
Richard A. Stall......... 170,823 1.8 96,248 30,012 10,000 160,823 1.2
Robert Louis-Dreyfus..... 1,650,582 16.6 -- 432,535(2) -- 1,650,582 12.3
Hugh H. Fenwick.......... 6,879 * -- -- -- 6,879 *
Shigeo Takayama(3)....... 706,653 7.4 -- -- -- 706,653 5.4
Charles Scott............ 3,857 * -- -- -- 3,857 *
John J. Hogan, Jr........ -- * -- -- -- -- *
Thomas Brennan........... 265,128 2.8 39,141 -- 40,000 225,128 1.7
Robert Bryan............. 265,128 2.8 39,141 -- 50,000 215,128 1.6
Craig Farley............. -- * -- -- -- -- *
David D. Hess............ 8,665 * 4,412 -- -- 8,665 *
Louis A. Koszi........... 10,098 * 10,098 -- -- 10,098 *
William J. Kroll......... 79,990 * 21,085 16,134 6,000 73,900 *
Paul Rotella............. 3,578 * 3,578 -- -- 3,578 *
All directors and
executive officers as a
group (16 persons)..... 6,281,865 57.3 353,957 1,110,357 -- 6,281,865 44.5
The AER 1997 Trust(4).... 1,588,063 16.5 -- 141,504 -- 1,588,063 12.1
Gallium Enterprises,
Inc.(5)................ 1,218,047 12.3 -- 432,535 -- 1,218,047 9.1
Union Miniere Inc.(6).... 642,857 6.8 -- -- 250,000 392,857 3.0
Uniroyal Technology
Corporation(7)......... 642,857 6.8 -- -- 270,000 372,857 2.8
Hakuto Co., Ltd.......... 706,653 7.4 -- -- -- 706,653 5.4
General Electric(8)...... -- -- -- -- -- -- *
Alfred T. Copeland,
Jr..................... 8,000 * -- 8,000 8,000 -- *
Howard F. Curd........... 402,063 5.2 -- -- 93,015 309,048 3.1
Howard R. Curd........... 420,563 5.4 -- -- 93,015 327,548 3.2
Charles Maxwell.......... 42,511 * 42,511 10,511 32,000 *
Harold J. O'Keefe........ 6,869 * -- 3,069 3,069 3,800 *
Norman E. Schumaker...... 148,611 1.6 -- 138,831 48,831 99,780 *
</TABLE>
- ------------------------------
* Less than 1.0%
(1) With 141,504 held by the AER 1997 Trust -- see note 4.
(2) Held by Gallium Enterprises Inc. -- see note 5.
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<PAGE> 68
(3) Includes 442,368 shares of Common Stock and 264,286 shares of convertible
preferred stock owned by Hakuto Co., Ltd., which is controlled by Shigeo
Takayama.
(4) Dr. Thomas J. Russell, one of the three trustees for The AER 1997 Trust, is
the Chairman of EMCORE. After January 13, 2002, Avery E. Russell, the
daughter of Thomas J. Russell will be the primary beneficiary of the trust.
The address of The AER 1997 Trust is 117 Leabrook Lane, Princeton, NJ 10854.
(5) Gallium Enterprises Inc. is controlled by Robert Louis-Dreyfus, a member of
the board of directors of EMCORE. The address of Gallium Enterprises, Inc.
is c/o Harborstone Capital Management., 152 West 57th Street, 21st Floor,
New York, New York 10019.
(6) Includes 642,857 shares of convertible preferred stock. The address of Union
Miniere Inc. is 13847 West Virginia Drive, Lakewood, Colorado 80228.
(7) Includes 642,857 shares of convertible preferred stock. The address of
Uniroyal Technology Corporation is Two North Tamiami Trail, Suite 900,
Sarasota, Florida 34236.
(8) In connection with the consummation of the GELcore joint venture, EMCORE
issued to General Electric common stock purchase warrants for 282,010 shares
of EMCORE common stock based on the stock price as of this offering or the
closing price on March 31, 1999. Those warrants have an exercise price of
$22.875 and will expire in 2006. General Electric also purchased a $7.8
million subordinated convertible debenture that is convertible into 340,984
shares of common stock at General Electric's option.
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<PAGE> 69
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement,
the underwriters named below, who are represented by Donaldson, Lufkin &
Jenrette Securities Corporation, Prudential Securities Incorporated, Needham &
Company, Inc. and SoundView Technology Group, Inc. have severally agreed to
purchase from EMCORE and the selling shareholders the respective number of
shares of common stock set forth opposite their names below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS: SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.........
Prudential Securities Incorporated..........................
Needham & Company, Inc......................................
SoundView Technology Group, Inc............................. --
-------
Total.....................................................
=======
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares of common stock
offered hereby are subject to approval by their counsel of certain legal matters
and certain other conditions. The underwriters are obligated to purchase and
accept delivery of all the shares of common stock offered hereby (other than
those shares covered by the over-allotment option described below) if any are
purchased.
The underwriters initially propose to offer the shares of common stock in
part directly to the public at the public offering price set forth on the cover
page of this prospectus and in part to certain dealers (including the
underwriters) at such price less a concession not in excess of $ per
share. The underwriters may allow, and such dealers may re-allow, to certain
other dealers a concession not in excess of $ per share. After the
initial offering of the common stock, the public offering price and other
selling terms may be changed by the representatives at any time without notice.
DLJdirect, Inc., an affiliate of Donaldson, Lufkin & Jenrette Securities
Corporation and a member of the selling group, is facilitating the distribution
of the shares sold in the offering over the Internet. The underwriters have
agreed to allocate a limited number of shares to DLJdirect, Inc. for sale to its
brokerage account holders.
EMCORE has granted to the underwriters an option, exercisable within 30
days after the date of this prospectus, to purchase, from time to time, in whole
or in part, up to an aggregate of 555,000 additional shares of common stock at
the public offering price less underwriting discounts and commissions. The
underwriters may exercise such option solely to cover over-allotments, if any,
made in connection with this offering. To the extent that the underwriters
exercise such option, each underwriter will become obligated, subject to certain
conditions, to purchase its pro rata portion of such additional shares based on
such underwriter's percentage underwriting commitment as indicated in the
preceding table.
EMCORE and the selling shareholders have agreed to indemnify the
underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, or to contribute to payments that the underwriters may
be required to make in respect thereof.
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<PAGE> 70
Each of EMCORE, its executive officers and directors and certain
shareholders of EMCORE (including the selling shareholders) has agreed, subject
to certain exceptions, not to (i) offer, pledge, sell, contract to sell, sell
any option or contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase or otherwise transfer or dispose
of, directly or indirectly, any shares of common stock or (ii) enter into any
swap or other arrangement that transfers all or a portion of the economic
consequences associated with the ownership of any common stock (regardless of
whether any of the transactions described in clause (i) or (ii) is to be settled
by the delivery of common stock, or such other securities, in cash or otherwise)
for a period of 90 days after the date of the prospectus without the prior
written consent of Donaldson, Lufkin & Jenrette. In addition, during such
period, EMCORE has also agreed not to file any registration statement with
respect to, and each of its executive officers, directors and certain
shareholders of EMCORE (including the selling shareholders) has agreed not to
make any demand for, or exercise any right with respect to, the registration of
any shares of common stock or any securities convertible into or exercisable or
exchangeable for common stock without the prior written consent of Donaldson,
Lufkin & Jenrette.
Other than in the United States, no action has been taken by EMCORE, the
selling shareholders or the underwriters that would permit a public offering of
the shares of common stock offered hereby in any jurisdiction where action for
that purpose is required. The shares of common stock offered hereby may not be
offered or sold, directly or indirectly, nor may this prospectus or any other
offering material or advertisements in connection with the offer and sale of any
such shares of common stock be distributed or published in any jurisdiction,
except under circumstances that will result in compliance with the applicable
rules and regulations of such jurisdiction. Persons into whose possession this
prospectus comes are advised to inform themselves about and to observe any
restrictions relating to this offering of the common stock and the distribution
of this prospectus. This prospectus does not constitute an offer to sell or
solicitation of an offer to buy any shares of common stock offered hereby in any
jurisdiction in which such an offer or a solicitation is unlawful.
The underwriters and dealers may engage in passive market making
transactions in the common stock in accordance with Rule 103 of Regulation M
promulgated by the Commission. In general, a passive market maker may not bid
for or purchase shares of common stock at a price that exceeds the highest
independent bid. In addition, the net daily purchases made by any passive market
maker generally may not exceed 30% of its average daily trading volume in the
common stock during a specified two-month period, or 200 shares, whichever is
greater. A passive maker must identify passive market making bids as such on the
Nasdaq electronic inter-dealer reporting system. Passive market making may
stabilize or maintain the market price of the common stock above independent
market levels. Underwriters and dealers are not required to engage in passive
market making and may end passive market making activities at any time.
In connection with the offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
common stock. Specifically, the underwriters may overallot this offering,
creating a syndicate short position. In addition, the underwriters may bid for
and purchase shares of common stock in the open market to cover syndicate short
positions or to stabilize the price of the common stock. Finally, the
underwriting syndicate may reclaim selling concessions from
69
<PAGE> 71
syndicate members in the offering, if the syndicate repurchases previously
distributed common stock in syndicate covering transactions, in stabilization
transactions or otherwise. Any of these activities may stabilize or maintain the
market price of the common stock above independent market levels. The
underwriters are not required to engage in these activities, and may end any of
these activities at any time.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
EMCORE by White & Case LLP, Miami, Florida, who may rely upon Dillon, Bitar &
Luther, New Jersey counsel for EMCORE as to matters of New Jersey law. Certain
legal matters in connection with this offering will be passed upon for the
underwriters by Brobeck, Phleger & Harrison LLP, New York, New York.
EXPERTS
The consolidated financial statements of EMCORE as of September 30, 1998
and for the year then ended included and incorporated by reference in this
prospectus, have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report (which expresses an unqualified opinion and includes an
explanatory paragraph relating to a restatement described in Note 20), which is
included and incorporated by reference herein, and has been so included and
incorporated in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
The balance sheet of EMCORE as of September 30, 1997, and the statements of
operations, shareholders' equity and cash flow for the two year period ended
September 30, 1997, included and incorporated by reference in this prospectus,
have been included herein and incorporated by reference in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of that firm as experts in accounting and auditing.
The financial statements of MicroOptical Devices, Inc. included in this
prospectus and elsewhere in the registration statement, to the extent and for
the periods indicated in their reports, have been audited by Arthur Andersen
LLP, independent public accountants, and are included herein in reliance upon
the authority of said firm as experts in giving said reports. EMCORE has agreed
to indemnify and hold harmless Arthur Andersen LLP and its personnel for any
costs and expenses including attorneys' fees incurred by Arthur Andersen in
successful defense of a legal action or proceeding that arises as a result of
Arthur Andersen's consent to the inclusion of its audit reports on MODE's past
financial statements in a registration statement filed by EMCORE with the SEC. A
successful defense in this context would be one in which Arthur Andersen is
neither decreed to have been culpable nor pays any part of MODE's or EMCORE's
damages as a result of judgment or settlement.
The statements in this Prospectus set forth under the captions "Risk
Factors -- Our ability to protect our trade secrets is crucial to our business."
"-- We may require licenses to continue to manufacture and sell certain of our
compound semiconductor wafers and devices." and discussions of trade secrets and
the Rockwell Patent litigation in "Business -- Intellectual Property and
Licensing" have been reviewed and approved by Lerner David Littenberg Krumholz &
Mentlik, Westfield, New Jersey, patent counsel for EMCORE, as experts on such
matters, and are included herein in reliance upon such review and approval.
70
<PAGE> 72
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
On December 5, 1997, EMCORE acquired all of the outstanding capital stock
of MODE in exchange for 1,461,866 shares of EMCORE's common stock, 200,966
common stock purchase options and 47,118 common stock purchase warrants. The
purchase price was approximately $32.8 million, including direct acquisition
costs of approximately $500,000. MODE was a development stage company
(incorporated in August 1995) and had 18 employees at the date of acquisition.
MODE's activities were substantially directed towards the research and
development of optical laser devices. The following unaudited pro forma
consolidated statement of operations is based on the historical financial
statements of EMCORE and MODE, adjusted to give the effect to the acquisition of
MODE by EMCORE. The unaudited pro forma consolidated statements of operations
assume that the acquisition of MODE by EMCORE occurred as of October 1, 1997.
The pro forma financial information reflects the purchase method of accounting
for the acquisition of MODE. The accompanying unaudited pro forma information
does not give effect to any cost savings that may be realized as a result of the
integration of EMCORE and MODE, or to any changes in the revenues of the
combined entity, resulting from such integration. The accompanying unaudited pro
forma financial information should be read in conjunction with EMCORE's
historical financial statements and the notes thereto and the MODE historical
financial statements and the notes thereto included herein. Such unaudited pro
forma financial information does not purport to be indicative of the results of
operations of EMCORE in the future or what its financial position and results of
operations would have been had the acquisition occurred at the dates indicated
above.
EMCORE's acquisition of MODE, a development stage company, constituted a
significant and strategic investment for EMCORE to acquire and gain access to
MODE's in-process research and development of micro-optical technology. EMCORE's
over-riding investment consideration was that if MODE's research and development
efforts, with continued research and development funding contemplated and
required after acquisition, yielded commercial products for targeted
applications, EMCORE would possess a broader array of enabling advanced
technologies and would be better positioned for entry into certain existing
large and/or high growth technology-dependent markets. The primary value
enhancing asset acquired in the MODE acquisition was the technology under
development by MODE as part of its planned micro-laser and optical subassembly
products. EMCORE plans to use MODE's micro-optical laser technology in new
products for data communications and telecommunications applications. As of the
date of acquisition, MODE had six primary micro-optical laser research and
development projects in process. EMCORE expects MODE's microlasers and optical
subassemblies to provide design, performance and significant cost advantages
over their technical predecessors such as edge-emitting solid state lasers.
Through the integration of vertical cavity surface emitting lasers (VCSELs) with
leading original equipment manufacturer systems design, VCSELs are expected to
provide enhanced performance benefits to market applications such as Internet
access, onboard photonics, Gigabit Ethernet, local area networks, microarea
network, digital video discs (DVDs) and fiberoptic switching. In developing
EMCORE's financial projections for future revenues and costs, new micro-optical
laser product introductions were expected to commence in fiscal 1998 and
reflected the
71
<PAGE> 73
impact of entering new markets such as the data communications and
telecommunications industries. Should EMCORE be unable to complete the
development of any of the six projects, EMCORE may not realize the product,
market and financial benefits expected from this acquisition. In February 1998,
MODE announced the introduction of its first commercial product, a Gigalase
VCSEL. Subsequent to such announcement, MODE's Gigalase product efforts were
primarily directed toward engineering, testing and quality control activities to
facilitate commercial production which commenced in May 1998. On December 14,
1998, MODE announced its second commercial product, a Gigarray VCSEL.
As part of the acquisition, EMCORE incurred a one-time in-process research
and development write-off of $19.5 million which is reflected in the
accompanying financial statements. EMCORE also recorded goodwill of
approximately $13.2 million. This is being charged against operations over a
three year period, and will therefore impact financial results through December
2000.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1998
-----------------------------------------
HISTORICAL PRO FORMA
---------------- ----------------------
EMCORE MODE ADJUSTMENTS COMBINED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues................................ $43,760 $100 $ -- $ 43,860
Cost of sales........................... 24,676 161 -- 24,836
-------- ----- -------- --------
Gross profit.......................... 19,084 (61) -- 19,024
-------- ----- -------- --------
Operating expenses
Selling, general and administrative... 14,082 346 -- 14,428
Goodwill amortization(2).............. 3,638 -- 738 4,393
Research and development:(3)
One-time acquired in-process....... 19,516 -- (19,516) --
Recurring.......................... 16,495 283 -- 16,778
-------- ----- -------- --------
Total operating expenses........... 53,731 629 (18,778) 35,599
-------- ----- -------- --------
Operating loss..................... (34,647) (690) 18,778 (16,575)
-------- ----- -------- --------
Other expenses
Stated interest expense (income),
net................................ 973 (4) -- 970
Imputed warrant interest, non-cash.... 601 -- -- 601
Equity in net loss of unconsolidated
affiliate.......................... 198 -- -- 198
-------- ----- -------- --------
Total other expense................ 1,772 (4) -- 1,769
-------- ----- -------- --------
Loss before income taxes and
extraordinary item............... (36,419) (686) 18,778 (18,344)
Provision for income taxes.............. -- -- -- --
-------- ----- -------- --------
Net loss.............................. (36,419) (686) 18,778 (18,344)
======== ===== ======== ========
Shares used in computation of net
loss.................................. 8,775 8,775
======== ========
Net loss per share before extraordinary
item.................................. $ (4.15) $ (2.09)
======== ========
Net loss per share...................... $ (4.15) $ (2.09)
======== ========
</TABLE>
- ------------------------------
Notes to Pro Forma Statement of Operations
(1) EMCORE acquired MODE on December 5, 1997 in exchange for (i) the issuance of
1,461,866 shares of common stock, and (ii) the assumption of (x) up to
200,966 common stock purchase options at exercise prices ranging from $0.43
to $0.59 and (y) 47,118 common stock purchase warrants at exercise prices
ranging from $4.32 to $5.92. The transaction purchase price amounted to
approximately $32,800,000, including approximately $500,000 of direct
acquisition costs. EMCORE's
72
<PAGE> 74
common stock was valued based upon the average closing price of EMCORE's
common stock for the five days before and after the announcement of the
acquisition. The purchase price was allocated to the assets acquired
(approximately $2,801,000) and liabilities assumed (approximately
$2,645,000), based upon the fair value at the date of acquisition. In
addition, EMCORE recorded a one-time write-off of approximately $19,516,000
(as restated) relating to purchased in-process research and development.
Goodwill of approximately $13,157,000 (as restated) was recorded as a result
of the acquisition.
(2) To reflect the amortization of goodwill over a period of three years.
(3) To reverse the non-recurring, one-time write-off of $19,516,000 (as
restated) relating to purchased in-process research and development.
(4) The operating results of MODE are from the period of October 1, 1997 through
the date of acquisition. Subsequent to the date of acquisition, MODE's
operations are included with those of EMCORE.
The pro forma statement of operations for the year ended September 30, 1998,
does not reflect the non-recurring write-off of the acquired in-process research
and development.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents have been filed by EMCORE with the Commission under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and are
incorporated herein by reference:
1. EMCORE's Annual Report on Form 10-K and 10-K/A for the fiscal year
ended September 30, 1998;
2. EMCORE's Quarterly Reports on Form 10-Q and 10-Q/A for the period
ended December 31, 1998 and on Form 10-Q for the period ended March 31,
1999;
3. EMCORE's Current Report on Form 8-K dated May 13, 1999; and
4. The description of the common stock, contained in EMCORE's
Registration Statement on Form 8-A filed pursuant to Section 12 of the
Exchange Act and all amendments thereto and reports filed for the purpose
of updating such description.
All documents filed by us pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Exchange Act: (1) subsequent to the initial filing of this prospectus and
prior to the date it is declared effective; and (2) subsequent to the date of
this prospectus and prior to the termination of this offering are incorporated
by reference and become a part of this prospectus and to be a part hereof from
their date of filing. Any statement contained in this prospectus to the extent
that a statement contained in any such document modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this prospectus.
On request, we will provide anyone who receives a copy of this prospectus
with a copy of any or all of the documents incorporated in this prospectus by
reference. We will provide this information at no cost to you. Written or
telephone requests for such copies should be directed to our principal office:
EMCORE Corporation, 394 Elizabeth Avenue, Somerset, New Jersey 08872, Attn:
Thomas G. Werthan, Secretary, Telephone (732) 271-9090.
73
<PAGE> 75
AVAILABLE INFORMATION
We file reports, proxy statement and other information with the Commission.
Those reports, proxy statements and other information may be obtained:
- At the Public Reference Room of the Commission, Room 1024 -- Judiciary
Plaza, 450 Fifth Street, N.W., Washington, DC 20549 (for information,
please call 1-800-SEC-0330);
- At the public reference facilities at the Commission's regional offices
located at Seven World Trade Center, 13th Floor, New York, New York 10048
or Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661;
- By writing to the Commission, Public Reference Section, Judiciary Plaza,
450 Fifth Street, N.W., Washington, DC 20549;
- At the offices of the National Association of Securities Dealers, Inc.,
Reports Section, 1735 K Street, N.W., Washington, DC 20006; or
- From the Internet site maintained by the Commission at
http://www.sec.gov. which contains reports, proxy and information
statements and other information regarding issuers that file
electronically with the Commission.
Some locations may charge prescribed or modest fees for copies.
EMCORE has filed with the Commission a Registration Statement on Form S-3
(together with any amendments or supplements thereto, the "Registration
Statement") under the Securities Act covering the shares of common stock offered
hereby. As permitted by the Commission, this prospectus, which constitutes a
part of the Registration Statement, does not contain all the information
included in the Registration Statement. Such additional information may be
obtained from the locations described above. Statements contained in this
prospectus as to the contents of any contract or other document are not
necessarily complete. You should refer to the contract or other document for all
the details.
74
<PAGE> 76
EMCORE CORPORATION
INDEX OF FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Deloitte & Touche LLP, Independent Accountants.... F-2
Report of Coopers & Lybrand L.L.P., Independent
Accountants............................................... F-3
FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of September 30, 1997 and
1998...................................................... F-4
Consolidated Statements of Operations for the Years Ended
September 30, 1996, 1997 and 1998......................... F-5
Consolidated Statements of Shareholders' Equity as of
September 30, 1996, 1997 and 1998......................... F-6
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1996, 1997 and 1998......................... F-7
Notes to Financial Statements............................... F-9
</TABLE>
F-1
<PAGE> 77
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Shareholders of EMCORE Corporation
Somerset, New Jersey
We have audited the accompanying consolidated balance sheet of EMCORE
Corporation, (the "Company") as of September 30, 1998, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1998 consolidated financial statements present fairly,
in all material respects, the financial position of the Company as of September
30, 1998, and the results of their operations and their cash flows for the year
then ended in conformity with generally accepted accounting principles.
As discussed in Note 20 the accompanying 1998 consolidated financial
statements have been restated.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
May 14, 1999
F-2
<PAGE> 78
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of EMCORE Corporation
We have audited the accompanying balance sheet of EMCORE Corporation (the
"Company") as of September 30, 1997, the related statements of operations,
shareholders' (deficit) equity and cash flows for each of the two years in the
period ended September 30, 1997. These financial statements schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of EMCORE Corporation as of
September 30, 1997, and the results of its operations and its cash flows for
each of the two years in the period ended September 30, 1997, in conformity with
generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Parsippany, New Jersey
November 3, 1997, except for
note 15, as to which the date
is December 5, 1997
F-3
<PAGE> 79
EMCORE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF
AS OF SEPTEMBER 30, MARCH 31,
--------------------------- 1999
1997 1998 (UNAUDITED)
(AS RESTATED (AS RESTATED
SEE NOTE 20) SEE NOTE 20)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents......................... $ 3,653,145 $ 4,455,836 $ 1,640,437
Restricted cash................................... 312,500 62,500 --
Accounts receivable, net of allowance for doubtful
accounts of approximately $697,000, $611,000 and
$577,000 at September 30, 1997, September 30,
1998 and March 31, 1999, respectively........... 8,439,704 7,437,822 11,462,660
Accounts receivable -- related parties............ 2,500,000 500,000 2,746,731
Inventories, net.................................. 7,185,626 12,445,326 12,684,046
Costs in excess of billings on uncompleted
contracts....................................... -- 77,531 93,962
Prepaid expenses and other current assets......... 120,393 130,075 199,919
------------ ------------ ------------
Total current assets............................ 22,211,368 25,109,090 28,827,755
Property, plant and equipment, net.................. 16,797,833 36,209,831 43,259,928
Goodwill, net....................................... -- 9,519,000 7,322,000
Investments in unconsolidated affiliates............ -- 291,504 4,391,762
Other assets, net................................... 453,608 2,090,219 1,269,705
------------ ------------ ------------
Total assets.................................... $ 39,462,809 $ 73,219,644 $ 85,071,150
============ ============ ============
Current liabilities:
Note payable -- related party..................... $ -- $ 7,000,000 $ --
Accounts payable.................................. 4,050,216 12,022,628 9,131,425
Accrued expenses.................................. 3,867,589 4,197,405 5,457,262
Advanced billings................................. 1,998,183 3,180,370 6,682,305
Capitalized lease obligation -- current........... 15,030 673,036 731,908
Other current liabilities......................... 124,279 52,778 161,815
------------ ------------ ------------
Total current liabilities....................... 10,055,297 27,126,217 22,164,715
Long-term debt:
Bank loans........................................ -- 17,950,000 23,000,000
Subordinated notes, net........................... 7,499,070 7,808,772 8,002,588
Capitalized lease obligation, net of current
portion......................................... 77,870 754,517 470,242
Other liabilities................................. -- -- 1,097,389
------------ ------------ ------------
Total liabilities............................... 17,632,237 53,639,506 54,734,934
------------ ------------ ------------
Mandatorily redeemable convertible preferred stock,
1,550,000 shares issued and outstanding at March
31, 1999 (redeemable at maturity for
$21,700,000)...................................... -- -- 21,368,476
Shareholders' equity:
Preferred stock, $.0001 par value, 5,882,353 shares
authorized, no shares outstanding in all
periods........................................... -- -- --
Common stock, no par value, 23,529,411 shares
authorized, 6,000,391, 9,375,952, and 9,446,347
issued and outstanding September 30, 1997,
September 30, 1998 and March 31, 1999,
respectively...................................... 45,816,774 87,443,237 87,855,450
Accumulated deficit................................. (23,777,658) (60,196,454) (71,221,065)
Notes receivable from warrant issuances and stock
sales............................................. (208,544) (7,666,645) (7,666,645)
------------ ------------ ------------
Total shareholders' equity...................... 21,830,572 19,580,138 8,967,740
------------ ------------ ------------
Total shareholders' equity and mandatorily
redeemable convertible preferred stock........ 21,830,572 19,580,138 30,336,216
------------ ------------ ------------
Total liabilities, shareholders' equity, and
mandatorily redeemable convertible preferred
stock......................................... $ 39,462,809 $ 73,219,644 $ 85,071,150
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 80
EMCORE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED SEPTEMBER 30, MARCH 31,
---------------------------------------- ---------------------------
1996 1997 1998 1998 1999
(AS RESTATED (UNAUDITED)
SEE NOTE 20)
(AS RESTATED (AS RESTATED
SEE NOTE 20) SEE NOTE 20)
<S> <C> <C> <C> <C> <C>
Revenues:
Systems and materials............ $24,066,506 $46,591,662 $ 42,820,791 $25,881,555 $ 26,048,272
Services......................... 3,712,379 1,160,910 939,192 283,020 148,402
----------- ----------- ------------ ------------ ------------
Total revenues................. 27,778,885 47,752,572 43,759,983 26,164,575 26,196,674
Cost of sales:
Systems and materials............ 16,121,938 29,309,898 24,148,783 13,808,098 15,165,847
Services......................... 2,484,482 784,117 526,706 101,071 52,998
----------- ----------- ------------ ------------ ------------
Total cost of sales............ 18,606,420 30,094,015 24,675,489 13,909,169 15,218,845
----------- ----------- ------------ ------------ ------------
Gross profit................... 9,172,465 17,658,557 19,084,494 12,255,406 10,977,829
----------- ----------- ------------ ------------ ------------
Operating expenses:
Selling, general and
administrative................. 6,524,482 9,346,329 14,082,438 5,753,766 6,367,485
Goodwill amortization............ -- -- 3,637,941 1,441,941 2,197,000
Research and development --
recurring...................... 5,401,413 9,001,188 16,494,888 5,876,593 10,272,376
Research and development --
one-time acquired in-process,
non-cash....................... -- -- 19,516,000 19,516,000 --
----------- ----------- ------------ ------------ ------------
Total operating expenses... 11,925,895 18,347,517 53,731,267 32,588,300 18,836,861
----------- ----------- ------------ ------------ ------------
Operating loss................. (2,753,430) (688,960) (34,646,773) (20,332,894) (7,859,032)
----------- ----------- ------------ ------------ ------------
Other expenses:
Stated interest, net of interest
income of $71,000, $237,000,
and $448,000 for the years
ended September 30, 1996, 1997
and 1998, respectively, and
$192,000 and $285,000 for the
six months ended March 31, 1998
and 1999, respectively......... 297,093 519,422 972,992 115,922 693,112
Imputed warrant interest expense,
non-cash....................... 125,791 3,988,390 600,536 192,121 632,973
Equity in net loss of
unconsolidated affiliate....... -- -- 198,495 -- 1,671,021
----------- ----------- ------------ ------------ ------------
Loss before income taxes and
extraordinary item........... (3,176,314) (5,196,772) (36,418,796) (20,640,937) (10,856,138)
Provision for income taxes......... -- 137,000 -- 20,000 --
----------- ----------- ------------ ------------ ------------
Net loss before extraordinary
item......................... (3,176,314) (5,333,772) (36,418,796) (20,660,937) (10,856,138)
Extraordinary item -- loss on early
extinguishment of debt........... -- 285,595 -- -- --
----------- ----------- ------------ ------------ ------------
Net loss....................... $(3,176,314) $(5,619,367) $(36,418,796) $(20,660,937) $(10,856,138)
=========== =========== ============ ============ ============
Per share data:
Weighted average basic and
diluted shares used in per
share data calculations........ 2,994,466 4,668,822 8,775,270 8,189,112 9,408,570
Net loss per basic and diluted
share before extraordinary
item............................. $ (1.06) $ (1.14) $ (4.15) $ (2.52) $ (1.17)
=========== =========== ============ ============ ============
Net loss per basic and diluted
share............................ $ (1.06) $ (1.20) $ (4.15) $ (2.52) $ (1.17)
=========== =========== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 81
EMCORE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997, 1998
AND THE SIX-MONTH PERIOD ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
COMMON STOCK SHAREHOLDERS' TOTAL
------------------------ ACCUMULATED NOTES SHAREHOLDERS'
SHARES AMOUNT DEFICIT RECEIVABLE EQUITY
<S> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1995........... 2,994,461 $16,637,566 $(14,981,977) $ (146,107) $ 1,509,482
Issuance of common stock purchase
warrants.............................. -- 2,340,000 2,340,000
Notes receivable due from shareholders
in connection with issuance of
detachable warrants................... (151,579) (151,579)
Net loss................................ (3,176,314) (3,176,314)
---------- ----------- ------------ ----------- ------------
BALANCE AT SEPTEMBER 30, 1996........... 2,994,461 18,977,566 (18,158,291) (297,686) 521,589
Issuance of common stock purchase
warrants.............................. 3,601,455 3,601,455
Issuance of common stock in initial
public offering, net of issuance cost
of $3,110,345......................... 2,875,000 22,764,655 22,764,655
Issuance of common stock on exercise of
warrants.............................. 94,124 384,027 384,027
Issuance of common stock on exercise of
stock options......................... 34,965 53,640 53,640
Redemptions of notes receivable from
shareholders.......................... 31,842 31,842
Forgiveness of notes receivable from
shareholder........................... 57,300 57,300
Compensatory stock issuances............ 1,841 35,431 35,431
Net loss................................ (5,619,367) (5,619,367)
---------- ----------- ------------ ----------- ------------
BALANCE AT SEPTEMBER 30, 1997........... 6,000,391 45,816,774 (23,777,658) (208,544) 21,830,572
Issuance of common stock purchase
warrants.............................. 1,309,546 1,309,546
Issuance of common stock on exercise of
warrants in exchange for notes
receivable............................ 1,827,966 7,458,101 (7,458,101) --
Issuance of common stock and common
stock purchase options and warrants in
connection with the acquisition of
MODE.................................. 1,461,866 32,329,000 32,329,000
Stock option exercise................... 35,809 83,486 83,486
Stock purchase warrant exercise......... 5,660 23,092 23,092
Issuance of common stock on exercise of
warrants in exchange for subordinated
notes................................. 17,605 71,841 71,841
Compensatory stock issuances............ 26,655 351,397 351,397
Net loss (as restated, see Note 20)..... (36,418,796) (36,418,796)
---------- ----------- ------------ ----------- ------------
BALANCE AT SEPTEMBER 30, 1998 (AS
RESTATED, SEE NOTE 20)................ 9,375,952 87,443,237 (60,196,454) (7,666,645) 19,580,138
Preferred stock dividends............... (144,663) (144,663)
Periodic accretion of redeemable
preferred stock to mandatory
redemption value...................... (23,810) (23,810)
Stock purchase warrant exercise......... 359 1,157 1,157
Stock option exercise................... 55,564 200,069 200,069
Compensatory stock issuances............ 14,472 210,987 210,987
Net loss................................ (10,856,138) (10,856,138)
---------- ----------- ------------ ----------- ------------
BALANCE AT MARCH 31, 1999 (UNAUDITED)... 9,446,347 $87,855,450 $(71,221,065) $(7,666,645) $ 8,967,740
========== =========== ============ =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 82
EMCORE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED SEPTEMBER 30, MARCH 31,
------------------------------------------ ---------------------------
1996 1997 1998 1998 1999
(AS RESTATED (UNAUDITED)
SEE NOTE 20)
(AS RESTATED (AS RESTATED
SEE NOTE 20) SEE NOTE 20)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss......................... $ (3,176,314) $ (5,619,367) $(36,418,796) $(20,660,937) $(10,856,138)
Adjustments to reconcile net loss
to net cash provided by (used
for) operating activities:
Acquired in-process research
and development, non-cash.... -- -- 19,516,000 19,516,000 --
Depreciation and
amortization................. 1,871,016 3,187,755 8,767,105 4,087,116 5,661,977
Provision for doubtful
accounts..................... 146,418 515,000 1,118,000 (80,200) 120,000
Provision for inventory
valuation.................... 105,000 120,000 120,000 60,000 --
Deferred gain on sale to
associated company........... -- -- -- -- 1,259,204
Detachable warrant accretion
and debt issuance cost
amortization................. 125,792 3,988,390 600,536 192,121 632,973
Extraordinary loss on early
extinguishment of debt....... -- 285,595 -- -- --
Equity in net loss of an
unconsolidated affiliate..... -- -- 198,495 -- 1,671,021
Compensatory stock issuances... -- 35,431 351,397 169,833 210,987
Write-off note receivable due
from shareholder............. -- 57,300 -- -- --
Change in assets and liabilities:
Accounts receivable -- trade... (1,041,956) (5,929,533) 1,882 (2,559,591) (4,144,838)
Accounts receivable -- related
party........................ -- (2,500,000) 2,000,000 -- (2,246,731)
Inventories.................... (4,410,566) 339,414 (5,243,187) (2,636,638) (238,719)
Costs in excess of billings on
uncompleted contracts........ (2,882) 19,322 (77,531) (19,281) (16,431)
Prepaid expenses and other
current assets............... (26,784) (60,458) 12,632 (258,792) (69,844)
Other assets................... (468,565) 27,568 (623,775) (168,226) 315,876
Accounts payable............... 3,398,078 (2,029,154) 7,949,760 1,413,423 (2,891,203)
Accrued expenses............... 777,899 1,880,943 (970,148) (1,255,438) 1,259,857
Advanced billings.............. 1,122,667 (1,308,279) 1,182,187 (1,912,317) 3,501,935
Billings in excess of costs on
uncompleted contracts........ (306,359) -- -- -- --
Unearned service revenue....... 12,315 111,964 (71,501) (94,279) (52,778)
------------ ------------ ------------ ------------ ------------
Total adjustments................ 1,302,073 (1,258,742) 34,831,852 16,453,731 4,973,286
------------ ------------ ------------ ------------ ------------
Net cash and cash equivalents
used for operating
activities..................... (1,874,241) (6,878,109) (1,586,944) (4,207,206) (5,882,852)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property, plant,
and equipment................ (7,090,869) (11,631,642) (22,132,071) (4,995,579) (10,448,436)
Acquisition, cash acquired..... -- -- 192,799 192,799 --
Investments in unconsolidated
affiliates................... -- -- (490,000) (5,771,279)
(Funding) payments of
restricted cash.............. -- (312,500) 250,000 124,999 62,501
------------ ------------ ------------ ------------ ------------
Net cash and cash equivalents
used for investing
activities..................... (7,090,869) (11,944,142) (22,179,272) (4,677,781) (16,157,214)
------------ ------------ ------------ ------------ ------------
</TABLE>
F-7
<PAGE> 83
EMCORE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED SEPTEMBER 30, MARCH 31,
------------------------------------------ ---------------------------
1996 1997 1998 1998 1999
(AS RESTATED (UNAUDITED)
SEE NOTE 20)
(AS RESTATED (AS RESTATED
SEE NOTE 20) SEE NOTE 20)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from preferred stock
offering -- net of issuance
costs of $500,000............ -- -- -- -- 21,200,000
Proceeds from initial public
offering, net of issuance
cost of $3,110,345........... -- 22,764,655 -- --
Proceeds (payments) under bank
loans........................ -- 8,000,000 17,950,000 7,950,000 5,050,000
Proceeds (payments) from notes
payable, related party,
net.......................... -- -- 7,000,000 -- (7,000,000)
Proceeds from subordinated note
issuance..................... 11,009,600 -- -- -- --
Payments on demand note
facility and subordinated
debt......................... -- (10,000,000) -- -- --
Proceeds from exercise of stock
purchase warrants............ -- 85,121 23,092 19,131 308
Proceeds from exercise of stock
options...................... -- 53,640 83,486 41,926 199,763
Payments on capital lease
obligations.................. (3,000,000) (5,723) (487,671) (187,105) (225,403)
Reduction in notes receivable
from shareholders............ -- 210,317 -- -- --
------------ ------------ ------------ ------------ ------------
Net cash and cash equivalents
provided by financing
activities..................... 8,009,600 21,108,010 24,568,907 7,823,952 19,224,668
------------ ------------ ------------ ------------ ------------
Net (decrease) increase in cash
and cash equivalents........... (955,510) 2,285,759 802,691 (1,061,035) (2,815,398)
Cash and cash equivalents at
beginning of period............ 2,322,896 1,367,386 3,653,145 3,653,145 4,455,835
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at end
of period...................... $ 1,367,386 $ 3,653,145 $ 4,455,836 $ 2,592,110 $ 1,640,437
============ ============ ============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid for interest........... $ 276,000 $ 600,000 $ 1,347,000 314,521 865,087
Cash paid for income taxes....... 55,000 -- -- -- --
NONCASH INVESTING AND FINANCING
ACTIVITIES:
Common stock issued on the
exercise of warrants in
exchange for subordinated
notes.......................... -- -- $ 71,841 -- --
Issuance of common stock on the
exercise of warrants in
exchange for notes
receivable..................... -- -- $ 7,458,101 $ 7,458,101 --
Issuance of common stock, and
common stock purchase options
and warrants in connection with
the acquisition of MicroOptical
Devices, Inc................... -- -- $ 32,329,003 $32,329,003 --
</TABLE>
Reference is made to Note 8 -- Debt Facilities -- for disclosure relating to
certain non-cash warrant issuance.
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE> 84
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS
EMCORE is a designer and developer of compound semiconductor materials and
process technology and a manufacturer of production systems used to fabricate
compound semiconductor wafers. Compound semiconductors are used in a broad range
of applications in wireless communications, telecommunications, computers, and
consumer and automotive electronics. The Company has recently capitalized on its
technology base by expanding into the design and production of compound
semiconductor wafers and package-ready devices and under specific arrangements
has licensed certain process technologies. During fiscal 1998, the Company
completed the acquisition of a development stage company focused on the research
and development of optical laser technologies (see Note 3). The Company offers
its customers a complete, vertically-integrated solution for the design,
development and production of compound semiconductor wafers and devices.
Basis of Presentation and Liquidity. The accompanying financial statements
have been prepared on a going concern basis. For the year ended September 30,
1998, the Company experienced an 8% decline in revenue of approximately $4.0
million and a substantial operating loss amounting to approximately $34.6
million (approximately $15.1 million excluding the effect of acquired in-process
research and development) and had a working capital deficiency of $2.0 million.
The Company's operations are subject to a number of risks, including but
not limited to a history of net losses from operations, future capital needs,
dependence on key personnel, competition and risk of technological obsolescence,
governmental regulations and approvals, technology research and development
results, continued development of its compound semiconductor manufacturing and
marketing capabilities and a concentration of international sales in Asia. The
Company's operations for the year ended September 30, 1998 were primarily funded
through borrowings under existing credit facilities and short-term advances from
the Company's Chairman -- aggregating $7.0 million as of September 30, 1998. The
Company's Chairman has from time to time provided credit enhancements in the
form of debt guarantees and has loaned the Company funds to support its
expansion and capital equipment requirements. The Company's Chief Executive
Officer has also provided credit enhancement in the form of debt guarantees for
the Company. On November 30, 1998, the Company completed a preferred stock
private placement (the "Private Placement" see Note 17), resulting in net
proceeds of $21.2 million. The Company repaid its Chairman $8.5 million
(including $1.5 million advanced to the Company subsequent to September 30,
1998), invested approximately $5.6 million in two unconsolidated ventures, used
$2 million to repay debt and the balance is being used for general working
capital purposes. In addition, the Company's $10.0 million credit facility was
extended to October 1, 1999. The Company's Chairman has committed to provide the
Company with $30 million of long-term financing through July 1, 2000. The
Chairman's financing commitment terminates if the Company completes a secondary
offering of approximately $40.0 million. The Company's operating plans include,
among other things attempting to improve (i) operating cash flow through
increased sales of compound semiconductor systems, wafers and package-ready
devices
F-9
<PAGE> 85
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
and (ii) managing its cost structure in relation to its anticipated level of
revenues. The Company believes that its current liquidity, together with
available credit facilities and the proceeds from the Private Placement, should
be sufficient to meet its cash needs for working capital through fiscal 1999. If
the working capital generated from the Private Placement and cash generated from
operations is not sufficient to satisfy the Company's liquidity requirements,
the Company will seek to obtain additional equity or debt financing. Additional
funding may not be available when needed or on terms acceptable to the Company.
If the Company is required to raise additional financing and if adequate funds
are not available or are not available on acceptable terms, the ability to
continue to fund expansion, develop and enhance products and services, or
otherwise respond to competitive pressures would be severely limited. Such a
limitation could have a material adverse effect on the Company's business,
financial condition or operations and the financial statements do not include
any adjustment that could result therefrom.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information. The financial information as of March 31,
1999 and for the six-month periods ended March 31, 1998 and 1999 is unaudited,
but includes all adjustments (consisting only of normal recurring accruals) that
the Company considers necessary for a fair presentation of the financial
position at such date and the operating results and cash flows for those
periods. Operating results for the six months ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the entire year.
Principles of Consolidation. The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiary. The equity method
of accounting is used for unconsolidated affiliates in which the Company's
equity is at least 20% and not more than 50%. All significant intercompany
transactions are eliminated upon consolidation.
Cash and Cash Equivalents. The Company considers all highly liquid
short-term investments purchased with an original maturity of three months or
less to be cash equivalents. The Company had approximately $2.3 million and $3.0
million in cash equivalents at September 30, 1997 and 1998, respectively. As of
September 30, 1998, the Company had restricted cash in the amount of $62,500 due
to a contractual obligation.
Inventories. Inventories are stated at the lower of FIFO (first-in,
first-out) cost or market. Reserves are established for slow moving or obsolete
inventory based upon historical and anticipated usage.
Property and Equipment. Property and equipment are stated at cost.
Significant renewals and betterments are capitalized. Maintenance and repairs
which do not extend the useful lives of the respective assets are expensed.
Depreciation is recorded using the straight-line method over the estimated
useful lives of the applicable assets, which range from three to five years.
Leasehold improvements are amortized using the straight-line method over the
term of the related leases or the estimated useful lives of
F-10
<PAGE> 86
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 assets is reviewed on a regular
basis for the existence of facts or circumstances, both internally and
externally, that suggest impairment. To date no such impairment has been
indicated. The Company determines if the carrying amount of a long-lived asset
is impaired based on anticipated undiscounted cash flows before interest. In the
event of an impairment, a loss is recognized based on the amount by which the
carrying amount exceeds fair value of the asset. Fair value is determined
primarily using the anticipated cash flows before interest, discounted at a rate
commensurate with the risk involved.
Deferred Costs. Included in other assets are deferred costs related to
obtaining product patents and debt issuance costs and an investment in an
unconsolidated affiliate. Total amortization expense amounted to approximately
$128,000, $40,000 and $79,000 for the years ended September 30, 1996, 1997 and
1998, respectively. During the year ended September 30, 1998, the Company issued
284,684 common stock purchase warrants in exchange for the guaranteeing of a
credit facility by the Company's Chairman and Chief Executive Officer. The
warrants were assigned a value of $1,310,000 which is being amortized over the
eighteen month term of the facility. The warrants were valued by the Company
based upon its application of the Black Scholes Option Pricing Model ("Black
Scholes"). Amortization expense related to such warrant issuance amounted to
approximately $219,000 for fiscal 1998.
Goodwill. Goodwill is amortized using the straight-line method over three
years. The Company, 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, Components and Service Revenues.
Revenue from systems sales is recognized upon shipment, when title passes to the
customer. Subsequent to product shipment, the Company incurs certain
installation costs at the customer's facility and warranty costs which are
estimated and accrued at the time the sale is recognized. Component sales and
service revenues are recognized when goods are shipped or services are rendered
to the customer. Service revenue
F-11
<PAGE> 87
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 durations greater than six
months, the Company recognizes revenue to the extent of costs incurred plus the
estimated gross profit as stipulated in such contracts, based upon contract
performance. Contracts with a duration of six months or less are accounted for
on the completed contract method. A contract is considered complete when all
costs, except insignificant items, have been incurred, and the research
reporting requirements to the customer have been met. Contract costs include all
direct material and labor costs and those indirect costs related to contract
performance, such as indirect labor, supplies, tools, repairs and depreciation
costs, as well as coverage of certain general and administrative costs.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined. Revenues from contracts amounted to
approximately $3,295,000, $614,000 and $438,000 for the years ended September
30, 1996, 1997 and 1998, respectively.
Research and Development. Research and development costs related to the
development of both present and future products and Company-sponsored materials
application research are charged to expense as incurred. In connection with the
acquisition of MicroOptical Devices, Inc. ("MODE"), the Company recorded a
charge of $19,516,000 for acquired in-process research and development.
Fair Value of Financial Instruments. The Company estimates the fair value
of its financial instruments based upon discounted cash flow analyses using the
Company's incremental borrowing rate on similar instruments as the discount
rate. As of September 30, 1998, the fair value of the Company's subordinated
notes exceeded the carrying value of such instruments by approximately $830,000.
As of September 30, 1998, the carrying values of the Company's cash and cash
equivalents, receivables, accounts payable and variable rate based debt as
reflected on the Company's accompanying balance sheet approximates fair value.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements. Estimates also affect the reported amounts of revenues
and expenses during the reporting period. Actual results may differ from those
estimates. The Company's most significant estimates relate to acquired
in-process research and development, accounts receivable and inventory valuation
reserves, warranty and installation accruals, estimates of cost and related
gross profits on certain research contracts and the valuation of long-lived
assets.
F-12
<PAGE> 88
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Net Loss Per Share. The Company accounts for earnings per share under the
provisions of Statement of Financial Accounting Standards No. 128 "Earnings per
Share" ("SFAS No. 128"). Basic and diluted earnings per share calculated
pursuant to SFAS No. 128 have been restated for all periods presented to give
effect to the Securities and Exchange Commission's Staff Accounting Bulletin No.
98 which eliminated certain computational requirements of Staff Accounting
Bulletin No. 64.
Basic earnings per common share was calculated by dividing net loss by the
weighted average number of common stock shares outstanding during the period.
Diluted earnings per share was calculated by dividing net loss by the sum of the
weighted average number of common shares outstanding plus all additional common
shares that would have been outstanding if potentially dilutive common shares
had been issued. The following table reconciles the number of shares utilized in
the Company's earnings per share calculations.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED SEPTEMBER 30, MARCH 31,
---------------------------------------- ---------------------------
1996 1997 1998 1998 1999
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss............... $(3,176,314) $(5,619,367) $(36,418,796) $(20,660,937) $(10,856,138)
Preferred stock
dividends.......... -- -- -- -- (144,663)
Periodic accretion of
preferred stock to
redemption value... -- -- -- -- (23,810)
----------- ----------- ------------ ------------ ------------
Net loss available to
common
shareholders......... $(3,176,314) $(5,619,367) $(36,418,796) $(20,660,937) $(11,024,611)
=========== =========== ============ ============ ============
Loss per common share--
basic................ $ (1.06) $ (1.20) $ (4.15) $ (2.52) $ (1.17)
=========== =========== ============ ============ ============
Loss per common share--
diluted.............. $ (1.06) $ (1.20) $ (4.15) $ (2.52) $ (1.17)
=========== =========== ============ ============ ============
Common
shares -- basic...... 2,994,466 4,668,822 8,775,270 8,189,112 9,408,570
Effect of dilutive
securities:
Stock options and
warrants............. -- -- -- -- --
Preferred Stock........ -- -- -- -- --
Common
shares -- diluted.... 2,994,466 4,668,822 8,775,270 8,189,112 9,408,570
</TABLE>
- -------------------------
The effect of outstanding common stock purchase options and warrants and the
number of shares to be issued upon the conversion of the Company's Series I
Preferred Stock have been excluded from the Company's earnings per share
calculation since the effect of such securities is anti-dilutive.
Reclassifications. Prior period balances have been reclassified to conform
with the current period financial statement presentation.
F-13
<PAGE> 89
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131 "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS No. 131"), which
establishes standards for reporting information about operating segments in
annual financial statements. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The Company is required to adopt this standard in its fiscal year ended
September 30, 1999. The adoption of SFAS No. 131 will not have an impact on the
Company's results of operations, financial position or cash flows.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-
1 is effective for financial statements for years beginning after December 15,
1998. SOP 98-1 provides guidance over accounting for computer software developed
or obtained for internal use, including the requirement to capitalize specified
costs and amortization of such costs. The Company does not expect the adoption
of this standard to have a material effect on its results of operations,
financial position or cash flows.
In April 1998, AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities" ("SOP 98-5"). SOP 98-5, which is effective for fiscal years
beginning after December 15, 1998, provides guidance on the financial reporting
of start-up costs and organization costs. It requires costs of start up
activities and organization costs to be expenses as incurred. The adoption of
this standard is not expected to have a significant 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 is effective for
fiscal years beginning after June 15, 1999. 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.
F-14
<PAGE> 90
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. ACQUISITION
On December 5, 1997, the Company acquired all of the outstanding capital
stock of MODE in exchange for 1,461,866 shares of EMCORE common stock, 200,966
common stock purchase options (exercise prices ranging from $0.43 to $0.59), and
47,118 common stock purchase warrants (exercise prices ranging from $4.32 to
$5.92). The purchase price was approximately $32,829,000 including direct
acquisition costs of approximately $500,000. The acquisition of MODE was
recorded using the purchase method of accounting. Accordingly, the results of
operations of the acquired business and the fair values of the acquired tangible
and intangible assets and assumed liabilities have been included in the
Company's financial statements as of December 5, 1997. The allocation of the
fair value of the net assets acquired is as follows:
<TABLE>
<S> <C>
Net tangible assets......................................... $ 156,000
Goodwill.................................................... 13,157,000
Acquired in process research and development................ 19,516,000
-----------
Total purchase price...................................... $32,829,000
===========
</TABLE>
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.
F-15
<PAGE> 91
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following unaudited pro forma basis financial information reflects the
combined results of operations of the Company and MODE, as if MODE had been
acquired as of October 1, 1996 and October 1, 1997, respectively, but does not
reflect the non-recurring write-off of the acquired in-process research and
development. The summary includes the impact of certain adjustments, such as
goodwill amortization and the number of shares outstanding.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------
1997 1998
(UNAUDITED)
<S> <C> <C>
Revenue............................................. $ 48,313,000 $ 43,860,000
Net loss before extraordinary item.................. (12,219,000) (18,344,000)
Net loss............................................ (12,505,000) (18,344,000)
Net loss per basic and diluted share................ $(2.04) $(2.09)
</TABLE>
The unaudited pro forma results of operations are not necessarily
indicative of what actually would have occurred if the acquisition had occurred
on October 1, 1996. In addition, the unaudited pro forma results of operations
are not intended to be a projection of future results that might be achieved
from the combined entity. The foregoing pro forma results of operations does not
reflect the non-recurring write-off of acquired in-process research and
development.
NOTE 4. CONCENTRATION OF CREDIT RISK
The Company sells its compound semiconductor products domestically and
internationally. The Company's international sales are generally made under
letter of credit arrangements.
For the years ended September 30, 1996, 1997 and 1998, the Company sold
42.5%, 42.0% and 39.1% of its products to foreign customers, respectively.
The Company's world-wide sales to major customers were as follows:
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
---------------------------------------
1996 1997 1998
<S> <C> <C> <C>
Customer A................................ $ 6,558,930 $ 4,872,540 $ 7,563,137
Customer B................................ 1,773,864 7,158,619 5,602,120
Customer C................................ -- 2,500,000 2,501,500
Customer D................................ 1,530,000 3,085,000 178,856
Customer E................................ 2,075,722 -- --
----------- ----------- -----------
Total................................... $11,938,516 $17,616,159 $15,845,613
=========== =========== ===========
</TABLE>
The Company performs material application research under contract with the
U.S. Government or as a subcontractor of U.S. Government funded projects.
The Company performs ongoing credit evaluations of its customers' financial
condition and collateral is not requested. The Company maintains reserves for
potential credit losses based upon the credit risk of specified customers,
historical trends and other information. To reduce credit risk and to fund
manufacturing costs, the
F-16
<PAGE> 92
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Company requires periodic prepayments or irrevocable letters of credit on most
production system orders. During the quarter ended June 30, 1998, the Company
wrote off outstanding receivables of approximately $1.0 million which was due
from an Asian customer. Prior to this event, the Company's credit losses
generally had not exceeded its expectations.
The Company has maintained cash balances with certain financial
institutions in excess of the $100,000 insured limit of the Federal Deposit
Insurance Corporation.
NOTE 5. INVENTORIES
The components of inventories consisted of the following:
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, AS OF
------------------------ MARCH 31,
1997 1998 1999
(UNAUDITED)
<S> <C> <C> <C>
Raw materials.............................. $6,513,379 $11,346,487 $ 9,926,968
Work-in-process............................ 672,247 1,091,971 2,743,897
Finished goods............................. -- 6,868 13,181
---------- ----------- -----------
Total.................................... $7,185,626 $12,445,326 $12,684,046
========== =========== ===========
</TABLE>
NOTE 6. PROPERTY, PLANT AND EQUIPMENT
Major classes of property and equipment are summarized below:
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, AS OF
--------------------------- MARCH 31,
1997 1998 1999
(UNAUDITED)
<S> <C> <C> <C>
Land................................... $ -- $ 1,028,902 $ 1,028,902
Building............................... -- 7,493,385 8,915,945
Equipment.............................. 19,190,770 28,367,324 34,379,727
Furniture and fixtures................. 2,300,146 3,255,680 3,999,342
Leasehold improvements................. 6,085,256 9,948,121 10,283,521
Fixed assets under capital leases...... 98,623 2,042,728 3,956,157
------------ ------------ ------------
27,674,795 52,136,140 62,563,594
Less: accumulated depreciation and
amortization......................... (10,876,962) (15,926,309) (19,303,666)
------------ ------------ ------------
Total................................ $ 16,797,833 $ 36,209,831 $ 43,259,928
============ ============ ============
</TABLE>
F-17
<PAGE> 93
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
At September 30, 1998, minimum future lease payments due under the capital
leases are as follows:
<TABLE>
<CAPTION>
PERIOD ENDING SEPTEMBER 30,
<S> <C>
1999...................................................... $ 796,648
2000...................................................... 741,345
2001...................................................... 62,478
2002...................................................... 25,336
2003 and thereafter....................................... --
----------
Total minimum lease payments................................ 1,625,807
Less: amount representing interest (average rate of 9.8%)... (198,254)
----------
Net minimum lease payments.................................. 1,427,553
Less: current portion....................................... (673,036)
----------
Long-term portion........................................... $ 754,517
==========
</TABLE>
The provisions for depreciation and amortization expense on owned property
and equipment amounted to approximately $1,743,000, $3,148,000 and $4,683,000
for the years ended September 30, 1996, 1997 and 1998, respectively. Accumulated
amortization on assets accounted for as capital lease amounted to approximately
$366,000 as of September 30, 1998.
Included in equipment above are ten systems and twenty systems with a
combined net book value of approximately $5.1 million and $9.8 million at
September 30, 1997 and 1998, respectively. Such systems are utilized for the
production of compound semiconductor wafers and package-ready devices for sale
to third parties, systems demonstration purposes, system sales support, in-house
materials applications, internal research and contract research funded by third
parties.
NOTE 7. ACCRUED EXPENSES
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, AS OF
----------------------- MARCH 31,
1997 1998 1999
(UNAUDITED)
<S> <C> <C> <C>
Accrued payroll, vacation and other employee
expenses................................... $1,659,428 $2,113,765 $2,197,670
Installation and warranty costs.............. 1,411,120 704,114 1,255,646
Interest..................................... 272,445 346,250 402,140
Other........................................ 524,596 1,033,276 1,601,806
---------- ---------- ----------
Total...................................... $3,867,589 $4,197,405 $5,457,262
========== ========== ==========
</TABLE>
F-18
<PAGE> 94
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8. DEBT FACILITIES
1998 Agreement:
On June 22, 1998, the Company entered into an $8.0 million loan agreement
with First Union National Bank (the "1998 Agreement"), which expires December
31, 1999. The 1998 Agreement bears interest at a rate equal to one-month LIBOR
plus three-quarters of one percent per annum (or 6.4%) at September 30, 1998. As
of September 30, 1998, $8.0 million was outstanding under the 1998 Agreement and
is due and payable on December 31, 1999. The 1998 Agreement is guaranteed by
both the Company's Chairman and Chief Executive Officer. In exchange for
guaranteeing the facility, the Chairman and the Chief Executive Officer were
granted an aggregate of 284,684 common stock purchase warrants exercisable at
$11.375 per share until May 1, 2001. These warrants are callable at the
Company's option at $0.85 per warrant at such time as the Company's Common Stock
has traded at or above 150% of the exercise price for a period of thirty days.
The Company assigned a value of $1,310,000 to the warrants issued to the
guarantors. This valuation was based upon the Company's application of Black
Scholes. This value is accounted for as debt issuance cost and will be amortized
over the eighteen month life of the 1998 Agreement.
1997 Agreement:
On March 31, 1997, the Company entered into a $10.0 million loan agreement
(the "1997 Agreement"). The Agreement bears interest at the rate of Prime plus
50 basis points (8.75% and 9.0% at September 30, 1998 and 1997, respectively).
As of September 30, 1998 the Company had $9,950,000 outstanding under this
facility. As of September 30, 1997, there were no amounts outstanding under this
facility.
As a result of the net loss for the quarters ended June 30, 1998 and
September 30, 1998, the Company was not in compliance with the 1997 Agreement
fixed charged coverage ratio covenant. The Company received a waiver from the
bank regarding this non-compliance. The Company's 1997 Agreement was
subsequently further extended through October 1, 1999. The 1997 Agreement's
financial covenants were modified under the second amendment, and management
believes that the Company will be able to comply with such requirements
throughout fiscal 1999. In addition, the Company's Chairman has guaranteed such
debt in the event the Company does not meet certain financial covenants.
Subordinated Notes:
On May 1, 1996, the Company issued subordinated notes (the "Subordinated
Notes") in the amount of $9,500,000 to its existing shareholders, $1,000,000 of
which were exchanged for notes receivable from officers and certain employees
with identical payment and interest provisions. The Subordinated Notes are
scheduled to mature on May 1, 2001, and have a stated interest rate of 6.0%
which is payable semi-annually on May 1 and November 1. In addition, the
noteholders were issued 2,328,432 common stock purchase warrants with an
exercise price of $4.08 per share which
F-19
<PAGE> 95
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
expire on May 1, 2001. The warrants are exercisable after November 1, 1996, and
are callable at the Company's option, after May 1, 1997, at $0.85 per warrant.
The Company has the legal right of offset with respect to the notes receivable
from officers and certain key employees, and it is their full intention to
offset the corresponding notes receivable and payable upon maturity. As such,
the Company reflected $848,000 of the officers' and employees' notes receivable
as a contra liability, reducing the Company's Subordinated Notes balance. The
remaining $152,000 note receivable has been reflected as a contra equity note
receivable balance, representing the portion of the employee note receivable
associated with common stock purchase warrants issued to such employees. The
Company received cash proceeds of $8,500,000 in connection with this
Subordinated Notes issuance.
On September 1, 1996, the Company issued a subordinated note in the amount
of $2,500,000 to the Company's then majority shareholder with terms identical to
the Subordinated Notes issued on May 1, 1996. In addition, under the terms of
this issuance, 245,098 common stock purchase warrants were issued to purchase
common stock at $10.20 per share and which expire September 1, 2001. These
warrants are exercisable after March 1, 1997, and are callable at the Company's
option after September 1, 1997, at $0.85 per warrant.
The Company assigned a value of $1,440,000 to the May 1, 1996 detachable
warrants and $900,000 to the September 1, 1996 detachable warrants. These
valuations were based upon the Company's application of Black Scholes and the
Company's assessment of the underlying valuation factors, as well as an
assessment of the terms of the Subordinated Notes. The carrying value of the
Subordinated Notes will be subject to periodic accretions, using the interest
method, in order for the carrying amount to equal the Company's obligation upon
maturity. As a result, the May 1, 1996 and September 1, 1996 Subordinated Notes
have an effective interest rate of approximately 9.3% and 15.0%, respectively.
For the years ended September 30, 1998, 1997 and 1996, imputed warrant interest
related to the Subordinated Notes amounted to $370,000, $388,000 and $126,000,
respectively.
Demand Note Facilities:
On September 17, 1998, the Company borrowed $7.0 million from its Chairman.
The loan bears interest at the 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 17).
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
F-20
<PAGE> 96
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
July 1, 1997, and are callable at the Company's option after December 1, 1997 at
$0.85 per warrant. The Facility was terminated in conjunction with the Company's
initial public offering.
The Company assigned a value of $3,600,000 to the warrants issued to the
guarantor. This valuation was based upon the Company's application of Black
Scholes. This value was accounted for as debt issuance cost and was amortized
over the expected period that the facility was to be in place (four months).
The Company utilized a portion of the proceeds from its initial public
offering to pay down or discharge certain of its debts. The Company repaid the
entire $8.0 million outstanding under its October 1996 Facility and $2.0 million
was used to repay a portion of the Company's outstanding subordinated notes, due
May 1, 2001. In connection with the discharge of the Company's subordinated
notes, an extraordinary loss of $286,000 was recognized.
NOTE 9. COMMITMENTS AND CONTINGENCIES
On November 16, 1992, the Company entered into a three-year lease agreement
with a bank for 34,000 square feet of space in the building the Company
presently occupies. On March 31, 1995, the agreement was renewed for 5 years for
49,000 square feet. In November 1996, the Company signed an agreement to occupy
the remaining 26,000 square feet that it previously had not occupied.
The Company leases certain equipment under non-cancelable operating leases.
Facility and equipment rent expense under such leases amounted to
approximately $350,000, $548,000 and $637,000 for the years ended September 30,
1996, 1997 and 1998, 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,
1998 are as follows:
<TABLE>
<CAPTION>
PERIOD ENDING SEPTEMBER 30,
<S> <C>
1999...................................................... $ 712,000
2000...................................................... 359,000
2001...................................................... 74,000
2002...................................................... 13,000
2003...................................................... 8,000
----------
Total minimum lease payments.............................. $1,166,000
==========
</TABLE>
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.
F-21
<PAGE> 97
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10. INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------
1996 1997 1998
<S> <C> <C> <C>
Current:
Federal.............................................. $ -- $113,000 $ --
State................................................ -- 24,000 --
----- -------- -----
-- 137,000 --
Deferred:
Federal.............................................. -- -- --
State................................................ -- -- --
----- -------- -----
Total............................................. $ -- $137,000 $ --
===== ======== =====
</TABLE>
The principal differences between the U.S. statutory and effective income
tax rates were as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------
1996 1997 1998
<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....................... 38.3 37.7 19.8
Non-deductible amortization......................... -- -- 3.4
Other............................................... 1.6 4.7 (1.5)
------ ------ ------
Effective tax rate.................................. 0.0% 2.5% 0.0%
====== ====== ======
</TABLE>
F-22
<PAGE> 98
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The components of the Company's net deferred taxes were as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------
1997 1998
<S> <C> <C>
Deferred tax assets:
Federal net operating loss carryforwards.............. $3,502,348 $7,943,877
Research credit carryforwards (state and federal)..... 718,644 1,479,221
Inventory reserves.................................... 207,732 247,521
Accounts receivable reserves.......................... 243,996 239,701
Interest.............................................. 1,461,389 1,657,337
Accrued installation reserve.......................... 362,379 163,778
Accrued warranty reserve.............................. 158,202 75,621
State net operating loss carryforwards................ 461,821 1,494,064
Other................................................. 144,586 238,318
Valuation reserve -- federal.......................... (5,583,217) (9,438,122)
Valuation reserve -- state............................ (1,334,975) (3,751,314)
---------- ----------
Total deferred tax assets.......................... 342,905 350,002
Deferred tax liabilities:
Fixed assets and intangibles.......................... (342,905) (350,002)
---------- ----------
Total deferred tax liabilities..................... (342,905) (350,002)
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.
As of September 30, 1998, the Company has net operating loss carryforwards
for regular tax purposes of approximately $22.0 million which expire in the
years 2003 through 2013. The Company believes that the consummation of certain
equity transactions and a significant change in the ownership during fiscal
years 1995 and 1998 have constituted a change in control under Section 382 of
the Internal Revenue Code ("IRC"). Due to the change in control, the Company's
ability to use its federal net operating loss carryovers and federal research
credit carryovers to offset future income and income taxes, respectively, are
subject to annual limitations under IRC Section 382 and 383.
The Company believes that the acquisition of MODE and the consummation of
certain other equity transactions has constituted a change in control in fiscal
1998 under Section 382 of the IRC. As such, Federal net operating loss
carryovers and research credit carryovers incurred subsequent to the Company's
fiscal 1995 change in control (as described above) will also be subject to
annual limitations under IRC Section 382 and 383.
NOTE 11. STOCKHOLDERS' EQUITY
Reverse Stock Split. On February 3, 1997, the Board of Directors approved
a 3.4:1 reverse stock split of its common stock and approved a decrease in the
number of
F-23
<PAGE> 99
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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. In March 1997, the Company completed an initial
public offering of 2,500,000 shares of common stock at a price of $9.00 per
share (the "Offering"), and upon the exercise of the Underwriter's overallotment
option, 375,000 additional shares of common stock were also sold at $9.00 per
share. The proceeds, net of commissions and certain expenses, to the Company
from the offering were approximately $22.8 million. Prior to the Offering, there
was no public market for the Company's common stock.
Warrant Exercise. On December 3, 1997, the holders of 1.8 million common
stock purchase warrants (with an exercise price of $4.08) exercised such
warrants with the Company taking full recourse notes amounting to approximately
$7.5 million in exchange for the issued common stock. The notes receivable
mature and are payable in full on May 1, 2001 and bear interest at a rate of 6%,
compounding semi-annually. In addition, the holders are required to provide
collateral at a 2:1 coverage ratio. This collateral is presently held by the
Company.
Preferred Stock. The Company's certificate of incorporation authorizes the
Board of Directors to issue up to 5,882,353 shares of preferred stock of the
Company upon such terms and conditions having such rights, privileges and
preferences as the Board of Directors may determine.
NOTE 12. STOCK OPTIONS AND WARRANTS
Stock Option Plan. In November 1994, the Company's Incentive Stock Option
Plan, initiated in 1987, was eliminated. On June 5, 1995, the Company adopted
the 1995 Incentive and Non-Statutory Stock Option Plan (the "Option Plan").
Under the terms of the Option Plan, options to acquire 323,529 shares of common
stock may be granted to eligible employees, as defined, at no less than 100
percent of the fair market value on the date of grant. In March 1996, options to
acquire an additional 323,530 shares of common stock were approved. In February
1997, options to acquire an additional 725,000 shares of common stock were
approved. As of September 30, 1998, 1,372,059 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 1998, options with respect to 816,284 shares were granted
pursuant to the Company's option plan or issued in connection with the MODE
acquisition at exercise prices ranging from $0.44 to $20.00 per share.
Stock options granted generally vest over three to five years and are
exercisable over a ten year period. As of September 30, 1996, 1997 and 1998,
options with respect to 162,764, 199,368 and 481,863 shares were exercisable,
respectively.
F-24
<PAGE> 100
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the activity under the plan:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
<S> <C> <C>
Outstanding as of September 30, 1995.................... 281,470 $ 3.03
Granted............................................... 57,942 6.04
Exercised............................................. -- --
Canceled.............................................. -- --
--------- ------
Outstanding as of September 30, 1996.................... 339,412 $ 3.54
Granted............................................... 182,700 11.06
Exercised............................................. (42,165) 3.17
Canceled.............................................. (4,475) 3.08
--------- ------
Outstanding as of September 30, 1997.................... 475,472 $ 6.47
Granted............................................... 615,318 13.34
Exercised............................................. (19,919) 3.78
Canceled.............................................. (35,457) 12.34
--------- ------
Outstanding as of September 30, 1998.................... 1,035,414 $10.40
Granted............................................... 9,000 25.06
Exercised............................................. (11,466) 3.29
Canceled.............................................. (23,489) 12.00
--------- ------
Outstanding as of March 31, 1999 (unaudited)............ 1,009,459 10.44
========= ======
</TABLE>
As of September 30, 1998, stock options outstanding, excluding those
assumed in connection with the acquisition of MODE, were as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
REMAINING
OPTIONS CONTRACTUAL LIFE EXERCISABLE
EXERCISE PRICES OUTSTANDING (YEARS) OPTIONS
<S> <C> <C> <C>
$0.00 , x # $5.00......................... 242,219 7.96 295,423
$5.00 , x # $10.00........................ 22,500 9.88 --
$10.00 , x # $15.00....................... 661,975 9.17 178,873
$15.00 , x # $20.00....................... 74,720 9.19 767
$20.00 , x # $25.00....................... 34,000 8.94 6,800
</TABLE>
In connection with the Company's acquisition of MODE, it assumed 200,966
common stock purchase options with exercise prices ranging from $0.43 to $0.59.
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. As of September 30, 1998, there are 177,312 options
outstanding at a weighted average exercise price of $0.49.
F-25
<PAGE> 101
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.............. 200,966 $0.50
Exercised............................................... (15,890) 0.51
Cancelled............................................... (7,764) 0.56
--------- -----
Outstanding as of September 30, 1998.................... 177,312 0.50
Granted................................................. -- --
Exercised............................................... (9,634) 0.54
Cancelled............................................... (5,170) 0.58
--------- -----
Outstanding as of March 31, 1999 (unaudited)............ 162,508 $0.49
========= =====
</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>
YEARS ENDED SEPTEMBER 30,
--------------------------
1997 1998
<S> <C> <C>
Net loss before extraordinary item
As reported.......................................... $5,333,772 $36,418,796
Pro forma............................................ 5,441,274 37,037,847
Net loss per basic and diluted share before
extraordinary item
As reported.......................................... $ (1.14) $ (4.15)
Pro forma............................................ (1.17) (4.22)
Net loss
As reported.......................................... $5,619,367 $36,418,796
Pro forma............................................ 5,726,869 37,037,847
Net loss per basic and diluted share
As reported.......................................... $ (1.20) $ (4.15)
Pro forma............................................ (1.23) (4.22)
</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 in fiscal 1997: no dividend yield; expected volatility of 0%
prior to the Company's initial public offering and 60% thereafter; a risk-free
interest rate of 6.04% and 5.57% for fiscal years 1997 and 1998, respectively;
and expected lives of 5 years. The weighted average fair value of options
granted during the years ended September 30, 1997 and 1998 is $3.82 and $7.50
per share, respectively. Stock options granted by the
F-26
<PAGE> 102
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Company prior to its initial public offering were valued using the minimum value
method under FASB No. 123.
Warrants. Set forth below is a summary of the Company's outstanding
warrants at September 30, 1998:
<TABLE>
<CAPTION>
EXERCISE EXPIRATION
SECURITY PRICE WARRANTS DATE
<S> <C> <C> <C>
Common Stock(1)........................... $ 4.08 385,428 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 1,225,490 September 1, 2001
Common Stock(4)........................... 11.38 284,684 May 1, 2001
</TABLE>
- -------------------------
(1) Issued in connection with the Company's May 1996 subordinated note issuance.
(2) Issued in connection with the MODE acquisition.
(3) Issued in connection with the Company's September 1996 subordinated debt
issuance and October 1996 debt guarantee.
(4) Issued in connection with the 1998 Agreement guarantee.
NOTE 13. RELATED PARTIES
In May 1995, 52% of the Company's outstanding shares of Common Stock were
purchased by Jesup & Lamont Merchant Partners, L.L.C. ("JLMP"). Prior to May 12,
1997, a majority of the Company's then six directors were members of JLMP. On
May 12, 1997, JLMP distributed all of its shares of the Company to the
individual members of JLMP. In May 1995, the Company entered into a consulting
agreement (the "Agreement") with Jesup & Lamont Capital Markets, Inc. ("Jesup &
Lamont") pursuant to which Jesup & Lamont agreed to provide financial advisory
and employee services for the Company for one year. Total fees paid to Jesup &
Lamont amounted to approximately $241,697 for the fiscal year ended September
30, 1996. No fees were paid to Jesup & Lamont during the fiscal years ended
September 30, 1998 and 1997.
In December 1996, the Company's chairman and chief executive officer
retired. The Company entered into a consulting agreement with him for a term of
two years and will provide compensation of $250,000 per annum. In addition, the
Company has also forgiven $115,300 of his indebtedness to the Company and had
agreed to extend the period for the exercise of his vested stock options through
March 1997 and accordingly he exercised all 26,471 vested shares.
In fiscal 1997, the Company entered into a non-exclusive and non-refundable
technology licensing and royalty agreement with Uniroyal Technology Corporation
("UTC") for the process technology to develop and manufacture high brightness
light emitting diodes ("LEDs"). During fiscal 1998 and 1997, revenue associated
with the UTC licensing agreement amounted to $2.5 million and $2.5 million,
respectively. At the time the transaction was originally entered into, UTC's
Chairman and CEO was a member of EMCORE's Board of Directors and EMCORE's
Chairman was on the Board of Directors of UTC. All related party accounts
receivable for fiscal 1997 have
F-27
<PAGE> 103
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
been paid in full. As of September 30, 1998, the Company had an outstanding
related party receivable of $500,000.
In July 1998, the Company and a wholly-owned subsidiary of UTC formed
Uniroyal Optoelectronics, a venture (the "UTC Venture") to produce and market
compound semiconductor products. The Company has a 49% non-controlling minority
interest. The Company's rights under the venture agreement are protective and as
such, the Company accounts for its interest in the venture under the equity
method of accounting. In July 1998, the Company invested $490,000 in the UTC
Venture which was classified as a component of other long-term assets. For the
year ended September 30, 1998, the Company recognized a loss of $198,000 related
to the UTC Venture, which has been recorded as a component of other income and
expense.
In November 1998, the Company invested an additional $5.0 million into the
UTC Venture. During the six months ended March 31, 1999, the Company sold three
compound semiconductor production systems to the UTC Venture totaling $5.3
million in revenues. The Company eliminated 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 UTC
Venture's production systems. For the six months and the year ended March 31,
1999 and September 30, 1998, respectively, the Company recognized a loss of $1.0
million and $198,000 related to this venture, which has been recorded as a
component of other income and expense. As of March 31, 1999, the Company's
investment in this venture amounted to $4.3 million.
The President of Hakuto Co. Ltd. ("Hakuto"), the Company's Asian
distributor, is a member of the Company's Board of Directors and Hakuto is a
minority shareholder of the Company. During the year ended September 30, 1998,
sales made through Hakuto approximated $9.2 million. During the six months ended
March 31, 1999, sales made through Hakuto amounted to approximately $5.1
million.
On June 22, 1998, the Company entered into the 1998 Agreement. The 1998
Agreement was guaranteed by the Chairman and the Chief Executive Officer of the
Company (see Note 8). In return for guaranteeing the facility, the Company
granted the Chairman and the Chief Executive Officer an aggregate of 284,684
common stock purchase warrants at $11.375 per share which expire May 1, 2001.
These warrants are callable at the Company's option at $0.85 per warrant at such
time as the Company's common stock has traded at or above 150% of the exercise
price for a period of 30 days.
On September 17, 1998, the Company borrowed $7.0 million from its Chairman,
Thomas J. Russell. The loan bears interest at 9.75% per annum. In addition, on
October 23, 1998 the Company borrowed an additional $1.5 million from its
Chairman on identical terms. The entire $8.5 million, borrowed from Mr. Russell
was repaid from the proceeds of a private placement (See Note 8).
F-28
<PAGE> 104
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14. EXPORT SALES
The information below summarizes the Company's export sales by geographic
area. The Company's export sales to the Far East and Europe are as follows:
<TABLE>
<CAPTION>
ASIA EUROPE TOTAL
<S> <C> <C> <C>
Year ended September 30, 1996.............. $ 8,209,309 $3,588,066 $11,797,375
Year ended September 30, 1997.............. 14,583,981 5,478,186 20,062,167
Year ended September 30, 1998.............. 15,527,169 1,584,851 17,112,020
</TABLE>
NOTE 15. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
NET
INCOME (LOSS)
PER
BASIC AND
OPERATING NET DILUTED
REVENUES INCOME (LOSS) INCOME (LOSS) SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Fiscal Year Ended September 30,
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 Ended September 30,
1998:
December 31, 1997 (as previously
reported)...................... $12,357 $(29,223)* $(29,389)* $(4.15)*
December 31, 1997 (as restated)... 12,357 (19,717) (19,883) (2.81)
March 31, 1998 (as previously
reported)...................... 13,808 200 37 0.00
March 31, 1998 (as restated)...... 13,808 (615) (778) (0.08)
June 30, 1998 (as previously
reported)...................... 9,074 (7,141) (7,446) (0.80)
June 30, 1998 (as restated)....... 9,074 (7,956) (8,260) (0.88)
September 30, 1998 (as previously
reported)...................... 8,521 (5,544) (6,683) (0.71)
September 30, 1998 (as
restated)...................... 8,521 (6,359) (7,498) (0.80)
</TABLE>
- -------------------------
See Note 20, "Restatement".
* includes a $19.5 million one-time charge to acquired in-process research and
development, non-cash.
NOTE 16. EMPLOYEE SAVINGS PLAN
The Company has a savings plan (the "Savings Plan") that qualifies as a
deferred salary arrangement under Section 401(k) of the Internal Revenue Code.
Under the Savings Plan, participating employees may defer a portion of their
pretax earnings, up to the Internal Revenue Service annual contribution limit.
Effective August 1, 1997, the Company began contributing to the Savings Plan.
All employer contributions are made in the Company's common stock. For the year
ended September 30, 1998, the Company contributed approximately $252,000 to the
Savings Plan.
F-29
<PAGE> 105
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 17. SUBSEQUENT EVENT -- REDEEMABLE PREFERRED STOCK PRIVATE PLACEMENT
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")
to related parties (Hakuto Company, Ltd., Uniroyal Technology Corporation, and
Union Miniere, Inc.) for aggregate consideration of $21.7 million before
deducting costs and expenses which amounted to approximately $500,000. The
Series I Preferred Stock was recorded net of issuance costs. The excess of the
preference amount over the carrying value of the Series I Preferred Stock is
being accreted by periodic charges to accumulated deficit in the absence of
additional paid in capital. The shares of Series I Preferred Stock are
convertible, at any time, at the option of the holders thereof, unless
previously redeemed, into shares of common stock at an initial conversion price
of $14.00 per share of common stock, subject to adjustment in certain cases. The
market price of the Company's common stock was $12.875 on the date the Series I
Preferred Stock was issued. The Series I Preferred Stock is redeemable, in whole
or in part, at the option of the Company at any time the Company's stock has
traded at or above $28.00 per share for 30 consecutive trading days, at a price
of $14.00 per share, plus accrued and unpaid dividends, if any, to the
redemption date. The Series I Preferred stock carries a dividend of 2% per
annum. Dividends are being charged to accumulated deficit in the absence of
additional paid in capital. In addition, the Series I Preferred Stock is subject
to mandatory redemption by the Company at $14.00 per share plus accrued and
unpaid dividends, if any, on November 17, 2003.
NOTE 18. SUBSEQUENT EVENTS -- JOINT VENTURES
In November 1998, the Company entered into a joint venture with Union
Miniere Inc. to undertake research and development aimed at new material
application of germanium substrates. The Company has a 50% non-controlling
interest in the venture. The Company will account for its interest in the
venture under the equity method of accounting. In November 1998, the Company
invested $600,000 in the venture. The Company is obligated to fund the venture's
capital requirements in proportion to its equity interest.
In November 1998, the Company also formed a venture with Optek Technology,
Inc. to produce, market and distribute packaged electronic semiconductor
components. The Company has a 50% non-controlling interest in the venture. The
Company will account for its interest in the venture under the equity method of
accounting. The Company is obligated to fund the venture's capital requirements
in proportion to its equity interest.
On January 21, 1999, GE Lighting and the Company agreed, subject to certain
conditions, to form a new joint venture to develop and market "white light"
light-emitting diodes. The new company, GELcore, LLC (the "GELcore Venture"),
will develop and market LEDs as replacements for miniature automotive, compact
fluorescent, halogen and traditional incandescent lighting. Under terms of the
joint venture agreement, the Company will have a 49% non-controlling interest in
the GELcore Venture.
F-30
<PAGE> 106
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the GELcore venture, General Electric will fund the
Company's initial capital contribution of $7.8 million into GELcore. The funding
will be in the form of a subordinated debenture (the "Debenture") with an
interest rate of 4.75% that will mature seven years from the date of issuance
and is convertible into common stock of the Company at a conversion price of
$22.875 or 340,984 shares. The Debenture is convertible at any time at the
option of GE Lighting and may be called by the Company after three years, if the
price of the Company's common stock has traded at or above $34 for at least
thirty days. The Debenture's interest rate will be subject to adjustment in the
event the Company does not complete a public offering by June 30, 1999.
In addition, General Electric will also receive 282,010 warrants to
purchase common stock at $22.875 per share. The warrants are exercisable at any
time and will expire in 2006. For the three months ended March 31, 1999, the
Company recognized a loss of $497,000 related to this venture which has been
recorded as a component of other income and expense. On a fully diluted basis,
General Electric will own approximately 5% of the common stock of the Company.
On April 27, 1999, the Company contributed an additional $500,000 as a
capital investment in their joint venture with Uniroyal Technologies
Corporation.
NOTE 19. SUBSEQUENT EVENTS -- OTHER
Short Term Borrowings. On February 1, 1999, the Company entered into a $5
million short-term note (the "Note") with First Union. The Note is due and
payable in May 1999. The Note bears interest at a rate equal to one-month LIBOR
plus three-quarters of one percent per annum.
On April 29, 1999, the Company entered into a $19.0 million short-term note
(the "Amended Note") with First Union. The Amended Note consolidated the $8.0
million loan agreement dated June 22, 1998 and the $5 million Note plus an
additional $6.0 million. The Amended Note is due and payable October 1, 1999 and
bears interest at a rate equal to one-month LIBOR plus three-quarters of one
percent per annum. The Amended Note is guaranteed by the Company's Chairman and
Chief Executive Officer.
1997 Agreement. In January 1999, the Company borrowed the remaining
balance of $2,050,000 available under the 1997 Agreement.
Related Party Transactions. On January 27, 1999, the Company borrowed $3.0
million from its Chairman. The loan bears interest at 8% per annum. This loan
was repaid from borrowings under the Note.
On January 29, 1999, the Company's Chairman committed to provide $30
million of long-term financing of the Company through July 1, 2000. The
Chairman's financing commitment terminates if the Company completes a secondary
offering of approximately $40.0 million.
F-31
<PAGE> 107
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
On April 29, 1999, the Company borrowed $2.5 million from its Chairman at
an interest rate of Prime plus two percent. On May 7, 1999, this loan was repaid
from borrowing under the Amended Note with First Union.
20. RESTATEMENT
Subsequent to the issuance of the Company's Annual Report on Form 10-K for
the year ended September 30, 1998, the Company's management revised the amount
of the purchase price which was allocated to in-process research and development
in accounting for the acquisition of MicroOptical Devices, Inc. ("MODE") in
December 1997. The revised allocation is based upon methods prescribed in a
letter from the Securities and Exchange Commission ("SEC") sent to the American
Institute of Certified Public Accountants. The letter sets forth the SEC's views
regarding the valuation methodology to be used in allocating a portion of the
purchase price to acquired in-process research and development ("IPR&D") at the
date of acquisition.
The revised valuation is based on management's estimates of the net cash
flows associated with expected operations of MODE and gives explicit
consideration to the SEC's views on acquired IPR&D as set forth in its letter to
the American Institute of Certified Public Accountants.
As a result of the revised allocation, the Company's financial statements
for the year ended September 30, 1998, have been restated from amounts
previously reported to reduce the amount of the acquired in-process research and
development expensed by $9.8 million and to increase goodwill by $9.8 million.
The amount allocated to goodwill includes approximately $0.5 million related to
the value of MODE's workforce. The change had no impact on net cash flows used
by operations.
A summary of the significant effects of the restatement is as follows:
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, 1998
-----------------------------
AS PREVIOUSLY
REPORTED AS RESTATED
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Goodwill, net................................... $ 2,457,000 $ 9,519,000
Accumulated deficit............................. (67,258,454) (60,196,454)
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 1998 MARCH 31, 1998
----------------------------- ----------------------------
AS PREVIOUSLY AS PREVIOUSLY
REPORTED AS RESTATED REPORTED AS RESTATED
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Goodwill amortization........................... $ 921,941 $ 3,637,941 $ 355,000 $ 1,442,000
Research and development -- one time acquired
in-process, non-cash.......................... 29,294,000 19,516,000 -- --
Net loss........................................ (43,480,796) (36,418,796) (29,351,937) (20,660,937)
Net loss per basic and diluted share............ $(4.95) $(4.15) $(3.58) $(2.52)
</TABLE>
F-32
<PAGE> 108
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
MicroOptical Devices, Inc.:
We have audited the accompanying balance sheets of MICROOPTICAL DEVICES,
INC. (a Delaware corporation in the development stage) (the "Company") as of
December 31, 1996 and 1995, and the related statements of operations,
stockholders' equity and cash flows for the year ended December 31, 1996 and for
the period from inception (August 3, 1995) through December 31, 1995 and 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of MicroOptical Devices, Inc.
as of December 31, 1996 and 1995, and the results of its operations and its cash
flows for the year ended December 31, 1996 and for the period from inception
(August 3, 1995) through December 31, 1995 and 1996, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Albuquerque, New Mexico
March 21, 1997
F-33
<PAGE> 109
MICROOPTICAL DEVICES, INC.
(A DEVELOPMENT STAGE CORPORATION)
BALANCE SHEETS
AS OF SEPTEMBER 30, 1997 (UNAUDITED), DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ---------------------
1997 1996 1995
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................... $ 643,542 $ 991,066 $125,837
Trade accounts receivable...................... 173,710 3,850 150
Inventory...................................... 131,931 83,926 --
Other current assets........................... 22,314 26,544 9,029
---------- ---------- --------
Total current assets........................ 971,497 1,105,386 135,016
Property and equipment, net...................... 2,405,541 2,388,953 5,220
Organization costs, net.......................... 2,247 2,814 3,571
---------- ---------- --------
Total assets................................ $3,379,285 $3,497,153 $143,807
========== ========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................... 70,589 $ 29,580 $ 18,148
Accrued liabilities............................ 755,568 74,600 746
Current portion of obligations under capital
leases...................................... 91,664 38,676 --
Deferred revenue............................... -- 125,000 --
---------- ---------- --------
Total current liabilities................... 917,821 267,856 18,894
---------- ---------- --------
Long-term liabilities:
Obligations under capital leases, net of
current portion............................. 1,753,994 107,648 --
---------- ---------- --------
Commitments and contingencies (Notes 8 and 9)
Stockholders' equity:
Series A Convertible Preferred Stock, $.001 par
value; 1,200,000 shares authorized; 666,666
shares issued and outstanding............... 666 666 222
Series B Convertible Preferred Stock, $.001 par
value; 5,333,334 shares authorized,
4,076,088 shares issued and outstanding..... 4,076 4,076 --
Common Stock, $.001 par value; 6,000,000 shares
authorized:
3,000,000 shares issued and outstanding..... 3,015 3,000 1,000
Additional paid-in capital....................... 3,275,592 3,251,532 181,596
Deficit accumulated during development stage..... (2,575,879) (137,625) (57,905)
---------- ---------- --------
Total stockholders' equity.................. 707,470 3,121,649 124,913
========== ========== ========
Total liabilities and stockholders'
equity.................................... $3,379,285 $3,497,153 $143,807
========== ========== ========
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-34
<PAGE> 110
MICROOPTICAL DEVICES, INC.
(A DEVELOPMENT STAGE CORPORATION)
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (AUGUST 3, 1995)
THROUGH DECEMBER 31, 1996,
THE YEAR ENDED DECEMBER 31, 1996,
THE PERIOD FROM INCEPTION THROUGH DECEMBER 31, 1995
AND FOR THE NINE MONTH PERIOD
ENDED SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
INCEPTION
NINE MONTH PERIOD (AUGUST, 1995)
ENDED THROUGH YEAR ENDED PERIOD FROM
SEPTEMBER 30, 1997 DECEMBER 31, 1996 DECEMBER 31, 1996 INCEPTION TO
(UNAUDITED) DECEMBER 31, 1995
<S> <C> <C> <C> <C>
Revenues............. $ 342,610 $ 661,350 $ 661,350 $ --
Cost of goods sold... 365,084 222,967 222,967 --
----------- ---------- ---------- ----------
Gross margin......... (22,474) 438,383 438,383 --
----------- ---------- ---------- ----------
Expenses:
Research and
development...... 1,683,176 339,696 292,592 47,104
General and
administrative... 659,654 192,105 178,540 13,565
Sales and
marketing........ 112,198 85,169 85,169 --
----------- ---------- ---------- ----------
Total expenses... 2,455,028 616,970 556,301 60,669
----------- ---------- ---------- ----------
Operating
(loss)....... (2,477,502) (178,587) (117,918) (60,669)
Interest income...... 39,248 40,962 38,198 2,764
----------- ---------- ---------- ----------
Net Loss....... $(2,438,254) $ (137,625) $ (79,720) $ (57,905)
=========== ========== ========== ==========
Net loss per share... $ (0.81) $ (.05) $ (.03) $ (.02)
=========== ========== ========== ==========
Weighted Average
Number of Post-
Split Common Shares
Outstanding........ 3,000,000 3,000,000 3,000,000 3,000,000
=========== ========== ========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-35
<PAGE> 111
MICROOPTICAL DEVICES, INC.
(A DEVELOPMENT STAGE CORPORATION)
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (AUGUST 3, 1995)
THROUGH SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
SERIES A SERIES B DEFICIT
CONVERTIBLE CONVERTIBLE ACCUMULATED
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL DURING
---------------- ------------------ ------------------ PAID-IN DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL STAGE TOTAL
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, at inception........ -- $ -- -- $ -- -- $ -- $ -- $ -- $ --
Issuance of Common Stock..... -- -- -- -- 1,000,000 1,000 -- -- 1,000
Issuance of Series A
Convertible Preferred
Stock:
Net of $18,182 in issuance
costs.................... 222,222 222 -- -- -- -- 181,596 -- 181,818
Net loss..................... -- -- -- (57,905) (57,905)
------- ---- --------- ------ --------- ------ ---------- ----------- ----------
Balance, December 31, 1995... 222,222 222 -- -- 1,000,000 1,000 181,596 (57,905) 124,913
Issuance of Series B
Convertible Preferred
Stock:
Net of $48,545 in issuance
costs.................... -- -- 1,293,479 1,294 -- -- 2,925,162 -- 2,926,456
Conversion of Note Payable... -- -- 65,217 65 -- -- 149,935 -- 150,000
Three for one stock split.... 444,444 444 2,717,392 2,717 2,000,000 2,000 (5,161) -- --
Net loss..................... -- -- -- (79,720) (79,720)
------- ---- --------- ------ --------- ------ ---------- ----------- ----------
Balance, December 31, 1996... 666,666 $666 4,076,088 $4,076 3,000,000 $3,000 $3,251,532 $ (137,625) $3,121,649
------- ---- --------- ------ --------- ------ ---------- ----------- ----------
Issuance of Common Stock upon
exercise of options........ 15,000 15 1,560 1,575
TVC finders fee forgiven..... 22,500 22,500
Net loss..................... (2,438,254) (2,438,254)
------- ---- --------- ------ --------- ------ ---------- ----------- ----------
Balance, September 30, 1997
(unaudited)................ 666,666 $666 4,076,088 $4,076 3,015,000 $3,015 $3,275,592 $(2,575,879) $ 707,470
======= ==== ========= ====== ========= ====== ========== =========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-36
<PAGE> 112
MICROOPTICAL DEVICES, INC.
(A DEVELOPMENT STAGE CORPORATION)
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (AUGUST 3, 1995)
THROUGH DECEMBER 31, 1996
AND FOR THE YEAR ENDED DECEMBER 31, 1996
AND FOR THE PERIOD FROM INCEPTION THROUGH DECEMBER 31, 1995
AND FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION INCEPTION
NINE MONTH (AUGUST, 1995) (AUGUST, 1995)
PERIOD ENDED THROUGH YEAR ENDED THROUGH
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1996 1995
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss......................................... $(2,438,254) $ (137,625) $ (79,720) $(57,905)
Adjustments to reconcile net loss to net cash
provided by operating activities --
Depreciation and amortization.................. 302,540 32,430 31,894 536
----------- ----------- ----------- --------
(2,135,714) (105,195) (47,826) (57,369)
----------- ----------- ----------- --------
Changes in certain operating accounts --
Trade accounts receivable.................... (169,860) (3,850) (3,700) (150)
Inventory.................................... (48,005) (83,926) (83,926) --
Other current assets......................... 4,229 (26,544) (17,515) (9,029)
Accounts payable............................. 41,009 29,580 11,432 18,148
Accrued liabilities.......................... 703,467 74,600 73,854 746
Deferred revenue............................. (125,000) 125,000 125,000 --
----------- ----------- ----------- --------
405,840 114,860 105,145 9,715
----------- ----------- ----------- --------
Net cash provided by (used in) operating
activities............................... (1,729,874) 9,665 57,319 (47,654)
----------- ----------- ----------- --------
CASH FLOWS USED BY INVESTING ACTIVITIES:
Additions to equipment........................... (318,559) (2,420,513) (2,414,970) (5,543)
Proceeds from sale and leaseback of equipment.... -- 150,234 150,234 --
Additions to organization costs.................. -- (3,784) -- (3,784)
----------- ----------- ----------- --------
Net cash used in investing activities...... (318,559) (2,274,063) (2,264,736) (9,327)
----------- ----------- ----------- --------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Proceeds from issuance of notes payable.......... 1,699,334 150,000 150,000 --
Repayments of obligations under capital leases... -- (3,810) (3,810) --
Net proceeds from issuance of preferred stock.... -- 3,108,274 2,926,456 181,818
Net proceeds from issuance of common stock....... 1,575 1,000 -- 1,000
----------- ----------- ----------- --------
Net cash provided by financing
activities............................... 1,700,909 3,255,464 3,072,646 182,818
----------- ----------- ----------- --------
Net increase in cash and cash equivalents........ (347,524) 991,066 865,229 125,837
Cash and cash equivalents, beginning of period... 991,066 -- 125,837 --
----------- ----------- ----------- --------
Cash and cash equivalents, end of period......... 643,542 $ 991,066 $ 991,066 $125,837
=========== =========== =========== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest........................... $ 1,776 $ 1,776 $ --
=========== =========== ========
NON CASH STOCK ACTIVITY:
Conversion of note payable to preferred stock.... $ 150,000 $ 150,000 $ --
=========== =========== ========
NON-CASH FINANCING ACTIVITY:
Equipment capital leases......................... $ 146,000 $ 146,000 $ --
=========== =========== ========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-37
<PAGE> 113
MICROOPTICAL DEVICES, INC.
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM INCEPTION (AUGUST 3, 1995)
THROUGH DECEMBER 31, 1996
AND FOR THE YEAR ENDED DECEMBER 31, 1996
AND FOR THE PERIOD FROM INCEPTION THROUGH DECEMBER 31, 1995
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT RISK FACTORS
MicroOptical Devices, Inc. (the "Company" or "MODE"), was incorporated
under the laws of the State of Delaware on August 3, 1995 for the purpose of
developing technology and manufacturing of advanced optoelectronic components
and systems for specific use in commercial identification and communications
markets.
The Company funded its marketing, development and operational activities to
date from the proceeds of two equity offerings. Since inception, the Company has
devoted substantially all of its efforts and resources to marketing and
development of its technology and remains in the development stage. Ultimately,
the Company's ability to achieve profitable operations is dependent, in large
part, upon making the transition to a manufacturing company.
On July 16, 1996, an amendment to the Certificate of Incorporation of MODE
(the "Amendment") was filed, which (a) increased the total number of its common
shares, which the Company is authorized to issue from two million to four
million, and (b) increased the total number of authorized shares of its
Convertible Preferred Stock, from four thousand to two million (222,222 shares
of Series A Convertible Preferred Stock and 1,777,778 shares of Series B
Convertible Preferred Stock).
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Basis. The financial books and records of the Company are
maintained on the accrual basis of accounting. As a development stage company,
cumulative results of operations from inception are presented.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Cash Equivalents. For the purposes of presenting cash flows, cash and cash
equivalents represent cash balances and highly liquid investments with original
maturities of less than 90 days.
Inventory. Inventories are stated at the lower of standard cost (which
approximates actual cost using the first-in, first-out method) or market and
consist of raw materials.
Property and Equipment. Equipment is stated at cost, net of accumulated
depreciation. Depreciation is computed on the straight-line method based on
estimated useful lives ranging from three to five years. Leasehold improvements
are amortized
F-38
<PAGE> 114
MICROOPTICAL DEVICES, INC.
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
using the straight-line method over the shorter of the estimated useful life of
the asset or the remaining term of the lease.
Organization Costs. Costs to organize the Company are capitalized and
amortized on a straight-line basis over five years.
Research and Development. The costs of research and development activities
are charged to expense as incurred.
Fair Value of Financial Instruments. The carrying value of all financial
instruments approximates fair market value at December 31, 1996 and 1995.
Stock-Based Compensation. The Company accounts for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25 ("APB Opinion No. 25"), "Accounting for Stock
Issued to Employees," and related Interpretations. Accordingly, compensation
cost for stock options is measured as the excess, if any, of the quoted market
price of the Company's stock at the date of the grant over the amount an
employee must pay to acquire the stock. Financial Accounting Standards Board
Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), was
issued in 1995 and the Company has adopted the disclosure requirements of SFAS
123 (see Note 6).
Income Taxes. MODE accounts for income taxes using the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under Financial Accounting Standards Board Statement No.
109, "Accounting for Income Taxes" ("SFAS No. 109"), the effect on deferred tax
assets and liabilities of a change in tax rates is recognized in operations in
the period that includes the enactment date.
Net Loss Per Share. Net loss per share for each period was calculated
based upon the weighted average number of Common Stock outstanding during each
period, using post split shares resulting from the three- for-one stock split
effective August 1996. Common Stock equivalents were excluded in the calculation
of weighted average shares outstanding since their inclusion would have had an
anti-dilutive effect.
Accounting Pronouncement Not Yet Adopted. The Financial Accounting
Standards Board issued SFAS No. 128, "Earnings Per Share," which is effective
for calendar years beginning after December 15, 1997 at which time it will
require restatement of prior years earnings per share calculations. Management
has not yet determined the effect, if any, of SFAS No. 128 on the financial
statements.
F-39
<PAGE> 115
MICROOPTICAL DEVICES, INC.
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment at December 31 by major classification are as
follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Manufacturing equipment..................................... $1,781,487 $ --
Leasehold improvements...................................... 570,397 --
Furniture and fixtures...................................... 68,529 5,543
---------- ------
2,420,413 5,543
Less accumulated depreciation and amortization.............. 31,460 323
---------- ------
$2,388,953 $5,220
========== ======
</TABLE>
NOTE 4. CAPITAL LEASES
In 1996, the Company financed certain manufacturing equipment, leasehold
improvements, and furniture and fixtures under a Master Equipment Lease
Agreement ("the Lease") expiring June 30, 1997, which provides for financing of
up to $2,000,000. The Company had only nominal borrowings under the Lease at
December 31, 1996. The capital leases have terms of 42 months and are
collateralized by manufacturing equipment. The transactions under the Lease are
accounted for as a financing, whereby the property remains on the books and
continues to be depreciated and amortized. Obligations under capital leases
representing the proceeds was recorded, and is reduced based on payments under
capital lease obligations. All items are sold and leasedback at original
purchase price, therefore no gain or loss was recorded on such transactions
during 1996.
At December 31, 1996, approximately $146,000 of manufacturing equipment was
under capital lease. The future minimum lease payments for assets under capital
lease and the present value of the net minimum lease payments at December 31,
1996, are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR MINIMUM PAYMENT
<S> <C>
1997...................................................... $ 49,964
1998...................................................... 49,964
1999...................................................... 49,964
2000...................................................... 20,575
--------
Total minimum lease payments................................ 170,467
Less amount representing interest........................... 24,143
--------
Present value of net minimum lease payments................. 146,324
Less current portion........................................ 38,676
--------
$107,648
========
</TABLE>
In connection with the Lease, the Company issued a warrant to purchase
208,695 shares of MODE's Series B convertible preferred stock, on a post stock
split basis (see Note 5), exercisable at any time for a period of up to ten
years ending on August 21,
F-40
<PAGE> 116
MICROOPTICAL DEVICES, INC.
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2006 at a price of $.77 per share. The warrant may terminate sooner in
connection with certain significant corporate events.
NOTE 5. STOCKHOLDERS' EQUITY
Effective August, 1996, the Company declared a stock split on all existing
preferred and common shares at a ratio of three to one. The accompanying
financial statements for the year ended December 31, 1996, have been adjusted to
reflect the stock split.
On July 17, 1996, the Company issued 4,076,088 shares, on a post stock
split basis, of its Series B Convertible Preferred Stock ("Series B"). Each
share of Series B, which has a liquidation preference of $.77, is convertible to
one share of the Company's Common Stock and earns dividends at the rate declared
for each share of Common Stock. No such dividends have been declared as of
December 31, 1996. Terms of the agreements with Preferred Shareholders require
the Company to comply with terms similar to those specified in the Series A
issuance.
As specified in the Series A Convertible Preferred Stock ("Series A")
issuance, the Series A Preferred Stockholder purchased $150,000 of Convertible
Promissory Notes (the "Notes"), during 1996. The Notes, which bore interest at
the prime rate compounded monthly, were convertible at a price equal to the per
share purchase price of the Series B stock issuance. On July 17, 1996, the Notes
and the related interest of $1,169 were converted to Series B convertible
preferred stock in conjunction with the Series B stock issuance.
On August 29, 1995, the Company issued 666,666 shares, on a post stock
split basis, of its Series A. Each share of Series A, which has a liquidation
preference of $.3, is convertible to one share of the Company's Common Stock and
earns dividends at the rate declared for each share of Common Stock. No such
dividends have been declared as of December 31, 1996. An agreement with the
Series A Preferred Stockholder requires the Company to, among other items,
maintain keyman life insurance on certain key employees, and obtain the
Preferred Stockholders' approval to make key changes in the operations of the
Company.
On August 3, 1995, the Company issued 3,000,000 shares, on a post stock
split basis, of its Common Stock at a par value of $.001 per share.
NOTE 6. DEFERRED COMPENSATION PLAN
In July 1996, the Company adopted the 1996 Stock Option Plan (the "Plan"),
where options granted to an employee are qualified "incentive stock options"
under the Internal Revenue Code and options granted to a non-employee are
"non-statutory stock options", for which 1,800,000 shares were reserved, on a
post stock split basis. The Company accounts for options granted to employee's
under this Plan in accordance with APB Opinion No. 25, under which no
compensation cost has been recognized. The compensation costs for the Plan
determined consistent with SFAS 123
F-41
<PAGE> 117
MICROOPTICAL DEVICES, INC.
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
is immaterial. Options granted to non-employee's under this Plan are accounted
for in accordance with the provisions of SFAS 123.
The Company has granted options on 645,500 shares through December 31,
1996. Under the Plan, the option exercise price equals the common stocks market
price on date of grant. All options are immediately exercisable and expire ten
years from date of grant. The options granted to MODE's founders are subject to
repurchase by the Company, at the original exercise price, upon the cessation of
service prior to vesting in such shares. Such shares vest in a series of 72
successive equal monthly installments over a six year period, however, such
vesting shall accelerate to 48 successive equal monthly installments upon the
Company meeting performance milestones as provided for by the Board. At December
31, 1996, the Company has achieved two out of five of its performance measures.
All other shares vest at the rate of 25 percent of the shares upon the
optionee's continued service to the Company through the initial vesting date,
with the remaining shares vesting in a series of 36 successive equal monthly
installments. The vesting period accelerates in connection with certain
significant corporate events.
A summary of the status of the Company's option Plan at December 31, 1996,
and changes during the year then ended is presented in the table and narrative
below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
<S> <C> <C>
Outstanding at beginning of year......................... -- $ --
Granted.................................................. 645,500 .077
Exercised................................................ -- --
Forfeited................................................ -- --
Expired.................................................. -- --
======= =====
Outstanding at end of year............................... 645,500 $.077
======= =====
Exerciseable at end of year.............................. 645,500 $.077
Weighted average fair value of options granted during the
year................................................... $ .02
</TABLE>
The options outstanding at December 31, 1996, have a weighted average
remaining contractual life of 9.5 years.
The fair value of each option grant is estimated on the date of grant using
Black-Scholes option pricing model with the following average assumptions used:
risk-free interest rate of 6.65%; expected lives of ten years; a divided yield
of 0%; and expected volatility of .01%.
F-42
<PAGE> 118
MICROOPTICAL DEVICES, INC.
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7. INCOME TAXES
MODE had no income tax expense and there were no income taxes currently
payable for the year ended December 31, 1996 and period ended December 31, 1995.
Deferred income taxes at December 31, 1996 and 1995, are offset by a valuation
allowance as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Deferred tax asset:
Net operating loss........................................ $16,197 $14,000
Deferred revenue.......................................... 48,750 --
------- -------
64,947 14,000
Valuation allowance....................................... (40,926) (14,000)
------- -------
24,021 --
------- -------
Deferred tax liability:
Depreciation and amortization............................. (22,535) --
Other..................................................... (1,486) --
------- -------
(24,021) --
------- -------
Net deferred taxes........................................ $ -- $ --
======= =======
</TABLE>
The Company has established a valuation allowance for the entire deferred
tax asset due to the uncertainty of future earnings (see Note 1). A net
operating loss carry forward of $46,214 is available to offset future taxable
income for the next fifteen years.
NOTE 8. COMMITMENTS AND CONTINGENCIES
Technology Assistance and Royalty Agreement. On February 22, 1996, the
Company entered into a technical assistance and royalty agreement (as
subsequently amended) in which the Company agreed to further develop laser
technology in return for eight years of co-exclusive rights to five existing
patents covering this technology. The Company is required to pay $7,500 in 1997,
plus royalty payments beginning in 1998 of 1.5% to 2.5%, subject to minimum
annual payments ranging from up to $50,000 over the life of the patents provided
that the technology is developed and the related products are manufactured in
Albuquerque, New Mexico. In the event that the Company fails to develop or
abandons development of this technology, all rights to the technology become
nonexclusive. The Company paid $7,500 under this Agreement in 1996.
In October, 1996, the Company signed an agreement for research and
development, which expires March 31, 1998. Under the Agreement, the Buyer paid
the Company $95,000 for non-recurring engineering expense, plus all applicable
fees and taxes, which payment is non-refundable. Buyer will pay MODE the balance
of the payment upon demonstration of feasibility.
F-43
<PAGE> 119
MICROOPTICAL DEVICES, INC.
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Keyman Life Insurance. The Company is beneficiary to $500,000 of term life
insurance for each of its two founders.
Licensing Agreement. On March 21, 1996, the Company signed a license
agreement (the "Agreement") with a major manufacturer in the identification
market (the "Manufacturer"). Under the Agreement, the Manufacturer paid the
Company a $500,000 license fee (the "Payment") plus all applicable gross
receipts tax that the Company is required to pay thereon.
The Manufacturer retains exclusive rights to use and sell any products or
components which the Company develops for the Manufacturer's portion of the
identification market (the "Product") for a limited period of time. After the
exclusive rights period expires, the Company is required to first offer these
Products, if achieved to the Manufacturer under similar sales terms as the
Products are offered to any other party for a limited period of time.
Within approximately one year of the receipt of the Payment, the Company
and the Manufacturer will negotiate in good faith to enter into a supply
agreement for the Product, if achieved. If no agreement is reached, then the
Company can elect to sell the Product, if achieved to the Manufacturer for an
additional license fee and, for each Product sold, the cost of the Product plus
a specified factor for overhead and profit.
Should the Company fail to pursue development or sell the Product to the
Manufacturer, the Manufacturer will be granted certain nonexclusive
sub-licensing rights.
At December 31, 1996, $325,000 has been earned under the terms of this
agreement.
Leased Property. The Company leases its facility under an operating lease
with a term of three years. Rental expense under operating leases was $18,214
for the year end December 31, 1996. There was no rental expense incurred for the
period from inception through December 31, 1995. The minimum future lease
commitments for all operating leases are $34,332 for each of the years ending
December 31, 1997 and 1998 and $17,166 for year end December 31, 1999.
NOTE 9. SUBSEQUENT EVENT
Purchase and Supply Agreement. On February 14, 1997, the Company signed a
purchase and supply contract (the "Contract"). Under the Contract, MODE
established the terms and conditions controlling potential sales of
vertical-cavity surface-emitting laser ("VCSEL") chips, devices and arrays in
the event they occur. The initial term of the Contract is five years, and can be
canceled by either party upon written notice 360 days prior to the end of the
initial term or any subsequent term. The Contract also may terminate prior to
the five year period under certain circumstances. Products sold under the
agreement are subject to a warranty period not to exceed the earlier of 18
months from the date the product is delivered to customer,
F-44
<PAGE> 120
MICROOPTICAL DEVICES, INC.
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
or one year from the date of delivery by customer to its end-users, or one year
from the date the products are placed in service.
Sale/Leaseback of Assets. Subsequent to year end, the Company financed an
additional $1,850,000 of its property via a sale-leaseback transaction with a
leasing company under the terms of the Master Equipment Lease Agreement (see
Note 4).
F-45
<PAGE> 121
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
, 1999
(EMCORE LOGO) EMCORE CORPORATION
3,897,441 SHARES OF COMMON STOCK
------------------------
PROSPECTUS
------------------------
DONALDSON, LUFKIN & JENRETTE
PRUDENTIAL SECURITIES
NEEDHAM & COMPANY, INC.
SOUNDVIEW TECHNOLOGY GROUP
------------------------
DLJDIRECT INC.
- --------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor any
sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of the company
have not changed since the date hereof.
- --------------------------------------------------------------------------------
<PAGE> 122
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than
underwriting discounts and commissions. All amounts shown are estimates except
the Securities and Exchange Commission registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
TO BE PAID
BY THE
REGISTRANT
<S> <C>
Securities and Exchange Commission registration fee......... $ 22,890.00
NASD filing fee............................................. 8,000.00
Accounting fees and expenses................................ 150,000.00
Printing expenses........................................... 300,000.00
Transfer agent and registrar fees........................... 15,000.00
Legal fees and expenses..................................... 300,000.00
Other expenses.............................................. 75,000.00
-----------
Total..................................................... $870,890.00
===========
</TABLE>
* to be provided
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
EMCORE's Restated Certificate of Incorporation provides that the Company
shall indemnify its directors and officers to the full extent permitted by New
Jersey law, including in circumstances in which indemnification is otherwise
discretionary under New Jersey law.
Section 14A:2-7 of the New Jersey Business Corporation Act provides that a
New Jersey corporation's:
"certificate of incorporation may provide that a director or officer shall
not be personally liable, or shall be liable only to the extent therein
provided, to the corporation or its shareholders for damages for breach of any
duty owed to the corporation or its shareholders, except that such provision
shall not relieve a director or officer from liability for any breach of duty
based upon an act or omission (a) in breach of such person's duty of loyalty to
the corporation or its shareholders, (b) not in good faith or involving a
knowing violation of law or (c) resulting in receipt by such person of an
improper personal benefit. As used in this subsection, an act or omission in
breach of a person's duty of loyalty means an act or omission which that person
knows or believes to be contrary to the best interests of the corporation or its
shareholders in connection with a matter in which he has a material conflict of
interest."
II-1
<PAGE> 123
In addition, Section 14A:3-5 (1995) of the New Jersey Business Corporation
Act (1995) provides as follows:
INDEMNIFICATION OF DIRECTORS, OFFICERS AND EMPLOYEES
(1) As used in this section,
(a) "Corporate agent" means any person who is or was a director,
officer, employee or agent of the indemnifying corporation or of any
constituent corporation absorbed by the indemnifying corporation in a
consolidation or merger and any person who is or was a director, officer,
trustee, employee or agent of any other enterprise, serving as such at the
request of the indemnifying corporation, or of any such constituent
corporation, or the legal representative of any such director, officer,
trustee, employee or agent;
(b) "Other enterprise" means any domestic or foreign corporation,
other than the indemnifying corporation, and any partnership, joint
venture, sole proprietorship, trust or other enterprise, whether or not for
profit, served by a corporate agent;
(c) "Expenses" means reasonable costs, disbursements and counsel fees;
(d) "Liabilities" means amounts paid or incurred in satisfaction of
settlements, judgments, fines and penalties;
(e) "Proceeding" means any pending, threatened or completed civil,
criminal, administrative or arbitrative action, suit or proceeding, and any
appeal therein and any inquiry or investigation which could lead to such
action, suit or proceeding; and
(f) References to "other enterprises" include employee benefit plans;
references to "fines" include any excise taxes assessed on a person with
respect to an employee benefit plan; and references to "serving at the
request of the indemnifying corporation" include any service as a corporate
agent which imposes duties on, or involves services by, the corporate agent
with respect to an employee benefit plan, its participants, or
beneficiaries; and a person who acted in good faith and in a manner the
person reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in
a manner "not opposed to the best interests of the corporation" as referred
to in this section.
(2) Any corporation organized for any purpose under any general or special
law of this State shall have the power to indemnify a corporate agent against
his expenses and liabilities in connection with any proceeding involving the
corporate agent by reason of his being or having been such a corporate agent,
other than a proceeding by or in the right of the corporation, if
(a) such corporate agent acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation; and
(b) with respect to any criminal proceeding, such corporate agent had
no reasonable cause to believe his conduct was unlawful. The termination of
any proceeding by judgment, order, settlement, conviction or upon a plea of
nolo contendere or its equivalent, shall not of itself create a presumption
that such
II-2
<PAGE> 124
corporate agent did not meet the applicable standards of conduct set forth
in paragraphs 14A:3-5(2)(a) and 14A:3-5(2)(b).
(3) Any corporation organized for any purpose under any general or special
law of this State shall have the power to indemnify a corporate agent against
his expenses in connection with any proceeding by or in the right of the
corporation to procure a judgment in its favor which involves the corporate
agent by reason of his being or having been such corporate agent, if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation. However, in such proceeding no
indemnification shall be provided in respect of any claim, issue or matter as to
which such corporate agent shall have been adjudged to be liable to the
corporation, unless and only to the extent that the Superior Court or the court
in which such proceeding was brought shall determine upon application that
despite the adjudication of liability, but in view of all circumstances of the
case, such corporate agent is fairly and reasonably entitled to indemnity for
such expenses as the Superior Court or such other court shall deem proper.
(4) Any corporation organized for any purpose under any general or special
law of this State shall indemnify a corporate agent against expenses to the
extent that such corporate agent has been successful on the merits or otherwise
in any proceeding referred to in subsections 14A:3-5(2) and 14A:3-5(3) or in
defense of any claim, issue or matter therein.
(5) Any indemnification under subsection 14A:3-5(2) and, unless ordered by
a court, under subsection 14A:3-5(3) may be made by the corporation only as
authorized in a specific case upon a determination that indemnification is
proper in the circumstances because the corporate agent met the applicable
standard of conduct set forth in subsection 14A:3-5(2) or subsection 14A:3-5(3).
Unless otherwise provided in the certificate of incorporation or bylaws, such
determination shall be made
(a) by the board of directors or a committee thereof, acting by a
majority vote of a quorum consisting of directors who were not parties to
or otherwise involved in the proceeding; or
(b) if such a quorum is not obtainable, or, even if obtainable and
such quorum of the board of directors or committee by a majority vote of
the disinterested directors so directs, by independent legal counsel, in a
written opinion, such counsel to be designated by the board of directors;
or
(c) by the shareholders if the certificate of incorporation or bylaws
or a resolution of the board of directors or of the shareholders so
directs.
(6) Expenses incurred by a corporate agent in connection with a proceeding
may be paid by the corporation in advance of the final disposition of the
proceeding as authorized by the board of directors upon receipt of an
undertaking by or on behalf of the corporate agent to repay such amount if it
shall ultimately be determined that he is not entitled to be indemnified as
provided in this section.
(7) (a) If a corporation upon application of a corporate agent has failed
or refused to provide indemnification as required under subsection 14A:3-5(4) or
permitted under subsections 14A:3-5(2), 14A:3-5(3) and 14A:3-5(6), a corporate
agent may apply to a court for an award of indemnification by the corporation,
and such court
II-3
<PAGE> 125
(i) may award indemnification to the extent authorized under
subsections 14A:3-5(2) and 14A:3-5(3) and shall award indemnification
to the extent required under subsection 14A:3-5(4), notwithstanding any
contrary determination which may have been made under subsection
14A:3-5(5); and
(ii) may allow reasonable expenses to the extent authorized by,
and subject to the provisions of, subsection 14A:3-5(6), if the court
shall find that the corporate agent has by his pleadings or during the
course of the proceeding raised genuine issues of fact or law.
(b) Application for such indemnification may be made:
(i) in the civil action in which the expenses were or are to be
incurred or other amounts were or are to be paid; or
(ii) to the Superior Court in a separate proceeding. If the
application is for indemnification arising out of a civil action, it
shall set forth reasonable cause for the failure to make application
for such relief in the action or proceeding in which the expenses were
or are to be incurred or other amounts were or are to be paid.
The application shall set forth the disposition of any previous application
for indemnification and shall be made in such manner and form as may be required
by the applicable rules of court or, in the absence thereof, by direction of the
court to which it is made. Such application shall be upon notice to the
corporation. The court may also direct that notice shall be given at the expense
of the corporation to the shareholders and such other persons as it may
designate in such manner as it may require.
(8) The indemnification and advancement of expenses provided by or granted
pursuant to the other subsections of this section shall not exclude any other
rights, including the right to be indemnified against liabilities and expenses
incurred in proceedings by or in the right of the corporation, to which a
corporate agent may be entitled under a certificate of incorporation, bylaw,
agreement, vote of shareholders, or otherwise; provided that no indemnification
shall be made to or on behalf of a corporate agent if a judgment or other final
adjudication adverse to the corporate agent establishes that his acts or
omissions (a) were in breach of his duty of loyalty to the corporation or its
shareholders, as defined in subsection (3) of N.J.S.14A:2-7, (b) were not in
good faith or involved a knowing violation of law or (c) resulted in receipt by
the corporate agent of an improper personal benefit.
(9) Any corporation organized for any purpose under any general or special
law of this State shall have the power to purchase and maintain insurance on
behalf of any corporate agent against any expenses incurred in any proceeding
and any liabilities asserted against him by reason of his being or having been a
corporate agent, whether or not the corporation would have the power to
indemnify him against such expenses and liabilities under the provisions of this
section. The corporation may purchase such insurance from, or such insurance may
be reinsured in whole or in part by, an insurer owned by or otherwise affiliated
with the corporation, whether or not such insurer does business with other
insureds.
II-4
<PAGE> 126
(10) The powers granted by this section may be exercised by the
corporation, notwithstanding the absence of any provision in its certificate of
incorporation or bylaws authorizing the exercise of such powers.
(11) Except as required by subsection 14A:3-5(4), no indemnification shall
be made or expenses advanced by a corporation under this section, and none shall
be ordered by a court, if such action would be inconsistent with a provision of
the certificate of incorporation, a bylaw, a resolution of the board of
directors or of the shareholders, an agreement or other proper corporate action,
in effect at the time of the accrual of the alleged cause of action asserted in
the proceeding, which prohibits, limits or otherwise conditions the exercise of
indemnification powers by the corporation or the rights of indemnification to
which a corporate agent may be entitled.
(12) This section does not limit a corporation's power to pay or reimburse
expenses incurred by a corporate agent in connection with the corporate agent's
appearance as a witness in a proceeding at a time when the corporate agent has
not been made a party to the proceeding.
The Underwriting Agreement provides for indemnification by the Underwriters
of the Registrant and its officers and directors for certain liabilities,
including liabilities under the Securities Act.
ITEM 16. EXHIBITS
The following exhibits are filed with this Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<C> <C> <S>
1.1 -- Form of Underwriting Agreement.
3.1 -- Restated Certificate of Incorporation, amended February 3,
1997 (incorporated by reference to Exhibit 3.1 to Amendment
No. 1 to the Registration Statement on Form S-1 (File No.
333-18565) filed with the Commission on February 6, 1997).
3.2 -- Amended By-Laws, as amended January 11, 1989 (incorporated
by reference to Exhibit 3.2 to Amendment No. 1 to the
Registration Statement on Form S-1 (File No. 333-18565)
filed with the Commission on February 6, 1997).
3.3 -- Certificate of Amendment to the Certificate of
Incorporation, dated November 19, 1998 (incorporated by
reference to Exhibit 3.3 to the registrant's annual report
on Form 10-K for the fiscal year ended September 30, 1998
(the "1998 10-K"))
4.1 -- Specimen certificate for shares of common stock
(incorporated by reference to Exhibit 4.1 to Amendment No. 3
to the Registration Statement on Form S-1 (File No.
333-18565) filed with the Commission on February 24, 1997).
4.2 -- Form of $4.08 Warrant (incorporated by reference to Exhibit
10.10 to Amendment No. 1 to the Registration Statement on
Form S-1 (File No. 333-18565) filed with the Commission on
February 6, 1997).
4.3 -- Form of $10.20 Warrant (incorporated by reference to Exhibit
10.12 to Amendment No. 1 to the Registration Statement on
Form S-1 (File No. 333-18565) filed with the Commission on
February 6, 1997).
</TABLE>
II-5
<PAGE> 127
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<C> <C> <S>
4.4 -- Form of $11.375 Warrant (incorporated by reference to
Exhibit 4.2 to the 1998 10-K).
5.1 -- Form of White & Case LLP Opinion.*
10.1 -- 1995 Incentive and Non-Statutory Stock Option Plan
(incorporated by reference to Exhibit 10.1 to Amendment No.
1 to the Registration Statement on Form S-1 (File No.
333-18565) filed with the Commission on February 6, 1997).
10.2 -- 1996 Amendment to Option Plan (incorporated by reference to
Exhibit 10.2 to Amendment No. 1 to the Registration
Statement on Form S-1 (File No. 333-18565) filed with the
Commission on February 6, 1997).
10.3 -- Specimen Incentive Stock Option Agreement (incorporated by
reference to Exhibit 10.3 to Amendment No. 1 to the
Registration Statement on Form S-1 (File No. 333-18565)
filed with the Commission on February 6, 1997).
10.4 -- Second Amended and Restated Distributorship Agreement dated
as of March 31, 1998 between the Company and Hakuto.
Confidential treatment has been requested by the Company for
portions of this document. Such portions are indicated by
"[*]" (incorporated by reference to Exhibit 10.4 to the 1998
10-K).
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 Registration
Statement on Form S-1 (File No. 333-18565) filed with the
Commission on February 6, 1997).
10.6 -- Registration Rights Agreement relating to September 1996
warrant issuance (incorporated by reference to Exhibit 10.6
to Amendment No. 1 to the Registration Statement on Form S-1
(File No. 333-18565) filed with the Commission on February
6, 1997).
10.7 -- Registration Rights Agreement relating to December 1996
warrant issuance (incorporated by reference to Exhibit 10.7
to Amendment No. 1 to the Registration Statement on Form S-1
(File No. 333-18565) filed with the Commission on February
6, 1997).
10.8 -- Form of 6% Subordinated Note Due May 1, 2001 (incorporated
by reference to Exhibit 10.8 to Amendment No. 1 to the
Registration Statement on Form S-1 (File No. 333-18565)
filed with the Commission on February 6, 1997).
10.9 -- Form of 6% Subordinated Note Due September 1, 2001
(incorporated by reference to Exhibit 10.9 to Amendment No.
1 to the Registration Statement on Form S-1 (File No.
333-18565) filed with the Commission on February 6, 1997).
</TABLE>
II-6
<PAGE> 128
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<C> <C> <S>
10.10 -- Purchase Order issued to the Company by General Motors
Corporation on November 17, 1996. (incorporated by reference
to Exhibit 10.15 to Amendment No. 1 to the Registration
Statement on Form S-1 (File No. 333-18565) filed with the
Commission on February 6, 1997). Confidential treatment has
been requested by the Company with respect to portions of
this document. Such portions are indicated by "[*]".
10.11 -- Purchase Agreement, dated November 30, 1998, by and between
the Company, Hakuto UMI and UTC (incorporated by reference
to Exhibit 10.15 to the 1998 10-K).
10.12 -- Registration Rights Agreement, dated November 30, 1998 by
and between the Company, Hakuto, UMI and UTC (incorporated
by reference to Exhibit 10.16 to the 1998 10-K).
10.13 -- Long Term Purchase Agreement dated November 24, 1998 by and
between the Company and Space Systems/Loral, Inc.
(incorporated by reference to Exhibit 10.17 to the 1998
10-K). Confidential treatment has been requested by the
Company with respect to portions of this document. Such
portions are indicated by "[*]."
10.14 -- Promissory Note, dated April 29, 1999 by EMCORE in favor of
First Union National Bank.
10.15 -- Second Amendment to Revolving Loan and Security Agreement,
dated as of November 30, 1998 between the Company and First
Union National Bank (incorporated by reference to Exhibit
10.19 to the 1998 10-K).
10.16 -- Agreement and Plan of Merger, dated as of December 5, 1997,
among the Company, the Merger Subsidiary, MODE and the
Principal Shareholders named therein (incorporated by
reference to Exhibit 2 to the Company's report on Form 8-K
filed with the Commission on December 22, 1997).
10.17 -- Transaction Agreement, dated January 26, 1999, by and
between EMCORE and General Electric Company (incorporated by
reference to Exhibit 10.1 to EMCORE's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1999).
Confidential treatment has been requested by EMCORE with
respect to portions of this document. Such portions are
indicated by "[*]."
10.18 -- Note Purchase Agreement, dated as of May 26, 1999, by and
between EMCORE Corporation and GE Capital Equity
Investments, Inc.*
10.19 -- Registration Rights Agreement, dated as of May 26, 1999, by
and between EMCORE Corporation and GE Capital Equity
Investments, Inc.*
10.20 -- $22.875 Warrant issued to General Electric Company*
21 -- Subsidiaries of the registrant.
23.1 -- Consent of Deloitte & Touche LLP*
23.2 -- Consent of PricewaterhouseCoopers LLP*
23.3 -- Consent of Arthur Andersen LLP*
</TABLE>
II-7
<PAGE> 129
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<C> <C> <S>
23.4 -- Consent of White & Case (included in Exhibit 5.1).*
23.5 -- Consent of Lerner David Littenberg Krumholz & Mentlik.*
99.1 -- Form of Power of Attorney and Custody Agreement for selling
shareholders.
</TABLE>
- -------------------------
* Filed herewith
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a)or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of a registration statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-8
<PAGE> 130
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the Township of Somerset, State
of New Jersey, on June 8, 1999.
EMCORE CORPORATION
By *
------------------------------------
Reuben
F.
Richards,
Jr.
President
and
Chief
Executive
Officer
Pursuant to the requirements of the Securities Act, this Amendment No. 2 on
Form S-3 has been signed by the following persons in the capacities indicated,
on June 8, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
<C> <S>
* Chairman of the Board and Director
- ------------------------------------------------
Thomas J. Russell
* President, Chief Executive Officer and
- ------------------------------------------------ Director (Principal Executive Officer)
Reuben F. Richards, Jr.
/s/ THOMAS G. WERTHAN Vice President, Chief Financial
- ------------------------------------------------ Officer, Secretary and Director
Thomas G. Werthan (Principal Accounting and Financial
Officer)
* Director
- ------------------------------------------------
Richard A. Stall
* Director
- ------------------------------------------------
Charles Scott
* Director
- ------------------------------------------------
Robert Louis-Dreyfus
* Director
- ------------------------------------------------
Hugh H. Fenwick
* Director
- ------------------------------------------------
Shigeo Takayama
/s/ JOHN J. HOGAN, JR. Director
- ------------------------------------------------
John J. Hogan, Jr.
*By: /s/ THOMAS G. WERTHAN
------------------------------------------
Thomas G. Werthan
Attorney-in-Fact
</TABLE>
II-9
<PAGE> 131
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<C> <C> <S>
1.1 -- Form of Underwriting Agreement.
3.1 -- Restated Certificate of Incorporation, amended February 3,
1997 (incorporated by reference to Exhibit 3.1 to Amendment
No. 1 to the Registration Statement on Form S-1 (File No.
333-18565) filed with the Commission on February 6, 1997).
3.2 -- Amended By-Laws, as amended January 11, 1989 (incorporated
by reference to Exhibit 3.2 to Amendment No. 1 to the
Registration Statement on Form S-1 (File No. 333-18565)
filed with the Commission on February 6, 1997).
3.3 -- Certificate of Amendment to the Certificate of
Incorporation, dated November 19, 1998 (incorporated by
reference to Exhibit 3.3 to the registrant's annual report
on Form 10-K for the fiscal year ended September 30, 1998
(the "1998 10-K"))
4.1 -- Specimen certificate for shares of common stock
(incorporated by reference to Exhibit 4.1 to Amendment No. 3
to the Registration Statement on Form S-1 (File No.
333-18565) filed with the Commission on February 24, 1997).
4.2 -- Form of $4.08 Warrant (incorporated by reference to Exhibit
10.10 to Amendment No. 1 to the Registration Statement on
Form S-1 (File No. 333-18565) filed with the Commission on
February 6, 1997).
4.3 -- Form of $10.20 Warrant (incorporated by reference to Exhibit
10.12 to Amendment No. 1 to the Registration Statement on
Form S-1 (File No. 333-18565) filed with the Commission on
February 6, 1997).
4.4 -- Form of $11.375 Warrant (incorporated by reference to
Exhibit 4.2 to the 1998 10-K).
5.1 -- Form of White & Case LLP Opinion.*
10.1 -- 1995 Incentive and Non-Statutory Stock Option Plan
(incorporated by reference to Exhibit 10.1 to Amendment No.
1 to the Registration Statement on Form S-1 (File No.
333-18565) filed with the Commission on February 6, 1997).
10.2 -- 1996 Amendment to Option Plan (incorporated by reference to
Exhibit 10.2 to Amendment No. 1 to the Registration
Statement on Form S-1 (File No. 333-18565) filed with the
Commission on February 6, 1997).
10.3 -- Specimen Incentive Stock Option Agreement (incorporated by
reference to Exhibit 10.3 to Amendment No. 1 to the
Registration Statement on Form S-1 (File No. 333-18565)
filed with the Commission on February 6, 1997).
</TABLE>
<PAGE> 132
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<C> <C> <S>
10.4 -- Second Amended and Restated Distributorship Agreement dated
as of March 31, 1998 between the Company and Hakuto.
Confidential treatment has been requested by the Company for
portions of this document. Such portions are indicated by
"[*]" (incorporated by reference to Exhibit 10.4 to the 1998
10-K).
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 Registration
Statement on Form S-1 (File No. 333-18565) filed with the
Commission on February 6, 1997).
10.6 -- Registration Rights Agreement relating to September 1996
warrant issuance (incorporated by reference to Exhibit 10.6
to Amendment No. 1 to the Registration Statement on Form S-1
(File No. 333-18565) filed with the Commission on February
6, 1997).
10.7 -- Registration Rights Agreement relating to December 1996
warrant issuance (incorporated by reference to Exhibit 10.7
to Amendment No. 1 to the Registration Statement on Form S-1
(File No. 333-18565) filed with the Commission on February
6, 1997).
10.8 -- Form of 6% Subordinated Note Due May 1, 2001 (incorporated
by reference to Exhibit 10.8 to Amendment No. 1 to the
Registration Statement on Form S-1 (File No. 333-18565)
filed with the Commission on February 6, 1997).
10.9 -- Form of 6% Subordinated Note Due September 1, 2001
(incorporated by reference to Exhibit 10.9 to Amendment No.
1 to the Registration Statement on Form S-1 (File No.
333-18565) filed with the Commission on February 6, 1997).
10.10 -- Purchase Order issued to the Company by General Motors
Corporation on November 17, 1996. (incorporated by reference
to Exhibit 10.15 to Amendment No. 1 to the Registration
Statement on Form S-1 (File No. 333-18565) filed with the
Commission on February 6, 1997). Confidential treatment has
been requested by the Company with respect to portions of
this document. Such portions are indicated by "[*]".
10.11 -- Purchase Agreement, dated November 30, 1998, by and between
the Company, Hakuto UMI and UTC (incorporated by reference
to Exhibit 10.15 to the 1998 10-K).
10.12 -- Registration Rights Agreement, dated November 30, 1998 by
and between the Company, Hakuto, UMI and UTC (incorporated
by reference to Exhibit 10.16 to the 1998 10-K).
10.13 -- Long Term Purchase Agreement dated November 24, 1998 by and
between the Company and Space Systems/Loral, Inc.
(incorporated by reference to Exhibit 10.17 to the 1998
10-K). Confidential treatment has been requested by the
Company with respect to portions of this document. Such
portions are indicated by "[*]."
10.14 -- Promissory Note, dated April 29, 1999 by EMCORE in favor of
First Union National Bank.
</TABLE>
<PAGE> 133
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<C> <C> <S>
10.15 -- Second Amendment to Revolving Loan and Security Agreement,
dated as of November 30, 1998 between the Company and First
Union National Bank (incorporated by reference to Exhibit
10.19 to the 1998 10-K).
10.16 -- Agreement and Plan of Merger, dated as of December 5, 1997,
among the Company, the Merger Subsidiary, MODE and the
Principal Shareholders named therein (incorporated by
reference to Exhibit 2 to the Company's report on Form 8-K
filed with the Commission on December 22, 1997).
10.17 -- Transaction Agreement, dated January 26, 1999, by and
between EMCORE and General Electric Company (incorporated by
reference to Exhibit 10.1 to EMCORE's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1999).
Confidential treatment has been requested by EMCORE with
respect to portions of this document. Such portions are
indicated by "[*]."
10.18 -- Note Purchase Agreement, dated as of May 26, 1999, by and
between EMCORE Corporation and GE Capital Equity
Investments, Inc.*
10.19 -- Registration Rights Agreement, dated as of May 26, 1999, by
and between EMCORE Corporation and GE Capital Equity
Investments, Inc.*
10.20 -- $22.875 Warrant issued to General Electric Company*
21 -- Subsidiaries of the registrant.
23.1 -- Consent of Deloitte & Touche LLP*
23.2 -- Consent of PricewaterhouseCoopers LLP*
23.3 -- Consent of Arthur Andersen LLP*
23.4 -- Consent of White & Case (included in Exhibit 5.1).*
23.5 -- Consent of Lerner David Littenberg Krumholz & Mentlik.*
99.1 -- Form of Power of Attorney and Custody Agreement for selling
shareholders.
</TABLE>
- -------------------------
* Filed herewith
<PAGE> 1
EXHIBIT 5.1
WHITE & CASE LLP OPINION
June 8, 1999
Emcore Corporation Company
394 Elizabeth Avenue
Somerset, New Jersey, 08873
Re: EMCORE Corporation
Public offering of shares of Common Stock
Ladies and Gentlemen:
On the date hereof EMCORE Corporation, a New Jersey corporation (the
"Company"), filed with the Securities and Exchange Commission under the
Securities Act of 1933, as amended (No. 333-71791) a Registration Statement on
Form S-3 (the "Registration Statement"). Such Registration Statement relates to
the sale by the Company of up to 3,584,616 shares of the Company's Common Stock,
no par value per share (the "Common Stock") and 897,441 shares of Common Stock
by selling shareholders.
We have acted as counsel to the Company in connection with the
preparation of the Registration Statement. We are familiar with the proceedings
of the Board of Directors of the Company in connection with the authorization,
issuance and sale of the Shares. We have examined such certificates of public
officials and certificates of officers of the Company and the selling
shareholders, and the originals (or copies thereof, certified to our
satisfaction) of such corporate documents and records of the Company, and such
other documents, records and papers as we have deemed relevant in order to give
the opinions hereinafter set forth. In this connection, we have assumed the
genuineness of signatures, the authenticity of all documents submitted to us as
<PAGE> 2
Page 2
originals and the conformity to authentic original documents of all documents
submitted to us as certified, conformed, facsimile or photostatic copies. In
addition, we have relied, to the extent that we deem such reliance proper, upon
such certificates of public officials and of officers of the Company with
respect to the accuracy of material factual matters contained therein which
were not independently established.
We do not express or purport to express any opinions with respect to
laws other than the Federal laws of the United States. As to all matters
governed by the laws of the State of New Jersey involved in our opinions set
forth below, we have relied, with your consent, upon an opinion of Dillon Bitar
& Luther dated today and addressed to us.
Based upon the foregoing, we are of the opinion that the Shares have
been duly authorized and, when issued and delivered by the Company against
payment therefor as provided by the Underwriting Agreement will be validly
issued, fully paid and non-assessable, and may be issued free of restrictive
legends.
We hereby consent to the filing of this opinon as an exhibit to the
Registration Statement and to the use of our name under the caption "Legal
Matters" in the Prospectus forming a part of the Registration Statement.
Very truly yours,
White & Case LLP
<PAGE> 1
Exhibit 10.18
NOTE PURCHASE AGREEMENT
NOTE PURCHASE AGREEMENT, dated as of May 26, 1999, by and
between Emcore Corporation, a New Jersey corporation ("Company"), and GE Capital
Equity Investments, Inc., a Delaware corporation ("GE Capital" or "Purchaser").
W I T N E S S E T H :
WHEREAS, Company has agreed to issue and sell to Purchaser,
and Purchaser has agreed to purchase from Company, upon the terms and conditions
hereinafter provided, a subordinated convertible promissory note in the
principal amount of $7,800,000, which is initially convertible into 340,984
shares of Common Stock (as defined herein) of Company (the "Note");
NOW, THEREFORE, in consideration of the premises and the
covenants hereinafter contained, it is agreed as follows:
1. DEFINITIONS
"Affiliate" shall mean, with respect to any Person, (i) each
Person that controls, is controlled by or is under common control with such
Person or any Affiliate of such Person, (ii) each of such Person's executive
officers and directors, (iii) any trust or beneficiary of a trust of which such
Person is the sole trustee or (iv) any lineal descendants, ancestors, spouse or
former spouses (as part of a marital dissolution) of such Person (or any trust
for the benefit of such Person). For the purpose of this definition, "control"
of a Person shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of its management or policies, whether through the
ownership of voting securities, by contract or otherwise.
"Agreement" shall mean this Note Purchase Agreement including
all amendments, modifications and supplements hereto and any appendices,
exhibits and schedules hereto or thereto, and shall refer to the Agreement as
the same may be in effect at the time such reference becomes operative.
"Business Day" shall mean any day that is not a Saturday, a
Sunday or a day on which banks are required or permitted to be closed in the
State of New York.
"Change of Control" shall mean any of the following: (a) any
person or group of persons (within the meaning of the Exchange Act) (other than
GE Capital and its Affiliates and those existing shareholders of Company set
forth on Schedule 1(A) hereto) shall have acquired beneficial ownership (within
the meaning of Rule 13d-3 promulgated by the SEC under the Exchange Act) of 30%
or more of the issued and outstanding shares of Common Stock of Company; (b)
Company shall be a party to a merger or consolidation in which Company is not
the survivor or in which Company's
<PAGE> 2
stockholders immediately prior thereto own less than a majority of the
outstanding voting stock of the survivor; or (c) Company shall have sold, leased
or otherwise transferred all or substantially all of its assets.
"Charges" shall mean all federal, state, county, city,
municipal, local, foreign or other governmental (including, without limitation,
PBGC) taxes at the time due and payable, levies, assessments, charges, liens,
claims or encumbrances upon or relating to (i) Company's or any of its
Subsidiaries' employees, payroll, income or gross receipts, (ii) Company's or
any of its Subsidiaries' ownership or use of any of its assets, or (iii) any
other aspect of Company's or any of the Subsidiaries' business.
"Closing" shall have the meaning set forth in Section 2.2
hereof.
"Closing Date" shall have the meaning set forth in Section 2.2
hereof.
"Closing Price" shall mean, in respect of any share of Common
Stock on any date herein specified which is a Business Day, (i) the last sale
price on such day on the principal stock exchange or NASDAQ National Market
System ("NASDAQ/NMS") on which such Common Stock is then listed or admitted to
trading or (ii) if no sale takes place on such day on such exchange or
NASDAQ/NMS, the average of the last reported closing bid and asked prices on
such day as officially quoted on any such exchange or NASDAQ/NMS.
"Common Stock" shall mean the common stock, no par value, of
Company.
"Conversion" shall have the meaning set forth in Section
7.1(a) hereof.
"Conversion Price" shall have the meaning set forth in Section
7.1 hereof.
"Current Market Price" shall mean, in respect of any share of
Common Stock on any date herein specified, the average of the daily market
prices for 30 consecutive Business Days commencing 45 days before such date. The
daily market price for each such Business Day shall be (i) the last sale price
on such day on the principal stock exchange or NASDAQ National Market System
("NASDAQ-NMS") on which such Common Stock is then listed or admitted to trading,
(ii) if no sale takes place on such day on any such exchange or NASDAQ-NMS, the
average of the last reported closing bid and asked prices on such day as
officially quoted on any such exchange or NASDAQ-NMS, (iii) if the Common Stock
is not then listed or admitted to trading on any stock exchange or NASDAQ-NMS,
the average of the last reported closing bid and asked prices on such day in the
over-the-counter market, as furnished by the National Association of Securities
Dealers Automatic Quotation System or the National Quotation Bureau, Inc., (iv)
if neither such corporation at the time is engaged in the business of reporting
such prices, as furnished by any similar firm then engaged in such business, or
(v) if there is no such firm, as furnished by any member of the National
Association of Securities Dealers ("NASD") selected mutually by the Required
Holders and Company or, if they cannot agree upon such selection, as selected by
two such members of the
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NASD, one of which shall be selected by the Required Holders and one of which
shall be selected by the Company.
"Default" shall mean any event which, with the passage of time
or notice or both, would, unless cured or waived, become an Event of Default.
"EBITDA" shall mean consolidated operating income (before
extraordinary items, interest, taxes, depreciation and amortization) of such
Person and its consolidated Subsidiaries determined in accordance with GAAP.
"Environmental Laws" shall mean all federal, state and local
laws, statutes, ordinances and regulations, now or hereafter in effect, and in
each case as amended or supplemented from time to time, and any judicial or
administrative interpretation thereof, including, without limitation, any
applicable judicial or administrative order, consent decree or judgment,
relative to the applicable Real Estate, relating to the regulation and
protection of human health, safety, the environment and natural resources
(including, without limitation, ambient air, surface water, groundwater,
wetlands, land surface or subsurface strata, wildlife, aquatic species and
vegetation). Environmental Laws include but are not limited to the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as amended (42
U.S.C. ss. 9601 et seq.) ("CERCLA"); the Hazardous Material Transportation Act,
as amended (49 U.S.C. ss. 1801 et seq.); the Federal Insecticide, Fungicide, and
Rodenticide Act, as amended (7 U.S.C. ss. 136 et seq.); the Resource
Conservation and Recovery Act, as amended (42 U.S.C. ss. 6901 et seq.) ("RCRA");
the Toxic Substance Control Act, as amended (15 U.S.C. ss. 2601 et seq.); the
Clean Air Act, as amended (42 U.S.C. ss. 740 et seq.); the Federal Water
Pollution Control Act, as amended (33 U.S.C. ss. 1251 et seq.); the Occupational
Safety and Health Act, as amended (29 U.S.C. ss. 651 et seq.) ("OSHA"); and the
Safe Drinking Water Act, as amended (42 U.S.C. ss. 300f et seq.), and any and
all regulations promulgated thereunder, and all analogous state and local
counterparts or equivalents and any transfer of ownership notification or
approval statutes.
"Event of Default" shall have the meaning set forth in Section
8.1 hereof.
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended, and all rules and regulations promulgated thereunder.
"GAAP" shall mean generally accepted accounting principles in
the United States of America as in effect from time to time.
"GE Capital" shall have the meaning set forth in the first
paragraph of this Agreement.
"Governmental Authority" shall mean any nation or government,
any state or other political subdivision thereof, and any agency, department or
other entity exercising executive, legislative, judicial, regulatory or
administrative functions of government.
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"Guaranteed Indebtedness" shall mean, as to any Person, any
obligation of such Person guaranteeing any Indebtedness, lease, dividend, or
other obligation ("primary obligations") of any other Person (the "primary
obligor") in any manner including, without limitation, any obligation or
arrangement of such Person (a) to purchase or repurchase any such primary
obligation, (b) to advance or supply funds (i) for the purchase or payment of
any such primary obligation or (ii) to maintain working capital or equity
capital of the primary obligor or otherwise to maintain the net worth or
solvency or any balance sheet condition of the primary obligor, (c) to purchase
property, securities or services primarily for the purpose of assuring the owner
of any such primary obligation of the ability of the primary obligor to make
payment of such primary obligation, or (d) to indemnify the owner of such
primary obligation against loss in respect thereof.
"Holder" shall have the meaning assigned to such term in
Section 9.1 hereof.
"Indebtedness" of any Person shall mean without duplication
(i) all indebtedness of such Person for borrowed money or for the deferred
purchase price of property or services (including, without limitation,
reimbursement and all other obligations with respect to surety bonds, letters of
credit and bankers' acceptances, whether or not matured, but not including
obligations to trade creditors incurred in the ordinary course of business),
(ii) all obligations evidenced by notes, bonds, debentures or similar
instruments, (iii) all Guaranteed Indebtedness, and (iv) all Indebtedness
referred to in clause (i), (ii) or (iii) above secured by (or for which the
holder of such Indebtedness has an existing right, contingent or otherwise, to
be secured by) any Lien upon or in property (including, without limitation,
accounts and contract rights) owned by such Person, even though such Person has
not assumed or become liable for the payment of such Indebtedness.
"Interest Payment Date" shall have the meaning assigned to
such term in Section 2.6(a) hereof.
"IRC" shall mean the Internal Revenue Code of 1986, as
amended, and any successor thereto.
"IRS" shall mean the Internal Revenue Service, or any
successor thereto.
"Lien" shall mean any mortgage or deed of trust, pledge,
hypothecation, assignment, lien, charge, security interest, easement or
encumbrance, or preference, priority or other security agreement granting a
lender an interest in the Company's property (including, without limitation, any
title retention agreement, any financing lease having substantially the same
economic effect as any of the foregoing, and the filing of, or agreement to
give, any financing statement perfecting a security interest as to assets owned
by the relevant Person under the Uniform Commercial Code or comparable law of
any jurisdiction).
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"Loan Documents" shall mean this Agreement, the Note and all
other agreements, instruments, documents and certificates, including, without
limitation, pledges, powers of attorney, consents, assignments, contracts,
notices, and all other written matter whether heretofore, now or hereafter
executed by or on behalf of Company, and delivered to Purchaser, in its capacity
as a purchaser of the Note hereunder, in connection with this Agreement or the
transactions contemplated hereby.
"Material Adverse Effect" shall mean material adverse effect
on the business, assets, operations or financial condition of Company and its
Subsidiaries, if any, taken as a whole.
"Material Subsidiary" shall mean a "significant subsidiary" as
defined in Regulation S-X as adopted by the SEC.
"Maximum Lawful Rate" shall have the meaning assigned to such
term in Section 2.6(d) hereof.
"Note" shall mean the subordinated convertible promissory note
of Company in the principal amount of $7,800,000 to be issued to Purchaser
hereunder, substantially in the form of Exhibit A hereto.
"Obligations" shall mean all amounts owing by Company to
Purchaser and any of its assignees pursuant hereto or the Note, including,
without limitation, all principal, interest, fees, expenses, attorneys' fees and
any other sum chargeable to Company under any of the Loan Documents.
"Permitted Liens" shall mean the following (i) Liens for taxes
or assessments or other governmental charges or levies, either not yet due and
payable or to the extent that nonpayment thereof is permitted by the terms of
this Agreement; (ii) pledges or deposits securing obligations under workmen's
compensation, unemployment insurance, social security or public liability laws
or similar legislation; (iii) pledges or deposits securing bids, tenders,
contracts (other than contracts for the payment of money) or leases to which
Company or any of its Subsidiaries is a party as lessee made in the ordinary
course of business; (iv) Liens arising solely by virtue of any statutory or
common law provision relating to bankers' liens, rights of set-off or similar
rights and remedies as to deposit accounts or other funds maintained with a
creditor depository institution; (v) workers, mechanics, suppliers, carriers,
warehousemen's or other similar liens arising in the ordinary course of business
and securing indebtedness, not yet due and payable; (vi) deposits securing or in
lieu of surety, appeal or customs bonds in proceedings to which Company or any
of its Subsidiaries is a party; (vii) Liens arising in the ordinary course of
business in connection with obligations that are not overdue or which are being
contested in good faith and by appropriate proceedings, including, but not
limited to, Liens under bid, performance and other surety bonds, supersedes and
appeal bonds, landlord Liens arising under leases of real property, Liens on
advance or progress payments received from customers under contracts for the
sale, lease or license of goods, software or services and upon the products
being sold or licensed, in each case securing performance of the underlying
contract or the repayment of such advances in the
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event final acceptance of performance under such contracts does not occur, and
Liens upon funds collected temporarily from others pending payment or remittance
on their behalf; (viii) zoning restrictions, easements, licenses, or other
restrictions on the use of real property or other minor irregularities in title
(including leasehold title) thereto, so long as the same do not materially
impair the use, value, or marketability of such real property, leases or
leasehold estates; and (ix) Liens existing on the date hereof and described on
Schedule 1 (B) hereto.
"Permitted Senior Debt" shall have the meaning assigned to
such term in Section 5.2(c) hereof.
"Person" shall mean any individual, sole proprietorship,
partnership, limited liability company, joint venture, trust, unincorporated
organization, association, corporation, institution, public benefit corporation,
entity or government (whether federal, state, county, city, municipal or
otherwise, including, without limitation, any instrumentality, division, agency,
body or department thereof).
"Purchaser" shall have the meaning set forth in the first
paragraph of this Agreement.
"Registration Rights Agreement" shall mean the Registration
Rights Agreement by and between Company and Purchaser, substantially in the form
attached hereto as Exhibit B, as such agreement may be amended, supplemented or
otherwise modified from time to time in accordance with the terms thereof.
"Required Holders" shall mean Persons who hold at least a
majority of the outstanding principal amount of the Note.
"SEC" shall mean the U.S. Securities and Exchange Commission,
or any successor thereto.
"Securities Act" shall mean the Securities Act of 1933, as
amended, and all rules and regulations promulgated thereunder.
"Senior Debt" shall mean:
(a) all principal of and premium, if any, and interest
(including interest at the applicable post-default interest rate) on, and all
other amounts owing (including post-petition interest whether or not such
post-petition interest is allowed as a claim under the Bankruptcy Code) in
respect of Indebtedness for borrowed money (other than the Note) of Company
listed on Schedule 5.2(d) ("Specified Senior Debt");
(b) all principal of and premium, if any, and interest
(including interest at the applicable post-default interest rate) on, and all
other amounts owing (including post-petition interest whether or not such
post-petition interest is allowed as a claim under the Bankruptcy Code) in
respect of Indebtedness for borrowed money (other than the Note) of Company
which is not expressly pari passu with or subordinated to the payment of the
Obligations and other than Indebtedness listed on Schedule 5.2(d); and
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(c) any and all increases, refinancings, replacements, or
refundings, of any of the amounts referred to in clauses (a) and (b) above;
provided that the aggregate principal of Senior Debt, including any committed
(subject to usual and customary conditions to funding any particular advance
under such commitments), but unfunded Specified Senior Debt with the Specified
Senior Creditor, shall not exceed, at any one time outstanding, the amount
permitted by the terms of Section 5.2(c) hereof, and provided further that the
aggregate principal amount of Specified Senior Debt, including any committed
(subject to usual and customary conditions to funding any particular advance
under such commitments), but unfunded portion thereof by the Specified Senior
Creditor, shall be deemed to be Senior Debt provided that such amount does not
exceed the amount of Permitted Senior Debt as defined in Section 5.2(c) hereof.
"Senior Debt Ceiling" shall have the meaning assigned to such term in Section
5.2(d) hereof.
"Senior Debt Document" shall mean any agreement, note,
instrument or other document, governing, securing, supporting, or evidencing any
Senior Debt.
"Specified Senior Creditor" shall mean First Union National
Bank and its successors and assigns as the Agent or the sole lender under the
Specified Senior Debt, provided that written notice of such successor or assign
is given to Purchaser by the Specified Senior Creditor or Company.
"Specified Senior Debt" shall have the meaning assigned to
such term in clause (a) of the definition of "Senior Debt" herein.
"Stock" shall mean all shares, options, warrants, general or
limited partnership interests, limited liability company membership interest,
participations or other equivalents (regardless of how designated) of or in a
corporation, partnership, limited liability company or equivalent entity whether
voting or nonvoting, including, without limitation, common stock, preferred
stock, or any other "equity security" (as such term is defined in Rule 3a11-1 of
the General Rules and Regulations promulgated by the SEC under the Exchange
Act).
"Subordinated Debt" shall have the meaning set forth in
Section 9.1 hereof.
"Subsidiary" shall mean, with respect to any Person, (a) any
corporation of which an aggregate of more than 50% of the outstanding Stock
having ordinary voting power to elect a majority of the board of directors of
such corporation (irrespective of whether, at the time, Stock of any other class
or classes of such corporation shall have or might have voting power by reason
of the happening of any contingency) is at the time, directly or indirectly,
owned legally or beneficially by such Person and/or one or more Subsidiaries of
such Person, and (b) any partnership or other entity in which such Person and/or
one or more Subsidiaries of such Person shall have an interest (whether in the
form of voting or participation in profits or capital contribution) of more than
50%.
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"Taxes" shall have the meaning set forth in Section 2.12(a)
hereof.
"Transaction Documents" shall mean this Agreement, the Note
and the Registration Rights Agreement.
Any accounting term used in this Agreement shall have, unless
otherwise specifically provided herein, the meaning customarily given such term
in accordance with GAAP, and all financial computations hereunder shall be
computed, unless otherwise specifically provided herein, in accordance with GAAP
consistently applied. That certain terms or computations are explicitly modified
by the phrase "in accordance with GAAP" shall in no way be construed to limit
the foregoing. The words "herein," "hereof" and "hereunder" and other words of
similar import refer to this Agreement as a whole, including the Exhibits and
Schedules hereto, as the same may from time to time be amended, modified or
supplemented, and not to any particular section, subsection or clause contained
in this Agreement. Wherever from the context it appears appropriate, each term
stated in either the singular or plural shall include the singular and the
plural, and pronouns stated in the masculine, feminine or neuter gender shall
include the masculine, the feminine and the neuter.
2. PURCHASE OF NOTE
2.1 Purchase of Note. Subject to the terms and conditions set
forth in this Agreement, Purchaser agrees to purchase from Company, and Company
agrees to issue and sell to Purchaser, on the Closing Date, the Note for an
aggregate purchase price of $7,800,000, containing the terms set forth herein
and in Exhibit A hereto. The principal amount of the Note shall be $7,800,000,
and the maturity date thereof shall be May 26, 2006.
2.2 Closing. The closing of the purchase and sale of the Note
(the "Closing") shall take place within five Business Days after the
satisfaction or waiver of the conditions set forth in Section 6 hereof or such
date and time as shall be mutually agreed to by the parties hereto (the "Closing
Date") at the offices of White & Case LLP, 1155 Avenue of the Americas, New
York, New York 10036-2787, or such other place as shall be mutually agreed to by
the parties hereto.
On the Closing Date, Company will deliver to Purchaser the
Note payable to Purchaser against delivery by Purchaser of the purchase price
therefor by wire transfer of funds to the account of Company.
2.3 Optional Prepayment. Subject to the applicable provisions
of Article 9 hereof, so long as after the third anniversary of the Closing Date
the Closing Price of a share of Common Stock is at least 150% of the then
current Conversion Price (which as of the Closing Date shall be a Closing Price
of $34.31) for a period of thirty (30) consecutive days, Company shall have the
right, without premium or penalty, and on ten (10) days' prior written notice to
Purchaser, to voluntarily prepay all or any portion (in multiples of not less
than $500,000 or the amount outstanding on the Note) of the Note; provided,
however, Purchaser shall retain conversion rights in respect of the Note for
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<PAGE> 9
such period of ten (10) days after Company has given such notice. Each
prepayment shall be accompanied by the payment of accrued and unpaid interest on
the amount being prepaid, through the date of prepayment. Company shall not have
any other right to prepay the Note.
2.4 Mandatory Redemption. Upon the occurrence of a Change of
Control, Purchaser, by written notice to Company and the Specified Senior
Creditor within thirty (30) days of the occurrence thereof, may require Company
to redeem all or a portion of the Note for a price equal to the outstanding
principal amount thereof, together with a payment of all accrued and unpaid
interest on the amount being prepaid through the date of prepayment. Company
shall give Purchaser and the Specified Senior Creditor written notice of the
occurrence of a Change of Control within ten (10) days after the occurrence
thereof.
2.5 Use of Proceeds. Company shall use the proceeds of the
purchase price to make its initial capital contribution pursuant to Section 3.01
(a)(i) of the Transaction Agreement dated January 20, 1999 between the Company
and General Electric Company.
2.6 Interest on Note. Company shall pay interest to
Purchaser, semi-annually in arrears on the last day of each October and April,
commencing on October 31, 1999 (each, an "Interest Payment Date"), at a rate
equal to 4.75% per annum, based on a year of 360 days for the actual number of
days elapsed, and based on the amounts outstanding from time to time under the
Note.
(a) If Company has not consummated a public offering of
equity securities registered under the Securities Act with gross proceeds of at
least $40 million by June 15, 1999 and until Company does consummate such an
offering, the interest rate applicable to the Note shall be at a rate equal to
13.00% per annum. After Company consummates such an offering, the interest rate
applicable to the Note shall return to 4.75% per annum.
(b) If any payment on the Note becomes due and payable on a
day other than a Business Day, the maturity thereof shall be extended to the
next succeeding Business Day and, with respect to payments of principal,
interest thereon shall be payable at the then applicable rate during such
extension.
(c) Notwithstanding anything to the contrary set forth in
this Section 2.6, if at any time until payment in full of the Note, the interest
rate payable thereon exceeds the highest rate of interest permissible under any
law which a court of competent jurisdiction shall, in a final determination,
deem applicable hereto (the "Maximum Lawful Rate"), then in such event and so
long as the Maximum Lawful Rate would be so exceeded, the rate of interest
payable on the Note shall be equal to the Maximum Lawful Rate; provided,
however, that if at any time thereafter the interest rate payable thereon is
less than the Maximum Lawful Rate, Company shall continue to pay interest
thereunder at the Maximum Lawful Rate until such time as the total interest
received by Purchaser is equal to the total interest which it would have
received had the interest rate on the Note been (but for the operation of this
paragraph) the interest rate payable since the Closing
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Date. Thereafter, the interest rate payable shall be the stated interest rate
unless and until such rate again exceeds the Maximum Lawful Rate, in which event
this paragraph shall again apply. In no event shall the total interest received
by Purchaser pursuant to the terms hereof exceed the amount which it could
lawfully have received had the interest due hereunder been calculated for the
full term hereof at the Maximum Lawful Rate. In the event the Maximum Lawful
Rate is calculated pursuant to this paragraph, such interest shall be calculated
at a daily rate equal to the Maximum Lawful Rate divided by the number of days
in the year in which such calculation is made. In the event that a court of
competent jurisdiction, notwithstanding the provisions of this Section 2.6(d),
shall make a final determination that Purchaser has received interest hereunder
or under any of the Loan Documents in excess of the Maximum Lawful Rate,
Purchaser shall, to the extent permitted by applicable law, promptly apply such
excess first to any interest due and not yet paid under the Note, then to the
outstanding principal of the Note, then to other unpaid Obligations and
thereafter shall refund any excess to Company or as a court of competent
jurisdiction may otherwise order.
2.7 Receipt of Payments. Company shall make each payment
under the Note not later than 2:00 P.M. (New York City time) on the day when due
in lawful money of the United States of America in immediately available funds
to Purchaser's depository bank in the United States as designated by Purchaser
from time to time for deposit in Purchaser's depositary account.
2.8 Application of Payments. Company irrevocably waives the
right to direct the application of any and all payments at any time or times
hereafter received by Purchaser from or on behalf of Company pursuant to the
terms of this Agreement, and Company irrevocably agrees that Purchaser shall
have the continuing exclusive right to apply any and all such payments against
the then due and payable Obligations of Company and in repayment of the Note as
it may deem advisable. In the absence of a specific determination by Purchaser
with respect thereto, the same shall be applied in the following order: (i) then
due and payable interest payments on the Note; and (ii) then due and payable
principal payments on the Note.
2.9 Sharing of Payments. If any holder of the Note or a
portion thereof shall obtain any payment (whether voluntary, involuntary,
through the exercise of any right of set-off, or otherwise) on account of the
Note held by it in excess of its ratable share of payments on account of the
Notes held by all holders thereof, such holder shall forthwith purchase from
each other holder such participations in the Note held by it as shall be
necessary to cause such purchasing holder to share the excess payment ratably
with each other holder; provided, however, that if all or any portion of such
excess payment is thereafter recovered from such purchasing holder, such
purchase shall be rescinded and such holder shall repay to the purchasing holder
the purchase price to the extent of such recovery together with an amount equal
to such holder's ratable share (according to the proportion of (i) the amount of
such holder's required repayment to (ii) the total amount so recovered from the
purchasing holder) of any interest or other amount paid or payable by the
purchasing holder in respect of the total amount so recovered. Company agrees
that any holder so purchasing a participation from another holder pursuant to
this Section 2.9 may, to the fullest extent permitted by law, exercise all
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its rights of payment (including the right of set-off) with respect to such
participation as fully as if such holder were the direct creditor of Company in
the amount of such participation. Company further agrees to make all payments on
the Note to all holders thereof on a pro rata basis, based on the principal
amount of the Note held by each.
2.10 Indemnity. (a) Company shall indemnify and hold
Purchaser and each of its officers, directors and Affiliates harmless from and
against any and all suits, actions, proceedings, claims, damages, losses,
liabilities and expenses (including, without limitation, reasonable attorneys'
fees and disbursements, including those incurred upon any appeal) which may be
instituted or asserted by a third party against or incurred by Purchaser or such
other indemnified person as the result of Purchaser having entered into this
Agreement or any of the other Loan Documents or purchased the Note hereunder or
arising out of any Environmental Law applicable to Company or its Subsidiaries
or otherwise relating to or arising out of the transactions contemplated hereby;
provided, however, that Company shall not be liable for such indemnification to
such indemnified Person to the extent that any such suit, action, proceeding,
claim, damage, loss, liability or expense results from such indemnified Person's
gross negligence or willful misconduct.
2.11 Access. Purchaser and any of its officers, employees
and/or agents shall have the right, during normal business hours, to visit and
inspect the properties and facilities of Company and its Subsidiaries and to
inspect, audit and make extracts from all of Company's and its Subsidiaries'
records, files, corporate books and books of account and to discuss the affairs,
finances and accounts of Company and its Subsidiaries with the principal
officers of Company, all at such reasonable times and upon reasonable notice as
Purchaser may reasonably request. Company shall deliver any document or
instrument reasonably necessary for Purchaser, as it may request, to obtain
records from any service bureau maintaining records for Company or its
Subsidiaries. In connection with its rights under this Section 2.11, Purchaser
shall be bound by the confidentiality provisions applicable to General Electric
Company contained in the Confidentiality Agreement dated May 26, 1999 among the
Company, General Electric Company and GELcore, LLC.
2.12 Taxes. Any and all payments by Company hereunder or
under the Note shall be made, in accordance with this Section 2.12, free and
clear of and without deduction for any and all present or future taxes, levies,
imposts, deductions, charges or withholdings, and all liabilities with respect
thereto, excluding taxes imposed on or measured by the net income or net profits
of Purchaser, or any franchise or similar tax imposed on or measured by the net
income of Purchaser, by the jurisdiction under the laws of which it is organized
or any political subdivision thereof (all such non-excluded taxes, levies,
imposts, deductions, charges, withholdings and liabilities being hereinafter
referred to as "Taxes"). If Company shall be required by law to deduct any Taxes
from or in respect of any sum payable hereunder or under the Note to Purchaser,
(i) the sum payable shall be increased as may be necessary so that after making
all required deductions (including deductions applicable to additional sums
payable under this Section 2.12) Purchaser receives an amount equal to the sum
it would have received had no such deductions been made, (ii) Company shall make
such deductions, and (iii)
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Company shall pay the full amount deducted to the relevant taxing or other
authority in accordance with applicable law.
(a) In addition, Company agrees to pay any present or future
stamp or documentary taxes or any other sales, or exercise taxes, charges or
similar levies that arise from any payment made hereunder or under the Note or
from the execution, sale, delivery or registration of, or otherwise with respect
to, any of the Transaction Documents (hereinafter referred to as "Other Taxes").
(b) Within 45 days after the date of any payment of Taxes,
Company shall furnish to Purchaser the original or a certified copy of a receipt
evidencing payment thereof.
(c) Without prejudice to the survival of any other agreement
of Company hereunder, the agreements and obligations of Company contained in
this Section 2.12 shall survive the payment in full of the Note.
3. PURCHASER'S REPRESENTATIONS AND WARRANTIES
Purchaser makes the following representations and warranties
to Company, each and all of which shall survive the execution and delivery of
this Agreement and the Closing hereunder:
3.1 Investment Intention. Purchaser is purchasing the Note
for its own account, for investment purposes and not with a view to the
distribution thereof. Purchaser will not, directly or indirectly, offer,
transfer, sell, assign, pledge, hypothecate or otherwise dispose of the Note (or
solicit any offers to buy, purchase, or otherwise acquire any of the Note),
except in compliance with the Securities Act.
3.2 Accredited Investor. Purchaser is an "accredited
investor" (as that term is defined in Rule 501 of Regulation D under the
Securities Act) and by reason of its business and financial experience, it has
such knowledge, sophistication and experience in business and financial matters
as to be capable of evaluating the merits and risks of the prospective
investment, is able to bear the economic risk of such investment and is able to
afford a complete loss of such investment.
3.3 Corporate Existence. Purchaser is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware.
3.4 Corporate Power; Authorization; Enforceable Obligations.
The execution, delivery and performance by Purchaser of this Agreement and the
other Transaction Documents to be executed by it: (i) are within Purchaser's
corporate power; (ii) have been duly authorized by all necessary corporate
action; (iii) are not in contravention of any provision of Purchaser's
certificate of incorporation or by-laws; and (iv) will not violate any law or
regulation, or any order or decree of any court or governmental instrumentality
binding on Purchaser. This Agreement and the other Transaction Documents to
which Purchaser is a party have each been duly executed and delivered by
Purchaser and constitute the legal, valid and binding obligations of
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Purchaser, enforceable against it in accordance with their respective terms,
subject to applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and similar laws affecting creditors' rights and
remedies generally, and subject, as to enforceability, to general principles of
equity, including principles of commercial reasonableness, good faith and fair
dealing (regardless of whether enforcement is sought in a proceeding at law or
in equity).
4. COMPANY'S REPRESENTATIONS AND WARRANTIES
Company makes the following representations and warranties to
Purchaser, each and all of which shall survive the execution and delivery of
this Agreement and the Closing hereunder:
4.1 Authorization and Issuance of Note. Upon delivery to
Purchaser of the Note against payment in accordance with the terms hereof, the
Note will have been validly issued, free and clear of all pledges, liens,
encumbrances and preemptive rights. The issuance of shares of Common Stock upon
conversion of the Note has been duly authorized by all necessary corporate
action on the part of Company and, when issued upon conversion of the Note, such
Common Stock will have been validly issued and fully paid and non-assessable.
Company has duly reserved 340,984 shares of Common Stock for issuance pursuant
to the terms of the Note.
4.2 Corporate Existence; Compliance with Law. Company and
each of its Subsidiaries, if any, (i) is a corporation duly organized, validly
existing and in good standing under the laws of the State of New Jersey in the
case of Company and as set forth on Schedule 4.2 in the case of its
Subsidiaries; (ii) is duly qualified as a foreign corporation and in good
standing under the laws of each jurisdiction where its ownership or lease of
property or the conduct of its business requires such qualification (except for
jurisdictions in which such failure to so qualify or to be in good standing
would not have a Material Adverse Effect); (iii) has the requisite corporate
power and authority and the legal right to own, pledge, mortgage or otherwise
encumber and operate its properties, to lease the property it operates under
lease, and to conduct its business as now being conducted; (iv) has, or has
applied for, all material licenses, permits, consents or approvals from or by,
and has made all material filings with, and has given all material notices to,
all Governmental Authorities having jurisdiction, to the extent required for
such ownership, operation and conduct; (v) is in compliance with its certificate
or articles of incorporation and by-laws; and (vi) is in compliance with all
applicable provisions of law, except for such non-compliance which would not
have a Material Adverse Effect.
4.3 Securities Laws. In reliance on the investment
representations contained in Sections 3.1 and 3.2, the offer, issuance, sale and
delivery of the Note, as provided in this Agreement, are exempt from the
registration requirements of the Securities Act and all applicable state
securities laws, and are otherwise in compliance with such laws. Neither Company
nor any Person acting on its behalf has taken or will take any action
(including, without limitation, any offering of any securities of Company under
circumstances which would require the integration of such offering with the
offering of the Note under the Securities Act and the rules and regulations of
the SEC
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thereunder) which might subject the offering, issuance or sale of the Note, to
the registration requirements of Section 5 of the Securities Act.
4.4 Corporate Power; Authorization; Enforceable Obligations.
The execution, delivery and performance by Company of this Agreement, the other
Transaction Documents to which it is a party and all instruments and documents
to be delivered by Company, the issuance and sale of the Note and the
consummation of the other transactions contemplated by any of the foregoing: (i)
are within Company's corporate power and authority; (ii) have been duly
authorized by all necessary or proper corporate action; (iii) are not in
contravention of any provision of Company's certificate of incorporation or
by-laws; (iv) will not violate any law or regulation, or any order or decree of
any court or governmental instrumentality; (v) will not conflict with or result
in the breach or termination of, constitute a default under or accelerate any
performance required by, any indenture, mortgage, deed of trust, lease,
agreement or other instrument to which Company or any of its Subsidiaries is a
party or by which Company, any of its Subsidiaries or any of their property is
bound; (vi) will not result in the creation or imposition of any Lien upon any
of the property of Company or any of its Subsidiaries; and (vii) do not require
on the part of Company the consent or approval of, or any filing with, any
Governmental Authority or any other Person (except (A) for those filings
required by the Registration Rights Agreement and (B) to the extent previously
obtained or made). At or prior to the Closing Date, each of this Agreement and
the other Transaction Documents shall have been duly executed and delivered by
Company and each shall then constitute a legal, valid and binding obligation of
Company, enforceable against it in accordance with its terms, subject to
applicable bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and similar laws affecting creditors' rights and remedies generally,
and subject, as to enforceability, to general principles of equity, including
principles of commercial reasonableness, good faith and fair dealing (regardless
of whether enforcement is sought in a proceeding at law or in equity).
4.5 Financial Statements. The audited consolidated balance
sheet of Company as at September 30, 1998, and the related consolidated
statements of income and cash flows for the year then ended, with the opinion
thereon of Pricewaterhouse Coopers LLP, and the unaudited consolidated balance
sheet of Company as at March 31, 1999 (the "Balance Sheet") and the related
unaudited consolidated statements of income, and cash flows for the six months
then ended, copies of which have previously been delivered to Purchaser, have
been, except as noted therein, prepared in conformity with GAAP consistently
applied throughout the periods involved and present fairly in all material
respects the consolidated financial position of Company as at the dates thereof,
and the consolidated results of its operations and cash flows for the periods
then ended, subject, in the case of the interim financial statements, to normal
year-end audit adjustments.
4.6 Brokers. No broker or finder acting on behalf of Company
or any of its Subsidiaries brought about the consummation of the transactions
contemplated pursuant to this Agreement and neither Company nor any of its
Subsidiaries has any obligation to any Person in respect of any finder's or
brokerage fees (or any similar
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obligation) in connection with the transactions contemplated by this Agreement.
Company is solely responsible for the payment of all such finder's or brokerage
fees.
4.7 Patents, Trademarks, Copyrights and Licenses. Company and
each of its Subsidiaries owns or has a license or other right to use all
patents, patent applications, copyrights, service marks, trademarks and
registrations and applications for registration thereof, and trade names
necessary to continue to conduct its business as heretofore conducted by it and
now being conducted by it, except where the failure to have such right would not
be reasonably expected to have a Material Adverse Effect. To Company's
knowledge, there are no pending or threatened claims alleging or potential
claims that could reasonably be expected to be alleged, that any or all such
intellectual property rights of Company and its Subsidiaries infringes or
conflicts with the intellectual property rights of others.
4.8 No Material Adverse Effect. Except as set forth on
Schedule 4.8, no event has occurred since December 31, 1998 which has had or
could be reasonably expected to have a Material Adverse Effect.
4.9 SEC Documents. Company has made available to Purchaser a
true and complete copy of each report, schedule, registration statement and
definitive proxy statement filed by Company with the SEC since January 1, 1998
and prior to the date of this Agreement (the "Company SEC Documents"), which are
all the documents (other than preliminary material) that Company was required to
file with the SEC since such date. As of their respective dates, the Company SEC
Documents complied in all material respects with the requirements of the
Securities Act or the Exchange Act, as the case may be, and the rules and
regulations of the SEC thereunder applicable to such Company SEC Documents, and
none of the Company SEC Documents contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
4.10 Full Disclosure. No information contained in this
Agreement, any other Transaction Document or any financial statements furnished
by or on behalf of Company pursuant to the terms of this Agreement contains any
untrue statement of a material fact or omits to state a material fact necessary
to make the statements contained herein or therein not misleading in light of
the circumstances under which made.
5. COVENANTS
5.1 Affirmative Covenants. Company covenants and agrees that
from and after the date hereof (except as otherwise provided herein, or unless
the Required Holders have given their prior written consent) so long as the Note
is outstanding:
(a) Tax Compliance. Company shall pay all transfer, excise or
similar taxes (not including income, profits or franchise taxes) in connection
with the issuance, sale, delivery or transfer by Company to Purchaser of the
Note and the Common Stock issuable upon conversion thereof, and shall indemnify
and save Purchaser harmless
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without limitation as to time against any and all liabilities with respect to
such taxes. Company shall not be responsible for any taxes in connection with
the transfer of the Note or such Common Stock by the holder thereof. The
obligations of Company under this Section 5.1(a) shall survive the payment,
prepayment or redemption of the Note and the termination of this Agreement.
(b) Insurance. Company shall and shall cause each Subsidiary
of Company to maintain insurance covering, without limitation, fire, theft,
burglary, public liability, property damage, product liability, workers'
compensation, directors' and officers' insurance and insurance on all property
and assets material to the operation of the business, all in amounts customary
for the industry. Company shall, and shall cause each of its Subsidiaries to,
pay all insurance premiums payable by them.
(c) Compliance with Law. Company shall, and shall cause each
of its Subsidiaries to, comply with all laws, including Environmental Laws,
applicable to it, except where the failure to comply would not be reasonably
likely to result in a Material Adverse Effect.
(d) Maintenance of Existence. Company shall, and shall cause
each of its Subsidiaries to do or cause to be done all things necessary to
preserve and keep in full force and effect its corporate existence, and its
rights and franchises.
(e) Senior Debt Compliance. As soon as available and in any
event within 45 days after the end of each fiscal quarter, Company shall deliver
to Purchaser a certificate of the chief financial officer of Company certifying
Company's compliance with the covenant contained in Section 5.2(c) hereof as of
the last day of the immediate preceding fiscal quarter, showing the calculation
thereof.
5.2 Negative Covenants. Company covenants and agrees that
from and after the date hereof (except as otherwise provided herein, or unless
the Required Holders have given their prior written consent) so long as the Note
is outstanding:
(a) Sales of Assets; Liquidation. Company shall not, and
shall not permit any Material Subsidiary of Company to, (i) sell, transfer,
convey or otherwise dispose of all or substantially all of its assets or
properties or (ii) liquidate, dissolve or wind up Company, or any of its
Material Subsidiaries, except for transfers to Company, whether voluntary or
involuntary; provided, however, that the foregoing shall not prohibit (i) the
sale of inventory in the ordinary course of business, (ii) the sale of surplus
or obsolete equipment and fixtures, (iii) transfers resulting from any casualty
or condemnation of assets or properties or (iv) sales as to which the net
proceeds are either (x) reinvested in Company's or, if sold by a Material
Subsidiary, such Material Subsidiary's or Company's existing or related lines of
business or (y) applied to repay Indebtedness, within 180 days after such sale.
(b) Transactions with Affiliates. Company shall not and shall
not permit any Subsidiary of Company to enter into or be a party to any
transaction involving $250,000 or more in any single transaction or $1,000,000
or more in the aggregate for all
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such transactions with any Affiliate of Company or such Subsidiary, except (i)
transactions expressly permitted hereby, (ii) transactions in the ordinary
course of and pursuant to the reasonable requirements of Company's or such
Subsidiary's business and upon fair and reasonable terms that are fully
disclosed to Purchaser and are no less favorable to Company or such Subsidiary
than would be obtained in a comparable arm's-length transaction (as determined
by disinterested members of the board of directors of Company) with a Person not
an Affiliate of Company or such Subsidiary, (iii) transactions between Company
and its wholly-owned Subsidiaries or between such Subsidiaries and (iv) payment
of compensation to employees and directors' fees. For the avoidance of doubt,
Company and Purchaser hereby acknowledge that the foregoing shall not restrict
or prohibit certain transactions between Company and certain of its Affiliates
which are in any way related to the guaranty of, or collateral security provided
for, any and all of the Specified Senior Debt.
(c) Senior Debt. Company shall not and shall not permit any
Subsidiary of Company to incur or suffer to exist Senior Debt in an aggregate
principal amount in excess of the greater of (X) the Permitted Senior Debt and
(Y) the product obtained by multiplying Company's EBITDA (determined on the
basis of the immediately preceding four fiscal quarters ending on the last day
of the most recent fiscal quarter) by four (such greater amount, as may be
adjusted from time to time, the "Senior Debt Ceiling"). For purposes hereof,
"Permitted Senior Debt" shall be an aggregate principal amount equal to $30
million plus any additional amounts of which Purchaser is given notice by
Company which would constitute an Event of Default and as a result of which
Purchaser does not elect to accelerate the amounts due under the Note in
accordance with the provisions of Section 8.2 hereof. Notwithstanding the
foregoing, if the amount of Senior Debt outstanding exceeds the Senior Debt
Ceiling pursuant to the calculation of the amount in clause (Y) above, it shall
not be deemed a Default or an Event of Default hereunder so long as such excess
Senior Debt does not exceed fifteen percent (15%) of the total amount of Senior
Debt outstanding.
(d) Indebtedness. Company shall not, and shall not permit any
Subsidiary of Company to, incur or suffer to exist any Indebtedness other than
(i) Senior Debt permitted pursuant to Section 5.2(c) hereof, (ii) Indebtedness
listed on Schedule 5.2(d) and (iii) Indebtedness subordinated to the Note on
terms and conditions (including, without limitation, subordination terms)
reasonably acceptable to Purchaser. It is understood that Purchaser shall be
acting reasonably in not agreeing to any subordinated Indebtedness which has
payments of principal (other than, with respect to all subordinated
Indebtedness, an aggregate principal amount of $1,000,000) prior to the payment
in full of the Note or which has interest payments Purchaser reasonably believes
to be excessive.
(e) Liens. Company shall not, and shall not permit any
Subsidiary of Company to, incur or suffer to exist any Liens on any of its
assets, except Permitted Liens and Liens securing Senior Debt permitted
hereunder.
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(f) Mergers. Company shall not, directly or indirectly, by
operation of law or otherwise, merge with, consolidate with, or otherwise
combine with any Person where there is a Change in Control or would result in a
Default or Event of Default.
6. CONDITIONS PRECEDENT
6.1 Conditions Precedent. The obligation of Purchaser to
purchase the Note pursuant to Section 2.1 hereof, is subject to the condition
that Purchaser shall have received, on the Closing Date, the following, each
dated the Closing Date unless otherwise indicated, in form and substance
satisfactory to Purchaser:
(a) Favorable opinions of White & Case, special counsel to
Company, and Dillon, Bitar & Luther, L.L.C., special New Jersey counsel to
Company, substantially in the form attached hereto as Exhibits C-1 and C-2,
respectively.
(b) Resolutions of the board of directors of Company,
certified by the Secretary or Assistant Secretary of Company, as of the Closing
Date, to be duly adopted and in full force and effect on such date, authorizing
(i) the consummation of each of the transactions contemplated by this Agreement
and (ii) specific officers to execute and deliver this Agreement and each other
Transaction Document to which it is a party.
(c) Governmental certificates, dated the most recent
practicable date prior to the Closing Date, with telegram updates where
available, showing that Company is organized and in good standing in the State
of New Jersey and is qualified as a foreign corporation and in good standing in
all other jurisdictions in which it is qualified to transact business.
(d) A copy of the certificate of incorporation and all
amendments thereto of Company, certified by the Secretary or Assistant Secretary
of Company, and copies of Company's by-laws, certified by the Secretary or
Assistant Secretary of Company as true and correct as of the Closing Date.
(e) The Registration Rights Agreement duly executed by the
parties thereto.
(f) Certificates of the Secretary or an Assistant Secretary
of Company, dated the Closing Date, as to the incumbency and signatures of the
officers of Company executing this Agreement, the Note, each other Transaction
Document to which it is a party and any other certificate or other document to
be delivered pursuant hereto or thereto, together with evidence of the
incumbency of such Secretary or Assistant Secretary.
(g) Certificate of the President of Company, dated the
Closing Date, stating that all of the representations and warranties of Company
contained herein or in the other Transaction Documents are true and correct on
and as of the Closing Date as if made on such date and that no breach of any
covenant contained in Article V has occurred or would result from the Closing
hereunder.
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(h) Receipt of all requisite third-party consents to the
transactions contemplated hereby, including an acknowledgment from the Specified
Senior Creditor concerning the incurrence of the Obligations hereunder as
constituting "Subordinated Debt", as defined in the Specified Senior Creditor's
Senior Debt Documents and consenting to the use of proceeds described in Section
2.5 hereof.
6.2 Additional Conditions. The obligation of Purchaser to
purchase the Note pursuant to Section 2.1 is subject to the additional
conditions precedent that:
(a) Except as disclosed pursuant to Article IV, there shall
not have occurred any event or condition since December 31, 1998 which could
have a Material Adverse Effect.
(b) All of the representations and warranties of Company
contained herein or in the other Transaction Documents shall be true and correct
on and as of the Closing Date as if made on such date and no breach of any
covenant contained in Article V shall have occurred or would result from the
Closing hereunder.
(c) The Closing shall have occurred no later than May 27,
1999.
7. CONVERSION
7.1 Conversion of Note.
(a) Subject to the provisions for adjustment hereinafter set
forth, the Note shall be convertible, in whole or in part, at any time and from
time to time, at the option of the holder thereof (a "Conversion"), up to the
outstanding principal amount of the Note held by Purchaser at the time of such
conversion into a number of fully paid and nonassessable shares of Common Stock
equal to the quotient obtained by dividing (A) the principal amount of the Note
to be converted by (B) the Conversion Price (as hereinafter defined). The
Conversion Price shall initially be $22.875 per share of Common Stock and shall
be subject to further adjustments from time to time pursuant to Section 7.1(f)
below.
No fractional shares shall be issued upon the conversion of
the Note. All shares of Common Stock (including fractions thereof) issuable upon
conversion of the Note by Purchaser shall be aggregated for purposes of
determining whether conversion would result in the issuance of any fractional
share. If, after the aforementioned aggregation, the conversion would result in
the issuance of a fraction of a share of Common Stock, Company shall, in lieu of
issuing any fractional share, pay Purchaser a sum in cash equal to the Current
Market Price of such fraction on the date of conversion.
(b) A conversion of the Note may be effected by Purchaser
upon the surrender to Company at the principal office of Company of the Note to
be converted accompanied by a written notice stating that Purchaser elects to
convert all or a specified amount of its Note in accordance with the provisions
of this Section 7.1 and specifying the name or names in which Purchaser wishes
the certificate or certificates for shares of Common Stock to be issued.
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(c) In case the written notice specifying the name or names
in which Purchaser wishes the certificate or certificates for shares of Common
Stock to be issued shall specify a name or names other than that of Purchaser,
such notice shall be accompanied by payment of all transfer taxes payable upon
the issuance of shares of Common Stock in such name or names. Other than such
taxes, Company will pay any and all issue and other taxes (other than taxes
based on income) that may be payable in respect of any issue or delivery of
shares of Common Stock on conversion of the Note pursuant hereto. As promptly as
practicable, and in any event within five Business Days after the surrender of
the Note and the receipt of such notice relating thereto and, if applicable,
payment of all transfer taxes (or the demonstration to the satisfaction of
Company that such taxes have been paid), Company shall deliver or cause to be
delivered (1) certificate(s) representing the number of validly issued, fully
paid and nonassessable full shares of Common Stock to which the holder of the
Note being converted shall be entitled and (2) if less than all of principal
amount of the Note evidenced by the surrendered Note is being converted, in
exchange for the Note surrendered, a new Note, of like tenor, in a principal
amount equal the full principal amount of the Note surrendered less the
principal amount being converted.
(d) A conversion shall be deemed to have been made at the
close of business on the date of giving the written notice referred to in the
first sentence of (b) above and of such surrender of the certificate or
certificates representing the Note to be converted so that the rights of the
holder thereof as to the Note being converted shall cease except for the right
to receive shares of Common Stock in accordance herewith, and the Person
entitled to receive the shares of Common Stock shall be treated for all purposes
as having become the record holder of such shares of Common Stock at such time.
(e) Company shall at all times reserve, and keep available
for issuance upon the conversion of the Note, such number of its authorized but
unissued shares of Common Stock as will from time to time be sufficient to
permit the conversion of all of the outstanding principal balance of the Note,
and shall take all action required to increase the authorized number of shares
of Common Stock if necessary to permit the conversion of all of the outstanding
principal balance of the Note.
(f) The Conversion Price will be subject to adjustment from
time to time as follows:
(i) In case Company shall at any time or from
time to time after the Closing Date (A) pay a dividend, or
make a distribution, on the outstanding shares of Common Stock
in shares of Common Stock, (B) subdivide the outstanding
shares of Common Stock, (C) combine the outstanding shares of
Common Stock into a smaller number of shares or (D) issue by
reclassification of the shares of Common Stock any shares of
capital stock of Company, then, and in each such case, the
Conversion Price in effect immediately prior to such event or
the record date therefor, whichever is earlier, shall be
adjusted so that the holder of any Note thereafter surrendered
for conversion shall be entitled to receive the
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number of shares of Common Stock or other securities of
Company which Purchaser would have owned or have been entitled
to receive after the happening of any of the events described
above, had such Note been surrendered for conversion
immediately prior to the happening of such event or the record
date therefor, whichever is earlier. An adjustment made
pursuant to this clause (i) shall become effective (x) in the
case of any such dividend or distribution, immediately after
the close of business on the record date for the determination
of holders of shares of Common Stock entitled to receive such
dividend or distribution, or (y) in the case of such
subdivision, reclassification or combination, at the close of
business on the day upon which such corporate action becomes
effective. No adjustment shall be made pursuant to this clause
(i) in connection with any transaction to which Section 7.1(g)
applies.
(ii) In case Company shall issue shares of Common
Stock (or rights, warrants or other securities convertible
into or exchangeable for shares of Common Stock) after the
Closing Date, other than (A) pursuant to existing obligations,
including, without limitation, under agreements with existing
lenders, outstanding options, rights, warrants or other
securities convertible into or exchangeable for shares of
Common Stock, or pursuant to any existing employee benefit
plan, (B) pursuant to any joint venture or other strategic
alliance, with the prior written consent of Purchaser, (C)
issuances covered by clause (i) above, and (D) issuances
pursuant to a registration statement under the Securities Act,
for consideration in an amount per share of Common Stock (or
having an exercise, conversion or exchange price per share)
less than an amount equal to 25% below the Current Market
Price, then (i) the number of shares of Common Stock for which
this Note is convertible shall be adjusted to equal the
product obtained by multiplying the number of shares of Common
Stock for which this Note is convertible immediately prior to
such issue or sale by a fraction (A) the numerator of which
shall be the number of shares of Common Stock outstanding
immediately after such issue or sale, and (B) the denominator
of which shall be the number of shares of Common Stock
outstanding immediately prior to such issue or sale plus the
number of shares which the aggregate offering price of the
total number of such additional shares of Common Stock would
purchase at the then Current Market Price; and (ii) the
Conversion Price as to the number of shares for which this
Note is convertible prior to such adjustment shall be adjusted
by multiplying such Conversion Price by a fraction (X) the
numerator of which shall be the number of shares for which
this Note is convertible immediately prior to such issue or
sale; and (Y) the denominator of which shall be the number of
shares of Common Stock purchasable immediately after such
issue or sale. An example of the calculation required pursuant
to this clause (ii) is annexed hereto as Exhibit D.
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(iii) An adjustment made pursuant to clause (ii)
above shall be made on the next Business Day following the
date on which any such issuance is made and shall be effective
retroactively immediately after the close of business on such
date. No adjustment shall be made pursuant to clause (ii) in
respect of any issuance of shares of Common Stock on or prior
to the Closing Date. For purposes of clause (ii), the
aggregate consideration received by Company in connection with
the issuance of shares of Common Stock or of rights, warrants
or other securities exchangeable or convertible into shares of
Common Stock shall be deemed to be equal to the sum of the
aggregate offering price of all such Common Stock and such
rights, warrants, or other exchangeable or convertible
securities plus the aggregate amount, if any, receivable upon
exchange or conversion of any such exchangeable or convertible
securities into shares of Common Stock.
(iv) In case Company shall at any time or from
time to time after the Closing Date declare, order, pay or
make a dividend or other distribution (including, without
limitation, any distribution of stock or other securities or
property or rights or warrants to subscribe for securities of
Company or any of its Subsidiaries by way of dividend or
spinoff), on its Common Stock, other than dividends or
distributions of shares of Common Stock which are referred to
in clause (i) above and cash dividends paid out of retained
earnings, then the Conversion Price shall be adjusted so that
it shall equal the price determined by multiplying (A) the
applicable Conversion Price on the day immediately prior to
the record date fixed for the determination of stockholders
entitled to receive such dividend or distribution by (B) a
fraction, the numerator of which shall be the Current Market
Price per share of Common Stock on the day immediately prior
to such record date less the amount of such dividend or
distribution per share of Common Stock, and the denominator of
which shall be such Current Market Price per share of Common
Stock on the day immediately prior to such record date. No
adjustment shall be made pursuant to this clause (iv) in
connection with any transaction to which Section 7.1(g)
applies.
(v) For purposes of this Section 7.1(f), 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 Company or any of its Subsidiaries.
(vi) If Company shall take a record of the
holders of its Common Stock for the purpose of entitling them
to receive a dividend or other distribution, and shall
thereafter and before the distribution to stockholders thereof
legally abandon its plan to pay or deliver such dividend or
distribution, then thereafter no adjustment in the number of
shares of Common Stock issuable upon exercise of the right of
conversion
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granted by this Section 7.1(f) or in the Conversion Price then
in effect shall be required by reason of the taking of such
record.
(vii) Anything in this Section 7.1(f) to the
contrary notwithstanding, Company shall not be required to
give effect to any adjustment in the Conversion Price unless
and until the net effect of one or more adjustments (each of
which shall be carried forward), determined as above provided,
shall have resulted in a change of the Conversion Price by at
least 1%, and when the cumulative net effect of more than one
adjustment so determined shall be to change the Conversion
Price by at least one cent, such change in Conversion Price
shall thereupon be given effect.
(viii) If any option or warrant expires or is
cancelled without having been exercised, then, for the
purposes of the adjustments set forth above, such option or
warrant shall have been deemed not to have been issued and the
Conversion Price shall be adjusted accordingly. No holder of
Common Stock which was previously issued upon conversion of
the Note shall have any obligation to redeem or cancel any
such shares of Common Stock as a result of the operation of
this clause (viii).
(g) In case of any reorganization of capital,
reclassification of capital stock (other than a reclassification of capital
subject to 7.1(f)(i)), consolidation or merger with or into another corporation,
or sale, transfer or disposition of all or substantially all the property,
assets or business of Company to another corporation (any one or more of such
events being an "Organic Change"), the Note then outstanding, shall thereafter
be convertible into, in lieu of the Common Stock issuable upon such conversion
prior to consummation of such Organic Change, the kind and amount of shares of
stock and other securities and property receivable (including cash) upon the
consummation of such Organic Change by a holder of that number of shares of
Common Stock into which the Note was convertible immediately prior to such
Organic Change (including, on a pro rata basis, the cash, securities or property
received by holders of Common Stock in any tender or exchange offer that is a
step in such Organic Change). In case securities or property other than Common
Stock shall be issuable or deliverable upon conversion as aforesaid, then all
references in this Section 7.1(g) shall be deemed to apply, so far as
appropriate and nearly as may be, to such other securities or property.
(h) In case at any time or from time to time Company shall
pay any stock dividend or make any other non-cash distribution to the holders of
its Common Stock, or shall offer for subscription pro rata to the holders of its
Common Stock any additional shares of stock of any class or any other right, or
there shall be any capital reorganization or reclassification of the Common
Stock of Company or consolidation or merger of Company with or into another
corporation, or any sale or conveyance to another corporation of the property of
Company as an entirety or substantially as an entirety, or there shall be a
voluntary or involuntary dissolution, liquidation or winding up of Company,
then, in any one or more of said cases, Company shall give at least 20 days'
prior written notice to the registered holder of the Note at the address of each
as shown
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on the books of Company as of the date on which (i) the books of Company shall
close or a record shall be taken for such stock dividend, distribution or
subscription rights or (ii) such non-bankruptcy reorganization,
reclassification, consolidation, merger, sale or conveyance, dissolution,
liquidation or winding up shall take place, as the case may be, provided that in
the case of any Organic Change to which Section 7.1(g) applies Company shall
give at least 20 days' prior written notice as aforesaid. Such notice shall also
specify the date as of which the holders of the Common Stock of record shall
participate in such dividend, distribution or subscription rights or shall be
entitled to exchange their Common Stock for securities or other property
deliverable upon such non-bankruptcy reorganization, reclassification,
consolidation, merger, sale or conveyance or participate in such dissolution,
liquidation or winding up, as the case may be. Failure to give such notice shall
not invalidate any action so taken.
(i) Upon any adjustment of the Conversion Price then in
effect and any increase or decrease in the number of shares of Common Stock
issuable upon the operation of the conversion set forth in this Section 7.1,
then, and in each such case, Company shall promptly deliver to the holder of the
Note, a certificate signed by the President or a Vice President and by the
Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary
of Company setting forth in reasonable detail the event requiring the adjustment
and the method by which such adjustment was calculated and specifying the
Conversion Price then in effect following such adjustment and the increased or
decreased number of shares issuable upon the conversion granted by this Section
7.1, and shall set forth in reasonable detail the method of calculation of each
and a brief statement of the facts requiring such adjustment.
8. EVENTS OF DEFAULT; RIGHTS AND REMEDIES
8.1 Events of Default. The occurrence of any one or more of
the following events (regardless of the reason therefor) shall constitute an
"Event of Default" hereunder and under the Note:
(a) Company shall fail to make any payment of principal of,
or interest on or any other amount owing in respect of, the Note, or any of the
other Obligations when due and payable or declared due and payable, including
pursuant to Section 2.4 hereof, which, other than principal or interest, shall
have remained unremedied for a period of ten (10) days.
(b) Company shall fail or neglect to perform, keep or
observe any of the provisions of Section 5.2 hereof (other than Section 5.2(c)).
(i) Company shall fail or neglect to perform, keep or observe
any of the provisions of Section 5.2(c) hereof and such
non-compliance shall have remained unremedied for a period of
45 days after the last day of the fiscal quarter during which
such non-compliance occurred.
(c) Company shall fail or neglect to perform, keep or observe
any other provision of this Agreement or of any of the other Loan Documents, and
the same shall
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<PAGE> 25
remain unremedied for a period of thirty (30) days after Company shall receive
written notice of any such failure from Purchaser.
(d) A default shall occur under any other agreement, document
or instrument to which Company or any Subsidiary is a party or by which Company
or any of its Subsidiaries or any of their property is bound, and such default
(i) involves the failure to make any payment (whether of principal, interest or
otherwise) due at the scheduled final maturity date thereof beyond the period of
grace, if any, applicable thereto in respect of any Indebtedness of Company or
any of its Subsidiaries in an aggregate amount exceeding $1,000,000, or (ii)
causes such Indebtedness or a portion thereof in an aggregate amount exceeding
$1,000,000, to become due prior to its stated maturity.
(e) Any representation or warranty herein or in any Loan
Document or in any written statement pursuant thereto or hereto, report,
financial statement or certificate made or delivered to Purchaser by Company
pursuant hereto or thereto shall be untrue or incorrect in any material respect,
as of the date when made.
(f) Any of the assets of Company or any of its Subsidiaries
shall be attached, seized, levied upon or subjected to a writ or distress
warrant, or come within the possession of any receiver, trustee, custodian or
assignee for the benefit of creditors of Company or any of its Subsidiaries and
shall remain unstayed or undismissed for sixty (60) consecutive days; or Company
or any of its Subsidiaries shall have concealed, removed or permitted to be
concealed or removed, any part of its property, with intent to hinder, delay or
defraud its creditors or any of them or made or suffered a transfer of any of
its property or the incurring of an obligation which may be fraudulent under any
bankruptcy, fraudulent conveyance or other similar law.
(g) A case or proceeding shall have been commenced against
Company or any of its Subsidiaries in a court having competent jurisdiction
seeking a decree or order in respect of Company or any of its Subsidiaries (i)
under title 11 of the United States Code, as now constituted or hereafter
amended, or any other applicable federal, state or foreign bankruptcy or other
similar law, (ii) appointing a custodian, receiver, liquidator, assignee,
trustee or sequestrator (or similar official) of Company or any of its
Subsidiaries or of any substantial part of its or their properties, or (iii)
ordering the winding-up or liquidation of the affairs of Company or any of its
Subsidiaries and such case or proceeding shall remain undismissed or unstayed
for sixty (60) consecutive days or such court shall enter a decree or order
granting the relief sought in such case or proceeding.
(h) Company or any of its Subsidiaries shall (i) file a
petition seeking relief under title 11 of the United States Code, as now
constituted or hereafter amended, or any other applicable federal, state or
foreign bankruptcy or other similar law, (ii) consent to the institution of
proceedings thereunder or to the filing of any such petition or to the
appointment of or taking possession by a custodian, receiver, liquidator,
assignee, trustee or sequestrator (or similar official) of Company or any of its
Subsidiaries or of any substantial part of its properties, (iii) fail generally
to pay its debts
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<PAGE> 26
as such debts become due, or (iv) take any corporate action in furtherance of
any such action.
(i) Final judgment or judgments (after the expiration of all
times to appeal therefrom) for the payment of money in excess of $1,000,000 in
the aggregate shall be rendered against Company or any of its Subsidiaries and
the same shall not be (i) fully covered by insurance, or (ii) vacated, stayed,
bonded, paid or discharged for a period of thirty (30) days.
8.2 Remedies. (a) If any Event of Default specified in
Section 8.1 other than a default specified in Section 8.1(b)(ii) shall have
occurred and be continuing, Purchaser may, subject to the applicable provisions
of Article 9, without notice, declare all Obligations to be forthwith due and
payable, whereupon all such Obligations shall become and be due and payable,
without presentment, demand, protest or further notice of any kind, all of which
are expressly waived by Borrower; provided, however, that upon the occurrence of
an Event of Default specified in Section 8.1(f), (g) or (h) hereof, such
Obligations shall become due and payable without declaration, notice or demand
by Purchaser.
(a) If an Event of Default specified in Section 8.1(b)(ii)
shall have occurred and be continuing, Purchaser shall have 50 days after
delivery of the certificate of Company required under Section 5.1(e) hereof or
50 days after the date such certificate is required to be delivered, if earlier,
to declare, with notice to the Specified Senior Creditor, all Obligations due
and payable; provided, however, that if prior to the time Purchaser makes such
declaration Company has repaid its Senior Debt such that the Senior Debt is not
in excess of the Senior Debt Ceiling, Purchaser shall not declare the
Obligations due and payable. Purchaser shall give Company 10 days' notice prior
to the time that it makes such declaration. If Purchaser elects not to make such
declaration, such Event of Default under Section 8.1(b)(ii) shall be deemed to
be waived for such fiscal quarter only. The amount payable upon an acceleration
because of an Event of Default under Section 8.1(b)(ii) hereof shall include a
premium equal to the percentage set forth below of the outstanding principal
amount of the Note corresponding to the number of years after the Closing Date
set forth below during which such acceleration occurs:
<TABLE>
<CAPTION>
Year after Closing Date Premium
----------------------- -------
<S> <C>
Less than or equal to 1 19%
Greater than 1, but less than or equal to 2 17%
Greater than 2, but less than or equal to 3 15%
Greater than 3 12.5%
</TABLE>
Subject to the applicable provisions of Article 9, Purchaser
may (but shall not be obligated to) take such action, or refrain from taking
such action, with respect to
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<PAGE> 27
such Default or Event of Default as it shall deem advisable in its best
interests, including any action (or the failure to act) pursuant to the Loan
Documents.
In the event of a declaration of acceleration by Purchaser (an
"Applicable Acceleration") because of an Event of Default set forth in Section
8.1(d) above has occurred and is continuing solely as a result of the
acceleration of Senior Debt by the holders thereof (a "Senior Debt
Acceleration"), such Applicable Acceleration shall be automatically annulled if
the holders of such Senior Debt have rescinded such Senior Debt Acceleration
within 20 days thereof (but not beyond 90 days after the occurrence of such
Event of Default) and if (x) the annulment of such Applicable Acceleration would
not conflict with any judgment or decree of a court of competent jurisdiction
and (y) all existing Events of Default, except the non-payment of principal or
interest on the Note hereunder which shall have become due solely because of
such Applicable Acceleration, have been cured or waived.
8.3 Waivers by Company. Except as otherwise provided for in
this Agreement and applicable law, Company waives (i) presentment, demand and
protest and notice of presentment, dishonor notice of intent to accelerate and
notice of acceleration, (ii) all rights to notice and a hearing prior to
Purchaser's taking possession or control of, or to Purchaser's replevy,
attachment or levy upon, the Collateral or any bond or security which might be
required by any court prior to allowing Purchaser to exercise any of its
remedies, and (iii) the benefit of all valuation, appraisal and exemption laws.
Company acknowledges that it has been advised by counsel of its choice with
respect to this Agreement, the other Loan Documents and the transactions
evidenced by this Agreement and the other Loan Documents.
9. SUBORDINATION
9.1 Note Subordinated to Senior Debt. Company covenants and
agrees, and Purchaser and any other holder of the Note (Purchaser and such
holders being hereinafter referred to collectively as "Holder") by its
acceptance thereof likewise covenants and agrees, that all payments of the
principal of and interest on the Note and all other Obligations (whether in the
form of distribution of assets, set-off of other claims or other forms of cash
or non-cash exchanges) of Company pursuant to this Agreement or under the Note
(collectively the "Subordinated Debt") shall be subordinated in accordance with
the provisions of this Section 9 to the prior payment in full of all Senior Debt
of Company. For purposes of this Section 9, the term "Senior Debt" shall mean
the Senior Debt of Company and shall include principal of and premium, if any,
and interest (including interest accruing at the rate provided for in the
documents evidencing such Senior Debt after the commencement of any proceedings
of the type referred to in Section 9.2(a) hereof, whether or not an allowed
claim in such proceeding) on all loans and other extensions of credit under, and
all expenses, fees, reimbursements, indemnities and other amounts owing pursuant
to, the Senior Debt, to the extent permitted to be incurred pursuant hereto.
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<PAGE> 28
9.2 Priority and Payment Over of Proceeds in Certain Events.
(a) Subordination on Dissolution, Liquidation or
Reorganization of Company. Upon payment or distribution of assets or securities
of Company of any kind or character, whether in cash, property or securities,
upon any dissolution or winding up or total or partial liquidation or
reorganization of Company, whether voluntary or involuntary, or in bankruptcy,
insolvency, receivership or other proceedings or upon an assignment for the
benefit of creditors or any other marshalling of the assets and liabilities of
Company (any such proceeding, an "Insolvency Proceeding"), all Senior Debt shall
first be paid in full in cash, or payment provided for in cash or cash
equivalents in a manner satisfactory to the holders of Senior Debt, before any
direct or indirect payments or distributions, including, without limitation, by
exercise of set-off, of any cash, property or securities on account of principal
of (or premium, if any) or interest on the Note and to that end the holders of
Senior Debt shall be entitled to receive (pro rata on the basis of the
respective amounts of Senior Debt held by them) directly, for application to the
payment thereof (to the extent necessary to pay all Senior Debt in full after
giving effect to any substantially concurrent payment or distribution to or
provision for payment to the holders of such Senior Debt), any payment or
distribution of any kind or character, whether in cash, property or securities,
in respect of the Subordinated Debt. The holders of Senior Debt are hereby
authorized to file an appropriate claim for and on behalf of the Holders if they
or any of them do not file, and there is not otherwise filed on behalf of the
Holders, a proper claim or proof of claim in the form required in any such
proceeding prior to 30 days before the expiration of the time to file such claim
or claims.
(b) Subordination on Default in Senior Debt. No direct or
indirect payment, prepayment pursuant to Section 2.3 hereof or payment
incidental to the redemption of the Note pursuant to Section 2.4 hereof or
pursuant to Section 8.2(b) hereof, by or on behalf of Company of principal of
(premium, if any), or interest on, the Subordinated Debt, whether pursuant to
the terms of the Note, upon acceleration or otherwise, shall be made if at the
time of such payment there exists (i) a default in the payment of all or any
portion of principal of (premium, if any), interest on, fees or other amounts
owing in connection with any Senior Debt, or (ii) any other default (howsoever)
characterized) under any document or instrument governing, securing, supporting
or evidencing any Senior Debt, and Purchaser has received written notice of such
default (a "Blockage Notice") from a holder or representative of the holders of
Senior Debt, and, in either case, such default shall not have been cured or
waived in writing, provided however, that if within the period specified in the
next sentence with respect to a default referred to in clause (ii) above, the
holders of Senior Debt have not declared the Senior Debt to be immediately due
and payable (or have declared such Senior Debt to be immediately due and payable
and within such period have rescinded such acceleration), then and in that
event, payment of principal of, and interest on, the Note shall be resumed. With
respect to any default under clause (ii) above, the period referred to in the
preceding sentence shall commence upon receipt by Purchaser of a Blockage Notice
(which shall specify the defaults existing under the Senior Debt on the date of
such notice which is the basis for the blockage of payments on the Note
contemplated herein), and shall end at the completion of the 179th day after the
beginning of such period (a "Blockage Period"). Only one such 179 day period may
commence within any period of
28
<PAGE> 29
360 consecutive days. Upon termination of any Blockage Period, Company shall
resume payments on account of the principal of (premium, if any), and interest
on, the Note, and on account of all other Subordinated Debt, subject to the
provisions of Sections 9.1 and 9.2 hereof.
(c) Rights and Obligations of Holders.
(i) In the event that, notwithstanding the
foregoing provision prohibiting such payment or distribution,
the Holders shall have received any payment on account of the
Subordinated Debt at a time when such payment is prohibited by
such provision before the Senior Debt is paid in full, then
and in such event, such payment or distribution shall be
received and held in trust by the Holders apart from their
other assets and paid over or delivered to the holders of the
Senior Debt remaining unpaid to the extent necessary to pay in
full in cash the principal of (premium, if any), and interest
on, such Senior Debt in accordance with its terms and after
giving effect to any concurrent payment or distribution to the
holders of such Senior Debt.
(ii) Upon any payment or distribution of assets or
securities referred to in this Section 9, the Holders shall be
entitled to rely upon any order or decree of a court of
competent jurisdiction in which such dissolution, winding up,
liquidation or reorganization proceedings are pending, and
upon a certificate of the receiver, trustee in bankruptcy,
liquidating trustee, agent or other person making any such
payment or distribution, delivered to the Holders for the
purpose of ascertaining the persons entitled to participate in
such distribution, the holders of Senior Debt and other
Indebtedness of Company, the amount thereof or payable
thereon, the amount or amounts paid or distributed thereon and
all other facts pertinent thereto or to this Section 9.
9.3 Rights of Holders of Senior Debt Not To Be Impaired. No
right of any present or future holder of any Senior Debt to enforce
subordination as herein provided shall at any time in any way be prejudiced or
impaired by any act or failure to act by any such holder, or by any
noncompliance by Company with the terms and provisions and covenants herein
regardless of any knowledge thereof such holder may have or otherwise be charged
with.
The provisions of this Section 9 are intended to be for the
benefit of, and shall be enforceable directly by, the holders of the Senior
Debt. Company and each Holder of a Note, by its acceptance thereof, acknowledges
that the holders of the Senior Debt are relying upon the provisions of this
Section 9 in extending such Senior Debt.
9.4 Limitation on Rights and Remedies; Notice of Exercise of
Remedies.
(a) Notwithstanding anything contained herein to the
contrary, for any period during which Holder shall be blocked from receiving
payments in respect of the
29
<PAGE> 30
Subordinated Debt pursuant to Section 9.2(b) hereof (but in no event exceeding
90 consecutive days, provided that the Holder complies with the notice
requirements of clause (b) below), Holder shall not (i) accelerate any portion
of the Subordinated Debt, (ii) initiate any judicial proceeding or action to
collect any portion of the Subordinated Debt or (iii) initiate or join in any
Insolvency Proceeding unless, prior to the expiration of such period, the
holders of the Senior Debt shall take an action of such type in respect of the
Senior Debt, provided, however, that this Section 9.4(a) shall not apply to an
Event of Default under Section 8.1(b)(ii) hereof, except that Holder agrees that
it shall not accelerate any portion of the Subordinated Debt or take any other
action proscribed by this Section 9.4(a) pursuant to such Event of Default prior
to 90 days after the end of the applicable fiscal quarter to which such Event of
Default relates.
(b) Should the Holder desire to take any action of the type
referred to in clauses (i), (ii) and (iii) of Section 9.4(a) hereof, Holder
shall (i) give the Specified Senior Creditor not less than 30 days' notice (or
in the case of an Event of Default under Section 8.1(b)(ii) hereof, 10 days'
notice) of Holder's intent to take any such action (which notice may be given
during the continuation of any period during which Holder is blocked from
receiving payments under Section 9.2 hereof), which notice shall detail the
facts and circumstances on which the Holder is basing its entitlement to take
such action, and (ii) obtain the prior written consent of the Required Holders.
9.5 In Furtherance of Subordination.
(a) At all times during which any of the Senior Debt is
outstanding or there shall be any commitment to extend credit to Company
thereunder, without the prior written consent of the holders of Senior Debt,
Holder shall not
(i) cancel or otherwise discharge any of the
obligations of Company in respect of the Subordinated Debt or
subordinate such obligations to any other Indebtedness of
Company, other than the Senior Debt;
(ii) accept any voluntary or optional prepayment
of the principal of, or interest on, the Subordinated Debt; or
(iii) amend, modify, supplement or restate (w) the
definition of "Permitted Liens", "Permitted Senior Debt",
"Senior Debt", "Senior Debt Ceiling", "Senior Debt Document",
"Specified Senior Creditor", "Specified Senior Debt" or
"Subordinated Debt" set forth in Section 1 hereof, (x) the
principal amortization of the Note; (y) Sections 2.3, 2.4,
2.6, 5.2, 8.1, 9.1 through 9.12 hereof, or the amount of any
premium payable pursuant to Section 8.2(b) hereof or (z) any
other provision hereunder which expressly inures to the
benefit of the Holder of the Senior Debt.
(b) In no event shall Holder commence or join in any action
or proceeding to contest the validity of the provisions of this Article 9.
30
<PAGE> 31
9.6 Subordination Hereunder Not Affected.
(a) The provisions of this Article 9 shall remain in full
force and effect irrespective of:
(i) any lack of validity or enforceability of any
of the Senior Debt Documents;
(ii) any change in the time, manner of place or
payment of, or in any other term of, all or any part of the
Senior Debt, or any other amendment or waiver of or any
consent to any departure from the Senior Debt, including,
without limitation, extending loans or other forms of credit
above the amounts stated therein (subject, however, to the
exclusion of such additional loans and credits in excess of
the Senior Debt Ceiling from the benefit of this Section
9.6(a) as "Senior Debt"), whether resulting from the extension
of additional credit to Company or any of its Subsidiaries or
Affiliate or otherwise;
(iii) any taking, exchange, release or
non-perfection of any other collateral, or any taking, release
or amendment or waiver of or consent to any departure from any
guaranty, for all or any of the Senior Debt;
(iv) any manner of application of collateral, or
proceeds thereof, to all or any of the Senior Debt, or any
manner of sale or other disposition of any collateral for all
or any of the Senior Debt or any other assets of Company or
any of its Subsidiaries; or
(v) any dissolution, merger, consolidation or
other form of corporate restructuring of Company or the
termination of corporate existence of Company.
(b) The provisions of this Section 9 constitute a continuing
agreement and shall (i) remain in full force and effect until the payment in
full in cash or cash equivalents acceptable to holders of the Senior Debt in
their sole discretion, of the Senior Debt and the termination of any commitment
to lend or otherwise extend credit thereunder, (ii) be binding upon any
successors or assignees of Holders or subsequent holders of the Subordinated
Debt, and (iii) inure to the benefit of, and be enforceable by, the holders of
the Senior Debt and their respective successors, transferees and assigns.
9.7 Relative Rights. The provisions of this Article 9 are for
the benefit of the holders of Senior Debt (and their successor and assigns) and
shall be enforceable by them directly against each holder of the Note. Each
Purchaser or holder of the Note acknowledges and agrees that any breach of the
provisions of this Article 9 will cause irreparable harm for which the payment
of monetary damages may be inadequate. For this reason, each holder of the Note
agrees that, in addition to any remedies at law or equity to which a holder of
the Senior Debt
31
<PAGE> 32
may be entitled, a holder of the Senior Debt will be entitled to an injunction
or other equitable relief to prevent breaches of the provisions of this Article
9 and/or to compel specific performance of such provisions.
9.8 Subrogation. Upon the payment in full of all Senior Debt
and the termination of any commitment to extend credit thereunder, the Holders
shall be subrogated to the extent of the payments or distributions made to the
holders of, or otherwise applied to payment of, the Senior Debt pursuant to the
provisions of this Section 9 and to the rights of the holders of Senior Debt to
receive payments or distributions of assets of Company made on the Senior Debt
until the Note shall be paid in full; and for the purposes of such subrogation,
no payments or distributions to holders of Senior Debt of any cash, property or
securities to which Holders of the Note would be entitled except for the
provisions of this Section 9, no payment over pursuant to the provisions of this
Section 9 to holders of Senior Debt by the Holders, shall, as between Company,
its creditors other than holders of Senior Debt and the Holders, be deemed to be
payment by Company to or on account of Senior Debt, it being understood that the
provisions of this Section 9 are solely for the purpose of defining the relative
rights of the holders of Senior Debt, on the one hand, and the Holders, on the
other hand.
If any payment or distribution to which the Holders would
otherwise have been entitled but for the provisions of this Section 9 shall have
been applied, pursuant to the provisions of this Section 9, to the payment of
Senior Debt, then and in such case, the Holders shall be entitled to receive
from the holders of Senior Debt at the time outstanding any payments or
distributions received by such holders of Senior Debt in excess of the amount
sufficient to pay all Senior Debt in full.
9.9 Obligations of Company Unconditional. Nothing contained
in this Section 9 or elsewhere in this Agreement or in the Note is intended to
or shall impair, as between Company and the Holders, the obligations of Company,
which are absolute and unconditional, to pay to the Holders the principal of
(premium, if any), and interest on, the Note as and when the same shall become
due and payable in accordance with their terms, or is intended to or shall
affect the relative rights of the Holders and creditors of Company other than
the holders of the Senior Debt, nor shall anything herein or therein prevent any
Holder from exercising all remedies otherwise permitted by applicable law upon
the occurrence of a Default or Event of Default under this Agreement, subject to
the rights, if any, under this Section 9 of the holders of Senior Debt in
respect of cash, property or securities of Company received upon the exercise of
any such remedy.
The failure to make a payment on account of principal of, or
interest on, the Note by reason of any provision of this Section 9 shall not be
construed as preventing the occurrence of a Default or an Event of Default
hereunder.
9.10 Notice to Holders. Company shall give prompt written
notice to each Holder of any fact known to Company which would prohibit the
making of any payment on or in respect of the Note, but failure to give such
notice shall not affect the subordination of the Subordinated Debt to the Senior
Debt provided in this Section 9. Notwithstanding the provisions of this Section
9 or any other provision of this Agreement or the Note, no Holder shall be
charged with knowledge of the existence of any facts
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<PAGE> 33
which would prohibit the making of any payment to or in respect of the Note,
unless and until the Holders shall have actual knowledge thereof or the Holders
shall have received written notice thereof from Company or a representative of
or holder of Senior Debt, and, prior to the receipt of any such written notice,
subject to the provisions of this Section 9, the Holders shall be entitled in
all respects to assume no such facts exist. Nothing contained in this Section
9.10 shall limit the right of the holders of Senior Debt to recover payments as
contemplated by 9.1 and 9.2.
9.11 Right of Any Holder as Holder of Senior Debt. Any Holder
in its individual capacity shall be entitled to all the rights set forth in this
Section 9 with respect to any Senior Debt which may at any time be held by it,
to the same extent as any other holder of Senior Debt, and nothing in this
Agreement shall deprive such Holder of any of its rights as such holder.
9.12 Reinstatement. The provisions of this Section 9 shall
continue to be effective or be reinstated, and the Senior Debt shall not be
deemed to be paid in full, as the case may be, if at any time any payment of any
of the Senior Debt is rescinded or must otherwise be returned by the holder
thereof upon the insolvency, bankruptcy or reorganization of the Company or
otherwise, all as though such payment had not been made.
10. [Intentionally omitted.]
11. MISCELLANEOUS
11.1 Complete Agreement; Modification of Agreement; Sale of
Interest.
(a) The Transaction Documents constitute the complete
agreement between the parties with respect to the subject matter hereof and may
not be modified, altered or amended except as provided therein, or in the case
of the Loan Documents by an agreement in writing signed by Company and Purchaser
in accordance with Section 11.1(d) hereof. Company may not sell, assign or
transfer any of the Loan Documents or any portion thereof, including, without
limitation, Company's rights, title, interests, remedies, powers and duties
hereunder or thereunder. Company hereby consents to Purchaser's sale of
participations, assignment, transfer or other disposition, at any time or times,
of any of the Loan Documents or of any portion thereof or interest therein,
including, without limitation, Purchaser's rights, title, interests, remedies,
powers or duties thereunder, whether evidenced by a writing or not.
(b) In the event Purchaser assigns or otherwise transfers all
or any part of the Note, Company shall, upon the request of Purchaser issue new
Notes to effectuate such assignment or transfer. Any such assignment or transfer
must comply with applicable securities laws and, at the request of Company,
Purchaser shall deliver to Company an opinion of counsel as to such compliance,
which counsel may be in-house counsel to Purchaser.
(b) Subject to the provisions of clause (ii) below, Purchaser
may sell, assign, transfer or negotiate to one or more other
lenders, commercial
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<PAGE> 34
banks, insurance companies, other financial institutions or
any other Person acceptable to Purchaser all or a portion of
its rights and obligations under the Note held by Purchaser
and this Agreement; provided, however, that acceptance of such
assignment by any assignee shall constitute the agreement of
such assignee to be bound by the terms of this Agreement
applicable to Purchaser. From and after the effective date of
such an assignment, (x) the assignees thereunder shall, in
addition to the rights and obligations hereunder held by it
immediately prior to such effective date, have the rights and
obligations hereunder that have been assigned to it pursuant
to such assignment and (y) the assignor thereunder shall, to
the extent that rights and obligations hereunder have been
assigned by it pursuant to such assignment, relinquish its
rights and be released from its obligations under this
Agreement (and, in the case of an assignment and acceptance
covering all or the remaining portion of an assignor's rights
and obligations under this Agreement, such assignor shall
cease to be a party hereto).
(i) Purchaser shall not assign or otherwise
transfer the Note to a Person which is not an Affiliate of
Purchase unless Purchaser first gives Company a notice of its
intention to do so. Company will then have a period of ten
(10) Business Days to make an offer to purchase the Note or
portion thereof which Purchaser indicates it intends to
transfer. Purchaser may then either accept such offer or
effectuate a transfer to a Person which is not an Affiliate of
Purchaser at a price higher than that offered by Company, if
any, provided that such transfer takes place no later than 90
days after the date of the notice by Purchaser to Company. If
at the end of the 90-day period Purchaser has not completed
the transfer of the Note, such transfer may not occur and the
Note shall again be subject to the restriction in this Section
11.1(c).
(d) No amendment or waiver of any provision of this Agreement
or the Note or any other Loan Document, nor consent to any departure by Company
therefrom, shall in any event be effective unless the same shall be in writing
and signed by the Required Holders, and then such waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given; provided, however, that no amendment, waiver or consent shall, unless in
writing and signed by each holder of a Note affected thereby do any of the
following: (i) subject such holder to any additional obligations, (ii) reduce
the principal of, or interest on, the Note or other amounts payable hereunder or
release or discharge Company from its obligations to make such payments, (iii)
postpone any date fixed for any payment of principal of, or interest on, the
Note or other amounts payable hereunder, (iv) change the aggregate unpaid
principal amount of the Note, or the number of holders thereof, which shall be
required for such holders or any of them to take any action hereunder, or (v)
amend this Section 11.1(d).
11.2 Fees and Expenses. If an Event of Default shall have
occurred and be continuing and Purchaser shall employ counsel or other advisors
for advice or other representation or shall incur reasonable legal or other
costs and expenses in connection
34
<PAGE> 35
with any attempt to enforce any rights of Purchaser against Company, any
Subsidiary of Company or any other Person, that may be obligated to Purchaser by
virtue of any of the Loan Documents then, and in any such event, the reasonable
attorneys' and other parties' fees arising from such services, including those
of any appellate proceedings, and all expenses, costs, charges and other fees
incurred by such counsel and others in any way or respect arising in connection
with or relating to any of the events or actions described in this Section shall
be payable, on demand, by Company to Purchaser and shall be additional
Obligations under this Agreement and the other Loan Documents. Without limiting
the generality of the foregoing, such expenses, costs, charges and fees may
include: paralegal fees, costs and expenses; accountants' and investment
bankers' fees, costs and expenses; court costs and expenses; photocopying and
duplicating expenses; court reporter fees, costs and expenses; long distance
telephone charges; air express charges; telegram charges; secretarial overtime
charges; and expenses for travel, lodging and food paid or incurred in
connection with the performance of such legal services.
11.3 No Waiver by Purchaser. Purchaser's failure, at any time
or times, to require strict performance by Company of any provision of this
Agreement and any of the other Loan Documents shall not waive, affect or
diminish any right of Purchaser thereafter to demand strict compliance and
performance therewith. Any suspension or waiver by Purchaser of an Event of
Default by Company under the Loan Documents shall not suspend, waive or affect
any other Event of Default by Company under this Agreement and any of the other
Loan Documents whether the same is prior or subsequent thereto and whether of
the same or of a different type. None of the undertakings, agreements,
warranties, covenants and representations of Company contained in this Agreement
or any of the other Loan Documents and no Event of Default by Company under this
Agreement and no defaults by Company under any of the other Loan Documents shall
be deemed to have been suspended or waived by Purchaser, unless such suspension
or waiver is by an instrument in writing signed by an officer of Purchaser and
the Required Holders and directed to Company specifying such suspension or
waiver.
11.4 Remedies. Purchaser's rights and remedies under this
Agreement shall be cumulative and nonexclusive of any other rights and remedies
which Purchaser may have under any other agreement, including without
limitation, the Loan Documents, the other Transaction Documents, by operation of
law or otherwise.
11.5 Waiver of Jury Trial. The parties hereto waive all right
to trial by jury in any action or proceeding to enforce or defend any rights
under the Transaction Documents.
11.6 Severability. Wherever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be prohibited by or
invalid under applicable law, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Agreement.
35
<PAGE> 36
11.7 Binding Effect; Benefits. This Agreement and the other
Transaction Documents shall be binding upon, and inure to the benefit of, the
successors of Company and Purchaser and the assigns, transferees and endorsees
of Purchaser.
11.8 Conflict of Terms. Except as otherwise provided in this
Agreement or any of the other Loan Documents by specific reference to the
applicable provisions of this Agreement, if any provision contained in this
Agreement is in conflict with, or inconsistent with, any provision in any of the
other Loan Documents, the provision contained in this Agreement shall govern and
control.
11.9 Governing Law. Except as otherwise expressly provided in
any of the Transaction Documents, in all respects, including all matters of
construction, validity and performance, this Agreement and the Obligations
arising hereunder shall be governed by, and construed and enforced in accordance
with, the laws of the State of New York applicable to contracts made and
performed in such state, without regard to the principles thereof regarding
conflict of laws, and any applicable laws of the United States of America.
Purchaser and Company agree to submit to personal jurisdiction and to waive any
objection as to venue in the federal or New York State courts located in the
County of New York, State of New York. Nothing herein shall preclude Purchaser
or Company from bringing suit or taking other legal action in any other
jurisdiction.
11.10 Notices. Except as otherwise provided herein, whenever
it is provided herein that any notice, demand, request, consent, approval,
declaration or other communication shall or may be given to or served upon any
of the parties by another, or whenever any of the parties desires to give or
serve upon another any such communication with respect to this Agreement, each
such notice, demand, request, consent, approval, declaration or other
communication shall be in writing and either shall be delivered in person with
receipt acknowledged or by registered or certified mail, return receipt
requested, postage prepaid, or by telecopy and confirmed by telecopy answerback
addressed as follows:
If to Company:
Emcore Corporation
394 Elizabeth Avenue
Somerset, New Jersey 08873
Attn: Thomas G. Werthan, Chief Financial Officer
Telecopy Number: (732) 271-0477
with a copy to:
White & Case
First Union Financial Center
200 South Biscayne Boulevard
Miami, Florida 33131-2352
Attn: Jorge L. Freeland, Esq.
Telecopy Number: (305) 358-5744
36
<PAGE> 37
If to Purchaser:
GE Capital Equity Investments, Inc.
120 Long Ridge Road
Stamford, Connecticut 06927
Attn: GE Equity Group-Emcore
Telecopy Number: (203) 357-6527
with copies to:
General Electric Capital Corporation
120 Long Ridge Road
Stamford, Connecticut 06927
Attention: GE Equity Group Legal Counsel
Telecopy Number: (203) 357-3047
and
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
Attn: Ted S. Waksman, Esq.
Telecopy Number: (212) 310-8007
If to the Specified Senior Creditor:
First Union National Bank
370 Scotch Road - NJ 72330
West Trenton, New Jersey 08628
Attn: Kathleen H. Czarniewski, Senior Vice President
Telecopy Number: (609) 771-5860
or at such other address as may be substituted by notice given as herein
provided. The giving of any notice required hereunder may be waived in writing
by the party entitled to receive such notice. Every notice, demand, request,
consent, approval, declaration or other communication hereunder shall be deemed
to have been duly given or served on the date on which personally delivered,
with receipt acknowledged, telecopied and confirmed by telecopy answerback, or
three (3) Business Days after the same shall have been deposited with the United
States mail. Failure or delay in delivering copies of any notice, demand,
request, consent, approval, declaration or other communication to the Persons
designated above to receive copies shall in no way adversely affect the
effectiveness of such notice, demand, request, consent, approval, declaration or
other communication.
11.11 Survival. The representations and warranties of Company
in this Agreement shall survive the execution, delivery and acceptance hereof by
the parties hereto and the closing of the transactions described herein or
related hereto.
37
<PAGE> 38
11.12 Section and Other Headings. The section and other
headings contained in this Agreement are for reference purposes only and shall
not affect the meaning or interpretation of this Agreement.
11.13 Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original and all
of which together shall be deemed to be one and the same instrument.
11.14 Publicity. Neither Purchaser nor Company shall issue
any press release or make any public disclosure regarding the transactions
contemplated hereby unless such press release or public disclosure is approved
by the other party in advance, which approval shall not be unreasonably
withheld. Notwithstanding the foregoing, each of the parties hereto may, in
documents required to be filed by it with the SEC or other regulatory bodies,
make such statements with respect to the transactions contemplated hereby as
each may be advised by counsel is legally necessary or advisable, and may make
such disclosure as it is advised by its counsel is required by law, subject to
advance consultation with the other party.
38
<PAGE> 39
IN WITNESS WHEREOF, Company and Purchaser have executed this
Agreement as of the day and year first above written.
EMCORE CORPORATION
By:
--------------------------------------
Name:
Title:
Purchaser:
GE CAPITAL EQUITY INVESTMENTS, INC.
By:
--------------------------------------
Name:
Title:
[SIGNATURE PAGE - NOTE PURCHASE AGREEMENT]
<PAGE> 40
NOTE PURCHASE AGREEMENT
dated as of May 26, 1999
by and between
EMCORE CORPORATION
and
GE CAPITAL EQUITY INVESTMENTS, INC.
<PAGE> 41
TABLE OF CONTENTS
NOTE PURCHASE AGREEMENT
<TABLE>
<CAPTION>
Section Page
- ------- ----
<S> <C> <C>
1. DEFINITIONS....................................................................................1
2. PURCHASE OF NOTE...............................................................................8
2.1 Purchase of Note......................................................................8
2.2 Closing...............................................................................8
2.3 Optional Prepayment...................................................................8
2.4 Mandatory Redemption..................................................................9
2.5 Use of Proceeds.......................................................................9
2.6 Interest on Note......................................................................9
2.7 Receipt of Payments..................................................................10
2.8 Application of Payments..............................................................10
2.9 Sharing of Payments..................................................................10
2.10 Indemnity............................................................................11
2.11 Access...............................................................................11
2.12 Taxes................................................................................11
3. PURCHASER'S REPRESENTATIONS AND WARRANTIES....................................................12
3.1 Investment Intention.................................................................12
3.2 Accredited Investor..................................................................12
3.3 Corporate Existence..................................................................12
3.4 Corporate Power; Authorization; Enforceable Obligations..............................12
4. COMPANY'S REPRESENTATIONS AND WARRANTIES......................................................13
4.1 Authorization and Issuance of Note...................................................13
4.2 Corporate Existence; Compliance with Law.............................................13
4.3 Securities Laws......................................................................13
4.4 Corporate Power; Authorization; Enforceable Obligations..............................14
4.5 Financial Statements.................................................................14
4.6 Brokers..............................................................................14
4.7 Patents, Trademarks, Copyrights and Licenses.........................................15
4.8 No Material Adverse Effect...........................................................15
4.9 SEC Documents........................................................................15
</TABLE>
i
<PAGE> 42
TABLE OF CONTENTS
NOTE PURCHASE AGREEMENT
<TABLE>
<CAPTION>
Section Page
- ------- ----
<S> <C> <C>
4.10 Full Disclosure......................................................................15
5. COVENANTS.....................................................................................15
5.1 Affirmative Covenants................................................................15
5.2 Negative Covenants...................................................................16
6. CONDITIONS PRECEDENT..........................................................................18
6.1 Conditions Precedent.................................................................18
6.2 Additional Conditions................................................................19
7. CONVERSION....................................................................................19
7.1 Conversion of Note...................................................................19
8. EVENTS OF DEFAULT; RIGHTS AND REMEDIES........................................................24
8.1 Events of Default....................................................................24
8.2 Remedies.............................................................................26
8.3 Waivers by Company...................................................................27
9. SUBORDINATION.................................................................................27
9.1 Note Subordinated to Senior Debt.....................................................27
9.2 Priority and Payment Over of Proceeds in Certain Events..............................28
9.3 Rights of Holders of Senior Debt Not To Be Impaired..................................29
9.4 Limitation on Rights and Remedies; Notice of Exercise of Remedies....................29
9.5 In Furtherance of Subordination......................................................30
9.6 Subordination Hereunder Not Affected.................................................31
9.7 Relative Rights......................................................................31
9.8 Subrogation..........................................................................32
9.9 Obligations of Company Unconditional.................................................32
9.10 Notice to Holders....................................................................32
9.11 Right of Any Holder as Holder of Senior Debt.........................................33
9.12 Reinstatement........................................................................33
10. [Intentionally omitted.]......................................................................33
11. MISCELLANEOUS.................................................................................33
</TABLE>
ii
<PAGE> 43
TABLE OF CONTENTS
NOTE PURCHASE AGREEMENT
<TABLE>
<CAPTION>
Section Page
- ------- ----
<S> <C> <C>
11.1 Complete Agreement; Modification of Agreement; Sale of Interest......................33
11.2 Fees and Expenses....................................................................34
11.3 No Waiver by Purchaser...............................................................35
11.4 Remedies.............................................................................35
11.5 Waiver of Jury Trial.................................................................35
11.6 Severability.........................................................................35
11.7 Binding Effect; Benefits.............................................................36
11.8 Conflict of Terms....................................................................36
11.9 Governing Law........................................................................36
11.10 Notices..............................................................................36
11.11 Survival.............................................................................37
11.12 Section and Other Headings...........................................................38
11.13 Counterparts.........................................................................38
11.14 Publicity............................................................................38
</TABLE>
Schedules
Schedule 1(A) - Existing Shareholders
Schedule 1(B) - Liens
Schedule 4.2 - Subsidiaries
Schedule 4.8 - Material Adverse Effect
Schedule 5.2(d) - Senior Debt
Exhibits
Exhibit A Form of Note
Exhibit B Registration Rights Agreement
Exhibit C-1 Opinion of White & Case, special counsel to Company
Exhibit C-2 Opinion of Dillon, Bitar & Luther L.L.C., special New
Jersey counsel to Company
Exhibit D Example of Anti-Dilution Adjustment
iii
<PAGE> 1
Exhibit 10.19
REGISTRATION RIGHTS AGREEMENT
Registration Rights Agreement, dated as of May 26, 1999, by
and between Emcore Corporation, a New Jersey corporation ("Company"), and GE
Capital Equity Investments, Inc. ("GE Capital" or "Purchaser").
W I T N E S S E T H :
WHEREAS, Company and Purchaser have entered into that certain
Note Purchase Agreement, dated as of May 26,1999 (the "Purchase Agreement"),
pursuant to which Company has agreed to issue and sell to Purchaser, and
Purchaser has agreed to purchase from Company, a senior subordinated convertible
promissory note in the principal amount of $7,800,000, which is initially
convertible into 340,984 shares of Common Stock of Company (the "Note"); and
WHEREAS, in order to induce Purchaser to enter into the
Purchase Agreement and to purchase the Note, Company has agreed to provide
registration rights with respect thereto;
NOW, THEREFORE, in consideration of the premises and the
covenants hereinafter contained, it is agreed as follows:
1. Definitions. Unless otherwise defined herein, terms
defined in the Purchase Agreement are used herein as therein defined, and the
following shall have (unless otherwise provided elsewhere in this Registration
Rights Agreement) the following respective meanings (such meanings being equally
applicable to both the singular and plural form of the terms defined):
"Agreement" shall mean this Registration Rights Agreement,
including all amendments, modifications and supplements and any exhibits or
schedules to any of the foregoing, and shall refer to the Agreement as the same
may be in effect at the time such reference becomes operative.
"Business Day" shall mean any day that is not a Saturday, a
Sunday or a day on which banks are required or permitted to be closed in the
State of New York.
"Commission" shall mean the Securities and Exchange Commission
or any other federal agency then administering the Securities Act and other
federal securities laws.
"Conversion Shares" shall mean shares of Common Stock issued
upon conversion of the Note.
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended, or any similar federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect from time to time.
<PAGE> 2
"Holder" shall mean the holder of the Note.
"NASD" shall mean the National Association of Securities
Dealers, Inc., or any successor corporation thereto.
"Registrable Securities" shall mean the shares of Common Stock
from time to time issued or issuable to the holder of the Note upon the
conversion thereof. "Required Holders" shall mean Holders of at least a majority
of the Registrable Securities.
"Securities Act" shall mean the Securities Act of 1933, as
amended, or any similar federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect from time to time.
2. Required Registration. Upon receipt of a written request
from the holders of Registrable Securities requesting that Company effect a
registration under the Securities Act covering at least 50% of the Registrable
Securities initially outstanding, and specifying the intended method or methods
of disposition thereof, Company shall promptly notify all Holders in writing of
the receipt of such request and each such Holder, in lieu of exercising its
rights under Section 3 may elect (by written notice sent to Company within 10
Business Days from the date of such Holder's receipt of the aforementioned
Company's notice) to have Registrable Securities included in such registration
thereof pursuant to this Section 2. Thereupon Company shall, as expeditiously as
is possible, use its reasonable best efforts to effect the registration under
the Securities Act of all shares of Registrable Securities which Company has
been so requested to register by such Holders for sale, all to the extent
required to permit the disposition (in accordance with the intended method or
methods thereof, as aforesaid) of the Registrable Securities so registered;
provided, however, that Company shall not be required to effect more than one
(1) registration of any Registrable Securities pursuant to this Section 2, which
registration shall not be underwritten; and provided further, however, that the
right of the holders of Registrable Securities to request that Company effect a
registration of any Registrable Securities pursuant to this Section 2 shall
terminate when the Registrable Securities may be sold pursuant to Rule 144 under
the Securities Act during any six-month period. A Holder may only request a
registration of registrable securities which it has a present intention to sell
and it shall so state in its request for registration.
3. Incidental Registration. If Company at any time proposes
to file on its behalf and/or on behalf of any of its security holders (the
"demanding security holders") a Registration Statement under the Securities Act
on any form (other than a Registration Statement on Form S-4 or S-8 or any
successor form for securities to be offered in a transaction of the type
referred to in Rule 145 under the Securities Act or to employees of Company
pursuant to any employee benefit plan, respectively) for the general
registration of securities, it will give written notice to all Holders at least
15 days before the initial filing with the Commission of such Registration
Statement, which notice shall set forth the intended method of disposition of
the securities proposed to be registered by
2
<PAGE> 3
Company. The notice shall offer to include in such filing the aggregate number
of shares of Registrable Securities as such Holders may request.
Each Holder desiring to have Registrable Securities registered
under this Section 3 shall advise Company in writing within 10 Business Days
after the date of receipt of such offer from Company, setting forth the amount
of such Registrable Securities for which registration is requested. Company
shall thereupon include in such filing, the number of shares of Registrable
Securities for which registration is so requested, subject to the next sentence,
and shall use its reasonable best efforts to effect registration under the
Securities Act of such shares if such offering proceeds. If the managing
underwriter of a proposed public offering shall advise Company in writing that,
in its opinion, the distribution of the Registrable Securities requested to be
included in the registration concurrently with the securities being registered
by Company or such demanding security holder would materially and adversely
affect the distribution of such securities by Company or such demanding security
holder, then all selling security holders, other than Company, (including the
demanding security holder who initially requested such registration) shall
reduce the amount of securities each intended to distribute through such
offering on a pro rata basis. Except as otherwise provided in Section 5, all
expenses of such registration shall be borne by Company.
4. Registration Procedures. If Company is required by the
provisions of Section 2 or 3 to use its reasonable best efforts to effect the
registration of any of its securities under the Securities Act, Company will, as
expeditiously as possible:
(a) prepare and file with the Commission a
Registration Statement with respect to such securities and use its reasonable
best efforts to cause such Registration Statement to become and remain effective
for a period of time required for the disposition of such securities by the
holders thereof, but not to exceed 120 days;
(b) prepare and file with the Commission such
amendments and supplements to such Registration Statement and the prospectus
used in connection therewith as may be necessary to keep such Registration
Statement effective and to comply with the provisions of the Securities Act with
respect to the sale or other disposition of all securities covered by such
Registration Statement until the earlier of such time as all of such securities
have been disposed of in a public offering or the expiration of 120 days;
(c) furnish to such selling security holders such
number of copies of a summary prospectus or other prospectus, including a
preliminary prospectus, in conformity with the requirements of the Securities
Act, and such other documents, as such selling security holders may reasonably
request;
(d) use its best efforts to register or qualify the
securities covered by such Registration Statement under such other securities or
blue sky laws of such jurisdictions within the United States as each holder of
such securities shall request (provided, however, that Company shall not be
obligated to qualify as a foreign corporation to do business under the laws of
any jurisdiction in which it is not then
3
<PAGE> 4
qualified or to file any general consent to service or process), and do such
other reasonable acts and things as may be required of it to enable such holder
to consummate the disposition in such jurisdiction of the securities covered by
such Registration Statement;
(e) furnish, at the request of any Holder requesting
registration of Registrable Securities pursuant to Section 2, on the date that
such shares of Registrable Securities are delivered to the underwriters for sale
pursuant to such registration or, if such Registrable Securities are not being
sold through underwriters, on the date that the Registration Statement with
respect to such shares of Registrable Securities becomes effective, (1) an
opinion, dated such date, of the independent counsel representing Company for
the purposes of such registration, addressed to the underwriters, if any, in
customary form and covering matters of the type customarily covered in such
legal opinions; and (2) a comfort letter dated such date, from the independent
certified public accountants of Company, addressed to the underwriters, if any,
and, if such accountants refuse to deliver such letter to such Holder, then to
Company, in a customary form and covering matters of the type customarily
covered by such comfort letters and as the underwriters or such Holder shall
reasonably request;
(f) enter into customary agreements (including an
underwriting agreement in customary form) and take such other actions as are
reasonably required in order to expedite or facilitate the disposition of such
Registrable Securities; and
(g) otherwise use its reasonable best efforts to
comply with all applicable rules and regulations of the Commission, and make
available to its security holders, as soon as reasonably practicable, but not
later than 18 months after the effective date of the Registration Statement, an
earnings statement covering the period of at least 12 months beginning with the
first full month after the effective date of such Registration Statement, which
earnings statement shall satisfy the provisions of Section 11(a) of the
Securities Act.
It shall be a condition precedent to the obligation of Company
to take any action pursuant to this Agreement in respect of the securities which
are to be registered at the request of any Holder that such Holder shall furnish
to Company such information regarding the securities held by such Holder and the
intended method of disposition thereof as Company shall reasonably request and
as shall be required in connection with the action taken by Company. Such Holder
shall also enter into reasonably acceptable customary custody and other
agreements in connection with any registration statements if requested by
Company.
5. Expenses. All expenses incurred in complying with this
Agreement, including, without limitation, all registration and filing fees
(including all expenses incident to filing with the NASD), printing expenses,
fees and disbursements of counsel for Company, the reasonable fees and expenses
of counsel for the selling security holders (selected by those holding a
majority of the shares being registered), expenses of any special audits
incident to or required by any such registration and expenses of complying
4
<PAGE> 5
with the securities or blue sky laws of any jurisdiction pursuant to Section
4(d), shall be paid by Company, except that:
(a) all such expenses in connection with any
amendment or supplement to the Registration Statement or prospectus filed more
than 180 days after the effective date of such Registration Statement because
any Holder has not effected the disposition of the securities requested to be
registered shall be paid by such Holder; and
(b) Company shall not be liable for any fees,
discounts or commissions to any underwriter or any fees or disbursements of
counsel for any underwriter in respect of the securities sold by such Holder.
6. Indemnification and Contribution.
(a) In the event of any registration of any
Registrable Securities under the Securities Act pursuant to this Agreement,
Company shall indemnify and hold harmless the holder of such Registrable
Securities, such holder's directors and officers, and each other person
(including each underwriter) who participated in the offering of such
Registrable Securities and each other person, if any, who controls such holder
or such participating person within the meaning of the Securities Act, against
any losses, claims, damages or liabilities, joint or several, to which such
holder or any such director or officer or participating person or controlling
person may become subject under the Securities Act or any other statute or at
common law, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon (i) any alleged untrue
statement of any material fact contained, on the effective date thereof, in any
Registration Statement under which such securities were registered under the
Securities Act, any preliminary prospectus or final prospectus contained
therein, or any amendment or supplement thereto, or (ii) any alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, and shall reimburse such holder or such
director, officer or participating person or controlling person for any legal or
any other expenses reasonably incurred by such holder or such director, officer
or participating person or controlling person in connection with investigating
or defending any such loss, claim, damage, liability or action; provided,
however, that Company shall not be liable in any such case to the extent that
any such loss, claim, damage or liability arises out of or is based upon any
actual or alleged untrue statement or actual or alleged omission made in such
Registration Statement, preliminary prospectus, prospectus or amendment or
supplement in reliance upon and in conformity with written information furnished
to Company by or on behalf of such holder specifically for use therein or (in
the case of any registration pursuant to Section 2) so furnished for such
purposes by or on behalf of any underwriter. Such indemnity shall remain in full
force and effect regardless of any investigation made by or on behalf of such
holder or such director, officer or participating person or controlling person,
and shall survive the transfer of such securities by such holder.
(b) Each Holder, by acceptance hereof, agrees to
indemnify and hold harmless Company, its directors and officers and each other
person, if any, who controls Company within the meaning of the Securities Act
against any losses, claims,
5
<PAGE> 6
damages or liabilities, joint or several, to which Company or any such director
or officer or any such person may become subject under the Securities Act or any
other statute or at common law, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon
information in writing provided to Company by or on behalf of such Holder
specifically for use in the following documents and contained, on the effective
date thereof, in any Registration Statement under which securities were
registered under the Securities Act at the request of such holder, any
preliminary prospectus or final prospectus contained therein, or any amendment
or supplement thereto. Notwithstanding the provisions of this paragraph (b) or
paragraph (d) below, no Holder shall be required to indemnify any person
pursuant to this Section 6 or to contribute pursuant to paragraph (d) below in
an amount in excess of the amount of the aggregate net proceeds received by such
Holder in connection with any such registration under the Securities Act.
(c) Promptly after receipt by an indemnified party
under Sections 6(a) or (b) above of notice of the assertion of any claim, such
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify each party against whom
indemnification is to be sought in writing of the commencement thereof (but the
failure so to notify an indemnifying party shall not relieve it from any
liability that it may have under this Section 6 except to the extent that it has
been prejudiced in any material respect by such failure or from any liability
that it may have otherwise). In case any such action is brought against any
indemnified party, and it notifies an indemnifying party of the commencement
thereof, the indemnifying party shall be entitled to participate therein, and to
the extent it may elect by written notice delivered to the indemnified party
promptly after receiving the aforesaid notice from such indemnified party, to
assume the defense thereof with counsel reasonably satisfactory to such
indemnified party. Notwithstanding the foregoing, the indemnified party or
parties shall have the right to employ its or their own counsel in any such
case, but the fees and expenses of such counsel shall be at the expense of such
indemnified party or parties unless (i) the employment of such counsel shall
have been authorized in writing by one of the indemnifying parties in connection
with the defense of such action, (ii) the indemnifying parties shall not have
employed counsel to take charge of the defense of such action within a
reasonable time after notice of commencement of the action, or (iii) such
indemnified party or parties shall have reasonably concluded that there may be
defenses available to it or them that are different from or additional to those
available to one or all of the indemnifying parties (in which case the
indemnifying parties shall not have the right to direct the defense of such
action on behalf of the indemnified party or parties with respect to such
different defenses), in any of which events such fees and expenses shall be
borne by the indemnifying parties. The indemnifying party under Sections 6(a) or
(b) above shall only be liable for the legal expenses of one counsel for all
indemnified parties in each jurisdiction in which any claim or action is
brought; provided, however, that the indemnifying party shall be liable for
separate counsel for any indemnified party in a jurisdiction, if counsel to the
indemnified parties shall have reasonably concluded that there may be defenses
available to such indemnified party that are different from or additional to
those available to one or more of the other indemnified parties and that
separate counsel for such indemnified party is prudent under the circumstances.
Anything in this subsection to the contrary notwithstanding, an
6
<PAGE> 7
indemnifying party shall not be liable for any settlement of any claim or action
effected without its written consent; provided, however, that such written
consent was not unreasonably withheld.
(d) If the indemnification provided for in this
Section 6 from the indemnifying party is unavailable to an indemnified party
hereunder in respect of any losses, claims, damages, liabilities or expenses
referred to therein, then the indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages, liabilities or
expenses in such proportion as is appropriate to reflect the relative fault of
the indemnifying party and indemnified parties in connection with the actions
which resulted in such losses, claims, damages, liabilities or expenses, as well
as any other relevant equitable considerations. The relative fault of such
indemnifying party and indemnified parties shall be determined by reference to,
among other things, whether any action in question, including any untrue or
alleged untrue statement of a material fact or omission or alleged omission to
state a material fact, has been made by, or relates to information supplied by,
such indemnifying party or indemnified parties, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such action. The amount paid or payable by a party as a result of the losses,
claims, damages, liabilities and expenses referred to above shall be deemed to
include any legal or other fees or expenses reasonably incurred by such party in
connection with any investigation or proceeding.
The parties hereto agree that it would not be just and
equitable if contribution pursuant to this Section 6(d) were determined by pro
rata allocation or by any other method of allocation which does not take account
of the equitable considerations referred to in the immediately preceding
paragraph. No Person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any Person who was not guilty of such fraudulent misrepresentation.
7. Certain Limitations on Registration Rights.
Notwithstanding the other provisions of this Agreement:
(a) Company shall not be obligated to register the
Registrable Securities of any Holder if, in the opinion of counsel to Company
reasonably satisfactory to the Holder and its counsel (or, if the Holder has
engaged an investment banking firm, to such investment banking firm and its
counsel), the sale or other disposition of such Holder's Registrable Securities,
in the manner proposed by such Holder (or by such investment banking firm), may
be effected without registering such Registrable Securities under the Securities
Act; and
(b) Company shall not be obligated to register the
Registrable Securities of any Holder pursuant to Section 2 if Company has had a
registration statement, under which such Holder had a right to have its
Registrable Securities included pursuant to Section 2 or 3, declared effective
within one year prior to the date of the request pursuant to Section 2;
provided, however, that if any Holder elected to have
7
<PAGE> 8
shares of its Registrable Securities included under such registration statement
but some or all of such shares were excluded pursuant to the penultimate
sentence of Section 3, then such one-year period shall be reduced to the greater
of six months or any lock-up period agreed to by such Holder with an
underwriter.
(c) Company shall have the right to delay the filing
or effectiveness of a registration statement required pursuant to Section 2
hereof during one or more periods aggregating not more than 90 days in any
twelve-month period in the event that (i) Company would, in accordance with the
advice of its counsel, be required to disclose in the prospectus information not
otherwise then required by law to be publicly disclosed and (ii) in the judgment
of Company's Board of Directors, there is a reasonable likelihood that such
disclosure, or any other action to be taken in connection with the prospectus,
would materially and adversely affect any existing or prospective material
business situation, transaction or negotiation or otherwise materially and
adversely affect Company.
8. Market Stand-Off Agreement. Each Holder hereby agrees
that, during the period of duration specified by Company and an underwriter of
common stock or other securities of Company, following the effective date of a
registration statement of Company filed under the Securities Act, it shall not,
to the extent requested by Company and such underwriter, directly or indirectly
sell, offer to sell, contract to sell (including, without limitation, any short
sale), grant any option to purchase or otherwise transfer or dispose of (other
than to donees who agree to be similarly bound) any securities of Company held
by it at any time during such period except common stock included in such
registration; provided, however, that such market stand-off time period shall
not exceed 180 days and all officers and directors of Company enter into similar
agreements.
In order to enforce the foregoing covenant, Company may impose
stop-transfer instructions with respect to the Registrable Securities of each
Holder (and the shares of securities of every other person subject to the
foregoing restriction) until the end of such period.
9. Miscellaneous.
(a) No Inconsistent Agreements. Company will not
hereafter enter into any agreement with respect to its securities which is
inconsistent with the rights granted to the Holders in this Agreement. Except as
set forth on Schedule 1 hereto, Company has not previously entered into any
agreement with respect to any of its securities granting any registration rights
to any person.
(b) Remedies. Each Holder, in addition to being
entitled to exercise all rights granted by law, including recovery of damages,
will be entitled to specific performance of its rights under this Agreement.
Company agrees that monetary damages would not be adequate compensation for any
loss incurred by reason of a breach by it of the provisions of this Agreement
and hereby agrees to waive the defense in any action for specific performance
that a remedy at law would be adequate. In any action or proceeding brought to
enforce any provision of this Agreement or where any provision
8
<PAGE> 9
hereof is validly asserted as a defense, the successful party shall be entitled
to recover reasonable attorneys' fees in addition to any other available remedy.
(c) Amendments and Waivers. Except as otherwise
provided herein, the provisions of this Agreement may not be amended, modified
or supplemented, and waivers or consents to departure from the provisions hereof
may not be given unless Company has obtained the written consent of the Required
Holders.
(d) Notice Generally. Any notice, demand, request,
consent, approval, declaration, delivery or other communication hereunder to be
made pursuant to the provisions of this Agreement shall be sufficiently given or
made if in writing and either delivered in person with receipt acknowledged or
sent by registered or certified mail, return receipt requested, postage prepaid,
or by telecopy and confirmed by telecopy answerback, addressed as follows:
(i) If to any Holder, at its last known address
appearing on the books of Company maintained for such
purpose.
(ii) If to Company, at
Emcore Corporation
394 Elizabeth Avenue
Somerset, New Jersey 08873
Attention: Thomas G. Wertham,
Chief Financial Officer
Telecopy Number: (732) 271-0477
with a copy to:
White & Case
First Union Financial Center
200 South Biscayne Boulevard
Miami, Florida 33131-2352
Attention: Jorge L. Freeland, Esq.
Telecopy Number: (305) 358-5744
or at such other address as may be substituted by notice given as herein
provided. The giving of any notice required hereunder may be waived in writing
by the party entitled to receive such notice. Every notice, demand, request,
consent, approval, declaration, delivery or other communication hereunder shall
be deemed to have been duly given or served on the date on which personally
delivered, with receipt acknowledged, telecopied and confirmed by telecopy
answerback or three Business Days after the same shall have been deposited in
the United States mail.
(e) Successors and Assigns. This Agreement shall
inure to the benefit of and be binding upon the successors and assigns of each
of the parties hereto including any person to whom Registrable Securities are
transferred.
9
<PAGE> 10
(f) Headings. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
(g) Governing Law; Jurisdiction. This Agreement
shall be governed by, construed and enforced in accordance with the laws of the
State of New York without giving effect to the conflict of laws provisions
thereof. Each of the parties hereby submits to personal jurisdiction and waives
any objection as to venue in the County of New York, State of New York. The
parties hereto waive all right to trial by jury in any action or proceeding to
enforce or defend any rights hereunder.
(h) Severability. Wherever possible, each provision
of this Agreement shall be interpreted in such manner as to be effective and
valid under applicable law, but if any provision of this Agreement shall be
prohibited by or invalid under applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Agreement.
(i) Entire Agreement. This Agreement, together with
the Purchase Agreement, represents the complete agreement and understanding of
the parties hereto in respect of the subject matter contained herein and
therein. This Agreement supersedes all prior agreements and understandings
between the parties with respect to the subject matter hereof.
10
<PAGE> 11
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written.
EMCORE CORPORATION
By:
---------------------------------
Name:
Title:
GE CAPITAL EQUITY INVESTMENTS, INC.
By:
---------------------------------
Name:
Title:
[SIGNATURE PAGE - REGISTRATION RIGHTS AGREEMENT]
11
<PAGE> 12
SCHEDULE 1
Other Registration Rights
<PAGE> 1
Exhibit 10.20
WARRANT
to Purchase Common Shares of
EMCORE CORPORATION
Warrant No. 1
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION PAGE
- ------- ----
<S> <C>
1. DEFINITIONS..................................................................................................3
2. EXERCISE OF WARRANT..........................................................................................6
2.1. Manner of Exercise..................................................................................6
2.2. Payment of Taxes....................................................................................7
2.3. Fractional Shares...................................................................................8
2.4. Continued Validity..................................................................................8
3. TRANSFER, DIVISION AND COMBINATION...........................................................................8
3.1. Transfer............................................................................................8
3.2. Division and Combination............................................................................8
3.3. Expenses............................................................................................8
3.4. Maintenance of Books................................................................................9
4. ADJUSTMENTS..................................................................................................9
4.1. Share Dividends, Subdivisions and Combinations......................................................9
4.2 Certain Other Distributions and Adjustments.........................................................9
4.3. Issuance of Additional Common Shares, Warrants or Other Rights.....................................10
4.4. Organic Change.....................................................................................10
4.5. Other Provisions Applicable to Adjustments Under This Section......................................11
4.6. Other Action Affecting Common Shares...............................................................11
5. NOTICES TO WARRANT HOLDERS..................................................................................12
5.1. Notice of Certain Events...........................................................................12
5.2. Notice of Adjustments..............................................................................12
6. NO IMPAIRMENT...............................................................................................12
7. RESERVATION AND AUTHORIZATION OF COMMON SHARES; REGISTRATION
WITH OR APPROVAL OF ANY GOVERNMENTAL AUTHORITY..............................................................13
8. TAXING OF RECORD; STOCK AND WARRANT TRANSFER BOOKS..........................................................13
9. RESTRICTIONS ON TRANSFERABILITY.............................................................................13
9.1. Restrictive Legend.................................................................................14
9.2. Notice of Proposed Transfers; Requests for Registration............................................14
9.3. Required Registration..............................................................................14
9.4. Incidental Registration............................................................................15
9.5. Registration Procedures............................................................................16
9.6. Expenses...........................................................................................17
9.7. Indemnification and Contribution...................................................................17
9.8. Termination of Restrictions........................................................................20
9.9. Listing on Securities Exchange.....................................................................20
9.10. Certain Limitations on Registration Rights.........................................................20
9.11. Market Stand-Off Agreement.........................................................................21
10. SUPPLYING INFORMATION.......................................................................................21
11. LOSS OR MUTILATION..........................................................................................21
12. OFFICE OF THE COMPANY.......................................................................................22
13. INTENTIONALLY OMITTED.......................................................................................22
14. LIMITATION OF LIABILITY.....................................................................................22
</TABLE>
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<PAGE> 3
<TABLE>
<S> <C>
15. MISCELLANEOUS...............................................................................................22
15.1. Nonwaiver and Expenses.............................................................................22
15.2. Notice Generally...................................................................................22
15.3. Remedies...........................................................................................23
15.4. Successors and Assigns.............................................................................23
15.5. Amendment..........................................................................................23
15.6. Severability.......................................................................................23
15.7. Headings...........................................................................................24
15.8. Governing Law......................................................................................24
SIGNATURES
EXHIBITS
Exhibit A - Subscription Form
Exhibit B - Assignment Form
SCHEDULE
Schedule 1 - Permitted Issuances
</TABLE>
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<PAGE> 4
THIS WARRANT AND THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR PURSUANT TO ANY STATE
SECURITIES LAWS AND REGULATIONS AND MAY NOT BE TRANSFERRED IN VIOLATION OF SUCH
ACT, THE RULES AND REGULATIONS THEREUNDER OR THE PROVISIONS OF THIS WARRANT.
Warrant No. 1
WARRANT
To Purchase Common Shares of
EMCORE CORPORATION
THIS IS TO CERTIFY THAT GENERAL ELECTRIC COMPANY, or
registered assigns, is entitled, at any time during the Exercise Period (as
hereinafter defined), to purchase from EMCORE CORPORATION, a New Jersey
corporation (the "Company"), the number of Common Shares (as hereinafter defined
and subject to adjustment as provided herein) described herein, in whole or in
part, including fractional parts, at a purchase price of $22.875 per share
(subject to adjustment as provided herein) all on the terms and conditions and
pursuant to the provisions hereinafter set forth.
1. DEFINITIONS
Terms used in this Warrant have the respective meanings set
forth below:
"Appraised Value" shall mean, in respect of any Common Share
on any date herein specified, the fair saleable value of such Common Share
(determined without giving affect to the discount for (i) a minority interest or
(ii) any lack of liquidity of the Common Share or (iii) to the fact that the
Company may have no class of equity registered under the Exchange Act) as of the
most recent determination thereof for all other purposes, hereof, based on the
equity value of the Company, as determined by an investment banking or valuation
firm selected in accordance with the following sentences, divided by the number
of Common Shares outstanding on a Fully Diluted Basis as determined in
accordance with GAAP (assuming the payment of the exercise prices for such
shares). The determination of the Appraised Value per Common Share shall be made
by an investment banking or valuation firm of nationally recognized standing
selected by the Company and acceptable to the Majority Holders. If the
investment banking or valuation firm selected by Company is not acceptable to
the Majority Holders and the Company and the Majority Holders cannot agree on a
mutually acceptable investment banking or valuation firm, then the Majority
Holders and the Company shall each choose one such investment banking or
valuation firm and the respective chosen firms shall agree on another investment
banking or valuation firm which shall make the determination. The Company shall
retain, at its sole cost, such investment banking or valuation firm as may be
necessary for the determination of Appraised Value required by the terms of this
Warrant.
<PAGE> 5
"Business Day" shall mean any day that is not a Saturday or
Sunday or a day on which banks are required or permitted to be closed in the
State of New York.
"Closing Date" shall have the meaning ascribed to such term in
Section 4.1 of the Transaction Agreement, dated May 20, 1999, between the
Company and General Electric Company.
"Commission" shall mean the Securities and Exchange Commission
or any other federal agency then administering the Securities Act, the Exchange
Act and other federal securities laws.
"Common Share" shall mean (except where the context otherwise
indicates) a Common Share, no par value, of the Company as constituted on the
date hereof, and any capital stock into which such Common Share may thereafter
be changed, and shall also include (i) capital stock of the Company of any other
class (regardless of how denominated) issued to the holders of Common Shares
upon any reclassification thereof which is also not preferred as to dividends or
assets over any other class of capital stock of the Company and which is not
subject to redemption and (ii) capital stock of any successor or acquiring
corporation received by or distributed to the holders of Common Shares of the
Company in the circumstances contemplated by Section 4.4.
"Current Market Price" shall mean, in respect of any Common
Share on any date herein specified (a) if there shall then be a public market
for the Common Shares, the average of the daily market prices for 20 consecutive
Business Days commencing 30 days before such date, or (b) if there shall then be
no public market for the Common Shares, the Appraised Value per Common Share as
at such date. The daily market price for each such Business Day shall be (i) the
last sale price on such day on the principal stock exchange or NASDAQ-NMS on
which such Common Shares are then listed or admitted to trading, or (ii) if no
sale takes place on such day on any such exchange or NASDAQ-NMS, the average of
the last reported closing bid and asked prices on such day as officially quoted
on any such exchange or NASDAQ-NMS, or (iii) if the Common Shares are not then
listed or admitted to trading on any stock exchange or NASDAQ-NMS, the average
of the last reported closing bid and asked prices on such day in the
over-the-counter market, as furnished by the NASDAQ or the National Quotation
Bureau, Inc., or (iv) if neither such corporation at the time is engaged in the
business of reporting such prices, as furnished by any similar firm then engaged
in such business, or (v) if there is no such firm, as furnished by any member of
the NASD selected mutually by the Majority Holders and the Company or, if they
cannot agree upon such selection, as selected by two such members of the NASD,
one of which shall be selected by the Majority Holders and one of which shall be
selected by the Company.
"Current Warrant Price" shall mean, in respect of any Common
Share at any date herein specified, the price at which such Common Share may be
purchased pursuant to this Warrant on such date.
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<PAGE> 6
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended, or any similar federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect from time to time.
"Exercise Period" shall mean the period during which this
Warrant is exercisable pursuant to Section 2.1.
"Expiration Date" shall mean May 26, 2006.
"Fully Diluted Basis" means, with respect to any determination
or calculation, that such determination or calculation is performed on a fully
diluted basis (assuming the issuance of all Common Shares issuable under any
then outstanding options, warrants or convertible securities of any kind)
determined in accordance with GAAP for purposes of determining book value or net
income per share.
"GAAP" shall mean generally accepted accounting principles in
the United States of America as from time to time in effect.
"GE" shall mean General Electric Company, a New York
corporation.
"Holder" shall mean the Person in whose name the Warrant set
forth herein is registered on the books of the Company maintained for such
purpose.
"Majority Holders" shall mean the holders of Warrants
exercisable for in excess of 50% of the aggregate number of Common Shares then
purchasable upon exercise of all Warrants, whether or not then exercisable.
"NASD" shall mean the National Association of Securities
Dealers, Inc., or any successor corporation thereto.
"NASDAQ" shall mean the National Association of Securities
Dealers Automated Quotation System.
"NASDAQ-NMS" shall mean the NASDAQ National Market System.
"Organic Change" shall have the meaning set forth in Section
4.4.
"Permitted Issuances" shall mean issuances (a) pursuant to
existing obligations, including, without limitation, under agreements with
existing lenders, outstanding options, rights, warrants or other securities
convertible into or exchangeable for Common Shares, or pursuant to any existing
employee benefit plan, (b) pursuant to any joint venture or other strategic
alliance, with the prior written consent of Holder, (c) covered by Section 4.1,
and (d) pursuant to a registration statement under the Securities Act.
"Person" shall mean any individual, sole proprietorship,
partnership limited liability the Company, joint venture, trust, incorporated
organization, association, corporation, institution, public benefit corporation,
entity or government (whether federal, state, county, city,
-5-
<PAGE> 7
municipal or otherwise, including, without limitation, any instrumentality,
division, agency, body or department thereof).
"Registration Statement" shall have the meaning set forth in
Section 9.4.
"Restricted Common Shares" shall mean Common Shares that are,
or upon their issuance on the exercise of this Warrant would be, evidenced by a
certificate bearing the restrictive legend set forth in Section 9.1(a).
"Securities Act" shall mean the Securities Act of 1933, as
amended, or any similar federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
"Subsidiary" of any Person means any corporation, partnership,
joint venture, limited liability the Company, association or other business
entity in respect of which that Person owns securities or other ownership
interests having ordinary voting power to elect a majority of the board of
directors, partnership committee, board of managers or trustees or other
managerial body thereof, whether directly or indirectly through one or more of
the other Subsidiaries of such Person or a combination thereof. Unless otherwise
specified, "Subsidiary" means a Subsidiary of the Company and "Subsidiaries"
means all Subsidiaries of the Company.
"Transfer" shall mean any disposition of any Warrant or
Warrant Share or of any interest in either thereof that would constitute a sale
thereof within the meaning of the Securities Act.
"Transfer Notice" shall have the meaning set forth in Section
9.2.
"Warrants" shall mean this Warrant and all warrants issued
upon transfer, division or combination of, or in substitution for, this Warrant.
All Warrants shall at all times be identical as to terms and conditions and
date, except as to the number of Common Shares for which they may be exercised.
"Warrant Price" shall mean an amount equal to (i) the number
of Common Shares being purchased upon exercise of this Warrant pursuant to
Section 2.1, multiplied by (ii) the Current Warrant Price as of the date of such
exercise.
"Warrant Shares" shall mean the Common Shares issued or
issuable to the holders of Warrants upon exercise of the Warrants.
2. EXERCISE OF WARRANT
2.1. MANNER OF EXERCISE. From and after the date hereof and until 5:00 P.M., New
York time, on the Expiration Date (the "Exercise Period"), Holder may exercise
this Warrant, on any Business Day, for all or any part of 282,010 Common Shares.
-6-
<PAGE> 8
In order to exercise this Warrant, in whole or in part, Holder
shall deliver to the Company at its principal office at 294 Elizabeth Avenue,
Somerset, New Jersey 08873, or at the office or agency designated by the Company
pursuant to Section 12: (i) a written notice of Holder's election to exercise
this Warrant, which notice shall specify the number of Common Shares to be
purchased, (ii) payment of the Warrant Price and (iii) this Warrant. Such notice
shall be substantially in the form of the subscription form appearing at the end
of this Warrant as Exhibit A, duly executed by Holder or its agent or attorney.
Upon receipt thereof, the Company shall, as promptly as practicable, and in any
event within five Business Days thereafter, execute or cause to be executed and
deliver or cause to be delivered to Holder a certificate or certificates
representing the aggregate number of full Common Shares issuable upon such
exercise, together with cash in lieu of any fraction of a share, as hereinafter
provided. The share certificate or certificates so delivered shall be, to the
extent possible, in such denomination or denominations as such Holder shall
request in the notice and shall be registered in the name of Holder or, subject
to Section 9, such other name as shall be designated in the notice. This Warrant
shall be deemed to have been exercised and such certificate or certificates
shall be deemed to have been issued, and Holder or any other Person so
designated to be named therein shall be deemed to have become a holder of record
of such shares for all purposes, as of the date the notice, together with the
cash or check or other payment as provided below and this Warrant, is received
by the Company as described above and all taxes required to be paid by Holder,
if any, pursuant to Section 2.2 prior to the issuance of such shares have been
paid. If this Warrant shall have been exercised in part, the Company shall, at
the time of delivery of the certificate or certificates representing Warrant
Shares, deliver to Holder a new Warrant evidencing the rights of Holder to
purchase the unpurchased Common Shares called for by this Warrant, which new
Warrant shall in all other respects be identical with this Warrant, or, at the
request of Holder, appropriate notation may be made on this Warrant and the same
returned to Holder.
Payment of the Warrant Price shall be made at the Option of
Holder by (i) certified or official bank check, and/or (ii) by Holder's
surrender to the Company of that number of Warrant Shares (or the right to
receive such number of shares) or Common Shares having an aggregate Current
Market Price equal to or greater than the Current Warrant Price for all shares
then being purchased (including those being surrendered), or (iii) any
combination thereof, duly endorsed by or accompanied by appropriate instruments
of transfer duly executed by Holder or by Holder's attorney duly authorized in
writing.
2.2. PAYMENT OF TAXES. All Common Shares issuable upon the
exercise of this Warrant pursuant to the terms hereof shall be validly issued,
fully paid and nonassessable and without any preemptive rights. The Company
shall pay all expenses in connection with, and all taxes and other governmental
charges that may be imposed with respect to, the issue or delivery thereof,
unless such tax or charge is imposed by law upon Holder, in which case such
taxes or charges shall be paid by Holder. The Company shall not be required,
however, to pay any tax or other charge imposed in connection with any transfer
involved in the issue of any certificate for Common Shares issuable upon
exercise of this Warrant in any name other than that of Holder, and in such case
the Company shall not be required to issue or deliver any share certificate
until such tax or other charge has been paid or it has been established to the
reasonable satisfaction of the Company that no such tax or other charge is due.
-7-
<PAGE> 9
2.3. FRACTIONAL SHARES. The Company shall not be required to
issue a fractional Common Share upon exercise of any Warrant. If any fraction of
a share would, but for this Section, be issuable upon exercise of this Warrant,
in lieu of such fractional share, the Company may, at its option, pay a cash
adjustment in respect of such final fraction in an amount equal to the same
fraction of the Current Market Price per Common Share on the date of exercise.
2.4. CONTINUED VALIDITY. A holder of Common Shares issued upon
the exercise of this Warrant, in whole or in part (other than a holder who
acquires such shares after the same have been publicly sold pursuant to a
Registration Statement under the Securities Act or sold pursuant to Rule 144
thereunder), shall continue to be entitled with respect to such shares to all
rights to which it would have been entitled as Holder under Sections 9, 10 and
15 of this Warrant. The Company will, at the time of each exercise of this
Warrant, in whole or in part, upon the request of the holder of the Common
Shares issued upon such exercise hereof, acknowledge in writing, in form
reasonably satisfactory to such holder, its continuing obligation to afford to
such holder all such rights; PROVIDED, HOWEVER, that if such holder shall fail
to make any such request, such failure shall not affect the continuing
obligation of the Company to afford to such holder all such rights.
3. TRANSFER, DIVISION AND COMBINATION
3.1. TRANSFER. Subject to compliance with Section 9 hereof,
transfer of this Warrant and all rights hereunder, in whole or in part, shall be
registered on the books of the Company to be maintained for such purpose, upon
surrender of this Warrant at the principal office of the Company referred to in
Section 2.1 or the office or agency designated by the Company pursuant to
Section 12, together with a written assignment of this Warrant substantially in
the form of Exhibit B hereto duly executed by Holder or its agent or attorney
and funds sufficient to pay any transfer taxes payable upon the making of such
transfer. Upon such surrender and, if required, such payment, the Company shall,
subject to Section 9, execute and deliver a new Warrant or Warrants in the name
of the assignee or assignees and in the denomination specified in such
instrument of assignment, and shall issue to the assignor a new Warrant
evidencing the portion of this Warrant not so assigned, and this Warrant shall
promptly be cancelled. A Warrant, if properly assigned in compliance with
Section 9, may be exercised by a new Holder for the purchase of Common Shares
without having a new Warrant issued.
3.2. DIVISION AND COMBINATION. Subject to Section 9, this
Warrant may be divided or combined with other Warrants upon presentation hereof
at the aforesaid office or agency of the Company, together with a written notice
specifying the names and denominations in which new Warrants are to be issued,
signed by Holder or its agent or attorney. Subject to compliance with Section
3.1 and with Section 9, as to any transfer that may be involved in such division
or combination, the Company shall execute and deliver a new Warrant or Warrants
in exchange for the Warrant or Warrants to be divided or combined in accordance
with such notice.
3.3. EXPENSES. The Company shall prepare, issue and deliver at
its own expense (other than transfer taxes) the new Warrant or Warrants under
this Section 3.
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<PAGE> 10
3.4. MAINTENANCE OF BOOKS. The Company agrees to maintain, at
its aforesaid office or agency, books for the registration and the registration
of transfer of the Warrants.
4. ADJUSTMENTS
The number of Common Shares for which this Warrant is
exercisable, or the price at which such shares may be purchased upon exercise of
this Warrant, shall be subject to adjustment from time to time as set forth in
this Section 4. The Company shall give each Holder notice of any event described
below in accordance with Section 5.2.
4.1. SHARE DIVIDENDS, SUBDIVISIONS AND COMBINATIONS. In case
the Company shall at any time or from time to time after the Closing Date:
(a) pay a dividend, or make a distribution, on the outstanding
Common Shares in Common Shares,
(b) subdivide the outstanding Common Shares,
(c) combine the outstanding Common Shares into a smaller
number of Common Shares, or
(d) issue by reclassification of the Common Shares any shares
of capital stock of the Company
then the Current Warrant Price in effect immediately prior to such event or the
record date therefor, whichever is earlier, shall be adjusted so that Holder,
who thereafter exercises this Warrant, shall be entitled to receive the number
of Common Shares or other securities of the Company which Holder would have
owned or have been entitled to receive after the happening of any of the events
described above, had the Warrant been exercised immediately prior to the
happening of such event or the record date therefor, whichever is earlier. An
adjustment made pursuant to this Section 4.1 shall become effective (x) in the
case of any such dividend or distribution, immediately after the close of
business on the record date for the determination of holders of Common Shares
entitled to receive such dividend or distribution, or (y) in the case of such
subdivision, reclassification or combination, at the close of business on the
day upon which such corporate action becomes effective. No adjustment shall be
made pursuant to this Section 4.1 in connection with any transaction to which
Section 4.4 applies.
4.2 CERTAIN OTHER DISTRIBUTIONS AND ADJUSTMENTS. In case the
Company shall at any time or from time to time after the Closing Date declare,
order, pay or make a dividend or other distribution (including, without
limitation, any distribution of stock or other securities or property or rights
or warrants to subscribe for securities of the Company or any of its
subsidiaries by way of dividend or spinoff), on its Common Shares, other than
dividends or distributions of Common Shares which are referred to in Section 4.1
above and cash dividends paid out of retained earnings, then the Current Warrant
Price shall be adjusted so that it shall equal the price determined by
multiplying (A) the applicable Current Warrant Price on the day
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immediately prior to the record date fixed for the determination of stockholders
entitled to receive such dividend or distribution by (B) a fraction, the
numerator of which shall be the Current Market Price per Common Share on the day
immediately prior to such record date less the amount of such dividend or
distribution per Common Share, and the denominator of which shall be such
Current Market Price per Common Share on the day immediately prior to such
record date. No adjustment shall be made pursuant to this Section 4.2) in
connection with any transaction to which Section 4.4 applies.
4.3. ISSUANCE OF ADDITIONAL COMMON SHARES, WARRANTS OR OTHER
RIGHTS.
(a) If at any time the Company shall issue Common Shares (or
rights, warrants or other securities convertible into or exchangeable for Common
Shares) after the Closing Date, other than Permitted Issuances, for
consideration in an amount per Common Share (or having an exercise, conversion
or exchange price per share) less than an amount equal to 25% below the Current
Market Price, then (i) the number of Common Shares subject to purchase upon
exercise of this Warrant shall be adjusted to equal the product obtained by
multiplying the number of Common Shares subject to purchase upon exercise of
this Warrant immediately prior to such issue or sale by a fraction (A) the
numerator of which shall be the number of Common Shares outstanding immediately
after such issue or sale, and (B) the denominator of which shall be the number
of Common Shares outstanding immediately prior to such issue or sale plus the
number of Common Shares which the aggregate offering price of the total number
of such additional Common Shares would purchase at the then Current Market
Price; and (ii) the Current Warrant Price as to the number of Common Shares
subject to purchase upon exercise of this Warrant prior to such adjustment shall
be adjusted by multiplying such Current Warrant Price by a fraction (X) the
numerator of which shall be the number of Common Shares subject to purchase upon
exercise of this Warrant immediately prior to such issue or sale; and (Y) the
denominator of which shall be the number of Common Shares subject to purchase
upon exercise of this Warrant immediately after such issue or sale.
(b) An adjustment made pursuant to Section 4.3(a) shall be
made on the next Business Day following the date on which any such issuance is
made and shall be effective retroactively immediately after the close of
business on such date. For purposes of Section 4.3(a), the aggregate
consideration received by the Company in connection with the issuance of Common
Shares or of rights, warrants or other securities exchangeable or convertible
into Common Shares shall be deemed to be equal to the sum of the aggregate
offering price of all such Common Shares and such rights, warrants, or other
exchangeable or convertible securities plus the aggregate amount, if any,
receivable upon exchange or conversion of any such exchangeable or convertible
securities into Common Shares.
4.4. ORGANIC CHANGE. In case of any reorganization of capital,
reclassification of capital stock (other than a reclassification of capital
subject to Section 4.1), consolidation or merger with or into another
corporation, or sale, transfer or disposition of all or substantially all the
property, assets or business of the Company to another corporation (any one or
more of such events being an "Organic Change"), this Warrant shall thereafter be
exercisable into, in lieu of the Common Shares issuable upon exercise of this
Warrant prior to consummation of such Organic Change, the kind and amount of
shares of stock and other securities and property
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<PAGE> 12
receivable (including cash) upon the consummation of such Organic Change by a
holder of that number of Common Shares subject to purchase upon exercise of this
Warrant immediately prior to such Organic Change (including, on a pro rata
basis, the cash, securities or property received by holders of Common Shares in
any tender or exchange offer that is a step in such Organic Change). In case
securities or property other than Common Shares shall be issuable or deliverable
upon exercise as aforesaid, then all references in this Section 4.4 shall be
deemed to apply, so far as appropriate and nearly as may be, to such other
securities or property.
4.5. OTHER PROVISIONS APPLICABLE TO ADJUSTMENTS UNDER THIS
SECTION. The following provisions shall be applicable to the making of
adjustments of the number of Common Shares for which this Warrant is exercisable
and the Current Warrant Price provided for in this Section 4:
(a) For purposes of this Section 4, the number of Common
Shares at any time outstanding shall not include any Common Shares then owned or
held by or for the account of the Company or any of its subsidiaries.
(b) If the Company shall take a record of the holders of its
Common Shares for the purpose of entitling them to receive a dividend or other
distribution, and shall thereafter and before the distribution to stockholders
thereof legally abandon its plan to pay or deliver such dividend or
distribution, then thereafter no adjustment in the number of Common Shares
issuable upon exercise of this Warrant granted by this Section 4 or in the
Current Warrant Price then in effect shall be required by reason of the taking
of such record.
(c) Anything in this Section 4 to the contrary
notwithstanding, the Company shall not be required to give effect to any
adjustment in the Current Warrant Price unless and until the net effect of one
or more adjustments (each of which shall be carried forward), determined as
above provided, shall have resulted in a change of the Current Warrant Price by
at least 1%, and when the cumulative net effect of more than one adjustment so
determined shall be to change the Current Warrant Price by at least one cent,
such change in Current Warrant Price shall thereupon be given effect.
(d) If any option or warrant expires or is cancelled without
having been exercised, then, for the purposes of the adjustments set forth
above, such option or warrant shall have been deemed not to have been issued and
the Current Warrant Price shall be adjusted accordingly. No holder of Common
Shares which were previously issued upon exercise of this Warrant shall have any
obligation to redeem or cancel any such Common Shares as a result of the
operation of this Section 4.5(d).
4.6. OTHER ACTION AFFECTING COMMON SHARES. In case at any time
or from time to time the Company shall take any action in respect of its Common
Shares, other than any action described in this Section 4, then, unless such
action will not have a materially adverse effect upon the rights of Holders, the
number of Common Shares or other stock for which this Warrant is exercisable
and/or the purchase price thereof shall be adjusted in such manner as may be
equitable in the circumstances.
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<PAGE> 13
5. NOTICES TO WARRANT HOLDERS
5.1. NOTICE OF CERTAIN EVENTS. In case at any time or from
time to time the Company shall pay any stock dividend or make any other non-cash
distribution to the holders of its Common Shares, or shall offer for
subscription pro rata to the holders of its Common Shares any additional shares
of stock of any class or any other right, or there shall be any capital
reorganization or reclassification of the Common Shares of the Company or
consolidation or merger of the Company with or into another corporation, or any
sale or conveyance to another corporation of the property of the Company as an
entirety or substantially as an entirety, or there shall be a voluntary or
involuntary dissolution, liquidation or winding up of the Company, then, in any
one or more of said cases, the Company shall give at least 20 days' prior
written notice to Holder at the address of each as shown on the books of the
Company as of the date on which (i) the books of the Company shall close or a
record shall be taken for such stock dividend, distribution or subscription
rights or (ii) such non-bankruptcy reorganization, reclassification,
consolidation, merger, sale or conveyance, dissolution, liquidation or winding
up shall take place, as the case may be, provided that in the case of any
Organic Change to which Section 4.4 applies the Company shall give at least 20
days' prior written notice as aforesaid. Such notice shall also specify the date
as of which the holders of the Common Shares of record shall participate in such
dividend, distribution or subscription rights or shall be entitled to exchange
their Common Shares for securities or other property deliverable upon such
non-bankruptcy reorganization, reclassification, consolidation, merger, sale or
conveyance or participate in such dissolution, liquidation or winding up, as the
case may be. Failure to give such notice shall not invalidate any action so
taken.
5.2. NOTICE OF ADJUSTMENTS. Upon any adjustment of the Current
Warrant Price then in effect and any increase or decrease in the number of
Common Shares subject to purchase upon exercise of this Warrant, then, and in
each such case, the Company shall promptly deliver to Holder, a certificate
signed by the President or a Vice President and by the Treasurer or an Assistant
Treasurer or the Secretary or an Assistant Secretary of the Company setting
forth in reasonable detail the event requiring the adjustment and the method by
which such adjustment was calculated and specifying the Current Warrant Price
then in effect following such adjustment and the increased or decreased number
of shares subject to purchase upon exercise of this Warrant granted by Section
4, and shall set forth in reasonable detail the method of calculation of each
and a brief statement of the facts requiring such adjustment.
6. NO IMPAIRMENT
The Company shall not by any action, including, without
limitation, amending its certificate of incorporation or through any
reorganization, transfer of assets, consolidation, merger, dissolution, issue or
sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms of this Warrant, but will at all
times in good faith assist in the carrying out of all such terms and in the
taking of all such actions as may be necessary or appropriate to protect the
rights of Holder against impairment. Without limiting the generality of the
foregoing, the Company will take all such action as may be necessary or
appropriate in order that the Company may validly and legally issue fully paid
and nonassessable Common Shares upon the exercise of this Warrant, including
taking such action as is necessary for the Current Warrant Price to be not less
than the par value of the Common Shares issuable
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<PAGE> 14
upon exercise of this Warrant, and (b) use its best efforts to obtain all such
authorizations, exemptions or consents from any public regulatory body having
jurisdiction thereof as may be necessary to enable the Company to perform its
obligations under this Warrant.
Upon the request of Holder, the Company will at any time
during the period this Warrant is outstanding acknowledge in writing, in form
satisfactory to Holder, the continuing validity of this Warrant and the
obligations of the Company hereunder.
7. RESERVATION AND AUTHORIZATION OF COMMON SHARES; REGISTRATION WITH OR APPROVAL
OF ANY GOVERNMENTAL AUTHORITY
From and after the date hereof, the Company shall at all times
reserve and keep available for issue upon the exercise of Warrants such number
of its authorized but unissued Common Shares as will be sufficient to permit the
exercise in full of all outstanding Warrants. All Common Shares that shall be so
issuable, when issued upon exercise of any Warrant and payment therefor in
accordance with the terms of such Warrant, shall be duly and validly issued and
fully paid and nonassessable, and not subject to preemptive rights.
Before taking any action that would result in an adjustment in
the number of Common Shares for which this Warrant is exercisable or in the
Current Warrant Price, the Company shall obtain all such authorizations or
exemptions thereof, or consents thereto, as may be necessary from any public
regulatory body or bodies having jurisdiction thereof.
If any Common Shares required to be reserved for issuance upon
exercise of Warrants require registration or qualification with any governmental
authority or other governmental approval or filing under any federal or state
law (otherwise than as provided in Section 9) before such shares may be so
issued, the Company will in good faith and as expeditiously as possible and at
its expense endeavor to cause such shares to be duly registered or such approval
to be obtained or filing made.
8. TAXING OF RECORD; STOCK AND WARRANT TRANSFER BOOKS
In the case of all dividends or other distributions by the
Company to the holders of its Common Shares with respect to which any provision
of Section 4 refers to the taking of a record of such holders, the Company will
in each such case take such record as of the close of business on a Business
Day. The Company will not at any time, except upon dissolution, liquidation or
winding up of the Company, close its stock transfer books or Warrant transfer
books so as to result in preventing or delaying the exercise or transfer of any
Warrant.
9. RESTRICTIONS ON TRANSFERABILITY
The Warrants and the Warrant Shares shall not be transferred,
hypothecated or assigned before satisfaction of the conditions specified in this
Section 9, which conditions are intended to ensure compliance with the
provisions of the Securities Act with respect to the Transfer of any Warrant or
any Warrant Share. Holder, by acceptance of this Warrant, agrees to be bound by
the provisions of this Section 9.
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<PAGE> 15
9.1. RESTRICTIVE LEGEND. (a) Except as otherwise provided in
this Section 9, each certificate for Warrant Shares initially issued upon the
exercise of this Warrant, and each certificate for Warrant Shares issued to any
subsequent transferee of any such certificate, shall be stamped or otherwise
imprinted with a legend in substantially the following form:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, or
pursuant to any State securities laws and regulations
and may not be transferred in violation of such Act
or the rules and regulations thereunder."
(b) Except as otherwise provided in this Section 9, each
Warrant shall be stamped or otherwise imprinted with a legend in substantially
the following form:
"This warrant and the securities represented hereby have not
been registered under the Securities Act of 1933, as amended,
or pursuant to any State securities laws and regulations and
may not be transferred in violation of such Act, the rules and
regulations thereunder or the provisions of this Warrant."
9.2. NOTICE OF PROPOSED TRANSFERS; REQUESTS FOR REGISTRATION.
Prior to any Transfer of any Warrant or any Restricted Common Share, the holder
of such Warrant or Restricted Common Share shall give written notice (a
"Transfer Notice") to the Company of such Transfer. Any such Transfer must
comply with applicable securities laws and, at the request of the Company,
Holder shall deliver to company an opinion of counsel to Holder that is
reasonably acceptable to the Company as to such compliance. Each certificate, if
any, evidencing such Restricted Common Share issued upon such Transfer shall
bear the restrictive legend set forth in Section 9.1(a), and each Warrant issued
upon such Transfer shall bear the restrictive legend set forth in Section
9.1(b), unless in the opinion of counsel to such holder that is reasonably
acceptable to the Company such legend is not required in order to ensure
compliance with the Securities Act.
The holders of Warrants and Warrant Shares shall have the
right to request registration of such Warrant Shares pursuant to Sections 9.3
and 9.4.
9.3. REQUIRED REGISTRATION. After receipt of a written request
from the holders of Warrants and/or Warrant Shares representing at least either
(x) an aggregate of 50% of the total of (i) all Warrant Shares then subject to
purchase upon exercise of all Warrants and (ii) all Warrant Shares then
outstanding and that are Restricted Common Shares, or (y) such Warrant Shares
having a minimum anticipated aggregate offering price of at least $5,000,000,
requesting that the Company effect the registration of Warrant Shares issuable
upon the exercise of such holder's Warrants or of any of such holder's Warrant
Shares under the Securities Act and specifying the intended method or methods of
disposition thereof, the Company shall promptly notify all holders of Warrants
and Warrant Shares in writing of the receipt of such request and each such
holder, in lieu of exercising its rights under Section 9.4, may elect (by
written notice
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<PAGE> 16
sent to the Company within 10 Business Days from the date of such holder's
receipt of the aforementioned the Company's notice) to have its Warrant Shares
included in such registration thereof pursuant to this Section 9.3. Thereupon
the Company shall, as expeditiously as is possible, use its reasonable best
efforts to effect the registration under the Securities Act of all Warrant
Shares that the Company has been so requested to register by such holders for
sale, all to the extent required to permit the disposition (in accordance with
the intended method or methods thereof, as aforesaid) of the Warrant Shares so
registered; PROVIDED, HOWEVER, that the Company shall not be required to effect
more than one registration of any Warrant Shares pursuant to this Section 9.3
which registration shall not be underwritten; and provided further, however,
that the right of the holders of the Warrant Shares to request that the Company
effect a registration of any Warrant Shares pursuant to this Section 9.3 shall
terminate when the Warrant Shares may be sold pursuant to Rule 144 under the
Securities Act during any six-month period. A holder may only request a
registration of Warrant Shares that it has a present intention to sell and it
shall so state in its request for registration.
9.4. INCIDENTAL REGISTRATION. If the Company at any time
commencing one year after the date hereof proposes to file on its behalf and/or
on behalf of any of its security holders (the "demanding security holders") a
registration statement under the Securities Act (a "Registration Statement") on
any form (other than a Registration Statement on Form S-4 or S-8 or any
successor form for securities to be offered in a transaction of the type
referred to in Rule 145 under the Securities Act or to employees of the Company
pursuant to any employee benefit plan, respectively) for the general
registration of securities to be sold for cash with respect to its Common Shares
or any other class of equity security (as defined in Section 3(a)(11) of the
Exchange Act) of the Company, it will give written notice to all holders of
Warrants or Warrant Shares that are Restricted Common Shares at least 15 days
before the initial filing with the Commission of such Registration Statement,
which notice shall set forth the intended method of disposition of the
securities proposed to be registered by the Company. The notice shall offer to
include in such filing the aggregate number of Warrant Shares, and the number of
Common Shares for which this Warrant is exercisable, as such holders may
request. Holders shall be entitled to an unlimited number of registrations
pursuant to this Section 9.4.
Each holder of any such Warrants or any such Warrant Shares
desiring to have Warrant Shares that are Restricted Common Shares registered
under this Section 9.4 shall advise the Company in writing within 10 days after
the date of receipt of such offer from the Company, setting forth the number of
such Warrant Shares for which registration is requested. The Company shall
thereupon include in such filing the number of Warrant Shares for which
registration is so requested, subject to the next sentence, and shall use its
reasonable best efforts to effect registration under the Securities Act of such
shares if such offering proceeds. If the managing underwriter of a proposed
public offering shall advise the Company in writing that, in its opinion, the
distribution of the Warrant Shares requested to be included in the registration
concurrently with the securities being registered by the Company or such
demanding security holder would materially and adversely affect the distribution
of such securities by the Company or such demanding security holder, then all
selling security holders, other than the Company (including any demanding
security holder who initially requested such registration), shall reduce the
amount of securities each intended to distribute through such offering on a pro
rata basis.
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<PAGE> 17
Except as otherwise provided in Section 9.6, all expenses of such registration
shall be borne by the Company.
9.5. REGISTRATION PROCEDURES. If the Company is required by
the provisions of this Section 9 to use its reasonable best efforts to effect
the registration of any of its securities under the Securities Act, the Company
will, as expeditiously as possible:
(a) prepare and file with the Commission a Registration
Statement with respect to such securities and use its reasonable best
efforts to cause such Registration Statement to become and remain
effective for a period of time required for the disposition of such
securities by the holders thereof, but not to exceed 120 days;
(b) prepare and file with the Commission such amendments and
supplements to such Registration Statement and the prospectus used in
connection therewith as may be necessary to keep such Registration
Statement effective and to comply with the provisions of the Securities
Act with respect to the sale or other disposition of all securities
covered by such Registration Statement until the earlier of such time
as all of such securities have been disposed of in a public offering or
the expiration of 120 days;
(c) upon request, furnish to each selling security holder such
number of copies of such Registration Statement, each amendment and
supplement thereto, the prospectus included in such Registration
Statement (including each preliminary prospectus and each prospectus
filed under Rule 424 of the Securities Act) and such other documents as
each such selling security holder may reasonably request;
(d) use its best efforts to register or qualify the securities
covered by such Registration Statement under such other securities or
blue sky laws of such jurisdictions within the United States as each
holder of such securities shall request (PROVIDED, HOWEVER, that the
Company shall not be obligated to qualify as a foreign corporation to
do business under the laws of any jurisdiction in which it is not then
qualified or to file any general consent to service or process), and do
such other reasonable acts and things as may be required of it to
enable such holder to consummate the disposition in such jurisdiction
of the securities covered by such Registration Statement;
(e) furnish, at the request of any holder requesting
registration of Warrant Shares pursuant to Section 9.3, on the date
that such Warrant Shares are delivered to the underwriters for sale
pursuant to such registration or, if such Warrant Shares are not being
sold through underwriters, on the date that the Registration Statement
with respect to such Warrant Shares becomes effective, (1) an opinion,
dated such date, of the independent counsel representing the Company
for the purposes of such registration, addressed to the underwriters,
if any, in customary form and covering matters of the type customarily
covered in such legal opinions; and (2) a comfort letter dated such
date, from the independent certified public accountants of the Company,
addressed to the underwriters, if any, and, if such accountants refuse
to deliver such letter to such holder, then to the Company in a
customary form and covering matters of the type customarily
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<PAGE> 18
covered by such comfort letters as the underwriters or such holders
shall reasonably request;
(f) enter into customary agreements (including an underwriting
agreement in customary form) and take such other actions as are
reasonably required in order to expedite or facilitate the disposition
of such securities); and
(g) otherwise use its reasonable best efforts to comply with
all applicable rules and regulations of the Commission, and make
available to its security holders, as soon as reasonably practicable,
but not later than 18 months after the effective date of the
Registration Statement, an earnings statement covering a period of at
least 12 months beginning after the effective date of such Registration
Statement, which earnings statements shall satisfy the provisions of
Section 11(a) of the Securities Act.
It shall be a condition precedent to the obligation of the
Company to take any action pursuant to this Section 9 in respect of the
securities that are to be registered at the request of any holder of Warrants or
Warrant Shares that such holder shall furnish to the Company such information
regarding the securities held by such holder and the intended method of
disposition thereof as the Company shall reasonably request and as shall be
required in connection with the action taken by the Company. Such Holder shall
also enter into reasonably acceptable customary custody and other agreements in
connection with any registration statements if requested by the Company.
9.6. EXPENSES. All expenses incurred in complying with Section
9, including, without limitation, all registration and filing fees (including
all expenses incident to filing with the NASD), printing expenses, fees and
disbursements of counsel for the Company, the reasonable fees and expenses of
one counsel for the selling security holders (selected by those holding a
majority of the shares being registered), expenses of any special audits
incident to or required by any such registration and expenses of complying with
the securities or blue sky laws of any jurisdictions pursuant to Section 9.5(d),
shall be paid by the Company, except that
(a) all such expenses in connection with any amendment or
supplement to the Registration Statement or prospectus filed more than
180 days after the effective date of such Registration Statement
because any holder of Warrant Shares has not effected the disposition
of the securities requested to be registered shall be paid by such
holder; and
(b) the Company shall not be liable for any fees, discounts or
commissions to any underwriter or any fees or disbursements of counsel
for any underwriter in respect of the securities sold by such holder of
Warrant Shares.
9.7. INDEMNIFICATION AND CONTRIBUTION. (a) In the event of any
registration of any Warrant Share under the Securities Act pursuant to this
Section 9, the Company shall indemnify and hold harmless the holder of such
Warrant Share, such holder's directors and officers, and each other Person
(including each underwriter) who participated in the offering of such Warrant
Share and each other person, if any, who controls such holder or such
participating Person within the meaning of the Securities Act, against any
losses, claims, damages or liabilities, joint or several, to which such holder
or any such director or officer or participating Person or controlling Person
may become subject under the Securities Act or any other statute or at common
law, insofar as such losses, claims, damages or
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<PAGE> 19
liabilities (or actions in respect thereof) arise out of or are based upon (i)
any alleged untrue statement of any material fact contained, on the effective
date thereof, in any Registration Statement under which such securities were
registered under the Securities Act, any preliminary prospectus or final
prospectus contained therein, or any amendment or supplement thereto, or (ii)
any alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, and shall
reimburse such holder or such director, officer or participating Person or
controlling Person for any legal or any other expenses reasonably incurred by
such holder or such director, officer or participating Person or controlling
Person in connection with investigating or defending any such loss, claim,
damage, liability or action; PROVIDED, HOWEVER, that the Company shall not be
liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon any alleged untrue statement or alleged
omission made in such Registration Statement, preliminary prospectus, prospectus
or amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by or on behalf of such holder specifically
for use therein or (in the case of any registration pursuant to Section 9.3) so
furnished for such purposes by or on behalf of any underwriter. Such indemnity
shall remain in full force and effect regardless of any investigation made by or
on behalf of such holder or such director, officer or participating Person or
controlling Person, and shall survive the transfer of such securities by such
holder.
(b) Each holder of any Warrant Share, by acceptance thereof,
agrees to indemnify and hold harmless the Company, its directors and officers
and each other Person, if any, who controls the Company within the meaning of
the Securities Act against any losses, claims, damages or liabilities, joint or
several, to which the Company or any such director or officer or any such Person
may become subject under the Securities Act or any other statute or at common
law, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon information in writing provided
to the Company by or on behalf of such holder of such Warrant Share specifically
for use in the following documents and contained, on the effective date thereof,
in any Registration Statement under which securities were registered under the
Securities Act at the request of such holder, any preliminary prospectus or
final prospectus contained therein, or any amendment or supplement thereto, but
in an amount not to exceed the net proceeds received by such holder in the
offering.
(c) Promptly after receipt by an indemnified party under
Sections 9(a) or (b) above of notice of the assertion of any claim, such
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify each party against whom
indemnification is to be sought in writing of the commencement thereof (but the
failure so to notify an indemnifying party shall not relieve it from any
liability that it may have under this Section 9 except to the extent that it has
been prejudiced in any material respect by such failure or from any liability
that it may have otherwise). In case any such action is brought against any
indemnified party, and it notifies an indemnifying party of the commencement
thereof, the indemnifying party shall be entitled to participate therein, and to
the extent it may elect by written notice delivered to the indemnified party
promptly after receiving the aforesaid notice from such indemnified party, to
assume the defense thereof with counsel reasonably
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<PAGE> 20
satisfactory to such indemnified party. Notwithstanding the foregoing, the
indemnified party or parties shall have the right to employ its or their own
counsel in any such case, but the fees and expenses of such counsel shall be at
the expense of such indemnified party or parties unless (i) the employment of
such counsel shall have been authorized in writing by one of the indemnifying
parties in connection with the defense of such action, (ii) the indemnifying
parties shall not have employed counsel to take charge of the defense of such
action within a reasonable time after notice of commencement of the action, or
(iii) such indemnified party or parties shall have reasonably concluded that
there may be defenses available to it or them that are different from or
additional to those available to one or all of the indemnifying parties (in
which case the indemnifying parties shall not have the right to direct the
defense of such action on behalf of the indemnified party or parties with
respect to such different defenses), in any of which events such fees and
expenses shall be borne by the indemnifying parties. The indemnifying party
under Sections 9(a) or (b) above shall only be liable for the legal expenses of
one counsel for all indemnified parties in each jurisdiction in which any claim
or action is brought; PROVIDED, HOWEVER, that the indemnifying party shall be
liable for separate counsel for any indemnified party in a jurisdiction, if
counsel to the indemnified parties shall have reasonably concluded that there
may be defenses available to such indemnified party that are different from or
additional to those available to one or more of the other indemnified parties
and that separate counsel for such indemnified party is prudent under the
circumstances. Anything in this subsection to the contrary notwithstanding, an
indemnifying party shall not be liable for any settlement of any claim or action
effected without its written consent; PROVIDED, HOWEVER, that such written
consent was not unreasonably withheld.
(d) If the indemnification provided for in this Section 9 from
the indemnifying party is unavailable to an indemnified party hereunder in
respect of any losses, claims, damages, liabilities or expenses referred to
therein, then the indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages, liabilities or expenses in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party and indemnified parties in connection with the actions which resulted in
such losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The relative fault of such indemnifying party
and indemnified parties shall be determined by reference to, among other things,
whether any action in question, including any untrue or alleged untrue statement
of a material fact or omission or alleged omission to state a material fact, has
been made by, or relates to information supplied by, such indemnifying party or
indemnified parties, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such action. The amount paid
or payable by a party as a result of the losses, claims, damages, liabilities
and expenses referred to above shall be deemed to include any legal or other
fees or expenses reasonably incurred by such party in connection with any
investigation or proceeding. The liability of any holder of Warrant Shares
hereunder shall not exceed the net proceeds received by it in the offering.
The parties hereto agree that it would not be just and
equitable if contribution pursuant to this Section 9.7(d) were determined by pro
rata allocation or by any other method of allocation that does not take account
of the equitable considerations referred to in the immediately preceding
paragraph. No Person guilty of fraudulent misrepresentation (within the
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<PAGE> 21
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any Person who was not guilty of such fraudulent
misrepresentation.
9.8. TERMINATION OF RESTRICTIONS. Notwithstanding the
foregoing provisions of Section 9, the restrictions imposed by this Section upon
the transferability of the Warrants, the Warrant Shares and the Restricted
Common Shares and the legend requirements of Section 9.1 shall terminate as to
any particular Warrant or Warrant Share or Restricted Common Share (i) when and
so long as such security shall have been effectively registered under the
Securities Act and disposed of pursuant thereto or (ii) when the Company shall
have received an opinion of counsel reasonably satisfactory to it that such
securities may be transferred without registration thereof under the Securities
Act. Whenever the restrictions imposed by Section 9 shall terminate as to this
Warrant, as hereinabove provided, Holder hereof shall be entitled to receive
from the Company, at the expense of the Company, a new Warrant without the
restrictive legend set forth in Section 9.1(b). Whenever the restrictions
imposed by this Section shall terminate as to any Restricted Common Share, as
hereinabove provided, the holder thereof shall be entitled to receive from the
Company, at the Company's expense, a new certificate representing such Common
Share not bearing the restrictive legend set forth in Section 9.1(a).
9.9. LISTING ON SECURITIES EXCHANGE. If the Company shall list
any Common Shares on any securities exchange, it will, at its expense, list
thereon, maintain and, when necessary, increase such listing of, all Common
Shares issued or, to the extent permissible under the applicable securities
exchange rules, issuable upon the exercise of this Warrant so long as any Common
Shares shall be so listed during any such Exercise Period.
9.10. CERTAIN LIMITATIONS ON REGISTRATION RIGHTS.
Notwithstanding the other provisions of Section 9:
(i) the Company shall not be obligated to register the
Warrant Shares of any holder if, in the opinion of
counsel to the Company reasonably satisfactory to the
holder and its counsel (or, if the holder has engaged
an investment banking firm, to such investment
banking firm and its counsel), the sale or other
disposition of such holder's Warrant Shares, in the
manner proposed by such holder (or by such investment
banking firm), may be effected without registering
such Warrant Shares under the Securities Act; and
(ii) the Company shall not be obligated to register the
Warrant Shares of any holder pursuant to Section 9.3,
if the Company has had a registration statement,
under which such holder had a right to have its
Warrant Shares included pursuant to Sections 9.3 or
9.4, declared effective within one year prior to the
date of the request pursuant to Section 9.3;
PROVIDED, HOWEVER, that if any holder elected to have
shares of its Warrant Shares included under such
registration statement but some or all of such shares
were excluded pursuant to the penultimate sentence of
Section 9.4, then such one-year period shall be
reduced to the greater of six months or any lock-up
period agreed to by such holder with an underwriter.
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<PAGE> 22
(iii) The Company shall have the right to delay the filing
or effectiveness of a registration statement required
pursuant to Section 9.3 hereof during one or more
periods aggregating not more than 90 days in any 12
month period in the event that (i) the Company would,
in accordance with the advice of its counsel, be
required to disclose in the prospectus information
not otherwise then required by law to be publicly
disclosed and (ii) in the judgment of the Company's
Board of Directors, there is a reasonable likelihood
that such disclosure, or any other action to be taken
in connection with the prospectus, would materially
and adversely affect any existing or prospective
material business situation, transaction or
negotiation or otherwise materially and adversely
affect the Company.
9.11. MARKET STAND-OFF AGREEMENT. Each Holder hereby agrees
that, during the period of duration specified by the Company and an underwriter
of common stock or other securities of the Company, following the effective date
of a registration statement of the Company filed under the Act, it shall not, to
the extent requested by the Company and such underwriter, directly or indirectly
sell, offer to sell, contract to sell (including, without limitation, any short
sale), grant any option to purchase or otherwise transfer or dispose of (other
than to donees who agree to be similarly bound) any securities of the Company
held by it at any time during such period except common stock included in such
registration; provided, however, that such market stand-off time period shall
not exceed 180 days and all officers and directors of the Company enter into
similar agreements.
In order to enforce the foregoing covenant, the Company may
impost stop-transfer instructions with respect to the Warrants and Warrant
Shares of each Holder (and the shares or securities of every other person
subject to the foregoing restriction) until the end of such period.
10. SUPPLYING INFORMATION
The Company shall cooperate with each Holder of a Warrant and
each holder of Restricted Common Shares in supplying such information as may be
reasonably necessary for such holder to complete and file any information
reporting forms presently or hereafter required by the Commission as a condition
to the availability of an exemption from the Securities Act for the sale of any
Warrant or Restricted Common Shares.
11. LOSS OR MUTILATION
Upon receipt by the Company from any Holder of evidence
reasonably satisfactory to it of the ownership of and the loss, theft,
destruction or mutilation of this Warrant and indemnity reasonably satisfactory
to it (it being understood that the written agreement of GE shall be sufficient
indemnity), and in case of mutilation upon surrender and cancellation hereof,
the Company will execute and deliver in lieu hereof a new Warrant of like tenor
to such Holder; PROVIDED, in the case of mutilation, no indemnity shall be
required if this Warrant in identifiable form is surrendered to the Company for
cancellation.
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<PAGE> 23
12. OFFICE OF THE COMPANY
As long as any of the Warrants remain outstanding, the
Company shall maintain an office or agency (which may be the principal
executive offices of the Company) where the Warrants may be presented for
exercise, registration of transfer, division or combination as provided in
this Warrant.
13. [INTENTIONALLY OMITTED]
14. LIMITATION OF LIABILITY
No provision hereof, in the absence of affirmative action by
Holder to purchase Common Shares, and no enumeration herein of the rights or
privileges of Holder hereof, shall give rise to any liability of such Holder for
the purchase price of any Common Share or as a shareholder of the Company,
whether such liability is asserted by the Company or by creditors of the
Company.
15. MISCELLANEOUS
15.1. NONWAIVER AND EXPENSES. No course of dealing or any
delay or failure to exercise any right hereunder on the part of Holder shall
operate as a waiver of such right or otherwise prejudice Holder's rights, powers
or remedies. If the Company fails to make, when due, any payments provided for
hereunder, or fails to comply with any other provision of this Warrant, the
Company shall pay to Holder such amounts as shall be sufficient to cover any
costs and expenses including, but not limited to, reasonable attorneys' fees,
including those of appellate proceedings, incurred by Holder in collecting any
amounts due pursuant hereto or in otherwise enforcing any of its rights, powers
or remedies hereunder.
15.2. NOTICE GENERALLY. Any notice, demand, request, consent,
approval, declaration, delivery or other communication hereunder to be made
pursuant to the provisions of this Warrant shall be sufficiently given or made
if in writing and either delivered in person with receipt acknowledged or sent
by registered or certified mail, return receipt requested, postage prepaid, or
by telecopy and confirmed by telecopy answerback, addressed as follows:
(a) If to any Holder or holder of Warrant Shares, at its last
known address appearing on the books of the Company maintained for such
purpose.
(b) If to the Company at
Emcore Corporation
294 Elizabeth Avenue
Somerset, New Jersey 08873
Attention: President
Telecopy Number: (732) 271-9686
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<PAGE> 24
With a Copy to
White & Case LLP
1155 Avenue of the Americas
New York, New York 10036
Attention: Steven M. Betensky, Esq.
Telecopy Number: (212) 354-8113
or at such other address as may be substituted by notice given as herein
provided. The giving of any notice required hereunder may be waived in writing
by the party entitled to receive such notice. Every notice, demand, request,
consent, approval, declaration, delivery or other communication hereunder shall
be deemed to have been duly given or served on the date on which personally
delivered, with receipt acknowledged, telecopied and confirmed by telecopy
answerback, or three Business Days after the same shall have been deposited in
the United States mail. Failure or delay in delivering copies of any notice,
demand, request, approval, declaration, delivery or other communication to the
Person designated above to receive a copy shall in no way adversely affect the
effectiveness of such notice, demand, request, approval, declaration, delivery
or other communication.
15.3. REMEDIES. Each holder of a Warrant or a Warrant Share,
in addition to being entitled to exercise all rights granted by law, including
recovery of damages, will be entitled to specific performance of its rights
under Section 9 of this Warrant. The Company agrees that monetary damages would
not be adequate compensation for any loss incurred by reason of a breach by it
of the provisions of Section 9 of this Warrant and hereby agrees to waive the
defense in any action for specific performance that a remedy at law would be
adequate. In any action or proceeding brought to enforce any provision of this
Agreement or where any provision hereof is validly asserted as a defense, the
successful party shall be entitled to recover reasonable attorneys' fees in
addition to any other available remedy.
15.4. SUCCESSORS AND ASSIGNS. Subject to the provisions of
Sections 3.1 and 9, this Warrant and the rights evidenced hereby shall inure to
the benefit of and be binding upon the successors of the Company and the
successors and assigns of Holder. The provisions of this Warrant are intended to
be for the benefit of all Holders from time to time of this Warrant and, with
respect to Section 9 hereof, holders of Warrant Shares, and shall be enforceable
by any such Holder or holder of Warrant Shares.
15.5. AMENDMENT. This Warrant and all other Warrants may be
modified or amended or the provisions hereof waived with the written consent of
the Company and the Majority Holders; PROVIDED that no such Warrant may be
modified or amended to reduce the number of Common Shares for which such Warrant
is exercisable or to increase the price at which such Common Shares may be
purchased upon exercise of such Warrant (before giving effect to any adjustment
as provided therein) without the prior written consent of Holder thereof.
15.6. SEVERABILITY. Wherever possible, each provision of this
Warrant shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Warrant shall be prohibited by or
invalid under applicable law, such provision shall be
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<PAGE> 25
ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Warrant.
15.7. HEADINGS. The headings used in this Warrant are for the
convenience of reference only and shall not, for any purpose, be deemed a part
of this Warrant.
15.8. GOVERNING LAW. This Warrant shall be governed by the
laws of the State of New York, without regard to the provisions thereof relating
to conflict of laws.
[Signature page follows.]
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<PAGE> 26
IN WITNESS WHEREOF, the Company has caused this Warrant to be
duly executed and attested by its Secretary or an Assistant Secretary.
Dated: May 26, 1999
EMCORE CORPORATION
By:
--------------------------------
Name:
Title:
Attest:
By:
--------------------------------
Name:
Title:
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<PAGE> 27
EXHIBIT A
SUBSCRIPTION FORM
[To be executed only upon exercise of Warrant]
The undersigned registered owner of this Warrant irrevocably
exercises this Warrant for the purchase of ______ Common Shares of EMCORE
CORPORATION and herewith makes payment therefor, all at the price and on the
terms and conditions specified in this Warrant and requests that certificates
for the Common Shares hereby purchased (and any securities or other property
issuable upon such exercise) be issued in the name of and delivered to
______________________________ whose address is ____________________________
and, if such Common Shares shall not include all of the Common Shares issuable
as provided in this Warrant, that a new Warrant of like tenor and date for the
balance of the Common Shares issuable hereunder be delivered to the
undersigned.
----------------------------------------------
(Name of Registered Owner)
----------------------------------------------
(Signature of Registered Owner)
----------------------------------------------
(Street Address)
----------------------------------------------
(City) (State) (Zip Code)
NOTICE: The signature on this subscription must correspond with the
name as written upon the face of the within warrant in every
particular, without alteration or enlargement or any change
whatsoever.
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<PAGE> 28
EXHIBIT B
ASSIGNMENT FORM
FOR VALUE RECEIVED the undersigned registered owner of this
Warrant hereby sells, assigns and transfers unto the Assignee named below all of
the rights of the undersigned under this Warrant, with respect to the number of
Common Shares set forth below:
NAME AND ADDRESS OF ASSIGNEE NO. OF COMMON SHARES
---------------------------- --------------------
and does hereby irrevocably constitute and appoint ________________________
attorney-in-fact to register such transfer on the books of EMCORE CORPORATION
maintained for the purpose, with full power of substitution in the premises.
Dated: Print Name:
------------------------- -------------------------
Signature:
-------------------------
Witness:
-------------------------
NOTICE: The signature on this assignment must correspond with the name
as written upon the face of the within Warrant in every
particular, without alteration or enlargement or any change
whatsoever.
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<PAGE> 29
SCHEDULE 1
[Permitted Issuances]
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<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Amendment No. 2 to
Registration Statement No. 333-71791 of EMCORE Corporation on Form S-3 of our
report dated May 14, 1999 (which expresses an unqualified opinion and includes
an explanatory paragraph relating to a restatement described in Note 20),
included in the Annual Report on Form 10-K/A of EMCORE Corporation for the year
ended September 30, 1998, and to the use of our report dated May 14, 1999,
appearing in the Prospectus, which is part of this Registration Statement. We
also consent to the reference to us under the heading "Experts" in such
Prospectus.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
June 8, 1999
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion and incorporation in this registration
statement on Form S-3 of our report dated November 3, 1997, except for Note 15,
as to which the date is December 5, 1997, on our audits of the financial
statements and financial statement schedule of EMCORE Corporation as of
September 30, 1997, and for the two years ended September 30, 1997. We also
consent to the references to our firm under the caption "Experts".
PricewaterhouseCoopers LLP
Florham Park, New Jersey
June 8, 1999
<PAGE> 1
Exhibit 23.3
Consent of Arthur Andersen LLP
As independent public accountants, we hereby consent to the
use of our report dated March 21, 1997 on the financial statements of
MicroOptical Devices, Inc. for the year ended December 31, 1996 and for the
period from inception (August 3, 1995) through December 31, 1995 and 1996,
included in or made a part of this registration statement under Amendment No. 2
to Form S-3 for EMCORE Corporation.
ARTHUR ANDERSEN LLP
Albuquerque, New Mexico
June 8, 1999
<PAGE> 1
Exhibit 23.5
Consent of Lerner David Littenberg Krumholz & Mentlik
We hereby consent to the reference to our firm under the caption
"Experts" in the Registration Statement on Form S-3 of EMCORE Corporation for
the offering of shares of common stock by EMCORE Corporation and certain selling
shareholders.
Lerner David Littenberg Krumholz & Mentlik, LLP
June 8, 1999
Westfield, New Jersey
