10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on August 9, 2006
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
QUARTERLY
REPORT PURSUANT TO
SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the
quarterly period ended: June
30, 2006
Commission
File Number: 0-22175
EMCORE
Corporation
(Exact
name of Registrant as specified in its charter)
New
Jersey
(State
or other jurisdiction of incorporation or organization)
22-2746503
(IRS
Employer Identification No.)
145
Belmont Drive, Somerset, NJ 08873
(Address
of principal executive offices)
(732)
271-9090
(Registrant's
telephone number)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. x
Yes o
No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (check
one): o
Large
accelerated filer x Accelerated
filer o
Non-accelerated filer
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
o
Yes x
No
The
number of shares outstanding of the registrant’s no par value common stock as of
August 4, 2006 was 50,889,524.
TABLE
OF CONTENTS
EMCORE
CORPORATION
Condensed
Consolidated Statements of Operations
For
the three and nine months ended June 30, 2006 and 2005
(in
thousands, except per share data)
(unaudited)
|
|
Three
Months Ended
June
30,
|
|
Nine
Months Ended
June
30,
|
|
||||||||
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Revenue
|
|
$
|
41,954
|
$
|
33,234
|
|
$
|
123,007
|
$
|
90,628
|
|
||
Cost
of revenue
|
|
|
33,336
|
|
26,503
|
|
|
98,864
|
|
76,293
|
|
||
Gross
profit
|
|
|
8,618
|
|
6,731
|
|
|
24,143
|
|
14,335
|
|
||
|
|
|
|
|
|
|
|
|
|
||||
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
||||
Selling,
general and administrative
|
|
|
8,182
|
|
7,902
|
|
|
26,445
|
|
18,589
|
|
||
Research
and development
|
|
|
5,152
|
|
4,061
|
|
|
14,550
|
|
13,189
|
|
||
Total
operating expenses
|
|
|
13,334
|
|
11,963
|
|
|
40,995
|
|
31,778
|
|
||
Operating
loss
|
|
|
(4,716
|
)
|
|
(5,232
|
)
|
|
(16,852
|
)
|
|
(17,443
|
)
|
|
|
|
|
|
|
|
|
|
|
||||
Other
(income) expenses:
|
|
|
|
|
|
|
|
|
|
||||
Interest
income
|
|
|
(263
|
)
|
|
(297
|
)
|
|
(838
|
)
|
|
(779
|
)
|
Interest
expense
|
|
|
1,331
|
|
1,202
|
|
|
3,987
|
|
3,606
|
|
||
Loss
from convertible subordinated notes
exchange
offer
|
|
|
-
|
|
-
|
|
|
1,078
|
|
-
|
|
||
Equity
in net loss of Velox investment
|
|
|
-
|
|
-
|
|
|
332
|
|
-
|
|
||
Equity
in net loss (income) of GELcore
investment
|
|
|
129
|
|
778
|
|
|
(21
|
)
|
|
703
|
||
Total
other expenses
|
|
|
1,197
|
|
1,683
|
|
|
4,538
|
|
3,530
|
|||
Loss
from continuing operations
|
|
|
(5,913
|
)
|
|
(6,915
|
)
|
|
(21,390
|
)
|
|
(20,973
|
)
|
|
|
|
|
|
|
|
|
|
|
||||
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
||||
Gain
on disposal of discontinued operations
|
|
|
-
|
|
-
|
|
|
2,012
|
|
12,476
|
|
||
Income
from discontinued operations
|
|
|
-
|
|
-
|
|
|
2,012
|
|
12,476
|
|
||
|
|
|
|
|
|
|
|
|
|
||||
Net
loss
|
|
$
|
(5,913
|
)
|
$
|
(6,915
|
)
|
$
|
(19,378
|
)
|
$
|
(8,497
|
)
|
|
|
|
|
|
|
|
|
|
|
||||
Per
share data:
|
|
|
|
|
|
|
|
|
|
||||
Basic
and diluted per share data:
|
|
|
|
|
|
|
|
|
|
||||
Loss
from continuing operations
|
|
$
|
(0.12
|
)
|
$
|
(0.15
|
)
|
$
|
(0.43
|
)
|
$
|
(0.44
|
)
|
Income
from discontinued operations
|
|
|
-
|
|
-
|
|
|
0.04
|
|
0.26
|
|
||
|
|
|
|
|
|
|
|
|
|
||||
Net
loss
|
|
$
|
(0.12
|
)
|
$
|
(0.15
|
)
|
$
|
(0.39
|
)
|
$
|
(0.18
|
)
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted
average number of shares outstanding
used
in basic and diluted per share calculations
|
|
|
50,430
|
|
47,426
|
|
|
49,336
|
|
47,228
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
EMCORE
CORPORATION
Condensed
Consolidated Balance Sheets
As
of June 30, 2006 and September 30, 2005
(in
thousands)
(unaudited)
|
|
|
As
of
June
30,
2006
|
|
|
As
of
September
30,
2005
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
16,138
|
|
$
|
19,525
|
|
Restricted
cash
|
|
|
1,303
|
|
|
547
|
|
Marketable
securities
|
|
|
7,900
|
|
|
20,650
|
|
Accounts
receivable, net
|
|
|
27,388
|
|
|
22,633
|
|
Receivables,
related parties
|
|
|
482
|
|
|
4,197
|
|
Inventory,
net
|
|
|
24,940
|
|
|
18,348
|
|
Prepaid
expenses and other current assets
|
|
|
3,224
|
|
|
3,638
|
|
Total
current assets
|
|
|
81,375
|
|
|
89,538
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
56,997
|
|
|
56,957
|
|
Goodwill
|
|
|
40,476
|
|
|
34,643
|
|
Intangible
assets, net
|
|
|
6,624
|
|
|
5,347
|
|
Investments
in unconsolidated affiliates
|
|
|
12,388
|
|
|
12,698
|
|
Receivables,
related parties
|
|
|
169
|
|
|
169
|
|
Other
assets, net
|
|
|
5,526
|
|
|
6,935
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
203,555
|
|
$
|
206,287
|
|
|
|
|
|
|
|
|
|
LIABILITIES
and SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
20,692
|
$
|
15,587
|
|
|
Accrued
expenses and other current liabilities
|
|
|
13,540
|
|
19,078
|
|
|
Notes
payable, current portion
|
|
|
430
|
|
-
|
|
|
Convertible
subordinated notes, current portion
|
|
|
-
|
|
1,350
|
|
|
Total
current liabilities
|
|
|
34,662
|
|
36,015
|
|
|
|
|
|
|
|
|
||
Notes
payable, long-term
|
|
|
277
|
|
-
|
|
|
Convertible
subordinated notes, long-term
|
|
|
95,895
|
|
94,709
|
|
|
Total
liabilities
|
|
|
130,834
|
|
130,724
|
|
|
|
|
|
|
|
|
||
Commitments
and contingencies
|
|
|
|
|
|
||
|
|
|
|
|
|
||
Shareholders’
equity:
|
|
|
|
|
|
||
Preferred
stock, $0.0001 par, 5,882 shares authorized, no shares
outstanding
|
|
|
-
|
|
-
|
|
|
Common
stock, no par value, 100,000 shares authorized, 50,805
shares
issued and 50,646 shares outstanding at June 30, 2006;
48,023
shares issued and 48,003 shares outstanding at September 30,
2005
|
|
|
410,153
|
|
392,466
|
|
|
Accumulated
deficit
|
|
|
(335,349
|
)
|
|
(315,971
|
)
|
Treasury
stock, at cost
159
shares at June 30, 2006; 20 shares at September 30, 2005
|
|
|
(2,083
|
)
|
|
(932
|
)
|
Total
shareholders’ equity
|
|
|
72,721
|
|
75,563
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
203,555
|
|
$
|
206,287
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
EMCORE
CORPORATION
Condensed
Consolidated Statements of Cash Flows
For
the nine months ended June 30, 2006 and 2005
(in
thousands)
(unaudited)
|
|
Nine
Months Ended
June
30,
|
|||||
|
|
|
2006
|
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(19,378
|
)
|
$
|
(8,497
|
)
|
Adjustments
to reconcile net loss to net cash used for operating
activities:
|
|
|
|
|
|||
Gain
on disposal of discontinued operations
|
|
|
(2,012
|
)
|
|
(12,476
|
)
|
Stock
option compensation expense
|
|
|
3,086
|
|
-
|
||
Depreciation
and amortization expense
|
|
|
10,297
|
|
10,861
|
||
Accretion
of loss from convertible subordinated notes exchange offer
|
|
|
116
|
|
-
|
||
Loss
on convertible subordinated notes exchange offer
|
|
|
1,078
|
|
-
|
||
Provision
for doubtful accounts
|
|
|
56
|
|
(170
|
)
|
|
Equity
in net (income) loss of GELcore
|
|
|
(21
|
)
|
|
703
|
|
Equity
in net loss of Velox
|
332
|
-
|
|||||
Compensatory
stock issuances
|
|
|
591
|
|
579
|
||
Forgiveness
of shareholders’ notes receivable
|
|
|
2,613
|
|
34
|
||
Reduction
of note receivable due for services received
|
|
|
390
|
|
390
|
||
Total
non-cash adjustments
|
|
|
16,526
|
|
(79
|
)
|
|
Changes
in operating assets and liabilities:
|
|
|
|
||||
Accounts
receivable
|
|
|
(4,072
|
)
|
|
(6,328
|
)
|
Receivables,
related parties
|
|
|
(49
|
)
|
|
(317
|
)
|
Inventory
|
|
|
(5,931
|
)
|
|
(2,761
|
)
|
Prepaid
expenses and other current assets
|
|
|
389
|
|
941
|
||
Other
assets
|
|
|
(928
|
)
|
|
(402
|
)
|
Accounts
payable
|
|
|
3,320
|
|
(2,070
|
)
|
|
Accrued
expenses and other current liabilities
|
|
|
(7,904
|
)
|
|
(1,664
|
)
|
Total
change in operating assets and liabilities
|
|
|
(15,175
|
)
|
|
(12,601
|
)
|
Net
cash used for operating activities
|
|
|
(18,027
|
)
|
|
(21,177
|
)
|
|
|
|
|
||||
Cash
flows from investing activities:
|
|
|
|
||||
Cash
proceeds from disposition of discontinued operations
|
|
|
-
|
|
13,197
|
||
Investment
in GELcore
|
|
|
-
|
|
(1,470
|
)
|
|
Purchase
of plant and equipment
|
|
|
(4,008
|
)
|
|
(3,280
|
)
|
Proceeds
from (investment in) K2 Optronics
|
|
|
500
|
|
|
(1,000
|
)
|
Cash
purchase of businesses, net of cash acquired
|
|
|
610
|
|
|
(2,783
|
)
|
Purchase
of marketable securities
|
|
|
(350
|
)
|
|
(11,225
|
)
|
Funding
of restricted cash
|
|
|
(703
|
)
|
|
-
|
|
Sale
of marketable securities
|
|
|
13,100
|
|
22,875
|
||
Net
cash provided by investing activities
|
|
|
9,149
|
|
16,314
|
||
|
|
|
|
||||
Cash
flows from financing activities:
|
|
|
|
||||
Payments
on debt obligations
|
|
|
(176
|
)
|
|
(31
|
)
|
Proceeds
from exercise of stock options
|
|
|
6,023
|
|
503
|
||
Proceeds
from employee stock purchase plan
|
|
|
1,108
|
|
1,006
|
||
Convertible
debt/equity issuance costs
|
|
|
(114
|
)
|
|
-
|
|
Principal
payment on convertible debt obligation
|
(1,350
|
)
|
-
|
||||
Net
cash provided by financing activities
|
|
|
5,491
|
|
|
1,478
|
|
|
|
|
|
|
|||
Net
decrease in cash and cash equivalents
|
|
|
(3,387
|
)
|
|
(3,385
|
)
|
Cash
and cash equivalents, beginning of period
|
|
|
19,525
|
|
|
19,422
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of period
|
|
$
|
16,138
|
|
$
|
16,037
|
|
|
|
|
|
|
|
||
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
||
Cash
paid during the period for interest
|
|
$
|
5,067
|
|
$
|
4,806
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock in conjunction with acquisitions
|
|
$
|
6,460
|
|
$
|
-
|
|
|
|
|
|
|
|
||
NON-CASH
INVESTING AND FINANCING ACTIVITIES
|
|
|
|
|
|
||
Acquisition
of property and equipment under capital leases
|
|
$
|
126
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Net
decrease in liabilities for purchase of plant and
equipment
|
$
|
670
|
$
|
-
|
|||
Manufacturing
equipment received in lieu of earn-out proceeds from disposition
of
discontinued operations
|
|
$
|
2,012
|
|
$
|
-
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
EMCORE
Corporation
Notes
to Condensed Consolidated Financial Statements
As
of June 30, 2006 and September 30, 2005 and
For
the three and nine months ended June 30, 2006 and 2005
(unaudited)
NOTE
1. Basis of Presentation.
The
accompanying unaudited condensed consolidated financial statements include
the
accounts of EMCORE Corporation and its subsidiaries (EMCORE). All intercompany
accounts and transactions have been eliminated. Certain amounts in prior
period
financial statements have been reclassified to conform to the current year
presentation. These reclassifications had no effect on previously reported
shareholders’ equity.
These
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America (US GAAP) for interim information,
and
with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the
Securities and Exchange Commission (SEC). Accordingly, they do not include
all
of the information and footnotes required by US GAAP for annual financial
statements. In the opinion of management, all information considered necessary
for a fair presentation of the financial statements has been included. Operating
results for interim periods are not necessarily indicative of results that
may
be expected for an entire fiscal year. The condensed consolidated balance
sheet
as of September 30, 2005 has been derived from the audited financial statements
as of such date. For a more complete understanding of EMCORE’s financial
position, operating results, risk factors and other matters, please refer
to
EMCORE's Annual Report on Form 10-K for the fiscal year ended September 30,
2005.
The
preparation of financial statements in conformity with US GAAP 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 reported period. Management bases estimates on historical
experience and on various assumptions about the future that are believed
to be
reasonable based on available information. EMCORE’s reported financial position
or results of operations may be materially different under changed conditions
or
when using different estimates and assumptions. In the event that estimates
or
assumptions prove to differ from actual results, adjustments are made in
subsequent periods to reflect more current information.
NOTE
2. Recent Accounting Pronouncements.
SFAS
No. 123(R)
-
Effective October 1, 2005, EMCORE adopted Statement of Financial Accounting
Standards (SFAS) No. 123(R), Share-Based
Payment (Revised 2004),
on a
modified prospective basis. As a result, EMCORE included stock-based
compensation expense in its results of operations for all periods presented
in
fiscal 2006, as more fully described in Note 3 to EMCORE’s condensed
consolidated financial statements.
SFAS
No. 151
-
Effective October 1, 2005, EMCORE adopted SFAS No. 151, Inventory
Costs, an amendment of ARB No. 43, Chapter 4.
SFAS
151 clarifies the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage). SFAS 151 requires
that
those items be recognized as current-period charges regardless of whether
they
meet the criterion of "so abnormal". In addition, it requires that allocation
of
fixed production overheads to the costs of conversion be based on the normal
capacity of the production facilities. The adoption of this pronouncement
did
not have a material impact on EMCORE’s financial statements.
SFAS
No. 154
-
Effective October 1, 2005, EMCORE adopted SFAS No. 154, Accounting
Changes and Error Corrections, a replacement of APB Opinion No. 20,
Accounting Changes,
and
Financial Accounting Standards Board (FASB) Statement No. 3, Reporting
Accounting Changes in Interim Financial Statements.
The
Statement applies to all voluntary changes in accounting principle, and changes
the requirements for accounting for and reporting of a change in accounting
principle. SFAS 154 requires retrospective application to prior periods’
financial statements of a voluntary change in accounting principle unless
it is
impracticable. SFAS 154 requires that a change in method of depreciation,
amortization, or depletion for long-lived, non-financial assets be accounted
for
as a change in accounting estimate that is affected by a change in accounting
principle. Opinion 20 previously required that such a change be reported
as a
change in accounting principle. The adoption of this pronouncement did not
have
a material impact on EMCORE’s financial statements.
FIN
47
-
Effective October 1, 2005, EMCORE adopted FASB Interpretation No. 47,
Accounting
for Conditional Asset Retirement Obligations, an Interpretation of FASB
Statement No. 143.
This
interpretation clarifies the timing of liability recognition for legal
obligations associated with the retirement of tangible long-lived assets
when
the timing and/or method of settlement of the obligations are conditional
on a
future event and where an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement obligation. The adoption of
this
pronouncement did not have a material impact on EMCORE’s financial statements.
FIN
48
- In
June 2006, the FASB issued Interpretation No. 48 (FIN 48),
Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement
No. 109.
FIN 48
clarifies the accounting for income taxes by prescribing the minimum recognition
threshold a tax position is required to meet before being recognized in the
financial statements. FIN 48 also provides guidance on derecognition,
measurement, classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN 48 applies to all tax positions related
to income taxes subject to FASB Statement No. 109,
Accounting for Income Taxes.
FIN 48
is effective for fiscal years beginning after December 15, 2006. Differences
between the amounts recognized in the statements of financial position prior
to
the adoption of FIN 48 and the amounts reported after adoption should be
accounted for as a cumulative-effect adjustment recorded to the beginning
balance of retained earnings. EMCORE does not believe the adoption of FIN
48 on
October 1, 2007 will have a material impact on its financial
statements.
EITF
No. 05-6
-
In
June
2005, the Emerging Issues Task Force (EITF) issued No. 05-6, Determining
the Amortization Period for Leasehold Improvements.
The
pronouncement requires that leasehold improvements acquired in a business
combination or purchased subsequent to the inception of the lease be amortized
over the lesser of the useful life of the asset or the lease term that includes
reasonably assured lease renewals as determined on the date of the acquisition
of the leasehold improvement. This pronouncement should be applied prospectively
and EMCORE adopted it during the first quarter of fiscal 2006. This
pronouncement did not have a material impact on the financial statements.
FSP
115-1
- In
November 2005, FASB issued Staff Position (FSP) 115-1, The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments,
which
provides guidance on determining when investments in certain debt and equity
securities are considered impaired, whether that impairment is
other-than-temporary, and on measuring such impairment loss. FSP 115-1 also
includes accounting considerations subsequent to the recognition of an
other-than-temporary impairment and requires certain disclosure about unrealized
losses that have not been recognized as other-than-temporary impairments.
FSP
115-1 is effective for annual reporting periods beginning after December
15,
2005. EMCORE does not believe the adoption of FSP 115-1 on October 1, 2006
will
have a material impact on its financial statements.
NOTE
3. Stock-based Compensation.
Stock
Options
EMCORE
has stock option plans to provide long-term incentives to eligible employees,
officers, and directors in the form of stock options. Most of the stock
options vest and become exercisable over four to five years and have ten-year
terms. EMCORE maintains two incentive stock option plans: the 2000 Stock
Option
Plan (2000 Plan), and the 1995 Incentive and Non-Statutory Stock Option Plan
(1995 Plan and, together with the 2000 Plan, the Option Plans). The 1995
Plan
authorizes the grant of options to purchase up to 2,744,118 shares of EMCORE's
common stock. As of June 30, 2006, no options were available for issuance
under
the 1995 Plan. The 2000 Plan authorizes the grant of options to purchase
up to
9,350,000 shares of EMCORE's common stock. As of June 30, 2006, 1,433,874
options were available for issuance under the 2000 Plan. Certain options
under
the Option Plans are intended to qualify as incentive stock options pursuant
to
Section 422A of the Internal Revenue Code.
During
the three and nine months ended June 30, 2006, 211,750 and 1,740,707 options
were granted pursuant to the 2000 Plan, respectively. All options were issued
at
the closing market price on the date of grant. The stock option issue prices
for
the three months ended June 30, 2006 ranged from $7.97 to $12.57 per share.
The
stock option issue prices for the nine months ended June 30, 2006 ranged
from
$5.18 to $12.57 per share. These options are subject to a five-year vesting
period for new-hire grants and a four-year vesting period for retention grants,
and have a contractual life of ten years. The weighted average grant date
fair
value for the options issued during the three and nine months ended June
30,
2006 was $7.89 and $6.33, respectively. No executive officers received any
stock
option grants during fiscal 2006. As of June 30, 2006, 2,408,896 options
were exercisable. EMCORE issues new shares of common stock upon exercise
of
stock options.
The
following table summarizes the activity under the Option Plans:
|
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual Life
(in
years)
|
|
|
Aggregate
Intrinsic Value
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
as of September 30, 2005
|
|
|
6,166,226
|
|
$
|
4.16
|
|
|
|
|
|
||
Granted
|
|
|
1,740,707
|
7.93
|
|
|
|
|
|
||||
Exercised
|
|
|
(1,524,542
|
)
|
3.95
|
|
|
|
|
|
|||
Cancelled
|
|
|
(222,409
|
)
|
|
3.46
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|||||
Outstanding
as of June 30, 2006
|
|
|
6,159,982
|
$
|
5.30
|
|
|
7.46
|
|
$
|
29,345
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Exercisable
as of June 30, 2006
|
|
|
2,408,896
|
$
|
5.53
|
|
|
5.36
|
|
$
|
12,629
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Non-vested
as of June 30, 2006
|
|
|
3,751,086
|
$
|
5.16
|
|
|
8.81
|
|
$
|
16,716
|
|
As
of
June 30, 2006 there was $12.7 million of total unrecognized compensation
expense
related to non-vested share-based compensation arrangements granted under
the
Option Plans. This expense is expected to be recognized over a weighted average
life of 3.3 years. The total intrinsic value of options exercised during
the
three and nine months ended June 30, 2006 was $1.6 million and $7.4 million,
respectively. The total fair value of shares vested during the three and
nine
months ended June 30, 2006 was $0.9 million and $2.6 million,
respectively. EMCORE received $0.6 million and $6.0 million in cash from
the exercise of stock options during the three and nine months ended June
30,
2006, respectively.
At
June
30, 2006, stock options outstanding were as follows:
Exercise
Price
|
|
|
Options
Outstanding
|
|
|
Weighted
Average Remaining
Contractual
Life (in years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
<$1
|
|
|
1,920
|
1.43
|
$0.23
|
|
||||
>$1
to <$5
|
|
|
3,572,590
|
7.39
|
2.70
|
|
||||
>$5
to <$10
|
|
|
2,332,582
|
7.92
|
7.60
|
|
||||
>$10
|
|
|
252,890
|
4.42
|
20.88
|
|
||||
|
|
|
|
|||||||
|
|
|
6,159,982
|
7.46
|
$5.30
|
|
At
June
30, 2006, stock options exercisable were as follows:
Exercise
Price
|
|
|
Options
Exercisable
|
|
|
Weighted
Average Remaining
Contractual
Life (in years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
<$1
|
|
|
1,920
|
1.43
|
$0.23
|
|
||||
>$1
to <$5
|
|
|
1,504,644
|
6.34
|
2.37
|
|
||||
>$5
to <$10
|
|
|
675,992
|
3.73
|
7.03
|
|
||||
>$10
|
|
|
226,340
|
3.79
|
22.07
|
|
||||
|
|
|
|
|||||||
|
|
|
2,408,896
|
5.36
|
$5.53
|
|
Employee
Stock Purchase Plan
In
fiscal
2000, EMCORE adopted an Employee Stock Purchase Plan (ESPP). The ESPP provides
employees of EMCORE an opportunity to purchase common stock through payroll
deductions. The ESPP is a 6-month duration plan, with new participation periods
beginning the first business day of January and July of each year. The purchase
price is set at 85% of the market price for EMCORE's common stock on either
the
first or last day of the participation period, whichever is lower and
contributions are limited to 10% of an employee's compensation. The number
of
shares of common stock available for issuance under the ESPP is 2,000,000
shares. The amount of shares issued for the ESPP are as
follows:
|
|
|
Number
of Shares
|
|
|
|
|
|
|
Amount
of shares reserved for the ESPP
|
|
|
2,000,000
|
|
|
|
|
|
|
Number
of shares issued in December 2000 for calendar year 2000
|
|
|
(16,534
|
)
|
Number
of shares issued in December 2001 for calendar year 2001
|
|
|
(48,279
|
)
|
Number
of shares issued in December 2002 for calendar year 2002
|
|
|
(89,180
|
)
|
Number
of shares issued in December 2003 for calendar year 2003
|
|
|
(244,166
|
)
|
Number
of shares issued in June 2004 for first half of calendar year
2004
|
|
|
(166,507
|
)
|
Number
of shares issued in December 2004 for second half of calendar year
2004
|
|
|
(167,546
|
)
|
Number
of shares issued in June 2005 for first half of calendar year
2005
|
|
|
(174,169
|
)
|
Number
of shares issued in December 2005 for second half of calendar year
2005
|
(93,619
|
)
|
||
Number
of shares issued in June 2006 for first half of calendar year
2006
|
|
|
(123,857
|
)
|
|
|
|
|
|
Remaining
shares reserved for the ESPP as of June 30, 2006
|
|
|
876,143
|
|
Future
Issuances
As
of June 30, 2006, EMCORE has reserved a total of 20,841,970 shares of its
common stock for future issuances as follows:
|
|
|
Number
of Shares
|
|
|
|
|
|
|
For
exercise of outstanding warrants to purchase common stock
|
|
|
31,535
|
|
For
exercise of outstanding common stock options
|
|
|
6,159,982
|
|
For
conversion of subordinated notes
|
|
|
12,016,930
|
|
For
future issuances to employees under the ESPP plan
|
|
|
876,143
|
|
For
future common stock option awards
|
|
|
1,433,874
|
|
|
|
|
|
|
Total
reserved
|
|
|
20,518,464
|
|
Valuation
of Stock-Based Compensation
Effective
October 1, 2005, EMCORE adopted SFAS 123(R), using the modified prospective
application transition method, which establishes accounting for stock-based
awards exchanged for employee services. Accordingly, stock-based compensation
expense is measured at grant date, based on the fair value of the award,
over
the requisite service period. EMCORE previously applied Accounting Principles
Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees,
and
related Interpretations, as permitted by SFAS No. 123, Accounting
for Stock-Based Compensation.
Periods
prior to the adoption of SFAS 123(R)
- Prior
to the adoption of SFAS 123(R), EMCORE provided the disclosures required
under
SFAS No. 123 as amended by SFAS No. 148, Accounting
for Stock-Based Compensation - Transition and Disclosures.
EMCORE
did not recognize stock-based compensation expense in its statement of
operations for periods prior to the adoption of SFAS 123(R) since options
granted had an exercise price equal to the market value of the underlying
common
stock on the date of grant. The following table illustrates the effect on
net
loss and net loss per share as if EMCORE had applied the fair value recognition
provisions of SFAS 123(R) to options granted under EMCORE’s stock-based
compensation plans prior to the adoption. For purposes of this pro forma
disclosure, the value of the options was estimated using a Black-Scholes
option
pricing formula and amortized on a straight-line basis over the respective
vesting periods of the awards. Disclosures for the three months and nine
months
ended June 30, 2006 are not presented because stock-based compensation was
accounted for under SFAS 123(R)’s fair-value method during this
period.
(in thousands,
except per share amounts)
|
|
|
Three
Months Ended
June
30, 2005
|
|
|
Nine
Months
Ended
June
30, 2005
|
|
|
|
|
|
|
|
||
Reported
net loss
|
|
$
|
(6,915
|
)
|
$
|
(8,497
|
)
|
Less:
|
|
|
|
|
|
|
|
Pro
forma stock-based compensation expense determined under the fair
value
based method, net of tax
|
|
|
(788
|
)
|
|
(2,132
|
)
|
|
|
|
|
|
|
|
|
Pro
forma net loss
|
|
$
|
(7,703
|
)
|
$
|
(10,629
|
)
|
|
|
|
|
|
|
|
|
Reported
net loss per basic and diluted share
|
|
$
|
(0.15
|
)
|
$
|
(0.18
|
)
|
|
|
|
|
|
|
|
|
Pro
forma net loss per basic and diluted share
|
|
$
|
(0.16
|
)
|
$
|
(0.23
|
)
|
Adoption
of SFAS 123(R)
- During
the three and nine months ended June 30, 2006, EMCORE recorded stock-based
compensation expense totaling $1.0 million and $3.1 million, respectively.
As
required by SFAS 123(R), management has made an estimate of expected forfeitures
and is recognizing compensation expense only for those equity awards expected
to
vest. The effect of recording stock-based compensation expense for the three
and
nine months ended June 30, 2006 was as follows:
(in thousands,
except per share amounts)
|
|
|
Three
Months Ended
June
30, 2006
|
|
|
Nine
Months
Ended
June
30, 2006
|
|
|
|
|
|
|
|
||
Stock-based
compensation expense by award type:
|
|
|
|
|
|
|
|
Employee
stock options
|
|
$
|
(904
|
)
|
$
|
(2,557
|
)
|
Employee
stock purchase plan
|
|
|
(119
|
)
|
|
(529
|
)
|
|
|
|
|
||||
Total
stock-based compensation expense
|
|
$
|
(1,023
|
)
|
$
|
(3,086
|
)
|
|
|
|
|
||||
Net
effect on net loss per basic and diluted share
|
|
$
|
(0.02
|
)
|
$
|
(0.06
|
)
|
The
stock-based compensation expense for the three and nine months ended June
30,
2006 was distributed as follows:
Stock-Based
Compensation Expense by Segment
For
the three months ended June 30, 2006
(in
thousands)
|
|
|
COGS
|
|
|
SG&A
|
|
|
R&D
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
||||
Fiber
Optics
|
|
$
|
202
|
|
$
|
257
|
|
$
|
255
|
|
$
|
714
|
|
Photovoltaics
|
|
|
52
|
117
|
44
|
213
|
|
||||||
Electronic
Materials and Devices
|
|
|
41
|
28
|
27
|
96
|
|
||||||
Total
stock-based compensation expense
|
|
$
|
295
|
|
$
|
402
|
|
$
|
326
|
|
$
|
1,023
|
|
Stock-Based
Compensation Expense by Segment
For
the nine months ended June 30, 2006
(in
thousands)
|
|
|
COGS
|
|
|
SG&A
|
|
|
R&D
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
||||
Fiber
Optics
|
|
$
|
494
|
|
$
|
1,014
|
|
$
|
677
|
|
$
|
2,185
|
|
Photovoltaics
|
125
|
409
|
89
|
623
|
|
||||||||
Electronic
Materials and Devices
|
92
|
115
|
71
|
278
|
|
||||||||
Total
stock-based compensation expense
|
|
$
|
711
|
|
$
|
1,538
|
|
$
|
837
|
|
$
|
3,086
|
|
Valuation
Assumptions
EMCORE
estimated the fair value of stock options using a Black-Scholes model. The
fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option valuation model and the straight-line attribution approach
using the following weighted-average assumptions:
Stock
Option Plans
|
|
Three
Months Ended
June
30,
|
|
Nine
Months Ended
June
30,
|
|
||||||||
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Expected
dividend yield
|
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
Expected
stock price volatility
|
|
|
97
|
%
|
|
106
|
%
|
|
97
|
%
|
|
106
|
%
|
Risk-free
interest rate
|
|
|
4.7
|
%
|
|
3.9
|
%
|
|
4.7
|
%
|
|
3.8
|
%
|
Expected
term (in years)
|
|
|
6
|
|
|
5
|
|
|
6
|
|
|
5
|
|
Expected
Dividend Yield: The
Black-Scholes valuation model calls for a single expected dividend yield
as an
input. EMCORE has not issued any dividends.
Expected
Stock Price Volatility: The
fair
values of stock based payments were valued using the Black-Scholes valuation
method with a volatility factor based on EMCORE’s historical stock prices.
Risk-Free
Interest Rate:
EMCORE
bases the risk-free interest rate used in the Black-Scholes valuation method
on
the implied yield currently available on U.S. Treasury zero-coupon issues
with
an equivalent remaining term. Where the expected term of EMCORE’s stock-based
awards do not correspond with the terms for which interest rates are quoted,
EMCORE performed a straight-line interpolation to determine the rate from
the
available maturities.
Expected
Term: EMCORE’s
expected term represents the period that EMCORE’s stock-based awards are
expected to be outstanding and was determined based on historical experience
of
similar awards, giving consideration to the contractual terms of the stock-based
awards, vesting schedules and expectations of future employee behavior as
influenced by changes to the terms of its stock-based awards.
Estimated
Pre-vesting Forfeitures: When
estimating forfeitures, EMCORE considers voluntary termination behavior as
well
as future workforce reduction programs.
NOTE
4. Investments.
In
January 1999, General Electric Lighting and EMCORE formed GELcore, a joint
venture to address the solid-state lighting market with high-brightness
light-emitting diode-based (HB-LED) lighting systems. 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. EMCORE has a 49%
non-controlling interest in the GELcore venture, and accounts for this
investment using the equity method of accounting. As of June 30, 2006, EMCORE's
net investment in this joint venture amounted to approximately $11.4
million.
In
April
2005, EMCORE divested product technology focused on gallium nitride (GaN)-based
power electronic devices for the power device industry. The new company,
Velox Semiconductor Corporation (Velox), raised $6.0 million from various
venture capital partnerships. Five EMCORE employees transferred to Velox
as full-time personnel and EMCORE contributed intellectual property and
equipment receiving a 19.2% stake in Velox. For the three months ended
December 31, 2005 and March 31, 2006, EMCORE had recognized a loss of $0.2
million and $0.1 million, respectively, related to Velox, which was recorded
as
a component of other income and expenses. During fiscal 2006, EMCORE
reduced its voting percentage and relinquished its Velox Board seat, and
its
right to a Velox Board seat. As a result of these modifications, EMCORE
now reports its investment in Velox under the cost method of accounting rather
than the equity method of accounting. Under the cost method of accounting,
the
Velox investment will be carried at cost and adjusted only for
other-than-temporary declines in fair value, distribution of earnings and
additional investments. As of June 30, 2006, EMCORE's net investment in Velox
amounted to approximately $1.0 million.
NOTE
5. Acquisitions.
On
January 12, 2006, EMCORE entered into an Agreement and Plan of Merger (Merger
Agreement) with K2 Optronics, Inc. (K2), a privately held company located
in
Sunnyvale, CA and EMCORE Optoelectronics Acquisition Corporation, a wholly
owned
subsidiary of EMCORE (Merger Sub). Pursuant to the Merger Agreement,
EMCORE acquired K2 in a transaction in which Merger Sub merged with and into
K2,
with K2 becoming a wholly owned subsidiary of EMCORE. EMCORE, an investor
in K2, paid approximately $4.1 million in EMCORE common stock, and paid
approximately $0.7 million in transaction-related expenses, to acquire the
remaining part of K2 that EMCORE did not already own. Prior to the transaction
EMCORE owned a 13.6% equity interest in K2 as a result of a $1.0 million
investment that EMCORE made in K2 in October 2004. In addition, K2 was a
supplier to EMCORE of analog external cavity lasers for CATV applications.
In
connection with the merger, EMCORE issued a total of 548,688 shares of EMCORE
common stock, no par value, (based on a 20-trading day weighted average price),
to K2’s shareholders. EMCORE has filed a shelf registration statement with
respect to the resale of the EMCORE shares on July 7, 2006. Including EMCORE’s
initial $1.0 million investment in K2, the
purchase price, on a preliminary basis, was allocated as follows: $1.1 million
in cash, $0.1 million in other current assets, $0.8 million in fixed assets,
$1.5 million in intellectual property, $2.4 million in accounts payable and
accrued liabilities, $0.8 million in debt and $4.8 million in residual goodwill.
Furthermore, in connection with this K2 acquisition, EMCORE and JDS Uniphase
(JDSU) amended their May 2005 Purchase Agreement relating to EMCORE’s
acquisition of JDSU’s analog CATV and RF over fiber specialty businesses.
As a result, JDSU retained its K2 investment (on a pre-merger basis), and
repaid
$0.5 million to EMCORE.
On
November 8, 2005, EMCORE entered into an Asset Purchase Agreement with
Phasebridge, Inc., a privately held company located in Pasadena, California.
In
connection with the asset purchase, based on a 10-trading day weighted average
price, EMCORE issued 128,205 shares of EMCORE common stock, no par value,
that
were valued in the transaction at $0.7 million. The acquisition included
Phasebridge’s products, technical and engineering staff, certain assets and
intellectual properties and technologies. On a preliminary basis, the purchase
price was allocated as follows: $0.1 million in fixed assets, $0.7 million
in
intellectual property and $0.1 million in accrued liabilities.
On
December 18, 2005, EMCORE entered into an Asset Purchase Agreement with Force,
Inc., a privately held company located in Christiansburg, Virginia. In
connection with the asset purchase, EMCORE issued 240,000 shares of EMCORE
common stock, no par value, with a market value of $1.6 million at the
measurement date and $0.5 million in cash. The acquisition included Force’s
fiber optic transport and video broadcast products, technical and engineering
staff, certain assets and intellectual properties and technologies. On a
preliminary basis, the purchase price was allocated as follows: $0.4 million
in
accounts receivable, $0.8 million in inventory, $0.2 million in fixed assets,
$1.2 million in intellectual property, $1.3 million in accounts payable and
accrued liabilities and $0.8 million in residual goodwill.
These
transactions were accounted for as purchases in accordance with SFAS
No. 141, Business
Combinations;
therefore, the tangible assets acquired were recorded at fair value on the
acquisition date. These acquisitions were not significant on a pro-forma
basis,
and therefore, pro-forma financial statements are not provided. The operating
results of the businesses acquired are included in the accompanying consolidated
statement of operations from the date of acquisition. The primary areas of
the
purchase price allocations that are not yet finalized relate to the valuation
of
accrued liabilities, intellectual property, and residual goodwill. The acquired
businesses are part of EMCORE's Fiber Optics operating segment.
NOTE
6. Discontinued Operations.
In
November 2003, EMCORE sold its TurboDisc capital equipment business in an
asset
sale to a subsidiary of Veeco Instruments Inc. (Veeco). The selling price
was
$60.0 million in cash at closing, with a potential additional earn-out up
to
$20.0 million over the next two years, calculated based on the net sales
of
TurboDisc products. In March 2005, EMCORE received $13.2 million of earn-out
payment from Veeco in connection with its first year of net sales of TurboDisc
products. After offsetting this receipt against expenses related to the
discontinued operation, EMCORE recorded a net gain from the disposal of
discontinued operations of $12.5 million. In March 2006, EMCORE earned $2.0
million as a final earn-out payment from Veeco in connection with Veeco’s second
year of net sales of TurboDisc products. The cumulative additional
earn-out totaled $15.2 million or 76% of the maximum available payout of
$20.0
million.
NOTE
7. Receivables.
Accounts
receivable consisted of the following:
Accounts
Receivable, net
(in
thousands)
|
|
|
As
of
June
30,
2006
|
|
|
As
of
September
30,
2005
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
$
|
25,977
|
|
$
|
21,721
|
|
Accounts
receivable - unbilled
|
|
|
1,732
|
|
|
1,240
|
|
Subtotal
|
|
|
27,709
|
|
|
22,961
|
|
Allowance
for doubtful accounts
|
|
|
(321
|
)
|
|
(328
|
)
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
27,388
|
|
$
|
22,633
|
|
In
September 2005, EMCORE entered into a non-recourse receivables purchase
agreement (AR Agreement) with Silicon Valley Bank (SVBank). Under the
terms of the AR Agreement, EMCORE from time to time may sell, without recourse,
certain account receivables to SVBank up to a maximum aggregate outstanding
amount of $20.0 million. The AR Agreement expires on December 31, 2006,
unless the term is extended by mutual agreement by all parties. In June 2006
and
September 2005, EMCORE sold approximately $6.5 million and $2.2 million of
account receivables to SVBank, respectively.
Receivables
from related parties consisted of the following:
Receivables,
Related Parties
(in
thousands)
|
|
|
As
of
June
30,
2006
|
|
|
As
of
September
30,
2005
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
GELcore-related
|
|
$
|
200
|
|
$
|
185
|
|
Velox-related
|
|
|
282
|
|
|
249
|
|
Employee
loans
|
|
|
-
|
|
|
3,000
|
|
Employee
loans - interest portion
|
|
|
-
|
|
|
763
|
|
Subtotal
|
|
|
482
|
|
|
4,197
|
|
|
|
|
|
|
|
||
Long-term
assets:
|
|
|
|
|
|
|
|
Employee
loans
|
|
|
169
|
|
|
169
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
651
|
|
$
|
4,366
|
|
Employee
Loans
From
time
to time, prior to July 2002, EMCORE loaned money to certain of its executive
officers and directors. Pursuant to due authorization from EMCORE's Board
of
Directors, EMCORE loaned $3.0 million to Mr. Reuben Richards, the Chief
Executive Officer in February 2001 (Note). The Note matured on February 22,
2006
and bore interest compounded at a rate of (a) 5.18% per annum through May
23,
2002 and (b) 4.99% from May 24, 2002 through maturity. All interest was payable
at maturity. On February 13, 2006, Mr. Richards tendered 139,485 shares of
EMCORE common stock in partial payment of the Note. Principal plus accrued
interest on the Note totaled approximately $3.83 million. The Compensation
Committee of EMCORE’s Board of Directors specifically approved the tender
of shares, as permitted by the Note, at the price of $8.25 per share, which
was
the closing price of EMCORE common stock on February 13, 2006. On February
28,
2006, the Compensation Committee resolved to forgive the remaining balance
of
the Note (approximately $2.7 million), effective as of March 10, 2006. Mr.
Richards’ tender of common stock on February 13, 2006 was accepted as full
payment and satisfaction of the Note, including principal and accrued
interest. Additionally, the Compensation Committee resolved to accelerate
and vest the final tranche of each of the incentive stock option grants made
in
fiscal 2004 and 2005 to Mr. Richards, which constitute a combined accelerated
vesting of 111,250 shares. In considering this matter, the Compensation
Committee carefully considered Mr. Richards’ past performance, including the
recent appreciation in the stock price and EMCORE’s improved financial
performance, the facts and circumstances surrounding the loan, Mr. Richards’
current compensation, Mr. Richards’ willingness to repay a portion of the Note
and all resulting taxes totaling $1.3 million, and the desire to retain Mr.
Richards’ continued service to EMCORE. EMCORE recorded a one-time, non-cash
charge of approximately $2.7 million in March 2006 for the partial forgiveness
of the Note, plus a non-cash charge of approximately $0.3 million in stock-based
compensation expense under SFAS 123(R) relating to the accelerated ISO grants.
In
addition, pursuant to due authorization of EMCORE's Board of Directors, EMCORE
also loaned $82,000 to the Chief Financial Officer (CFO) of EMCORE in December
1995. This loan does not bear interest and provides for offset of the loan
via
bonuses payable to the CFO over a period of up to 25 years. The remaining
related party receivable balance of $87,260 relates to multiple loans from
EMCORE to an officer (who is not an executive officer) that were made during
1997 through 2000 and are payable on demand.
NOTE
8. Inventory, net.
Inventory
is stated at the lower of cost or market, with cost being determined using
the
standard cost method that includes material, labor and manufacturing overhead
costs. Inventory consisted of the following:
Inventory,
net
(in
thousands)
|
|
|
As
of
June
30,
2006
|
|
|
As
of
September
30,
2005
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
18,430
|
$
|
15,482
|
|
|
Work-in-process
|
|
|
4,323
|
|
5,101
|
|
|
Finished
goods
|
|
|
8,930
|
|
5,911
|
|
|
Subtotal
|
|
|
31,683
|
|
26,494
|
|
|
|
|
|
|
|
|||
Less:
reserves
|
|
|
(6,743
|
)
|
|
(8,146
|
)
|
|
|
|
|
|
|
||
Total
|
|
$
|
24,940
|
$
|
18,348
|
|
NOTE
9. Property, Plant and Equipment, net.
Property,
plant and equipment consisted of the following:
Property,
Plant and Equipment, net
(in
thousands)
|
|
|
As
of
June
30,
2006
|
|
|
As
of
September
30,
2005
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
1,502
|
$
|
1,502
|
|
|
Building
and improvements
|
|
|
39,730
|
|
37,944
|
|
|
Equipment
|
|
|
71,844
|
|
71,854
|
|
|
Furniture
and fixtures
|
|
|
5,639
|
|
5,002
|
|
|
Leasehold
improvements
|
|
|
3,170
|
|
2,935
|
|
|
Construction
in progress
|
|
|
8,618
|
|
3,390
|
|
|
Property
and equipment under capital lease
|
|
|
466
|
|
466
|
|
|
Subtotal
|
|
|
130,969
|
|
123,093
|
|
|
|
|
|
|
|
|
||
Less:
accumulated depreciation and amortization
|
|
|
(73,972
|
)
|
|
(66,136
|
)
|
|
|
|
|
|
|
||
Total
|
|
$
|
56,997
|
$
|
56,957
|
|
NOTE
10. Goodwill and Intangible Assets, net.
The
following table sets forth changes in the carrying value of goodwill by
reportable segment:
(in
thousands)
|
|
|
Fiber
Optics
|
|
|
Photovoltaics
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of September 30, 2005
|
|
$
|
14,259
|
|
$
|
20,384
|
|
$
|
34,643
|
|
Acquisition
- Force Inc.
|
|
|
800
|
|
|
-
|
|
|
800
|
|
Acquisition
- JDSU CATV purchase price adjustment
|
20
|
-
|
20
|
|||||||
Acquisition
- K2 Optronics
|
|
|
4,750
|
|
|
-
|
|
|
4,750
|
|
Acquisition
- Earn out payments
|
|
|
263
|
|
|
-
|
|
|
263
|
|
|
|
|
|
|
|
|
|
|
||
Balance
as of June 30, 2006
|
|
$
|
20,092
|
|
$
|
20,384
|
|
$
|
40,476
|
|
The
following table sets forth changes in the carrying value of intangible assets
by
reportable segment:
(in
thousands)
|
|
As
of June 30, 2006
|
As
of September 30, 2005
|
||||||||||||||||
|
|
|
Gross
Assets
|
|
|
Accumulated
Amortization
|
|
|
Net
Assets
|
|
|
Gross
Assets
|
|
|
Accumulated
Amortization
|
|
|
Net
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiber
Optics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
495
|
|
$
|
(192)
|
$
|
303
|
|
$
|
368
|
|
$
|
(136)
|
$
|
232
|
|
||
Ortel
acquired IP
|
|
|
3,274
|
|
|
(2,232)
|
|
1,042
|
|
|
3,274
|
|
|
(1,746)
|
|
1,528
|
|
||
JDSU
acquired IP
|
|
|
1,040
|
|
|
(264)
|
|
776
|
|
|
1,650
|
|
|
(110)
|
|
1,540
|
|
||
Alvesta
acquired IP
|
|
|
193
|
|
|
(138)
|
|
55
|
|
|
193
|
|
|
(107)
|
|
86
|
|
||
Molex
acquired IP
|
|
|
558
|
|
|
(307)
|
|
251
|
|
|
558
|
|
|
(223)
|
|
335
|
|
||
Corona
acquired IP
|
|
|
1,000
|
|
|
(417)
|
|
583
|
|
|
1,000
|
|
|
(267)
|
|
733
|
|
||
Phasebridge
acquired IP
|
|
|
700
|
|
|
(108)
|
|
592
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Force
acquired IP
|
|
|
1,200
|
|
|
(161)
|
|
1,039
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
K2
Optronics acquired IP
|
|
|
1,500
|
|
|
(141)
|
|
1,359
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Subtotal
|
|
|
9,960
|
|
|
(3,960)
|
|
6,000
|
|
|
7,043
|
|
|
(2,589)
|
|
4,454
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Photovoltaics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Patents
|
|
|
352
|
|
|
(144)
|
|
208
|
|
|
271
|
|
|
(101)
|
|
170
|
|
||
Tecstar
acquired IP
|
|
|
1,900
|
|
|
(1,663)
|
|
237
|
|
|
1,900
|
|
|
(1,350)
|
|
550
|
|
||
Subtotal
|
|
|
2,252
|
|
|
(1,807)
|
|
445
|
|
|
2,171
|
|
|
(1,451)
|
|
720
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Electronic
Materials & Devices:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Patents
|
|
|
433
|
|
|
(254)
|
|
179
|
|
|
390
|
|
|
(217)
|
|
173
|
|
||
Total
|
|
$
|
12,645
|
|
$
|
(6,021)
|
$
|
6,624
|
|
$
|
9,604
|
|
$
|
(4,257)
|
$
|
5,347
|
|
Based
on
the carrying amount of the intangible assets, the estimated future amortization
expense is as follows:
Amortization
Expense
(in
thousands)
|
|
|
|
|
|
|
|
|
|
Period
ending:
|
|
|
|
|
3-month
period ended September 30, 2006
|
|
$
|
644
|
|
Year
ended September 30, 2007
|
|
|
2,174
|
|
Year
ended September 30, 2008
|
|
|
1,505
|
|
Year
ended September 30, 2009
|
|
|
1,104
|
|
Year
ended September 30, 2010
|
|
|
855
|
|
Thereafter
|
|
|
342
|
|
Total
future amortization expense
|
|
$
|
6,624
|
|
NOTE
11. Accrued Expenses and Other Current Liabilities.
The
components of accrued expenses and other current liabilities consisted of
the
following:
Accrued
Expenses and Other Current Liabilities
(in
thousands)
|
|
|
As
of
June
30,
2006
|
|
|
As
of
September
30,
2005
|
|
|
|
|
|
|
|
|
|
Compensation-related
|
|
$
|
4,909
|
|
$
|
4,974
|
|
Interest
|
|
|
619
|
|
|
1,814
|
|
Warranty
|
|
|
1,072
|
|
|
1,268
|
|
Deferred
revenue and customer deposits
|
|
|
697
|
|
|
1,539
|
|
Professional
fees
|
|
|
671
|
|
|
1,082
|
|
Royalty
|
|
|
475
|
|
|
551
|
|
Acquisition-related
|
|
|
2,351
|
|
|
5,006
|
|
Self
insurance
|
|
|
817
|
|
|
646
|
|
Other
|
|
|
1,929
|
|
|
2,198
|
|
Total
|
|
$
|
13,540
|
|
$
|
19,078
|
|
Product
Warranty Reserves.
EMCORE
provides its customers with limited rights of return for non-conforming
shipments and warranty claims for certain products. In accordance with FASB
Interpretation No. 45, Guarantor’s
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others,
EMCORE
makes estimates using historical experience rates as a percentage of revenue
and
accrues estimated warranty expense as a cost of revenue. Warranty
obligations are estimated based on historical experience of known product
failure rates, use of materials to repair or replace defective products and
service delivery costs incurred in correcting product failures. In addition,
from time to time, specific warranty accruals may be made if unforeseen
technical problems arise. Should actual experience relative to these factors
differ from estimates, additional warranty reserves may be required.
Alternatively, if more reserves were estimated than needed, a portion of
such
provisions may be reversed in future periods. The following table sets forth
changes in the product warranty accrual account:
Warranty
Reserve
(in
thousands)
|
|
|
|
|
|
|
|
|
|
Balance
as of October 1, 2005
|
|
$
|
1,268
|
|
Accruals
for warranty expense
|
|
|
192
|
|
Reversals
due to use or expiration of liability
|
|
|
(388
|
)
|
Balance
as of June 30, 2006
|
|
$
|
1,072
|
|
NOTE
12. Convertible Subordinated Notes.
In
May
2001, EMCORE issued $175.0 million aggregate principal amount of its 5%
convertible subordinated notes due in May 2006 (2006 Notes). In December
2002,
EMCORE purchased $13.2 million principal amount of the 2006 Notes at prevailing
market prices for an aggregate of approximately $6.3 million, resulting in
a
gain of approximately $6.6 million after netting unamortized debt issuance
costs
of approximately $0.3 million. In February 2004, EMCORE exchanged approximately
$146.0 million, or 90.2%, of its remaining 2006 Notes for approximately $80.3
million aggregate principal amount of new 5% Convertible Senior Subordinated
Notes due May 15, 2011 (2011 Notes) and approximately 7.7 million shares
of
EMCORE common stock. Interest on the 2011 Notes is payable in arrears
semiannually on May 15 and November 15 of each year. The notes are convertible
into EMCORE common stock at a conversion price of $8.06 per share, subject
to
adjustment under customary anti-dilutive provisions. They also are redeemable
should EMCORE's common stock price reach $12.09 per share. As a result of
this
transaction, EMCORE reduced debt by approximately $65.7 million, and recorded
a
gain from early debt extinguishment of approximately $12.3 million.
In
November 2005, EMCORE exchanged $14,425,000 aggregate principal amount of
EMCORE’s 2006 Notes for $16,580,460 aggregate principal amount of newly issued
Convertible Senior Subordinated Notes due May 15, 2011 (New 2011 Notes) pursuant
to an Exchange Agreement (Agreement) with Alexandra Global Master Fund Ltd.
(Alexandra). The terms of the New 2011 Notes are identical in all
material respects to EMCORE’s 2011 Notes. The New 2011 Notes are
ranked pari passu with the existing 2011 Notes. The New 2011 Notes will be
convertible at any time prior to maturity, unless previously redeemed or
repurchased by EMCORE, into the shares of EMCORE common stock, no par value,
at
the conversion rate of 124.0695 shares of common stock per $1,000 principal
amount. The effective conversion rate is $8.06 per share of common stock,
subject to adjustment under customary anti-dilutive provisions. They also
are
redeemable should EMCORE's common stock price reach $12.09 per share. As a
result of this transaction, EMCORE recognized a non-cash loss of approximately
$1.1 million in the first quarter of fiscal 2006. EMCORE will also incur
an
additional non-cash loss of approximately $1.1 million over the life of the
subordinated notes issued to Alexandra, which will be charged as interest
expense. Furthermore, the 2006 Notes exchanged by Alexandra represented
approximately 91.4% of the $15,775,000 total amount of existing 2006 Notes
outstanding at the time of the transaction. EMCORE paid the remaining
$1,350,000 of 2006 Notes on the May 15, 2006 maturity date.
NOTE
13. Commitments and Contingencies.
EMCORE
is
involved in lawsuits and proceedings that arise in the ordinary course of
business. There are no matters pending that we expect to be material in relation
to our business, consolidated financial condition, results of operations,
or
cash flows.
EMCORE
guarantees 49% of any amounts borrowed under GELcore’s revolving credit line. As
of June 30, 2006, GELcore’s outstanding borrowings were $4.9 million. The
maximum borrowing currently permitted under the credit line is approximately
$10.0 million.
NOTE
14. Segment Data and Related Information.
EMCORE
has three operating segments: Fiber Optics, Photovoltaics, and Electronic
Materials and Devices:
·
EMCORE's
Fiber Optics revenues are derived primarily from sales of optical components
and
subsystems for cable television (CATV), fiber to the premise (FTTP), enterprise
routers and switches, telecom grooming switches, core routers, high performance
servers, supercomputers, and satellite communications data links.
·
EMCORE's
Photovoltaics revenues are derived primarily from the sales of solar power
conversion products, including solar cells, covered interconnect solar cells,
and solar panels.
·
EMCORE's
Electronic Materials and Devices revenues are derived primarily from sales
of
wireless components, such as radio frequency (RF) materials including
hetero-junction bipolar transistors and enhancement-mode pseudomorphic high
electron mobility transistors, GaN materials for wireless base stations,
and
process development technology.
EMCORE
evaluates its reportable segments in accordance with SFAS No. 131, Disclosures
About Segments of an Enterprise and Related Information. EMCORE’s
Chief Executive Officer is EMCORE’s Chief Operating Decision Maker pursuant to
SFAS 131, and he allocates resources to segments based on their business
prospects, competitive factors, net revenue, operating results and other
non-GAAP financial ratios.
The
following tables set forth the revenues and percentage of total revenues
attributable to each of EMCORE's operating segments for the three and nine
months ended June 30, 2006 and 2005.
Revenues
by Segment
(in
thousands)
|
|
Three
months ended
June
30, 2006
|
Three
months ended
June
30, 2005
|
||||||||||
|
|
|
Revenue
|
|
|
%
of Revenue
|
|
|
Revenue
|
|
|
%
of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
||||
Fiber
Optics
|
|
$
|
25,968
|
|
|
61.9
|
%
|
$
|
21,109
|
|
63.5
|
%
|
|
Photovoltaics
|
|
|
10,354
|
|
|
24.7
|
|
|
8,807
|
|
26.5
|
|
|
Electronic
Materials and Devices
|
|
|
5,632
|
|
|
13.4
|
|
|
3,318
|
|
10.0
|
|
|
Total
revenues
|
|
$
|
41,954
|
|
|
100.0
|
%
|
$
|
33,234
|
|
100.0
|
%
|
Revenues
by Segment
(in
thousands)
|
|
Nine
months ended
June
30, 2006
|
Nine
months ended
June
30, 2005
|
||||||||||
|
|
|
Revenue
|
|
|
%
of Revenue
|
|
|
Revenue
|
|
|
%
of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
||||
Fiber
Optics
|
|
$
|
76,825
|
|
|
62.5
|
%
|
$
|
57,828
|
|
|
63.8
|
%
|
Photovoltaics
|
|
|
31,342
|
|
|
25.5
|
|
|
24,084
|
|
|
26.6
|
|
Electronic
Materials and Devices
|
|
|
14,840
|
|
|
12.0
|
|
|
8,716
|
|
|
9.6
|
|
Total
revenues
|
|
$
|
123,007
|
|
|
100.0
|
%
|
$
|
90,628
|
|
|
100.0
|
%
|
The
following tables set forth EMCORE's consolidated revenues by geographic region.
Revenue was assigned to geographic regions based on the customers’ or contract
manufacturers’ shipment locations.
Geographic
Revenues
(in
thousands)
|
|
Three
months ended
June
30, 2006
|
Three
months ended
June
30, 2005
|
||||||||||
|
|
|
Revenue
|
|
|
%
of Revenue
|
|
|
Revenue
|
|
|
%
of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
||||
North
America
|
|
$
|
32,201
|
|
76.8
|
%
|
$
|
28,969
|
|
87.2
|
%
|
||
South
America, Africa and Asia
|
|
|
8,573
|
|
20.4
|
|
|
2,893
|
|
8.7
|
|
||
Europe
|
|
|
1,180
|
|
2.8
|
|
|
1,372
|
|
4.1
|
|
||
Total
revenues
|
|
$
|
41,954
|
|
100.0
|
%
|
$
|
33,234
|
|
100.0
|
%
|
Geographic
Revenues
(in
thousands)
|
|
Nine
months ended
June
30, 2006
|
Nine
months ended
June
30, 2005
|
||||||||||
|
|
|
Revenue
|
|
|
%
of Revenue
|
|
|
Revenue
|
|
|
%
of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
||||
North
America
|
|
$
|
100,272
|
|
|
81.5
|
%
|
$
|
74,681
|
|
82.4
|
%
|
|
South
America, Africa and Asia
|
|
|
19,517
|
|
|
15.9
|
|
|
10,915
|
|
12.0
|
|
|
Europe
|
|
|
3,218
|
|
|
2.6
|
|
|
5,032
|
|
5.6
|
|
|
Total
revenues
|
|
$
|
123,007
|
|
|
100
|
%
|
$
|
90,628
|
|
100.0
|
%
|
For
the
three months ended June 30, 2006, Jabil Circuit, Ltd. (Jabil) accounted for
10%
of our total revenue. Jabil acts as a contract manufacturer assembling systems
for Cisco. A majority of EMCORE’s sales to Jabil consisted of 10G Ethernet
module products historically sold to Cisco. For the nine months ended June
30,
2006 and 2005, Cisco accounted for 14% and 21% of our total revenue,
respectively. For the three months ended June 30, 2005, Space Systems/Loral
accounted for 11% of our total revenue.
The
following table sets forth operating losses attributable to each EMCORE
operating segment.
Operating
Loss by Segment
(in thousands)
|
|
Three
Months Ended
June
30,
|
|
Nine Months
Ended
June
30,
|
|
||||||||
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Operating
(loss) income by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiber
Optics
|
|
$
|
(3,733
|
)
|
$
|
(2,869
|
)
|
$
|
(11,166
|
)
|
$
|
(11,387
|
)
|
Photovoltaics
|
|
|
(1,037
|
)
|
|
(1,707
|
)
|
|
(4,485
|
)
|
|
(2,759
|
)
|
Electronic
Materials and Devices
|
|
|
54
|
|
(656
|
)
|
|
(1,201
|
)
|
|
(3,297
|
)
|
|
Operating
loss
|
|
|
(4,716
|
)
|
|
(5,232
|
)
|
|
(16,852
|
)
|
|
(17,443
|
)
|
|
|
|
|
|
|
|
|
||||||
Other
(income) expenses:
|
|
|
|
|
|
|
|
||||||
Interest
expense
|
|
|
1,068
|
|
|
905
|
|
3,149
|
|
2,827
|
|
||
Loss
from convertible subordinated notes
exchange
offer
|
|
|
-
|
|
|
-
|
|
1,078
|
|
-
|
|
||
Equity
in net loss of Velox investment
|
|
|
-
|
|
|
-
|
|
332
|
|
-
|
|
||
Equity
in net loss (income) of GELcore investment
|
|
|
129
|
|
|
778
|
|
(21
|
)
|
|
703
|
||
Total
other expenses
|
|
|
1,197
|
|
|
1,683
|
|
4,538
|
|
3,530
|
|
||
|
|
|
|
|
|
|
|
||||||
Loss
from continuing operations
|
|
$
|
(5,913
|
)
|
$
|
(6,915
|
)
|
$
|
(21,390
|
)
|
$
|
(20,973
|
)
|
On
October 1, 2005, EMCORE adopted SFAS No. 123(R) and incurred stock-based
compensation expense as more fully described in Note 3 to EMCORE’s
condensed consolidated financial statements. For the three and nine months
ended June 30, 2006, operating loss includes the effect of $1.0 million and
$3.1
million, respectively, of stock-based compensation expense related to employee
stock options and employee stock purchases under SFAS 123(R). There was no
stock-based compensation expense in fiscal 2005.
Operating
loss also includes a $2.7 million charge associated with a related-party
loan
forgiveness. This charge was allocated to each segment based upon fiscal
2006
forecasted annual revenues.
Long-lived
assets (consisting of property, plant and equipment, goodwill and intangible
assets) for each operating segment are as follows:
Long-Lived
Assets
(in
thousands)
|
|
|
As
of
June
30,
2006
|
|
|
As
of
September
30,
2005
|
|
|
|
|
|
|
|
|
|
Fiber
Optics
|
|
$
|
61,309
|
|
$
|
56,261
|
|
Photovoltaics
|
|
|
39,082
|
|
|
37,861
|
|
Electronic
Materials and Devices
|
|
|
3,705
|
|
|
2,825
|
|
Total
|
|
$
|
104,096
|
|
$
|
96,947
|
|
NOTE
15. Subsequent Event.
On
July
19, 2006, EMCORE entered into an Asset Purchase Agreement (the ''Purchase
Agreement'') with IQE plc, a public limited company organized under the laws
of
the United Kingdom (''IQE''), and IQE RF, LLC, a New Jersey limited liability
corporation and a wholly owned subsidiary of IQE (the ''Purchaser''). Under
the
Purchase Agreement, the Purchaser will purchase the assets of EMCORE's
Electronic Materials & Device division (the ''EMD Business''), including
inventory, fixed assets, and intellectual property, for $16.0 million (the
''Purchase Price''), consisting of a $0.2 million deposit previously delivered
to EMCORE, $12.8 million delivered via wire transfer at closing of the
transaction, and $3.0 million in the form of a secured promissory note of
IQE
and Purchaser (the ''Note''), guaranteed by IQE's affiliates. The Note is
to be
repaid in four quarterly installments beginning in calendar year
2007, and
bears
interest at 7.5%. The transaction is currently expected to close in mid-August.
This
Quarterly Report on Form 10-Q includes forward-looking statements within
the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Exchange Act of 1934. These forward-looking statements are based
largely on our current expectations and projections about future events and
financial trends affecting the financial condition of our business. These
forward-looking statements may be identified by the use of terms and phrases
such as "expects", "anticipates", "intends", "plans", “believes", "estimates",
“targets”, “can”, “may”, “could”, “will”, and variations of these terms and
similar phrases. Management cautions that these forward-looking statements
are
subject to business, economic, and other risks and uncertainties, both known
and
unknown, that may cause actual results to be materially different from those
discussed in these forward-looking statements. The cautionary statements
made in
this Report should be read as being applicable to all forward-looking statements
wherever they appear in this Report. This discussion should be read in
conjunction with the consolidated financial statements, including the related
notes.
These
forward-looking statements include, without limitation, any and all statements
or implications regarding:
· The
ability of EMCORE Corporation (EMCORE) to remain competitive and a leader
in its
industry and the future growth of the company, the industry, and the economy
in
general;
· Difficulties
in integrating recent or future acquisitions into our
operations;
· The
expected level and timing of benefits to EMCORE from on-going cost reduction
efforts, including (i) expected cost reductions and their impact on our
financial performance, (ii) our continued leadership in technology and
manufacturing in our markets, and (iii) our belief that the cost reduction
efforts will not impact product development or manufacturing
execution;
· Expected
improvements in our product and technology development
programs;
· Whether
our products will (i) be successfully introduced or marketed, (ii) be qualified
and purchased by our customers, or (iii) perform to any particular
specifications or performance or reliability standards; and/or
· Guidance
provided by EMCORE regarding our expected financial performance in current
or
future periods, including, without limitation, with respect to anticipated
revenues, income, or cash flows for any period in fiscal 2006 and subsequent
periods.
These
forward-looking statements involve risks and uncertainties that could cause
actual results to differ materially from those projected, including without
limitation, the following:
· EMCORE’s
cost reduction efforts may not be successful in achieving their expected
benefits, or may negatively impact our operations;
· EMCORE
may incur increased costs due to difficulties in integrating recent
acquisitions;
· The
failure of our products (i) to perform as expected without material defects,
(ii) to be manufactured at acceptable volumes, yields, and cost, (iii) to
be
qualified and accepted by our customers, and (iv) to successfully compete
with
products offered by our competitors; and/or
· Other
risks and uncertainties described in EMCORE’s filings with the Securities and
Exchange Commission (SEC) such as: cancellations, rescheduling, or delays
in
product shipments; manufacturing capacity constraints; lengthy sales and
qualification cycles; difficulties in the production process; changes in
semiconductor industry growth; increased competition; delays in developing
and
commercializing new products; and other factors.
Neither
management nor any other person assumes responsibility for the accuracy and
completeness of the forward-looking statements. Forward-looking statements
are
made only as of the date of this Report and subsequent facts or circumstances
may contradict, obviate, undermine, or otherwise fail to support or substantiate
such statements. We assume no obligation to update the matters discussed
in this
Quarterly Report on Form 10-Q to conform such statements to actual results
or to
changes in our expectations, except as required by applicable law or
regulation.
Company
Overview
EMCORE,
a
New Jersey corporation established in 1984, offers a broad portfolio of compound
semiconductor-based components and subsystems for the broadband, fiber optic,
satellite, solar and wireless communications markets. EMCORE has three operating
segments: Fiber Optics, Photovoltaics, and Electronic Materials and Devices.
Our
integrated solutions philosophy embodies state-of-the-art technology, material
science expertise, and a shared vision of our customer's goals and objectives
to
be leaders in the transport of video, voice and data over copper, hybrid
fiber/coax (HFC), fiber, satellite, and wireless networks.
EMCORE’s
Fiber Optic segment offers optical components, subsystems and systems for
high
speed data and telecommunications networks, cable television (CATV) and
fiber-to-the-premises (FTTP). EMCORE’s Photovoltaic segment provides products
for both satellite and terrestrial applications. For satellite applications,
EMCORE offers high efficiency Gallium Arsenide (GaAs) solar cells, Covered
Interconnect Cells (CICs) and panels. For terrestrial applications, EMCORE
is
adapting its high-efficiency GaAs solar cells for use in solar concentrator
systems. Our Electronic Materials and Devices segment provides radio frequency
(RF) transistor materials for high bandwidth wireless communications
systems.
Through
its joint venture participation in GELcore, LLC, EMCORE plays a vital role
in
developing and commercializing next-generation high-brightness LED technology
for use in the general and specialty illumination markets.
Management
Summary
We
are an
industry-leading company in the development and manufacture of optoelectronic
and high-frequency products. By leveraging our broad compound
semiconductor expertise to provide cost-effective components, subsystems,
and
systems, we are focused on several key markets:
· Terrestrial
solar power for industrial power markets;
· High-speed
fiber optics for telephony, Internet core and metro networks;
· High-speed
fiber optics for large enterprise data communications, super computing, and
storage area networks;
· Next-generation
CATV and FTTP “triple play” networks;
· Satellite
communications, in space and on the ground;
· Advanced
transistors and amplifiers used in high-bandwidth wireless communications
systems, such
as
WiMAX and Wi-Fi Internet access and 3G mobile handsets and PDA devices;
and
· Solid
state lighting for specialty and commercial illumination.
EMCORE
has been supplying high-efficiency GaAs solar cells to the satellite industry
since 1999. Recently, with the increase in traditional energy costs, we have
been involved in migrating our GaAs high-efficiency solar cells for terrestrial
applications. EMCORE has developed a 35% high-efficiency terrestrial based
solar
cell and has fulfilled orders for two solar concentrator companies, and provided
samples to several others including two major system manufacturers in Europe
and
Asia.
Demand
for EMCORE's products continue to be driven principally by increased
communications bandwidth requirements and by expanded competition between
telecommunications carriers, CATV multiple service operators (MSOs), and
wireless network providers for the delivery of video, voice and data. We
also continue our leadership of the 10G Ethernet space, commenced volume
production of a next-generation FTTP triplexer product, won numerous major
satellite programs, and increased sales of our 3G wireless and base station
materials. In fiscal 2006 to date, revenues have increased by 36% over the
prior
period. We are continuing our efforts to streamline operations and focus
on
bottom-line profitability.
We
are
operationally focused on driving profitable revenue growth based on our existing
product lines, developing or acquiring next-generation technologies and
high-margin products for our strategic markets, and continuing our business
optimization efforts to manage costs and enhance productivity. While targeting
20-30% annual top-line growth, we intend to continue to improve annual gross
margins through material cost reductions, overseas contract manufacturing
labor,
yield improvements and product design improvements.
Subsequent
Event
On
July
19, 2006, EMCORE entered into an Asset Purchase Agreement (the ''Purchase
Agreement'') with IQE plc, a public limited company organized under the laws
of
the United Kingdom (''IQE''), and IQE RF, LLC, a New Jersey limited liability
corporation and a wholly owned subsidiary of IQE (the ''Purchaser''). Under
the
Purchase Agreement, the Purchaser will purchase the assets of EMCORE's
Electronic Materials & Device division (the ''EMD Business''), including
inventory, fixed assets, and intellectual property, for $16.0 million (the
''Purchase Price''), consisting of a $0.2 million deposit previously delivered
to EMCORE, $12.8 million delivered via wire transfer at closing of the
transaction, and $3.0 million in the form of a secured promissory note of
IQE
and Purchaser (the ''Note''), guaranteed by IQE's affiliates. The Note is
to be
repaid in four quarterly installments beginning in calendar year
2007, and
bears
interest at 7.5%. IQE will continue to operate the EMD Business in the Somerset,
New Jersey facility, and approximately 50 employees of EMCORE will be
transferred to IQE. The transaction is currently expected to close in
mid-August.
Business
Segments, Geographic Revenues and Customers
EMCORE
has three operating segments: Fiber Optics, Photovoltaics, and Electronic
Materials and Devices:
· EMCORE's
Fiber Optics revenues are derived primarily from sales of optical components
and
subsystems for CATV, FTTP, enterprise routers and switches, telecom grooming
switches, core routers, high performance servers, supercomputers and satellite
communications data links.
· EMCORE's
Photovoltaics revenues are derived primarily from the sales of solar power
conversion products, including solar cells, covered interconnect solar cells,
and solar panels.
· EMCORE's
Electronic Materials and Devices revenues are derived primarily from sales
of
wireless components, such as RF materials including hetero-junction bipolar
transistors and enhancement-mode pseudomorphic high electron mobility
transistors, BiFET power amplifiers for 3G, GSM, and high bandwidth wireless
communications, GaN materials for wireless base stations and high frequency
applications, and process development technology.
The
following tables set forth the revenues and percentage of total revenues
attributable to each of EMCORE's operating segments for the three and nine
months ended June 30, 2006 and 2005.
Revenues
by Segment
(in
thousands)
|
|
Three
months ended
June
30, 2006
|
Three
months ended
June
30, 2005
|
||||||||||
|
|
|
Revenue
|
|
|
%
of Revenue
|
|
|
Revenue
|
|
|
%
of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
||||
Fiber
Optics
|
|
$
|
25,968
|
|
|
61.9
|
%
|
$
|
21,109
|
|
63.5
|
%
|
|
Photovoltaics
|
|
|
10,354
|
|
|
24.7
|
|
|
8,807
|
|
26.5
|
|
|
Electronic
Materials and Devices
|
|
|
5,632
|
|
|
13.4
|
|
|
3,318
|
|
10.0
|
|
|
Total
revenues
|
|
$
|
41,954
|
|
|
100.0
|
%
|
$
|
33,234
|
|
100.0
|
%
|
Revenues
by Segment
(in
thousands)
|
|
Nine
months ended
June
30, 2006
|
Nine
months ended
June
30, 2005
|
||||||||||
|
|
|
Revenue
|
|
|
%
of Revenue
|
|
|
Revenue
|
|
|
%
of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
||||
Fiber
Optics
|
|
$
|
76,825
|
|
|
62.5
|
%
|
$
|
57,828
|
|
|
63.8
|
%
|
Photovoltaics
|
|
|
31,342
|
|
|
25.5
|
|
|
24,084
|
|
|
26.6
|
|
Electronic
Materials and Devices
|
|
|
14,840
|
|
|
12.0
|
|
|
8,716
|
|
|
9.6
|
|
Total
revenues
|
|
$
|
123,007
|
|
|
100.0
|
%
|
$
|
90,628
|
|
|
100.0
|
%
|
The
following tables set forth EMCORE's consolidated revenues by geographic region.
Revenue was assigned to geographic regions based on the customers’ or contract
manufacturers’ shipment locations.
Geographic
Revenues
(in
thousands)
|
|
Three
months ended
June
30, 2006
|
Three
months ended
June
30, 2005
|
||||||||||
|
|
|
Revenue
|
|
|
%
of Revenue
|
|
|
Revenue
|
|
|
%
of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
||||
North
America
|
|
$
|
32,201
|
|
|
76.8
|
%
|
$
|
28,969
|
|
87.2
|
%
|
|
South
America, Africa and Asia
|
|
|
8,573
|
|
|
20.4
|
|
|
2,893
|
|
8.7
|
|
|
Europe
|
|
|
1,180
|
|
|
2.8
|
|
|
1,372
|
|
4.1
|
|
|
Total
revenues
|
|
$
|
41,954
|
|
|
100.0
|
%
|
$
|
33,234
|
|
100.0
|
%
|
Geographic
Revenues
(in
thousands)
|
|
Nine
months ended
June
30, 2006
|
Nine
months ended
June
30, 2005
|
||||||||||
|
|
|
Revenue
|
|
|
%
of Revenue
|
|
|
Revenue
|
|
|
%
of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
||||
North
America
|
|
$
|
100,272
|
|
|
81.5
|
%
|
$
|
74,681
|
|
82.4
|
%
|
|
South
America, Africa and Asia
|
|
|
19,517
|
|
|
15.9
|
|
|
10,915
|
|
12.0
|
|
|
Europe
|
|
|
3,218
|
|
|
2.6
|
|
|
5,032
|
|
5.6
|
|
|
Total
revenues
|
|
$
|
123,007
|
|
|
100.0
|
%
|
$
|
90,628
|
|
|
100.0
|
%
|
EMCORE
is
devoted to working directly with its customers from initial product design,
product qualification and manufacturing to product delivery. EMCORE's customer
base includes many of the largest semiconductor, telecommunications, data
communications, and computer manufacturing companies in the world. For the
three months ended June 30, 2006, Jabil Circuit, Ltd. accounted for 10% of
our
total revenue. Jabil acts as a contract manufacturer assembling systems for
Cisco. A majority of EMCORE’s sales to Jabil consisted of 10G Ethernet module
products historically sold to Cisco. For the nine months ended June 30, 2006
and
2005, Cisco accounted for 14% and 21% of our total revenue, respectively.
For
the three months ended June 30, 2005, Space Systems/Loral accounted for 11%
of
our total revenue.
The
following table sets forth operating losses attributable to each EMCORE
operating segment
Operating
Loss by Segment
(in thousands)
|
|
Three
Months Ended
June
30,
|
|
Nine Months
Ended
June
30,
|
|
||||||||
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Operating
(loss) income by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiber
Optics
|
|
$
|
(3,733
|
)
|
$
|
(2,869
|
)
|
$
|
(11,166
|
)
|
$
|
(11,387
|
)
|
Photovoltaics
|
|
|
(1,037
|
)
|
|
(1,707
|
)
|
|
(4,485
|
)
|
|
(2,759
|
)
|
Electronic
Materials and Devices
|
|
|
54
|
|
(656
|
)
|
|
(1,201
|
)
|
|
(3,297
|
)
|
|
Operating
loss
|
|
|
(4,716
|
)
|
|
(5,232
|
)
|
|
(16,852
|
)
|
|
(17,443
|
)
|
|
|
|
|
|
|
|
|
||||||
Other
(income) expenses:
|
|
|
|
|
|
|
|
||||||
Interest
expense
|
|
|
1,068
|
|
|
905
|
|
3,149
|
|
2,827
|
|
||
Loss
from convertible subordinated notes
exchange
offer
|
|
|
-
|
|
|
-
|
|
1,078
|
|
-
|
|
||
Equity
in net loss of Velox investment
|
|
|
-
|
|
|
-
|
|
332
|
|
-
|
|
||
Equity
in net loss (income) of GELcore investment
|
|
|
129
|
|
|
778
|
|
(21
|
)
|
|
703
|
||
Total
other expenses
|
|
|
1,197
|
|
|
1,683
|
|
4,538
|
|
3,530
|
|
||
|
|
|
|
|
|
|
|
||||||
Loss
from continuing operations
|
|
$
|
(5,913
|
)
|
$
|
(6,915
|
)
|
$
|
(21,390
|
)
|
$
|
(20,973
|
)
|
On
October 1, 2005, EMCORE adopted SFAS No. 123(R) and incurred stock-based
compensation expense as more fully described in Note 3 to EMCORE’s
condensed consolidated financial statements. For the three and nine months
ended June 30, 2006, operating loss includes the effect of $1.0 million and
$3.1
million, respectively, of stock-based compensation expense related to employee
stock options and employee stock purchases under SFAS 123(R). There was no
stock-based compensation expense in fiscal 2005.
Operating
loss also includes a $2.7 million charge associated with a related-party
loan
forgiveness. This charge was allocated to each segment based upon fiscal
2006
forecasted annual revenues.
Long-lived
assets (consisting of property, plant and equipment, goodwill and intangible
assets) for each operating segment are as follows:
Long-Lived
Assets
(in
thousands)
|
|
|
As
of
June
30,
2006
|
|
|
As
of
September
30,
2005
|
|
|
|
|
|
|
|
|
|
Fiber
Optics
|
|
$
|
61,309
|
|
$
|
56,261
|
|
Photovoltaics
|
|
|
39,082
|
|
|
37,861
|
|
Electronic
Materials and Devices
|
|
|
3,705
|
|
|
2,825
|
|
Total
|
|
$
|
104,096
|
|
$
|
96,947
|
|
Recent
Accounting Pronouncements
SFAS
No. 123(R)
-
Effective October 1, 2005, EMCORE adopted Statement of Financial Accounting
Standards (SFAS) No. 123(R), Share-Based
Payment (Revised 2004),
on a
modified prospective basis. As a result, EMCORE included stock-based
compensation expense in its results of operations for the quarter ended June
30,
2006, as more fully described in Note 3 to EMCORE’s condensed consolidated
financial statements.
SFAS
No. 151
-
Effective October 1, 2005, EMCORE adopted SFAS No. 151, Inventory
Costs, an amendment of ARB No. 43, Chapter 4.
SFAS
151 clarifies the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage). SFAS 151 requires
that
those items be recognized as current-period charges regardless of whether
they
meet the criterion of "so abnormal". In addition, it requires that allocation
of
fixed production overheads to the costs of conversion be based on the normal
capacity of the production facilities. The adoption of this pronouncement
did
not have a material impact on EMCORE’s financial statements.
SFAS
No. 154
-
Effective October 1, 2005, EMCORE adopted SFAS No. 154, Accounting
Changes and Error Corrections, a replacement of APB Opinion No. 20,
Accounting Changes,
and
Financial Accounting Standards Board (FASB) Statement No. 3, Reporting
Accounting Changes in Interim Financial Statements.
The
Statement applies to all voluntary changes in accounting principle, and changes
the requirements for accounting for and reporting of a change in accounting
principle. SFAS 154 requires retrospective application to prior periods’
financial statements of a voluntary change in accounting principle unless
it is
impracticable. SFAS 154 requires that a change in method of depreciation,
amortization, or depletion for long-lived, non-financial assets be accounted
for
as a change in accounting estimate that is affected by a change in accounting
principle. Opinion 20 previously required that such a change be reported
as a
change in accounting principle. The adoption of this pronouncement did not
have
a material impact on EMCORE’s financial statements.
FIN
47
-
Effective October 1, 2005, EMCORE adopted FASB Interpretation No. 47,
Accounting
for Conditional Asset Retirement Obligations, an Interpretation of FASB
Statement No. 143.
This
interpretation clarifies the timing of liability recognition for legal
obligations associated with the retirement of tangible long-lived assets
when
the timing and/or method of settlement of the obligations are conditional
on a
future event and where an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement obligation. The adoption of
this
pronouncement did not have a material impact on EMCORE’s financial statements.
FIN
48
- In
June 2006, the FASB issued Interpretation No. 48 (FIN 48),
Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement
No. 109.
FIN 48
clarifies the accounting for income taxes by prescribing the minimum recognition
threshold a tax position is required to meet before being recognized in the
financial statements. FIN 48 also provides guidance on derecognition,
measurement, classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN 48 applies to all tax positions related
to income taxes subject to FASB Statement No. 109,
Accounting for Income Taxes.
FIN 48
is effective for fiscal years beginning after December 15, 2006. Differences
between the amounts recognized in the statements of financial position prior
to
the adoption of FIN 48 and the amounts reported after adoption should be
accounted for as a cumulative-effect adjustment recorded to the beginning
balance of retained earnings. EMCORE does not believe the adoption of FIN
48 on
October 1, 2007 will have a material impact on its financial
statements.
EITF
No. 05-6
-
In
June
2005, the Emerging Issues Task Force (EITF) issued No. 05-6, Determining
the Amortization Period for Leasehold Improvements.
The
pronouncement requires that leasehold improvements acquired in a business
combination or purchased subsequent to the inception of the lease be amortized
over the lesser of the useful life of the asset or the lease term that includes
reasonably assured lease renewals as determined on the date of the acquisition
of the leasehold improvement. This pronouncement should be applied prospectively
and EMCORE adopted it during the first quarter of fiscal 2006. This
pronouncement did not have a material impact on the financial statements.
FSP
115-1
- In
November 2005, FASB issued Staff Position (FSP) 115-1, The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments,
which
provides guidance on determining when investments in certain debt and equity
securities are considered impaired, whether that impairment is
other-than-temporary, and on measuring such impairment loss. FSP 115-1 also
includes accounting considerations subsequent to the recognition of an
other-than-temporary impairment and requires certain disclosure about unrealized
losses that have not been recognized as other-than-temporary impairments.
FSP
115-1 is effective for annual reporting periods beginning after December
15,
2005. EMCORE does not believe the adoption of FSP 115-1 on October 1, 2006
will
have a material impact on its financial statements.
Critical
Accounting Policies
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (US GAAP) 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 reported period. Management bases estimates on historical experience
and on various assumptions about the future that are believed to be reasonable
based on available information. EMCORE’s reported financial position or results
of operations may be materially different under changed conditions or when
using
different estimates and assumptions, particularly with respect to significant
accounting policies, which are discussed below. In the event that estimates
or
assumptions prove to differ from actual results, adjustments are made in
subsequent periods to reflect more current information. EMCORE's most
significant estimates relate to accounts receivable, inventory, goodwill,
intangibles, other long-lived assets, warranty accruals, revenue recognition,
and valuation of stock-based compensation.
Accounts
Receivable.
EMCORE
regularly evaluates its accounts receivable and accordingly maintains allowances
for doubtful accounts for estimated losses resulting from the inability of
our
customers to meet their financial obligations to us. The allowance is based
on
the age of receivables and a specific identification of receivables considered
at risk. EMCORE classifies charges associated with the allowance for doubtful
accounts as a SG&A expense. If the financial condition of our customers were
to deteriorate, additional allowances may be required.
Inventory.
Inventory is stated at the lower of cost or market, with cost being determined
using the standard cost method. EMCORE reserves against inventory once it
has
been determined that: (i) conditions exist that may not allow the inventory
to
be sold for its intended purpose, (ii) the inventory’s value is determined to be
less than cost, or (iii) or the inventory is determined to be obsolete. The
charge related to inventory reserves is recorded as a cost of revenue. The
majority of the inventory write-downs are related to estimated allowances
for
inventory whose carrying value is in excess of net realizable value and on
excess raw material components resulting from finished product obsolescence.
In
most cases where EMCORE sells previously written down inventory, it is typically
sold as a component part of a finished product. The finished product is sold
at
market price at the time resulting in higher average gross margin on such
revenue. EMCORE does not track the selling price of individual raw material
components that have been previously written down or written off, since such
raw
material components usually are only a portion of the resultant finished
products and related sales price. EMCORE evaluates inventory levels at least
quarterly against sales forecasts on a significant part-by-part basis, in
addition to determining its overall inventory risk. Reserves are adjusted
to
reflect inventory values in excess of forecasted sales, as well as overall
inventory risk assessed by management. We have incurred, and may in the future
incur, charges to write-down our inventory. While we believe, based on current
information, that the amount recorded for inventory is properly reflected
on our
balance sheet, if market conditions are less favorable than our forecasts,
our
future sales mix differs from our forecasted sales mix, or actual demand
from
our customers is lower than our estimates, we may be required to record
additional inventory write-downs.
Valuation
of Goodwill and Intangible Assets.
Goodwill represents the excess of the purchase price of an acquired business
or
assets over the fair value of the identifiable assets acquired and liabilities
assumed. Intangible assets consist primarily of intellectual property that
has
been internally developed or purchased intangible assets. Purchased intangible
assets include existing and core technology, trademarks and trade names,
and
customer contracts. Intangible assets are amortized using the straight-lined
method over estimated useful lives ranging from 1 to 15 years. EMCORE evaluates
its goodwill and intangible assets for impairment on an annual basis, or
whenever events or changes in circumstances indicate that the carrying value
may
not be recoverable. EMCORE last evaluated its goodwill and intangible assets
during the quarter ended March 31, 2006. Circumstances that could trigger
an
impairment test include but are not limited to: a significant adverse change
in
the business climate or legal factors; an adverse action or assessment by
a
regulator; unanticipated competition; loss of key personnel; the likelihood
that
a reporting unit or significant portion of a reporting unit will be sold
or
otherwise disposed; results of testing for recoverability of a significant
asset
group within a reporting unit; and recognition of a goodwill impairment loss
in
the financial statements of a subsidiary that is a component of a reporting
unit. The determination as to whether a write-down of goodwill or intangible
assets is necessary involves significant judgment based on the short-term
and
long-term projections of the future performance of the reporting unit to
which
the goodwill or intangible assets are attributed. During fiscal 2006, 2005,
and
2004, EMCORE tested for impairment of goodwill on an annual basis and did
not
record any impairment charges on any goodwill or intangible assets. As part
of
our quarterly review of financial results, we did not identify any impairment
indicators that the carrying value of our goodwill may not be recoverable.
In
accordance with SFAS No. 142, Goodwill
and Other Intangible Assets,
the fair
value of the reporting units was determined by using a valuation technique
based
on each reporting unit’s weighted average revenue. Based on that analysis, we
determined that the carrying amount of the reporting units did not exceed
their
fair value.
Valuation
of Long-lived Assets.
EMCORE
reviews long-lived assets on an annual basis or whenever events or circumstances
indicate that the assets may be impaired. EMCORE last evaluated its long-lived
assets during the quarter ended March 31, 2006. A long-lived asset is considered
impaired when its anticipated undiscounted cash flow is less than its carrying
value. In making this determination, EMCORE uses certain assumptions, including,
but not limited to: (a) estimates of the fair market value of these assets;
and
(b) estimates of future cash flows expected to be generated by these assets,
which are based on additional assumptions such as asset utilization, length
of
service that assets will be used in our operations, and estimated salvage
values. During fiscal 2006, 2005, and 2004, we recorded no impairment charges
on
any of EMCORE’s long-lived assets.
Product
Warranty Reserves.
EMCORE
provides its customers with limited rights of return for non-conforming
shipments and warranty claims for certain products. In accordance with FASB
Interpretation No. 45, Guarantor’s
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others,
EMCORE
makes estimates using historical experience rates as a percentage of revenue
and
accrues estimated warranty expense as a cost of revenue. We estimate the
costs of our warranty obligations based on our historical experience of known
product failure rates, use of materials to repair or replace defective products
and service delivery costs incurred in correcting product failures. In addition,
from time to time, specific warranty accruals may be made if unforeseen
technical problems arise. Should our actual experience relative to these
factors
differ from our estimates, we may be required to record additional warranty
reserves. Alternatively, if we provide more reserves than we need, we may
reverse a portion of such provisions in future periods.
Revenue
Recognition.
Revenue
is generally recognized upon shipment provided persuasive evidence of a contract
exists, (such as when a purchase order or contract is received from a customer),
the price is fixed, the product meets its specifications, title and ownership
have transferred to the customer, and there is reasonable assurance of
collection of the sales proceeds. In those few instances where a given sale
involves post shipment obligations, formal customer acceptance documents,
or
subjective rights of return, revenue is not recognized until all post-shipment
conditions have been satisfied and there is reasonable assurance of collection
of the sales proceeds. The majority of our products have shipping terms that
are
free on board (FOB) or free carrier alongside (FCA) shipping point, which
means
that EMCORE fulfills its delivery obligation when the goods are handed over
to
the freight carrier at our shipping dock. This means the buyer bears all
costs
and risks of loss or damage to the goods from that point. In certain cases,
EMCORE ships its products cost insurance and freight (CIF). Under this
arrangement, revenue is recognized under FCA shipping point terms, but EMCORE
pays (and bills the customer) for the cost of shipping and insurance to the
customer's designated location. EMCORE accounts for shipping and related
transportation costs by recording the charges that are invoiced to customers
as
revenue, with the corresponding cost recorded as cost of revenue. In those
instances where inventory is maintained at a consigned location, revenue
is
recognized only when our customer pulls product for its use and title and
ownership have transferred to the customer. In rare occurrences, at a customer’s
request, EMCORE enters into bill and hold transactions whereby title and
risk of
loss transfers to the customer, but carriage to the customer does not occur
until a specified later date. EMCORE recognizes revenue associated with the
sale
of product from bill and hold arrangements when the product is complete,
ready
for delivery, and all bill and hold criteria have been met. There were no
bill
and hold arrangements as of June 30, 2006.
Distributors
- EMCORE
uses a number of distributors around the world. In accordance with Staff
Accounting Bulletin No. 104, Revenue
Recognition,
EMCORE
recognizes revenue upon shipment of product to these distributors. Title
and
risk of loss pass to the distributors upon delivery, and our distributors
are
contractually obligated to pay EMCORE on standard commercial terms, just
like
our other direct customers. EMCORE does not sell to its distributors on
consignment and, except in the event of a product discontinuance, does not
give
distributors a right of return.
Solar
Panel Contracts
- EMCORE
records revenues from certain solar panel contracts using the
percentage-of-completion method. Revenue is recognized in proportion to actual
costs incurred compared to total anticipated costs expected to be incurred
for
each contract. If estimates of costs to complete long-term contracts indicate
a
loss, a provision is made for the total loss anticipated. EMCORE has numerous
contracts that are in various stages of completion. Such contracts require
estimates to determine the appropriate cost and revenue recognition. EMCORE
uses
all available information in determining dependable estimates of the extent
of
progress towards completion, contract revenues, and contract costs. Estimates
are revised as additional information becomes available.
Government
R&D Contracts
-
R&D contract revenue represents reimbursement by various U.S. government
entities, or their contractors, to aid in the development of new technology.
The
applicable contracts generally provide that EMCORE may elect to retain ownership
of inventions made in performing the work, subject to a non-exclusive license
retained by the government to practice the inventions for government purposes.
The R&D contract funding may be based on a cost-plus, cost reimbursement,
cost-share, or a firm-fixed price arrangement. The amount of funding under
each
R&D contract is determined based on cost estimates that include both direct
and indirect costs. Cost-plus funding is determined based on actual costs
plus a
set margin. As we incur costs under cost reimbursement type contracts, we
record
revenue. Contract costs include material, labor, special tooling and test
equipment, subcontracting costs, as well as an allocation of indirect costs.
For
cost-share contracts, the actual costs of performance are divided between
the
U.S. government and EMCORE based on the R&D contract terms. An R&D
contract is considered complete when all significant costs have been incurred,
milestones have been reached, and any reporting obligations to the customer
have
been met.
Stock-Based
Compensation.
EMCORE
estimates the fair value of stock options using a Black-Scholes model. The
fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option valuation model and the straight-line attribution approach.
The option-pricing model requires the input of highly subjective assumptions,
including the option’s expected life and the price volatility of the underlying
stock. EMCORE’s expected term represents the period that EMCORE’s stock-based
awards are expected to be outstanding and is determined based on historical
experience of similar awards, giving consideration to the contractual terms
of
the stock-based awards, vesting schedules and expectations of future employee
behavior as influenced by changes to the terms of its stock-based awards.
The
expected stock price volatility is based on EMCORE’s historical stock prices.
The stock-based compensation expense for the three and nine months ended
June
30, 2006 was distributed as follows:
Stock-Based
Compensation Expense by Segment
For
the three months ended June 30, 2006
(in
thousands)
|
|
|
COGS
|
|
|
SG&A
|
|
|
R&D
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
||||
Fiber
Optics
|
|
$
|
202
|
$
|
257
|
$
|
255
|
|
$
|
714
|
|
||
Photovoltaics
|
|
|
52
|
|
117
|
|
44
|
|
|
213
|
|
||
Electronic
Materials and Devices
|
|
|
41
|
|
28
|
|
27
|
|
|
96
|
|
||
Total
stock-based compensation expense
|
|
$
|
295
|
$
|
402
|
$
|
326
|
|
$
|
1,023
|
|
Stock-Based
Compensation Expense by Segment
For
the nine months ended June 30, 2006
(in
thousands)
|
|
|
COGS
|
|
|
SG&A
|
|
|
R&D
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
||||
Fiber
Optics
|
|
$
|
494
|
|
$
|
1,014
|
$
|
677
|
|
$
|
2,185
|
|
|
Photovoltaics
|
|
|
125
|
|
|
409
|
|
89
|
|
|
623
|
|
|
Electronic
Materials and Devices
|
|
|
92
|
|
|
115
|
|
71
|
|
|
278
|
|
|
Total
stock-based compensation expense
|
|
$
|
711
|
|
$
|
1,538
|
$
|
837
|
|
$
|
3,086
|
|
The
above
listing is not intended to be a comprehensive list of all of our accounting
policies. In many cases, US GAAP specifically dictates the accounting treatment
of a particular transaction. There also are areas in which management's judgment
in selecting any available alternative would not produce a materially different
result. For complete discussion of our accounting policies and other required
US
GAAP disclosures, please refer to EMCORE's Annual Report on Form 10-K for
the
fiscal year ended September 30, 2005, which was filed with the SEC on December
14, 2005.
Results
of Operations
The
following table sets forth the consolidated statements of operations data
of
EMCORE expressed as a percentage of total revenues for the three and nine
months
ended June 30, 2006 and 2005.
|
|
Three
Months Ended
June
30,
|
|
Nine
Months Ended
June
30,
|
|
||||||||
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Revenue
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost
of revenue
|
|
|
79.5
|
79.7
|
80.4
|
84.2
|
|||||||
Gross
profit
|
|
|
20.5
|
20.3
|
19.6
|
15.8
|
|||||||
|
|
|
|||||||||||
Operating
expenses:
|
|
|
|||||||||||
Selling,
general and administrative
|
|
|
19.5
|
23.8
|
21.5
|
20.5
|
|||||||
Research
and development
|
|
|
12.2
|
12.2
|
11.8
|
14.6
|
|||||||
Total
operating expenses
|
|
|
31.7
|
36.0
|
33.3
|
35.1
|
|||||||
Operating
loss
|
|
|
(11.2
|
)
|
(15.7
|
)
|
(13.7
|
)
|
(19.3
|
)
|
|||
|
|
|
|||||||||||
Other
(income) expenses:
|
|
|
|||||||||||
Interest
income
|
|
|
(0.6
|
)
|
(0.9
|
)
|
(0.7
|
)
|
(0.9
|
)
|
|||
Interest
expense
|
|
|
3.2
|
3.6
|
3.2
|
4.0
|
|||||||
Loss
from convertible subordinated notes exchange offer
|
|
|
-
|
-
|
0.9
|
-
|
|||||||
Equity
in net loss of Velox investment
|
|
|
-
|
-
|
0.3
|
-
|
|||||||
Equity
in net loss (income) of GELcore investment
|
|
|
0.3
|
2.4
|
-
|
0.8
|
|||||||
Total
other expenses
|
|
|
2.9
|
5.1
|
3.7
|
3.9
|
|||||||
Loss
from continuing operations
|
|
|
(14.1
|
)
|
(20.8
|
)
|
(17.4
|
)
|
(23.2
|
)
|
|||
|
|
|
|||||||||||
Discontinued
operations:
|
|
|
|||||||||||
Gain
on disposal of discontinued operations
|
|
|
-
|
-
|
1.6
|
13.8
|
|||||||
Income
from discontinued operations
|
|
|
-
|
-
|
1.6
|
13.8
|
|||||||
|
|
|
|||||||||||
Net
loss income
|
|
|
(14.1
|
)%
|
(20.8
|
)%
|
(15.8
|
)%
|
(9.4
|
)%
|
Comparison
of three and nine months ended June 30, 2006 and 2005
Consolidated
Revenue
For
the three months ended June 30, 2006, EMCORE’s consolidated revenue increased
$8.7 million or 26% to $41.9 million from $33.2 million, as reported in the
prior year. All three of EMCORE's operating segments: Fiber Optics,
Photovoltaics and Electronic Materials and Devices, posted revenue increases
year over year. On a product line basis, Fiber Optics revenues increased
$4.9
million or 23%, Photovoltaic revenues increased $1.5 million or 18%, and
revenues from Electronic Materials and Devices increased $2.3 million or
70%
from the prior year. For the three months ended June 30, 2006, international
sales increased $5.5 million or 129%, when compared to the prior year. For
the
three months ended June 30, 2006, revenue from government contracts decreased
$1.1 million or 30% to $2.6 million from $3 .7
million, as reported in the prior year.
For
the nine months ended June 30, 2006, EMCORE’s consolidated revenue increased
$32.4 million or 36% to $123.0 million from $90.6 million, as reported in
the
prior year. All three of EMCORE's operating segments: Fiber Optics,
Photovoltaics and Electronic Materials and Devices, posted year-to-date revenue
increases year over year. On a product line basis, Fiber Optics revenues
increased $19.0 million or 33%, Photovoltaic revenues increased $7.3 million
or
30%, and revenues from Electronic Materials and Devices increased $6.1 million
or 70% from the prior year. For the nine months ended June 30, 2006,
international sales increased $6.8 million or 43%, when compared to the prior
year. For the nine months ended June 30, 2006, revenue from government contracts
increased $2.7 million or 38% to $9.8 million from $7.1 million, as reported
in
the prior year.
A
comparison of revenue achieved at each of EMCORE’s operating segments follows:
Fiber
Optics
Over
the
past several years, communications networks have experienced dramatic growth
in
data transmission traffic due to worldwide Internet access, e-mail, and
e-commerce. As Internet content expands to include full motion video on-demand,
HDTV, multi-channel high quality audio, online video conferencing, image
transfer, online multi-player gaming, and other broadband applications, the
delivery of such data will place a greater demand on available bandwidth
and
require the support of higher capacity networks. The bulk of this traffic,
which
continues to grow at a very high rate, is already routed through the optical
networking infrastructure used by local and long distance carriers, as well
as
Internet service providers. Optical fiber offers substantially greater bandwidth
capacity, is less error prone, and is easier to administer than older copper
wire technologies. As greater bandwidth capability is delivered closer to
the
end user, increased demand for higher content, real-time, interactive visual
and
audio content is expected. We believe that EMCORE is well positioned to benefit
from the continued deployment of these higher capacity fiber-optic networks.
In
addition, an increasing number of enterprises are in the process of network
upgrades that include 10-Gigabit Ethernet throughout the local network. EMCORE
is a leader in the 10-Gigabit Ethernet arena supplying both components and
modules.
EMCORE's
Fiber Optics segment provides optical components, subsystems and systems
that
enable the transmission of video, voice and data over high-capacity fiber
optic
cables. Our products enable information that is encoded on light signals
to be
transmitted, routed (switched) and received in communication systems. EMCORE’s
Fiber Optics segment serves the CATV, FTTP, telecommunications, data and
satellite communications, storage area network and, increasingly, the defense
and homeland security markets.
For
the
three months ended June 30, 2006, EMCORE’s fiber optic revenues increased $4.9
million or 23% to $26.0 million from $21.1 million, as reported in the prior
year. For the nine months ended June 30, 2006, EMCORE’s fiber optic revenues
increased $19.0 million or 33% to $76.8 million from $57.8 million, as reported
in the prior year. Increased sales volumes of CATV, satellite communications,
telecommunications and FTTP components were the reason for the significant
increase in year over year revenues. The communications industry in which
we
participate in continues to be dynamic. The driving factor is the competitive
environment that exists between cable operators, telephone companies, and
satellite and wireless service providers. Each are rapidly investing capital
to
deploy a converging multi-service network capable of delivering “triple play
services”, i.e. video, voice and data content, bundled as a service provided by
a single communication provider. As a market leader in RF transmission over
fiber products for the CATV industry, EMCORE enables cable companies to offer
multiple forms of communications to meet the expanding demand for high-speed
Internet, on-demand and interactive video, and other new services (such as
HDTV
and VOIP). Television is also undergoing a major transformation, as the US
government requires television stations to broadcast exclusively in digital
format, abandoning the analog format used for decades. Although the transition
date for digital transmissions is not expected for several years, the build-out
of these television networks has already begun. To support the telephone
companies plan to offer competing video, voice and data services through
the
deployment of new fiber-based systems, EMCORE has developed and maintains
customer qualified FTTP components and subsystem products. Our CATV and FTTP
products include broadcast analog and digital fiber optic transmitters,
quadrature amplitude modulation (QAM) transmitters, video receivers, and
passive
optical network (PON) transceivers. Government contract revenues for fiber
optics products were $0.7
million
and $1.3
million
for the three and nine months ended June 30, 2006. There were no government
contract revenues for fiber optics products in fiscal 2005. Fiber optics
revenue
represented 62% and 64% of EMCORE's total revenues for the three months ended
June 30, 2006 and 2005, respectively. Fiber optics revenue represented 63%
and
64% of EMCORE's total revenues for the nine months ended June 30, 2006 and
2005,
respectively.
Customers
for the fiber optics segment include: Avago Technologies, Inc., Alcatel,
Aurora
Networks, BUPT-GUOAN Broadband, C-Cor Electronics, Cisco, Finisar,
Hewlett-Packard Corporation, Intel Corporation, Jabil, JDSU, Motorola, Network
Appliance, Scientific-Atlanta, Inc. Sycamore Networks, Inc., and Tellabs.
As
part
of our strategy, we are committed to identifying strategic opportunities
that
either complement or broaden the markets we operate in. Recent acquisitions
include:
· In
May
2005, EMCORE acquired the CATV and RF over fiber specialty businesses from
JDSU.
·
In
November 2005, EMCORE acquired privately held Phasebridge, Inc. of Pasadena,
California.
·
In
December 2005, EMCORE acquired privately held Force, Inc. of Christiansburg,
Virginia.
·
In
January 2006, EMCORE acquired privately held K2 Optronics, Inc. of Sunnyvale,
California
Photovoltaics
EMCORE
serves the global satellite communications market by providing advanced solar
cell products and solar panels. Compound semiconductor solar cells are used
to
power satellites because they are more resistant to radiation levels in space
and convert substantially more power from light, consequently weighing less
per
unit of power than silicon-based solar cells. These characteristics increase
satellite useful life, increase payload capacity, and reduce launch costs.
EMCORE’s Photovoltaics segment designs and manufactures multi-junction compound
semiconductor solar cells for both commercial and military satellite
applications. We currently manufacture and sell one of the most efficient
and
reliable, radiation resistant advanced triple-junction solar cells in the
world,
with an average "beginning of life" efficiency of 27.5%. EMCORE is also the
only
manufacturer to supply true monolithic bypass diodes, for shadow protection,
utilizing several EMCORE patented methods. A satellite’s broadcast success and
corresponding revenue depend on its power efficiency and its capacity to
transmit data. EMCORE also provides covered interconnect cells (CICs) and
solar
panel lay-down services, giving us the capacity to manufacture complete solar
panels. We can provide satellite manufacturers with proven integrated satellite
power solutions that considerably improve satellite economics. Satellite
manufacturers and solar array integrators rely on EMCORE to meet their satellite
power needs with our proven flight heritage. Through well-established
partnerships with major satellite manufacturers and a proven manufacturing
process, we play a vital role in the evolution of satellite communications
around the world.
For
the
three months ended June 30, 2006, EMCORE’s photovoltaic revenues increased $1.5
million or 18% to $10.3 million from $8.8 million, as reported in the prior
year. For the nine months ended June 30, 2006, EMCORE’s photovoltaic revenues
increased $7.3 million or 30% to $31.3 million from $24.1 million, as reported
in the prior year. Increased sales volume of all products: solar cells, solar
panels, and service revenue from government research contracts were the reason
for the significant increase in year over year revenues.
Government
contract revenues for photovoltaics products were $1.4
million
and $2.8 million for the three months ended June 30, 2006 and 2005,
respectively. Government contract revenues for photovoltaics products were
$7.0
million and $5.4
million
for the nine months ended June 30, 2006 and 2005, respectively.
The
space
power generation market continues to depend on government programs as a result
of significant sales price erosion for commercial solar products. After
several years of decline, commercial satellite awards appear to have stabilized
and the pace of new satellite orders thus far point to a modest recovery
in this
sector. This up tick in the commercial area resulted in EMCORE Photovoltaics
being awarded a multiyear volume solar cell production order from a major
satellite manufacturer valued at over $20.0 million. Production under this
purchase order has commenced and shipments are scheduled through the remainder
of 2006 and well into 2007. We see additional areas for growth resulting
from
the recently announced joint venture between the Indian Space Research
Organization (ISRO) and EADS Astrium for the manufacture of GEO communication
satellites. EMCORE is a leading supplier of solar cell products to ISRO,
and we
anticipate increased activity with that customer. Government and military
procurement remains steady, and we have succeeded in gaining market share
in
that area. EMCORE Photovoltaics recently has been awarded solar panel government
contracts for military and science missions, and this represents an expansion
of
our customer base.
EMCORE
is presently engaged in a solar cell development and production program for
a
major US aerospace corporation based on our commercial BTJ photovoltaics
technology. The initial phases of this multi-year cost reimbursable contract
are
focused on technology development and manufacturing optimization. The current
program scope is projected to exceed $40.0 million in development and production
revenues over the next several years.
EMCORE
is
also adapting its high efficiency solar cell product for terrestrial
applications. Intended for use with solar concentrator systems, these cells
have
already been measured at greater than 35% efficiency and further improvements
are anticipated. We believe that these systems will be competitive with silicon
technologies because they are more efficient than silicon and, therefore,
benefit more from concentration than silicon. With energy prices at all time
highs, we expect the demand for alternative energy sources will continue
to gain
momentum.
In
February 2006, EMCORE was awarded a subcontract to participate in the Defense
Research Projects Agency (DARPA) Very High Efficiency Solar Cell (VHSEC)
program
to more than double the efficiency of terrestrial solar cells within the
next 50
months. EMCORE was selected by the University of Delaware, the prime contractor
for the DARPA VHSEC program, to develop advanced III-V multi-junction solar
cells in Phase I of the program effort. The VHSEC program will provide up
to
$53.0 million in funding, which will be awarded to program participants in
various phases over the next several years.
In
July
2006, EMCORE signed a contract with Sandia National Laboratories. Sandia
will
provide technical support for EMCORE’s development of a second-generation
concentrator photovoltaic power system.
Photovoltaics
revenue represented 25% and 27% of EMCORE's total revenues for the three
months
ended June 30, 2006 and 2005, respectively. Photovoltaics revenue
represented 26% and 27% of EMCORE's total revenues for the nine months ended
June 30, 2006 and 2005, respectively. Customers for the photovoltaics segment
include Boeing, General Dynamics, the Indian Space Research Organization,
Lockheed Martin, and Space Systems/Loral.
Electronic
Materials & Devices
EMCORE’s
RF materials are compound semiconductor wafers used in wireless communications.
These materials have a broader bandwidth and superior performance at higher
frequencies compared to silicon-based materials. EMCORE’s Electronic Materials
and Devices (EMD) segment currently produces both GaAs and GaN based transistor
wafers. For GaAs materials, EMD produces 4-inch and 6-inch wafers for four
different products: InGaP hetero-junction bipolar transistors (HBTs),
pseudomorphic high electron mobility transistor wafers (pHEMTs),
enhancement-mode pHEMT transistor wafers (E-modes), and BiFET structures
to
improve PA efficiency and linearity to provide longer talk times for cell
phones. Due to high cell phone growth (with over 850 million units
projected in 2006) and increasing wireless computing demand, EMD has
substantially grown revenues over the first nine months of fiscal
2006 compared to the same period in the prior fiscal year. For GaN
materials, EMD produces 2-inch, 3-inch, and 4-inch AlGaN/GaN HEMT materials
on
silicon carbide, sapphire, and silicon substrates, as well as a DARPA-funded
development program exploring the use of diamond-bonded substrates for enhanced
performance in certain government applications.
For
the
three months ended June 30, 2006, revenues from EMCORE’s EMD segment increased
$2.3 million or 70% to $5.6 million from $3.3 million, as reported in the
prior
year. For the nine months ended June 30, 2006, revenues from EMCORE’s EMD
segment increased $6.1 million or 70% to $14.8 million from $8.7 million,
as
reported in the prior year. Government contract revenues for EMCORE’s EMD
products were $0.5 million and $1.0 million for
the
three months ended June 30, 2006 and 2005, respectively. Government contract
revenues for EMCORE’s EMD products were $1.5
million
and $1.7
million
for the nine months ended June 30, 2006 and 2005, respectively. EMCORE expects
continued funding from government contracts during fiscal 2006, with some
of
this funding transitioning to commercial business in 2007. Overall, the market
that this segment competes in is highly competitive, raw materials are extremely
expensive, and average selling prices have been declining over the past several
years. Management anticipates the broader acceptance of GaAs BiFET materials,
and introduction of new GaN RF materials to drive revenue growth in fiscal
2006.
Both of these materials are expected to be well utilized by major RF product
manufacturers in both infrastructure and wireless devices. EMD’s revenue
represented 13% and 10% of EMCORE's total revenues for the three months ended
June 30, 2006 and 2005, respectively. EMD’s revenue represented 12% and 10% of
EMCORE's total revenues for the nine months ended June 30, 2006 and 2005,
respectively. Major customers for the EMD segment include Anadigics, Inc.,
Freescale Semiconductor, Inc., RFMD, and Triquint.
Gross
Profit
For
the
three months ended June 30, 2006, gross profit increased $1.9 million or
28% to
$8.6 million from $6.7 million, as reported in the prior year. Compared to
the
prior year, gross margins for the three months ended June 30, 2006 increased
to
21% from 20%. On a segment basis, margins for Fiber Optics decreased to 22%
from
23% due in part to our substantial ramp-up costs associated with the PON
transceiver. Margins for the Photovoltaics segment increased to 19% from
17% due
to the completion of a significant long-term solar panel contract. Margins
for
the EMD segment increased to 18% from 13% due to increased revenues.
For
the
nine months ended June 30, 2006, gross profit increased $9.8 million or 68%
to
$24.1 million from $14.3 million, as reported in the prior year. Compared
to the
prior year, gross margins for the nine months ended June 30, 2006 increased
to
20% from 16%. On a segment basis, margins for Fiber Optics increased from
17% to
23%, margins for the Photovoltaics segment remained flat at 13% and margins
for
the EMD segment increased from 13% to 15%.
On
October 1, 2005, EMCORE adopted SFAS No. 123(R) and incurred stock-based
compensation expense as more fully described in Note 3 to EMCORE’s
condensed consolidated financial statements. For the three and nine months
ended June 30, 2006, gross profit includes the effect of $0.3 million and
$0.7
million, respectively, of stock-based compensation expense related to employee
stock options and employee stock purchases under SFAS 123(R), which reduced
gross margin by 0.7% and 0.6%, respectively. There was no stock-based
compensation expense in fiscal 2005.
Factors
that generally contributed to the increase in gross profit include the
introduction of new products where we were first to market which allowed
for
favorable pricing, lower unabsorbed overhead variances due to higher revenue
levels, overall decreasing overhead costs and favorable product mix shifts.
These factors were slightly offset by declining average selling prices, which
is
a gross profit pressure that is expected to remain for the foreseeable future.
Actions designed to improve our gross margins (through product mix improvements,
cost reductions associated with product transfers and product rationalization,
and yield and quality improvements, among other things) continue to be a
principal focus for us.
Operating
Expenses
Selling,
General and Administrative. For
the
three months ended June 30, 2006, SG&A expenses increased $0.3 million or 4%
to $8.2 million from $7.9 million, as reported in the prior year.
For the
nine months ended June 30, 2006, SG&A expenses increased $7.8 million or 42%
to $26.4 million from $18.6 million, as reported in the prior year. This
increase in SG&A is due, in part, to a March 2006 related-party partial loan
forgiveness approved by the Compensation Committee of EMCORE’s Board of
Directors that totaled approximately $2.7 million as more fully described
in
Note 7 to EMCORE’s condensed consolidated financial statements. SG&A
also increased year-over-year due to expenses attributable to the three
businesses acquired since November 2005 totaling $0.9 million, costs incurred
as
we maintain the requirements of the Sarbanes-Oxley Act of 2002, in particular,
Section 404 thereof, the continued investment in personnel strategic to our
business, and expenses associated with the consolidation of EMCORE’s City of
Industry, California location to New Mexico. For the three and nine months
ended
June 30, 2006, the increase in SG&A was also attributable to stock-based
compensation expense of $0.4 million and $1.5 million, respectively.
FY06
SG&A Increase
(in
thousands)
|
|
|
Nine
months ended
June
30, 2006
|
|
|
|
|
|
|
Related-party
loan forgiveness
|
|
$
|
2,683
|
|
SFAS
123(R) stock-based compensation
|
|
|
1,538
|
|
Severance
and restructuring
|
614
|
|||
Acquisitions-related
|
|
|
870
|
|
Additional
other SG&A expenses
|
|
|
2,151
|
|
|
|
|
|
|
Total
|
|
$
|
7,856
|
|
For
the
three months ended June 30, 2006, as a percentage of revenue, SG&A decreased
from 24% to 20%. For the nine months ended June 30, 2006, as a percentage
of
revenue, SG&A remained flat at 21%. In the three and nine months ended June
30, 2005, SG&A expense included approximately $1.8 million and $2.5 million
in severance-related and impairment charges. With the closure of our City
of
Industry facility and the sale of our EMD business, we expect SG&A to
decrease going forward. We intend to continue to aggressively address our
SG&A expenses and reduce these expenses as, and when, opportunities
arise.
Research
and Development.
Our R&D efforts have been sharply focused to maintain our technology
leadership position by working to improve the quality and attributes of our
product lines. We also invest significant resources to develop new products
and
production technology to expand into new market opportunities by leveraging
our
existing technology base and infrastructure. Our efforts are focused on
designing new proprietary processes and products, on improving the performance
of our existing materials, components, and subsystems, and on reducing costs
in
the product manufacturing process. In addition to using our internal capacity
to
develop and manufacture products for our target markets, EMCORE continues
to
expand its portfolio of products and technologies through
acquisitions.
For
the
three months ended June 30, 2006, R&D expenses increased $1.1 million or 27%
to $5.2 million from $4.1 million, as reported in the prior year.
For
the
nine months ended June 30, 2006, R&D expenses increased $1.4 million or 10%
to $14.6 million from $13.2 million, as reported in the prior year. The increase
in R&D is due to expenses attributable to the three businesses acquired
since November 2005 totaling $1.4 million. For the three and nine months
ended
June 30, 2006, the increase in R&D was also attributable to stock-based
compensation expense of $0.3 million and $0.8 million, respectively. As a
percentage of revenue, R&D remained flat at 12% for the three months ended
June 30, 2006 and 2005. As a percentage of revenue, R&D decreased from 15%
to 12% for the nine months ended June 30, 2006 and 2005.
FY06
R&D Increase
(in
thousands)
|
|
Nine
months ended
June
30, 2006
|
|
|
|
|
|
SFAS
123(R) stock-based compensation
|
$
|
837
|
|
Acquisitions-related
|
|
1,396
|
|
Reduction
of other R&D expenses
|
|
(872
|
)
|
Total
|
$
|
1,361
|
|
The
reduction of other R&D expenses is a direct result of several new product
launches. We believe that recently completed R&D projects have the potential
to greatly improve our competitive position and drive revenue growth in the
next
few years. Listed below are a couple of examples:
· In
the
FTTP market, EMCORE has developed an integrated PON transceiver utilizing
Ortel’s industry leading video technology. EMCORE’s PON transceiver has been
customer qualified and is now in volume production.
·
In
the
photovoltaics market, EMCORE has developed a high efficiency solar cell product
for terrestrial applications. Intended for use in concentrated sunlight,
these
cells have been measured at greater than 35% efficiency at 500
suns.
As
part
of the ongoing effort to cut costs, many of our projects are to develop lower
cost versions of our existing products and of our existing processes, while
improving quality. Also, we have implemented a program to focus research
and
product development efforts on projects that we expect to generate returns
within one year. As a result, EMCORE reduced overall R&D costs as a
percentage of revenue without, we believe, jeopardizing future revenue
opportunities. Our technology and product leadership is an important competitive
advantage. Driven by current and anticipated demand, we will continue to
invest
in new technologies and products that offer our customers increased efficiency,
higher performance, improved functionality, and/or higher levels of
integration.
In
the
near term, we expect R&D spending to increase as we invest in solar
concentrator system development.
Other
Income & Expenses
Loss
from Convertible Subordinated Notes Exchange Offer. In
November 2005, EMCORE exchanged $14,425,000 aggregate principal amount of
EMCORE’s 5% convertible subordinated notes due in May 2006 for $16,580,460
aggregate principal amount of newly issued convertible senior subordinated
notes
due May 15, 2011. As a result of this transaction, EMCORE recognized a non-cash
loss of approximately $1.1 million in the first quarter of fiscal 2006 related
to the early extinguishment of debt. EMCORE will also incur an additional
non-cash loss of approximately $1.1 million over the life of the subordinated
notes, which will be charged to interest expense. This charge will increase
interest expense by approximately $70,000 per quarter through May 2011, the
maturity date of the convertible subordinated notes.
Discontinued
Operations.
In
November 2003, EMCORE sold its TurboDisc capital equipment business in an
asset
sale to a subsidiary of Veeco Instruments Inc. (Veeco). The selling price
was
$60.0 million in cash at closing, with a potential additional earn-out up
to
$20.0 million over the next two years, calculated based on the net sales
of
TurboDisc products. In March 2005, EMCORE received $13.2 million of earn-out
payment from Veeco in connection with its first year of net sales of TurboDisc
products. After offsetting this receipt against expenses related to the
discontinued operation, EMCORE recorded a net gain from the disposal of
discontinued operations of $12.5 million. In March 2006, EMCORE earned $2.0
million as a final earn-out payment from Veeco in connection with Veeco’s second
year of net sales of TurboDisc products. The cumulative additional
earn-out totaled $15.2 million or 76% of the maximum available payout of
$20.0
million.
Liquidity
and Capital Resources
Working
Capital
As
of
June 30, 2006, EMCORE had working capital of approximately $46.7 million
compared to $53.5 million as of September 30, 2005. Cash, cash equivalents,
and
marketable securities at June 30, 2006 totaled $25.3 million, which reflects
a
net decrease of $15.4 million from September 30, 2005.
Cash
Flow
Net
Cash Used For Operations
For
the
nine months ended June 30, 2006, net cash used for operations decreased $3.2
million or 15% to $18.0 million from $21.2 million, as reported in the prior
period. The following is a summary of the major items accounting for the
cash
used in operations:
For
the
nine months ended June 30, 2006, significant changes in working capital include
an increase in receivables of $4.1 million, an increase in inventory of $5.9
million and a decrease in accounts payable and accrued expenses of $4.6 million.
The majority of the fluctuation is due to recent business acquisitions. For
the
nine months ended June 30, 2005, changes in working capital included an increase
in receivables of $6.6 million, an increase in inventory of $2.8 million
and a
decrease in accounts payable and accrued expenses of $3.7 million.
Net
Cash Provided by Investing Activities
For
the
nine months ended June 30, 2006, net cash provided by investing activities
decreased by $7.2 million to $9.1 million from $16.3 million, as reported
in the
prior year. Changes in cash flow during the nine months ended June 30, 2006
and
2005 consisted of:
In
March
2005, EMCORE received $13.2 million of earn-out payment from Veeco in connection
with its first year of net sales of TurboDisc products.
Capital
expenditures - During the nine months ended June 30, 2006, capital expenditures
increased to $4.0 million from $3.3 million, as reported in the prior period.
A
significant portion of the increase in capital spending is related to our
photovoltaics division as it increases manufacturing capacity.
Investment
in K2 - In fiscal 2005, EMCORE made an investment of $1.0 million in K2.
EMCORE
acquired the remaining interest in K2 in January 2006, as more fully described
in Note 5 to EMCORE’s condensed consolidated financial
statements.
Net
Cash Provided By Financing Activities
For
the
nine months ended June 30, 2006, net cash provided by financing activities
increased $4.0 million to $5.5 million from $1.5 million. In fiscal 2006,
proceeds from the exercise of stock options provided $6.0 million.
Financing
Transactions
In
May
2001, EMCORE issued $175.0 million aggregate principal amount of its 5%
convertible subordinated notes due in May 2006 (2006 Notes). In December
2002,
EMCORE purchased $13.2 million principal amount of the 2006 Notes at prevailing
market prices for an aggregate of approximately $6.3 million, resulting in
a
gain of approximately $6.6 million after netting unamortized debt issuance
costs
of approximately $0.3 million. In February 2004, EMCORE exchanged approximately
$146.0 million, or 90.2%, of its remaining 2006 Notes for approximately $80.3
million aggregate principal amount of new 5% convertible senior subordinated
notes due May 15, 2011 (2011 Notes) and approximately 7.7 million shares
of
EMCORE common stock. Interest on the 2011 Notes is payable in arrears
semiannually on May 15 and November 15 of each year. The notes are convertible
into EMCORE common stock at a conversion price of $8.06 per share, subject
to
adjustment under customary anti-dilution provisions. They also are redeemable
should EMCORE's common stock price reach $12.09 per share for at least twenty
trading days within a period of any thirty consecutive trading days. As a
result
of this transaction, EMCORE reduced debt by approximately $65.7 million,
recorded a gain from early debt extinguishment of approximately $12.3 million.
In
November 2005, EMCORE exchanged $14,425,000 aggregate principal amount of
EMCORE’s 2006 Notes for $16,580,460 aggregate principal amount of newly issued
convertible senior subordinated notes due May 15, 2011 (New 2011 Notes) pursuant
to an Exchange Agreement (Agreement) with Alexandra Global Master Fund Ltd.
(Alexandra). The terms of the New 2011 Notes are identical in all
material respects to EMCORE’s 2011 Notes. The New 2011 Notes are
ranked pari passu with the existing 2011 Notes. The New 2011 Notes will be
convertible at any time prior to maturity, unless previously redeemed or
repurchased by EMCORE, into the shares of EMCORE common stock, no par value,
at
the conversion rate of 124.0695 shares of common stock per $1,000 principal
amount. The effective conversion rate is $8.06 per share of common stock,
subject to adjustment under customary anti-dilution provisions. They also
are
redeemable should EMCORE's common stock price reach $12.09 per share for
at
least twenty trading days within a period of any thirty consecutive trading
days. As a result of this transaction, EMCORE recognized a non-cash loss
of approximately $1.1 million in the first quarter of fiscal 2006 related
to the
early extinguishment of debt. EMCORE will also incur an additional non-cash
loss
of approximately $1.1 million over the life of the subordinated notes issued
to
Alexandra, which will be charged to interest expense. Furthermore, the 2006
Notes exchanged by Alexandra represented approximately 91.4% of the $15,775,000
total amount of existing 2006 Notes outstanding at the time of the
transaction. EMCORE paid the remaining $1,350,000 of 2006 Notes on the May
15, 2006 maturity date.
EMCORE
may repurchase 2011 Notes and/or New 2011 Notes through various means,
including, but not limited to, one or more open market or privately negotiated
transactions in future periods. The timing and amount of repurchase, if any,
whether de
minimis or
material, will depend on many factors, including, but not limited to, the
availability of capital, the prevailing market price of the notes, and overall
market conditions.
If
our
cash flow is inadequate to meet our obligations or we are unable to generate
sufficient cash flow or otherwise obtain funds necessary to make required
payments on the notes or our other obligations, we would be in default under
the
terms thereof. Default under any of the note indentures would permit the
holders
of the notes to accelerate the maturity of the notes and could cause defaults
under future indebtedness we may incur. Any such default would have a material
adverse effect on our business, prospects, financial condition, results of
operations and cash flows. In addition, we cannot assure you that we would
be
able to repay amounts due in respect of the notes if payment of any of the
notes
were to be accelerated following the occurrence of an event of default as
defined in the respective note indentures.
In
September 2005, EMCORE entered into a non-recourse receivables purchase
agreement (AR Agreement) with Silicon Valley Bank (SVBank). Under the
terms of the AR Agreement, EMCORE from time to time may sell, without recourse,
certain account receivables to SVBank up to a maximum aggregate outstanding
amount of $20.0 million. The AR Agreement expires on December 31, 2006,
unless the term is extended by mutual agreement by all parties. In June 2006
and
September 2005, EMCORE sold approximately $6.5 million and $2.2 million of
account receivables to SVBank, respectively.
EMCORE
guarantees 49% of any amounts borrowed under GELcore’s revolving credit line. As
of June 30, 2006, GELcore’s outstanding borrowings were $4.9 million. The
maximum borrowing currently permitted under the credit line is approximately
$10.0 million.
Conclusion
We
believe that our current liquidity including proceeds from the sale of the
EMD
business should be sufficient to meet our cash needs for working capital
through
the next twelve months. If 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, our ability to continue to fund expansion,
develop and enhance products and services, or otherwise respond to competitive
pressures may be severely limited. Such a limitation could have a material
adverse effect on EMCORE's business, financial condition, results of operations,
and cash flow.
We
are
exposed to financial market risks, including changes in currency exchange
rates,
interest rates, and non-marketable equity security prices. We do not use
derivative financial instruments for speculative purposes.
Currency
Exchange Rates.
Although EMCORE enters into transactions denominated in foreign currencies
from
time to time, the total amount of such transactions is not material.
Accordingly, fluctuations in foreign currency values would not have a material
adverse effect on our future financial condition or results of operations.
However, some of our foreign suppliers may adjust their prices (in $US) from
time to time to reflect currency exchange fluctuations, and such price changes
could impact our future financial condition or results of
operations.
Interest
Rates.
We
maintain an investment portfolio in a variety of high-grade (AAA), short-term
debt and money market instruments, which carry a minimal degree of interest
rate
risk. Due in part to these factors, our future investment income may be slightly
less than expected because of changes in interest rates, or we may suffer
insignificant losses in principal if forced to sell securities that have
experienced a decline in market value because of changes in interest
rates.
Non-Marketable
Equity Securities. Our
strategic investments in non-marketable equity securities would be affected
by
an adverse movement of equity market prices, although the impact cannot be
directly quantified. Such a movement and the related underlying economic
conditions would negatively affect the prospects of the companies in which we
invest, their ability to raise additional capital, and the likelihood of
our
being able to realize our investments through liquidity events, such as initial
public offerings, mergers, and private sales. These types of investments
involve
a great deal of risk, and there can be no assurance that any specific company
will grow or will become successful. Consequently, we could lose all or part
of
our investment.
(a) Evaluation
of Disclosure Controls and Procedures
The
term
“disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e)
of the Securities Exchange Act of 1934, as amended (Exchange Act). This term
refers to the controls and procedures of a company that are designed to ensure
that information required to be disclosed by a company in the reports that
it
files under the Exchange Act is recorded, processed, summarized, and reported
within required time periods. Our Chief Executive Officer and our Chief
Financial Officer have evaluated the effectiveness of our disclosure controls
and procedures as of the end of the period covered by this quarterly report.
They have concluded that, as of that date, our disclosure controls and
procedures were effective.
(b) Changes
in Internal Control over Financial Reporting
No
change
in our internal control over financial reporting (as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act) occurred during the quarter ended June
30,
2006 that has materially affected, or is reasonably likely to materially
affect,
our internal control over financial reporting.
We
are
involved in lawsuits and proceedings which arise in the ordinary course of
business. There are no matters pending or threatened that we expect to be
material in relation to our business, consolidated financial condition, results
of operations, or cash flows.
You
should carefully consider the risks described below. Our business, financial
condition or results of operations could be materially adversely affected
by any
of these risks We caution the reader that these risk factors may not be
exhaustive and that we operate in a continually changing business environment
where new risks emerge from time to time. Risks not presently known to us
or
that we currently deem immaterial could also materially adversely affect
our
business, financial condition and results of operations.
We
have a history of incurring significant net losses and our future profitability
is not assured.
We
commenced operations in 1984 and as of June 30, 2006, we had an accumulated
deficit of $335.3 million. We incurred net losses of $19.4 million for the
nine
months ended June 30, 2006, $13.1 million in fiscal 2005, $13.4 million in
fiscal 2004 and $38.5 million in fiscal 2003. Our operating results for future
periods are subject to numerous uncertainties and we cannot assure you that
we
will not continue to experience net losses for the foreseeable future. Although
our revenues have grown in recent years, we may be unable to sustain such
growth
rates in light of changed market or economic conditions. In addition, if
we are
not able to reduce our costs, we may not be able to achieve
profitability.
Our
future revenues are inherently unpredictable. As a result, our operating
results
are likely to fluctuate from period to period, which may cause volatility
in our
stock price and may cause our stock price to decline.
Our
quarterly and annual operating results have fluctuated substantially in the
past
and are likely to fluctuate significantly in the future due to a variety
of
factors, some of which are outside of our control. The factors that could
cause
our quarterly or annual operating results to fluctuate include:
· |
market
acceptance of our products;
|
· |
market
demand for the products and services manufactured and provided by
our
customers;
|
· |
disruptions
or delays in our manufacturing processes or in our supply of raw
materials
or product components;
|
· |
changes
in the timing and size of orders by our
customers;
|
· |
cancellations
and postponements of previously placed
orders;
|
· |
reductions
in prices for our products or increases in the costs of our raw materials;
and
|
· |
the
introduction of new products and manufacturing
processes.
|
In
addition, the limited lead times with which several of our customers order
our
products restrict our ability to forecast revenues. We may also experience
a
delay in generating or recognizing revenues for a number of reasons. For
example, orders at the beginning of each quarter typically represent a small
percentage of expected revenues for that quarter and are generally cancelable
at
any time. We depend on obtaining orders during each quarter for shipment
in that
quarter to achieve our revenue objectives. Failure to ship these products
by the
end of a quarter may adversely affect our results of operations.
As
a
result of the foregoing, we believe that period-to-period comparisons of
our
results of operations should not be relied upon as indications of future
performance. In addition, our results of operations in one or more future
quarters may fail to meet the expectations of securities analysts or investors,
which would likely result in a decline in the trading price of our common
stock.
Our
ability to achieve operational and material cost reductions and to realize
production efficiencies for our operations is critical to our ability to
achieve
long-term profitability.
We
currently are in the process of implementing a number of operational and
material cost reductions and productivity improvement initiatives, particularly
with regards to our Fiber Optics segment. Cost reduction initiatives often
involve re-design of our products, which requires our customers to accept
and
qualify the new designs, potentially creating a competitive disadvantage
for our
products. We are also in the process of consolidating our solar panel operations
by moving our operations in City of Industry, California to our Albuquerque,
New
Mexico facility and may pursue other consolidation initiatives in the future.
These initiatives can be time-consuming and disruptive to our operations
and
costly in the short term. Successfully implementing these and other
cost-reduction initiatives throughout our operations is critical to our future
competitiveness and ability to achieve long-term profitability. However,
there
can be no assurance that these initiatives will be successful.
We
are substantially dependent on a small number of customers and the loss of
any
one of these customers could materially adversely affect our business, financial
condition and results of operations.
Our
top
five customers accounted for 35% of our total revenue for the nine months
ended
June 30, 2006, and 45% of our total revenue in fiscal 2005. In particular,
Cisco
Systems, Inc. accounted for 19% of our total revenue in fiscal 2005 and 14%
of
our total revenue for the nine months ended June 30, 2006. The majority of
our
revenue from Cisco came from sales of our LX4 module. We do not have an
exclusive commercial arrangement or a long term contract with Cisco and Cisco
has made it clear that continued sales are dependent on our price, quality
and
delivery. We understand that Cisco has recently qualified another vendor
for LX4
modules and is working with several vendors in addition to us to qualify
the
next generation LX4 module, the X2. If Cisco decreases its purchase orders
for
any reason, our business, financial condition and results of operations will
be
harmed. There can be no assurance that we will continue to achieve historical
levels of sales of our products to our largest customers. The loss of or
a
reduction in sales to one or more of our largest customers could have a material
adverse affect on our business, financial condition and results of
operations.
We
may not be successful in obtaining market acceptance and demand for our
terrestrial solar products.
We
have
invested and intend to continue to invest significant resources in the
adaptation of our solar cell products for terrestrial applications. This
will
require substantial additional funding for the hiring of employees, research
and
development and investment in capital equipment. Factors such as changes
in
energy prices or the development of new and efficient alternative energy
technologies could limit growth in or reduce the market for terrestrial solar
products. In addition, we may experience difficulties in applying our
satellite-based solar products to terrestrial applications or may be unable
to
compete with new and emerging terrestrial solar products.
There
can
be no assurance that our bids on solar power installations will be accepted,
that we will win any of these bids or that our solar concentrator systems
will
be qualified for these projects. If our terrestrial solar cell products are
not
cost competitive or accepted by the market, our business, financial condition
and results of operations may be materially adversely affected.
If
we
do not keep pace with rapid technological change, our products may not be
competitive.
We
compete in markets that are characterized by rapid technological change,
frequent new product introductions, changes in customer requirements, evolving
industry standards, continuous improvement in products and the use of our
existing products in new applications. We may not be able to develop the
underlying core technologies necessary to create new products and enhancements
at the same rate as or faster than our competitors, or to license the technology
from third parties that is necessary for our products. Product development
delays may result from numerous factors, including:
· |
changing
product specifications and customer
requirements;
|
· |
unanticipated
engineering complexities;
|
· |
expense
reduction measures we have implemented and others we may
implement;
|
· |
difficulties
in hiring and retaining necessary technical personnel;
and
|
· |
difficulties
in allocating engineering resources and overcoming resource
limitations.
|
We
cannot
assure you that we will be able to identify, develop, manufacture, market
or
support new or enhanced products successfully, if at all, or on a timely,
cost
effective or repeatable basis. Our future performance will depend on our
successful development and introduction of, as well as market acceptance
of, new
and enhanced products that address market changes as well as current and
potential customer requirements and our ability to respond effectively to
product announcements by competitors, technological changes or emerging industry
standards. 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. If we incur budget
overruns or delays in our research and development efforts, our business,
financial condition and results of operations may be materially adversely
affected.
The
competitive and rapidly evolving nature of our industry has in the past resulted
and is likely in the future to result in reductions in our product prices
and
periods of reduced demand for our products.
We
face
substantial competition in each of our operating segments from a number of
companies, many of which have greater financial, marketing, manufacturing
and
technical resources than us. Larger-sized competitors often spend more on
research and development, which could give those competitors an advantage
in
meeting customer demands and introducing technologically innovative products
before we do. We expect that existing and new competitors will improve the
design of their existing products and will introduce new products with enhanced
performance characteristics.
The
introduction of new products and more efficient production of existing products
by our competitors has resulted and is likely in the future to result in
price
reductions and increases in expenses and reduced demand for our products.
In
addition, some of our competitors may be willing to provide their products
at
lower prices, accept a lower profit margin or expend more capital in order
to
obtain or retain business. Competitive pressures have required us to reduce
the
prices of some of our products, including our LX4 modules and our solar cells.
These competitive forces could diminish our market share and gross margins,
resulting in a material adverse effect on our business, financial condition
and
results of operations.
New
competitors may also enter our markets, including some of our current and
potential customers who may attempt to integrate their operations by producing
their own components and subsystems or acquiring one of our competitors,
thereby
reducing demand for our products. In addition, rapid product development
cycles,
increasing price competition due to maturation of technologies, the emergence
of
new competitors in Asia with lower cost structures and industry consolidation
resulting in competitors with greater financial, marketing and technical
resources could result in lower prices or reduced demand for our
products.
Expected
and actual introductions of new and enhanced products may cause our customers
to
defer or cancel orders for existing products and may cause our products to
become obsolete. A slowdown in demand for existing products ahead of a new
product introduction could result in a write-down in the value of inventory
on
hand related to existing products. We have in the past experienced a slowdown
in
demand for existing products and delays in new product development and such
delays may occur in the future. To the extent customers defer or cancel orders
for existing products due to a slowdown in demand or in the expectation of
a new
product release or if there is any delay in development or introduction of
our
new products or enhancements of our products, our business, financial condition
and results of operations could be materially adversely affected.
We
may not be successful in implementing our growth strategy if we are unable
to
identify and acquire suitable acquisition targets. In addition, our acquisitions
may not have the anticipated effect on our financial results.
Finding
and consummating acquisitions is an important component of our growth strategy.
Our continued ability to grow by acquisition is dependent upon the availability
of suitable acquisition candidates and may be dependent on our ability to
obtain
acquisition financing on acceptable terms. We experience competition in making
acquisitions from larger companies with significantly greater resources.
There
can be no assurance that we will be able to procure the necessary funds to
effectuate our acquisition strategy on commercially reasonable terms, or
at
all.
Future
acquisitions by us may involve the following:
· |
use
of significant amounts of cash;
|
· |
potentially
dilutive issuances of equity securities on potentially unfavorable
terms;
and
|
· |
incurrence
of debt on potentially unfavorable terms, as well as amortization
expense
related to intangible assets.
|
If
we
are unable to successfully integrate companies we acquire into our operations
on
a timely basis, our profitability could be negatively
affected.
We
expect
that our acquisitions will result in certain business opportunities and growth
prospects. We, however, may never realize these expected business opportunities
and growth prospects. We may experience increased competition that limits
our
ability to expand our business. Our assumptions underlying estimates of expected
cost savings may be inaccurate or general industry and business conditions
may
deteriorate.
Acquisitions
involve numerous risks, including, but not limited to:
· |
difficulties
in assimilating and integrating the operations, technologies and
products
acquired;
|
· |
the
diversion of our management's attention from other business
concerns;
|
· |
current
operating and financial systems and controls may be inadequate to
deal
with our growth;
|
· |
the
risk that we will be unable to maintain or renew any of the contracts
of
businesses we acquire;
|
· |
the
risks of entering markets in which we have limited or no prior experience;
and
|
· |
potential
loss of key employees of the acquired business or company or of
us.
|
If
these
factors limit our ability to integrate the operations of our acquisitions
successfully or on a timely basis, our expectations of future results of
operations may not be met. In addition, our growth and operating strategies
for
businesses we acquire may be different from the strategies that such business
currently is pursuing. If our strategies are not the proper strategies for
a
business we acquire, it could materially adversely affect our business,
financial condition and results of operations. Further, there can be no
assurance that we will be able to maintain or enhance the profitability of
any
acquired business or consolidate the operations of any acquired business
to
achieve cost savings.
In
addition, there may be liabilities that we fail, or are unable, to discover
in
the course of performing due diligence investigations on each company, business
or asset we have already acquired or may acquire in the future. Such liabilities
could include those arising from employee benefits contribution obligations
of a
prior owner or non-compliance with, or liability pursuant to, applicable
federal, state or local environmental requirements by prior owners for which
we,
as a successor owner, may be responsible. In addition, there may be additional
costs relating to acquisitions including, but not limited to, possible purchase
price adjustments. We cannot assure you that rights to indemnification by
sellers of assets to us, even if obtained, will be enforceable, collectible
or
sufficient in amount, scope or duration to fully offset the possible liabilities
associated with the business or property acquired. Any such liabilities,
individually or in the aggregate, could materially adversely affect our
business, financial condition and results of operations.
Our
products are difficult to manufacture. Our production could be disrupted
and our
results will suffer if our production yields are low as a result of
manufacturing difficulties.
We
manufacture many of our products in our own production facilities. Difficulties
in the production process, such as contamination, poor quality materials,
human
error or equipment failure, can cause a substantial percentage of our products
to be nonfunctional. Lower-than-expected production yields may delay shipments
or result in unexpected levels of warranty claims, either of which can
materially adversely affect our results of operations. We have experienced
difficulties in achieving planned yields in the past, particularly in
pre-production and upon initial commencement of full production volumes,
which
have adversely affected our gross margins. Because the majority of our
manufacturing costs are fixed, achieving planned production yields is critical
to our results of operations. As a result of manufacturing many of our products
in a single facility, we have greater exposure to the risk of interruption
in
manufacturing resulting from fire, natural disaster, equipment failures,
or
similar events than we would if we had back-up facilities available for
manufacturing these products. We could also incur significant costs to repair
and/or replace products that are defective and in some cases costly product
redesigns and/or rework may be required to correct a defect. Additionally,
any
defect could adversely affect our reputation and result in the loss of future
orders.
We
face lengthy sales and qualifications cycles for our new products and, in
many
cases, must invest a substantial amount of time and funds before we receive
orders.
Most
of
our products are tested by current and potential customers to determine whether
they meet customer or industry specifications. The length of these qualification
processes, which sometimes span a year or more, also may vary substantially
by
product and customer, and thus cause our results of operations to be
unpredictable. During a given qualification period and prior to any commitment
to purchase by customers and without generating significant revenues from
the
qualification process, we invest significant resources and allocate substantial
production capacity to manufacture these new products. In addition, these
qualification processes often make it difficult to obtain new customers for
existing products, as customers are reluctant to expend the resources necessary
to qualify a new supplier if they have one or more existing qualified sources.
If we are unable to meet applicable specifications or do not receive sufficient
orders to profitably use the allocated production capacity, our business,
financial condition and results of operations could be materially adversely
affected.
Our
historical and future budgets for operating expenses, capital expenditures,
operating leases and service contracts are based upon our assumptions as
to the
anticipated market acceptance of our products. Because of the lengthy lead
times
required for product development and the changes in technology that typically
occur while a product is being developed, it is difficult to accurately estimate
customer demand for any given product. If our products do not achieve an
adequate level of customer demand, our business, financial condition and
results
of operations could be materially adversely affected.
If
our contract manufacturers fail to deliver quality products at reasonable
prices
and on a timely basis, our business, financial condition and results of
operations could be materially adversely affected.
We
are
increasing our use of contract manufacturers located outside of the U.S.
as a
less-expensive alternative to performing our own manufacturing of certain
products. Substantially all of our high-volume parts are currently manufactured
by contract manufacturers in Asia. If these contract manufacturers do not
fulfill their obligations to us, or if we do not properly manage these
relationships and the transition of production to these contract manufacturers,
our existing customer relationships may suffer. For example, we recently
experienced difficulties filling orders in our fiber-to-the-premises business
due to limited available capacity of one of our contract manufacturers. In
addition, by increasing our use of foreign contract manufacturers, we run
the
risk that the reputation and competitiveness of our products and services
may
deteriorate as a result of the reduction of our ability to oversee and control
quality and delivery schedules. The use of contract manufacturers located
outside of the U.S. also subjects us to the following additional risks that
could significantly impair our ability to source our contract manufacturing
requirements internationally:
· |
unexpected
changes in regulatory requirements;
|
· |
legal
uncertainties regarding liability, tariffs and other trade
barriers;
|
· |
inadequate
protection of intellectual property in some
countries;
|
· |
greater
incidence of shipping delays;
|
· |
greater
difficulty in hiring talent needed to oversee manufacturing operations;
and
|
· |
potential
political and economic instability.
|
Prior
to
our customers accepting products manufactured at our contract manufacturers,
they must requalify the product and manufacturing processes. The qualification
process can be lengthy and is expensive, with no guarantee that any particular
product qualification process will lead to profitable product sales. The
qualification process determines whether the product manufactured at our
contract manufacturer achieves our customers’ quality, performance and
reliability standards. Our expectations as to the time periods required to
qualify a product line and ship products in volumes to customers may be
erroneous. Delays in qualification can impair the expected timing of the
transfer of a product line to our contract manufacturer and may impair the
expected amount of sales of the affected products. We may, in fact, experience
delays in obtaining qualification of our contract manufacturers’ manufacturing
lines and, as a consequence, our operating results and customer relationships
could be materially adversely affected.
Our
supply chain and manufacturing process relies on accurate forecasting to
provide
us with optimal margins and profitability. Because of market uncertainties,
forecasting is becoming much more difficult. In addition, as we come to rely
more heavily on contract manufacturers, we may have fewer personnel with
expertise to manage these third-party arrangements.
Protecting
our trade secrets and obtaining patent protection is critical to our ability
to
effectively compete.
Our
success and competitive position depend on protecting our trade secrets and
other intellectual property. Our strategy is to rely both on trade secrets
and
patents to protect our manufacturing and sales processes and products. 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,
our joint venture partner, customers and suppliers. If parties breach these
agreements or the measures we take are not properly implemented, we may not
have
an adequate remedy. Disclosure of our trade secrets or reverse engineering
of
our proprietary products, processes, or devices could materially adversely
affect our business, financial condition and results of operations.
There
is
also no assurance that any patents will afford us commercially significant
protection of our technologies or that we will have adequate resources to
enforce our patents. Nor can there be any assurance that the significant
number
of patent applications that we have filed and are pending, or those we may
file
in the future, will result in patents being issued. In addition, the laws
of
certain other countries may not protect our intellectual property to the
same
extent as U.S. laws.
Our
failure to obtain or maintain the right to use certain intellectual property
may
materially adversely affect our business, financial condition and results
of
operations.
The
compound semiconductor, optoelectronics and fiber optic communications
industries are characterized by frequent litigation regarding patent and
other
intellectual property rights. From time to time we have received, and may
receive in the future, notice of claims of infringement of other parties’
proprietary rights and licensing offers to commercialize third party patent
rights. Although we are not currently involved in any litigation relating
to our
intellectual property, there can be no assurance that:
· |
infringement
claims (or claims for indemnification resulting from infringement
claims)
will not be asserted against us or that such claims will not be
successful;
|
· |
future
assertions will not result in an injunction against the sale of infringing
products or otherwise significantly impair our business and results
of
operations;
|
· |
any
patent owned by us will not be invalidated, circumvented or challenged;
or
|
· |
we
will not be required to obtain licenses, the expense of which may
adversely affect our results of operations and
profitability.
|
In
addition, effective copyright and trade secret protection may be unavailable
or
limited in certain foreign countries. Litigation, which could result in
substantial cost to us and diversion of our resources, may be necessary to
defend our rights or defend us against claimed infringement of the rights
of
others. In certain circumstances, our intellectual property rights associated
with government contracts may be limited.
Our
substantial level of indebtedness could materially adversely affect our
business, financial condition and results of operations.
We
have
substantial debt service obligations. As of June 30, 2006, our long-term
debt
was $96.2 million, which represented approximately 57% of our total long-term
debt and shareholders’ equity. In addition, we guarantee 49% of any amounts
borrowed under GELcore’s $10 million revolving credit line, which amount equaled
approximately $4.9 million as of June 30, 2006. We may incur additional debt
in
the future. This significant amount of debt could:
· |
make
it difficult for us to make payments on our convertible senior
subordinated notes and any other debt we may
have;
|
· |
make
it difficult for us to obtain any necessary future financing for
acquisitions, working capital, capital expenditures, debt service
requirements or other purposes;
|
· |
make
us more vulnerable to adverse changes in general economic, industry
and
competitive conditions, in government regulation and in our business
by
limiting our flexibility in planning for, and making it more difficult
for
us to react quickly to, changing
conditions;
|
· |
place
us at a competitive disadvantage compared with our competitors that
have
less debt;
|
· |
require
us to dedicate a substantial portion of our cash flow from operations
to
service our debt, which would reduce the amount of our cash flow
available
for other purposes, including acquisitions, working capital and capital
expenditures;
|
· |
limit
funds available for research and development;
and
|
· |
limit
our flexibility in planning for, or reacting to, changes in our
business.
|
If
our
cash flow is inadequate to meet our obligations or we are unable to generate
sufficient cash flow or otherwise obtain funds necessary to make required
payments on our outstanding indebtedness, we would be in default under the
terms
of our indebtedness. Default under the indenture governing our approximately
$95.8 million aggregate principal amount of convertible senior subordinated
notes would permit the holders of such notes to accelerate the maturity of
the
notes and could cause defaults under future indebtedness we may incur. Any
such
default could materially adversely affect our business, financial condition
and
results of operations. In addition, we cannot assure you that we would be
able
to repay amounts due in respect of the notes if payment of the notes were
to be
accelerated following the occurrence of an event of default as defined in
the
indenture.
We
generally do not have long-term contracts with our customers and we typically
sell our products pursuant to purchase orders with short lead times. As a
result, our customers could stop purchasing our products at any time and
we must
fulfill orders in a timely manner to keep our customers.
We
do not
generally have long-term contracts with our customers. As a result, our
agreements with our customers do not provide any assurance of future sales.
Risks associated with the absence of long-term contracts with our customers
include that:
· |
our
customers can stop purchasing our products at any time without
penalty;
|
· |
our
customers may purchase products from our competitors;
and
|
· |
our
customers are not required to make minimum
purchases.
|
We
generally sell our products pursuant to individual purchase orders, which
often
have extremely short lead times. If we are unable to fulfill these orders
in a
timely manner, it is likely that we will lose sales and customers. In addition,
we sell some of our products to governments and governmental entities. These
contracts are generally subject to termination for convenience provisions
and
may be cancelled at any time.
Our
joint venture agreement with General Electric Lighting contains provisions
that
require both parties to agree on most fundamental strategic issues. If we
and
our joint venture partner are unable to agree, GELcore’s business may be
adversely affected.
We
have a
49% minority interest in our GELcore joint venture with General Electric
Lighting. A board of managers governs GELcore with two representatives from
each
of General Electric Lighting and EMCORE and a fifth, selected by General
Electric Lighting, who also serves as chief executive officer of GELcore.
Many
fundamental decisions must be approved by both parties, which means we will
be
unable to direct the operation and direction of GELcore without the agreement
of
General Electric Lighting. If we are unable to agree on important commercial
issues with General Electric Lighting, GELcore's business may be delayed
or
interrupted, which may, in turn, materially adversely affect our financial
condition and results of operations.
We
have
devoted and may be required to continue to devote significant funds and
technologies to GELcore to develop and enhance its products. We guarantee
49% of
any amounts borrowed under GELcore’s approximately $10.0 million revolving
credit line, under which GELcore’s outstanding borrowings were approximately
$4.9 million as of June 30, 2006. In addition, GELcore requires that some
of our
employees devote much of their time to its projects. This places a strain
on our
management, scientific, financial and sales employees. If GELcore is
unsuccessful in developing and marketing its products, our business, financial
condition and results of operations may be materially adversely
affected.
We
have
agreed with General Electric Lighting that this joint venture will be the
sole
vehicle for each party's participation in the solid state lighting market.
We
have both also agreed to several limitations during the life of the venture
and
thereafter relating to how each of us can make use of the joint venture's
technology. One consequence of these limitations is that, in certain
circumstances, such as a material default by us or certain sales of our interest
in the joint venture, we would not be permitted to use the joint venture's
technology to compete in the solid state lighting market.
We
have significant international sales, which expose us to additional risks
and
uncertainties.
Sales
to
customers located outside the U.S. accounted for approximately 18% of our
revenue in the nine months ended June 30, 2006, 15% of our revenues in fiscal
2005, 29% of our revenues in fiscal 2004 and 27% of our revenues in fiscal
2003.
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 and we are seeking international expansion
opportunities. Because of this, the following international commercial risks
may
materially adversely affect our revenues:
· |
political
and economic instability or changes in United States government policy
may
inhibit export of our devices and limit potential customers’ access to
U.S. dollars in a country or region in which those potential customers
are
located;
|
· |
we
may experience difficulties in the timeliness of collection of foreign
accounts receivable and be forced to write off receivables from foreign
customers;
|
· |
tariffs
and other barriers may make our devices less cost
competitive;
|
· |
the
laws of certain foreign countries may not adequately protect our
trade
secrets and intellectual property or may be burdensome to comply
with;
|
· |
potentially
adverse tax consequences to our customers may make our devices not
cost
competitive;
|
· |
currency
fluctuations may make our products less cost competitive, affecting
overseas demand for our products; and
|
· |
language
and other cultural barriers may require us to expend additional resources
competing in foreign markets or hinder our ability to effectively
compete.
|
We
will lose sales if we are unable to obtain government authorization to export
our products.
Exports
of certain of our products to certain countries (such as the People's Republic
of China, Argentina, Brazil, India, Russia, 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. Failure to receive these authorizations may materially
adversely affect our revenues and in turn our business, financial condition
and
results of operations from international sales. Compliance with government
regulations may also subject us to additional fees and costs. The absence
of
comparable restrictions on competitors in other countries may materially
adversely affect our competitive position.
Our
satellite business is particularly sensitive to export control issues. All
of
our commercially available solar cell products are export-controlled. At
present, jurisdiction over export of these items is being reviewed by the
U.S.
Departments of State and Commerce. During this review period, we are required
to
apply to the U.S. Department of State for export licenses for our solar cell
products. Given the current global political climate, obtaining export licenses
can be difficult and time-consuming. Failure to obtain export licenses for
these
shipments could significantly reduce our revenue and could materially adversely
affect our business, financial condition and results of operations.
In
addition, certain foreign laws and regulations place restrictions on the
concentration of certain hazardous materials, including, but not limited
to,
lead, mercury and cadmium, in our products. Failure to comply with such laws
and
regulations could subject us to future liabilities or result in the limitation
or suspension of the sale or production of our products. These regulations
include the European Union's Restrictions on Hazardous Substances, Directive
on
Waste Electrical and Electronic Equipment and the directive on End of Life
for
Vehicles. Failure to comply with environmental and health and safety laws
and
regulations may limit our ability to export products to the EU and could
materially adversely affect our business, financial condition and results
of
operations.
Our
operating results could be harmed if we lose access to sole or limited sources
of materials, components or services.
We
currently obtain some materials, components and services used in our products
from limited or single sources. For example, we obtain Germanium for our
space-based solar cells from a single supplier. We generally do not carry
significant inventories of any raw materials. Because we often do not account
for a significant part of our suppliers' businesses, we may not have access
to
sufficient capacity from these suppliers in periods of high demand. For example,
we recently experienced difficulties filling orders in our fiber-to-the-premises
business due to limited available capacity of one of our contract manufacturers.
In addition, since we generally do not have guaranteed supply arrangements
with
our suppliers we risk serious disruption to our operations if an important
supplier terminates product lines, changes business focus, or goes out of
business. Because some of these suppliers are located overseas, we may be
faced
with higher costs of purchasing these materials if the U.S. dollar weakens
against other currencies. If we were to change any of our limited or sole
source
suppliers, we would be required to re-qualify each new supplier.
Re-qualification could prevent or delay product shipments that could materially
adversely affect our results of operations. In addition, our reliance on
these
suppliers may materially adversely affect our production if the components
vary
in quality or quantity. If we are unable to obtain timely deliveries of
sufficient components of acceptable quality or if the prices of components
for
which we do not have alternative sources increase, our business, financial
condition and results of operations could be materially adversely
affected.
A
failure to attract and retain technical and other key personnel could reduce
our
revenues and our operational effectiveness.
Our
future success depends, in part, on our ability to attract and retain certain
key personnel, including scientific, operational and management personnel.
The
competition for attracting and retaining these employees (especially scientists
and technical personnel) is intense. Because of this competition for 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 the extent
necessary to keep up with our business demands and changes, our business,
financial condition and results of operations may be materially adversely
affected.
We
depend on our management team.
We
believe that our ability to successfully implement our business strategy
and to
operate profitably depends on the continued employment of our senior management
team. If the members of the management team become unable or unwilling to
continue in their present positions, our business, financial condition and
results of operations could be materially adversely affected. Additionally,
we
generally do not enter into employment agreements with our
employees.
Failure
to comply with environmental and safety regulations, including through the
unsuccessful control of hazardous raw materials used in our manufacturing
processes, could result in costly remediation fees, penalties or
damages.
We
are
subject to laws and regulations and must obtain certain permits and licenses
relating to the use of hazardous materials. Our production activities involve
the use of certain hazardous raw materials, including, but not limited to,
ammonia, gallium, phosphine and arsine. If our control systems are unsuccessful
in preventing a release of these materials into the environment or other
adverse
environmental conditions or human exposures occur, we could experience
interruptions in our operations and incur substantial remediation and other
costs or liabilities.
None.
None.
None.
None.
Exhibit
No.
|
Description
|
|
|
2.1
|
Asset
Purchase Agreement between IQE RF, LLC, IQE, plc, and EMCORE Corporation,
dated July 19, 2006. (incorporated by reference to Exhibit 2.1
to
Registrant’s Current Report on Form 8-K filed on July 24,
2006).
|
31.1
|
Certification
by Chief Executive Officer pursuant to Rule 13a-14(a) under the
Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*
|
31.2
|
Certification
by Chief Financial Officer pursuant to Rule 13a-14(a) under the
Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*
|
32.1
|
Certification
by Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
|
32.2
|
Certification
by Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
|
|
|
__________
*
Filed
herewith
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
EMCORE
CORPORATION
|
|
|
Date: August
9, 2006
|
By:
/s/
Reuben F. Richards, Jr.
|
|
Reuben
F. Richards, Jr.
President
& Chief Executive Officer
(Principal
Executive Officer)
|
|
|
|
|
Date: August
9, 2006
|
By:
/s/
Thomas G. Werthan
|
|
Thomas
G. Werthan
Executive
Vice President & Chief Financial Officer
(Principal
Accounting and Financial Officer)
|
Exhibit
No.
|
Description
|
|
|
2.1
|
Asset
Purchase Agreement between IQE RF, LLC, IQE, plc, and EMCORE Corporation,
dated July 19, 2006. (incorporated by reference to Exhibit 2.1
to
Registrant’s Current Report on Form 8-K filed on July 24,
2006).
|
31.1
|
Certification
by Chief Executive Officer pursuant to Rule 13a-14(a) under the
Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*
|
31.2
|
Certification
by Chief Financial Officer pursuant to Rule 13a-14(a) under the
Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*
|
32.1
|
Certification
by Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
|
32.2
|
Certification
by Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
|
|
|
__________
*
Filed
herewith