10-K: Annual report pursuant to Section 13 and 15(d)
Published on December 28, 2000
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number: 0-22175
EMCORE Corporation
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-2746503
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
145 Belmont Drive, Somerset, NJ 08873
(Address of principal executive offices) (zip code)
Registrant's telephone number,
including area code: (732) 271-9090
Securities registered pursuant to
Section 12(b) of the Act: None
Securities registered pursuant to
Section 12(g) of the Act: Common Stock, No Par Value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of common stock held by non-affiliates of the
registrant as of December 1, 2000 was approximately $651,884,111 (based on the
closing sale price of $35.3125 per share).
The number of shares outstanding of the registrant's no par value common stock
as of December 1, 2000 was 34,012,909.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the 2001 Annual
Meeting of Shareholders (to be filed with the Securities and Exchange Commission
on or before January 28, 2001) are incorporated by reference in Part III of this
Form 10-K.
EMCORE Corporation
FORM 10-K
For the fiscal year ended September 30, 2000
INDEX
page
Part I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Consolidated Balance Sheets as of September 30, 1999 and 2000
Consolidated Statements of Operations for the years ended
September 30, 1998, 1999 and 2000
Consolidated Statements of Shareholders' Equity for the years
ended September 30, 1998, 1999 and 2000
Consolidated Statements of Cash Flows for the years ended
September 30, 1998, 1999 and 2000
Notes to Financial Statements
Independent Auditors' Report
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures
Part III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
SIGNATURES
PART I
Item 1. Business
Company Overview
EMCORE Corporation, a New Jersey Corporation, designs, develops and
manufactures compound semiconductor materials and is a leading developer and
manufacturer of the tools and manufacturing processes used to fabricate compound
semiconductor wafers and devices. Established in 1986, EMCORE offers a
comprehensive portfolio of compound semiconductor products for the rapidly
expanding broadband and wireless communications and solid state lighting
markets. EMCORE's product philosophy embodies state of the art technology,
material science expertise and a shared vision of our customers' goals and
objectives to be leaders and pioneers in the rapidly growing world of compound
semiconductors. EMCORE's product line features: optical components for
high-speed data and telecommunications; solar cells for global satellite
communications; electronic materials for high bandwidth communications systems,
such as Internet access and wireless telephones; MOCVD tools for the growth of
GaAs, AIGaAs, InP, InGaP, InGaAIP, InGaAsP, GaN, InGaN, AIGaN, and SiC epitaxial
materials used in numerous applications, including data and telecommunications
modules, cellular telephones, solar cells and high brightness LEDs. Our
customers include Agilent Technologies Ltd., AMP, Inc., Anadigics Inc., Corning,
Inc., General Motors Corp., Hewlett Packard Co., Honeywell Int'l Inc.,
Boeing-Spectrolab, JDS Uniphase Corp., Loral Space & Communications Ltd., Lucent
Technologies, Inc., Motorola, Inc., Nortel Networks Corp., Siemens AG's Osram
GmbH subsidiary, TriQuint Semiconductor, Inc. and more than a dozen of the
largest electronics manufacturers in Japan. For further information about
EMCORE, visit http://www.emcore.com.
Industry Overview
Recent advances in information technologies have created a growing need for
efficient, high-performance electronic systems that operate at very high
frequencies, have increased storage capacity, computational and display
capabilities and can be produced cost-effectively in commercial volumes. In the
past, electronic systems manufacturers have relied on advances in silicon
semiconductor technology to meet many of these demands. However, the newest
generation of high-performance electronic and optoelectronic applications
require certain functions that are generally not achievable using silicon-based
components.
Compound semiconductors have emerged as an enabling technology to meet the
complex requirements of today's advanced information systems. Many compound
semiconductor materials have unique physical properties that allow electrons to
move at least four times faster than through silicon-based devices. Advantages
of compound semiconductor devices over silicon devices include:
o higher operating speeds;
o lower power consumption;
o reduced noise and distortion; and
o light emitting and detecting optoelectronic properties.
Compound semiconductor devices can be used to perform individual functions
as discrete devices, such as VCSELs, RF materials, solar cells, HB LEDs and MR
sensors. Compound semiconductor devices can also be combined into integrated
circuits, such as transmitters, receivers and alphanumeric displays. Although
compound semiconductors are more expensive to manufacture than silicon-based
devices, electronics manufacturers are increasingly integrating compound
semiconductor devices into their products in order to achieve higher performance
in applications targeted for a wide variety of markets. These include satellite
communications, data communications, telecommunications, wireless
communications, consumer and automotive electronics, computers and peripherals,
and lighting.
The following factors have resulted in an increased demand for compound
semiconductor products and systems that enable electronic systems manufacturers
to reach the market faster with large volumes of high-performance products and
applications:
o widespread deployment of fiber optic networks and the increasing use
of optical systems within these networks;
o launch of new wireless services and wireless high-speed data systems;
o rapid build-out of satellite communications systems;
o increasing use of infrared emitters and optical detectors in computer
systems;
o emergence of advanced consumer electronics applications, such as DVDs
and flat panel displays;
o increasing use of high-performance electronic devices in automobiles;
and
o anticipated conversion to HB LEDs from incandescent, halogen and
compact fluorescent lighting.
The following chart summarizes the principal markets, examples of
applications for compound semiconductor devices, products incorporating these
devices and certain benefits and characteristics of these devices.
Compound Semiconductor Process Technology
Compound semiconductors are composed of two or more elements and usually
consist of a metal such as gallium, aluminum or indium and a non-metal such as
arsenic, phosphorous or nitrogen. The resulting compounds include gallium
arsenide, indium phosphide, gallium nitride, indium antimonide and indium
aluminum phosphide. The performance characteristics of compound semiconductors
are dependent on the composition of these compounds. Many of the unique
properties of compound semiconductor devices are achieved by the layering of
different compound semiconductor materials in the same device. This layered
structure creates an optimal configuration to permit the emission or detection
of light and the detection of magnetic fields.
Accordingly, the composition and properties of each layer and the control
of the layering process, or epitaxy, are fundamental to the performance of
advanced electronic and optoelectronic compound semiconductor devices. The
variation of thickness and composition of layers determines the intensity and
color of the light emitted or detected and the efficiency of power conversion.
The ability to vary the intensity, color and efficiency of light generation and
detection enables compound semiconductor devices to be used in a broad range of
advanced information systems.
Compound semiconductor device manufacturers predominantly use four
different methods to deposit compound materials: (i) molecular beam epitaxy;
(ii) vapor phase epitaxy; (iii) liquid phase epitaxy; and (iv) metal organic
chemical vapor deposition ("MOCVD"). The use of molecular beam epitaxy
technology can yield wafers having high thickness uniformity. Compound
semiconductor materials fabricated using vapor phase epitaxy or liquid phase
epitaxy technologies often have high electronic and optical properties. However,
due to the nature of the underlying processes, none of these methods can be
easily scaled up to high volume production, which is necessary for the
commercial viability of compound semiconductor devices. All of these four
methods used to manufacture compound semiconductor devices pose technical,
training and safety challenges that are not present in the manufacture of
silicon devices. The production systems typically require expensive reactant
materials, use of certain toxic chemicals and tight control over numerous
manufacturing parameters. The key differences between MOCVD and the three other
methods are that compound semiconductor wafers fabricated using MOCVD generally
possess a better combination of uniformity and optical and electronic properties
and are easier to produce in high volumes than wafers manufactured by the three
more traditional methods. Currently, MOCVD technology is being used to
manufacture a broad range of compound semiconductor devices.
Historically, manufacturers that use compound semiconductor devices in
their products have met research, pilot production and capacity needs with
in-house systems and technologies. However, as the need for the production of
commercial volumes of high-performance compound semiconductor devices and the
variety of these devices increase, manufacturers are often unable to meet these
requirements using in-house solutions. In response to these growing demands for
higher volumes of a broad range of higher performance devices, manufacturers are
increasingly turning to outside vendors to meet their needs for compound
semiconductor wafers and devices.
The EMCORE Solution
EMCORE provides a broad range of compound semiconductor products and
services intended to meet its customers' diverse technology requirements. EMCORE
has developed extensive materials science expertise, process technology and
MOCVD production systems to address its customers' needs and believes that its
proprietary TurboDisc(R) deposition technology makes possible one of the most
cost-effective production processes for the commercial volume manufacture of
high-performance compound semiconductor wafers and devices. This platform
technology provides the basis for the production of various types of compound
semiconductor wafers and devices and enables EMCORE to address the critical need
of manufacturers to cost-effectively get to the market faster with high volumes
of new and improved high-performance products. EMCORE's compound semiconductor
products and services include:
o materials and process development;
o design and development of devices;
o MOCVD production systems; and
o manufacture of wafers and devices in high volumes.
Customers can take advantage of EMCORE's vertically integrated approach by
purchasing custom-designed wafers and devices from EMCORE, or they can
manufacture their own devices in-house using a TurboDisc production system
configured to their specific needs.
Strategy
EMCORE's objective is to capitalize on its position in MOCVD process
technology and production systems to become the leading supplier of compound
semiconductor wafers, devices and production systems. The key elements of
EMCORE's strategy include:
Apply Core Technology Across Multiple Applications. EMCORE continually
leverages its proprietary core technology to develop compound semiconductor
products for multiple applications in a variety of markets. These activities
include developing new products for targeted applications as well as expanding
existing products into new applications. For example, EMCORE's array transceiver
program is being expanded to meet customer demands for a new transponder
product. Other existing products, which EMCORE intends to introduce in new
applications, include VCSELs for communications products and HB LEDs for broader
lighting applications;
Target High Growth Market Opportunities. EMCORE's strategy is to target
high growth market opportunities where performance characteristics and high
volume production efficiencies can give compound semiconductors a competitive
advantage over other devices. Historically, while technologically superior,
compound semiconductors have not been widely deployed because they are more
expensive to manufacture than silicon-based semiconductors and other existing
solutions. EMCORE believes that as compound semiconductor production costs are
reduced, new customers will be compelled to use these products because of their
higher performance characteristics. For example, EMCORE has reduced the average
cost of compound semiconductor solar cells to the point where customers are
replacing silicon-based solar cells because of the compound semiconductor solar
cells' higher overall efficiency, better end-of-life performance and lower
weight;
Partner with Key Industry Participants. EMCORE seeks to identify and
develop long-term relationships with leading companies in targeted industries.
EMCORE develops these relationships in a number of ways that include long-term,
high-volume supply agreements, joint ventures, an acquisition and other
arrangements. For example, EMCORE entered into a joint venture with General
Electric Lighting for the development and marketing of white light and colored
HB LED products for automotive, traffic, flat panel display and other lighting
applications. EMCORE has also signed a Joint Development Manufacturing and
Marketing Agreement with JDS Uniphase for the joint development, manufacture and
marketing of a family of array transceivers for cost effective, high bandwidth
optical networking products. EMCORE intends to actively seek similar strategic
relationships with other key customers and industry participants in order to
further expand its technological and production base; and
Continue Investment to Maintain Technology Leadership. Through substantial
investment in research and development, EMCORE seeks to expand its leadership
position in compound semiconductor production systems, wafers and devices.
EMCORE works with its customers to identify specific performance criteria and
uses this information to enhance the performance of its production systems and
to further expand its process and materials science expertise, including the
development of new low-cost, high-volume wafers and devices for its customers.
In addition, EMCORE's development efforts are focused on continually lowering
the production costs of its products.
Products
Production Systems
EMCORE is a leading supplier of MOCVD compound semiconductor production
systems, with more than 300 systems shipped as of September 30, 2000. EMCORE
believes that its TurboDisc production systems offer significant ownership
advantages over competing systems and that the high throughput capabilities of
its TurboDisc production systems make possible superior reproducibility of
thickness, composition, electronic properties and layer accuracy required for
electronic and optoelectronic devices. Each system can be customized for the
customer's throughput, wafer size and process chemistry requirements. EMCORE's
production systems also achieve a high degree of reliability with an average
time available for production, based on customer data, of approximately 95%.
EMCORE believes its TurboDisc production systems enable the lowest cost of
ownership for the manufacture of compound semiconductor materials. The major
components of the cost of ownership include yield, throughput, direct costs and
capital costs. Yield primarily relates to material uniformity, which is a
function of the precision of the physical and chemical processes by which atomic
layers are deposited. Throughput, the volume of wafers produced per unit of
time, includes both the time required for a process cycle and the handling time
between process steps. Direct costs include consumables used in manufacturing
and processing and the clean room space required for the equipment. Capital
costs include the cost of acquisition and installation of the process equipment.
EMCORE's proprietary TurboDisc technology utilizes a unique high speed
rotating disk in a stainless steel growth chamber with integrated
vacuum-compatible loading chambers. To produce a wafer, a bare substrate, such
as gallium arsenide, sapphire or germanium, is placed on a wafer carrier in the
TurboDisc growth chamber and subjected to high temperatures. Based on a
predetermined formula, metal organic gases are released into the growth chamber.
These gases decompose on the hot, rapidly spinning wafer. Semiconductor
materials are then deposited on the substrate in a highly uniform manner. The
resulting wafer thus carries one or more ultra-thin layers of compound
semiconductor material such as gallium arsenide, gallium nitride or indium
aluminum phosphide. The TurboDisc technology not only produces uniformity of
deposition across the wafer, but also offers flexibility for diverse
applications with improved material results and increased production rates. The
unique precision control of reactant gas flow in the TurboDisc technology
platform allows users to scale easily from research to commercial volumes with
substantially reduced time and effort. Upon removal from the growth chamber, the
wafer is transferred to a device processing facility for various steps such as
photolithography, etching, masking, metallization and dicing. Upon completion of
these steps, the devices are then sent for packaging and incorporation in the
customer's product.
EMCORE's next generation of TurboDisc products are being designed to
provide a number of innovations including:
o new reactor design to improve efficiency;
o cassette-to-cassette wafer handling to increase automation;
o digital control system to reduce noise;
o real-time process control and data acquisition on WindowsNT platform;
o modular component design to ease outsourcing and upgrading; and
o improved temperature control.
Wafers and Devices
Since its inception, EMCORE has worked closely with its customers to design
and develop process technology and material science expertise for use in
production systems for its customers' end-use applications. EMCORE has leveraged
its process and materials science knowledge base to manufacture a broad range of
compound semiconductor wafers and devices such as VCSELs, RF materials, solar
cells, HB LEDs and MR sensors.
Within most of these product lines, EMCORE has established strategic
relationships through joint ventures, long-term supply agreements and an
acquisition. A summary of these relationships is found below:
VCSELs
Vertical cavity surface-emitting lasers ("VCSELs") are semiconductor lasers
that emit light in a cylindrical beam. VCSELs offer significant advantages over
traditional laser diodes used in fiber optic communications, including:
o greater control over beam size and wavelength;
o reduced manufacturing complexity and packaging costs;
o lower power consumption; and
o higher frequency performance.
Leading electronic systems manufacturers are integrating VCSELs into a
broad array of end-market applications including Internet access, digital
cross-connect telecommunications switches, DVD, and fiber optic switching and
routing, such as Gigabit Ethernet.
In December 1997, EMCORE acquired MicroOptical Devices, Inc. ("MODE"), a
development stage company primarily dedicated to the research and development of
enabling VCSEL technologies. In February 1998, EMCORE announced Gigalase(R), its
first commercial high speed VCSEL laser operating at 1.25 Gbps. In December
1998, EMCORE announced its second VCSEL product, Gigarray(R), a VCSEL array. In
March 2000, EMCORE debuted the industry's first commercial 2.5 Gbps 850nm oxide
VCSEL, the Gigalase(R) with OxideGuide(TM), and in August 2000 announced the
availability of its first 850 nm 1x4 and 1x12 Oxide VCSEL arrays and its high
speed gallium arsenide (GaAs) photodetector arrays. The 1x4 array is capable of
up to 10 Gbps transmission speeds, while the 1x12 has a transmission speed of
30Gbps. EMCORE's photodetector arrays operate up to speeds of 3.125Gbps and
provide the efficiency required for high speed data transmission.
In January 2000, EMCORE entered into a three-year supply agreement with
Agilent, a leading supplier of fiber optic transceivers and integrated circuits
for infrastructure products for the Internet. Under this agreement, EMCORE will
manufacture Gigarray(R) VCSEL arrays for use in parallel optical transceivers.
The initial purchase order under the agreement is contingent upon EMCORE's
development of a component that meets Agilent's specifications. EMCORE began
shipping commercial product in December 2000.
In June 2000, EMCORE signed a Joint Development Manufacturing and Marketing
Agreement with JDS Uniphase for the joint development, manufacture and marketing
of a family of array transceivers for the Very Short Reach OC-192 and related
markets. Recent industry forecasts indicate that the market opportunity for
high-speed optical transceivers, including 2.5 gigabit per channel arrays and 10
gigabit serial devices will exceed $3.4 billion by the year 2004. EMCORE has
completed alpha testing and began shipping prototype array transceivers in
December 2000.
RF Materials
Radio frequency ("RF") materials are compound semiconductor materials that
transmit and receive communications. Compound semiconductor RF materials have a
broader bandwidth and superior performance at higher frequencies than
silicon-based materials. EMCORE currently produces 4-inch and 6-inch InGaP HBT
and pHEMT materials that are used by its wireless customers for power amplifiers
for GSM, TDMA, and CDMA multiband wireless handsets. InGaP HBT materials provide
higher linearity, higher power added efficiency as well as greater reliability
than first generation AlGaAs HBT technologies, and have become the technology of
choice for next generation HBT-based power amplifiers for wireless handsets. In
addition, recent developments and transfers to production of enhancement mode
pHEMT technologies have demonstrated their continued competitiveness for handset
applications.
EMCORE is also exploring opportunities to market RF materials to its fiber
optic customers for use in high speed digital components for OC-48 and OC-192
fiber optic communication and to its power satellite customers for satellite
communication applications. EMCORE believes that its ability to produce high
volumes of RF materials at a low cost will facilitate their adoption in new
applications and products.
In May 2000, EMCORE signed an agreement with Motorola to meet their
requirements for epitaxial tools, wireless electronic materials and technology.
This relationship includes supplying Motorola with epitaxial process technology
and multiple MOCVD production tools, as well as purchase orders for electronic
device epitaxial wafers. Motorola also announced that EMCORE was awarded their
Standard Supplier Designation, making EMCORE the only qualified supplier of
MOCVD tools for Motorola's compound semiconductor factories.
In October 2000 EMCORE received a $10.7 million order from Anadigics to
supply 6-inch GaAs HBT and pHEMT wafers for their fiber optic and wireless
communications devices. Anadigics will be using EMCORE's materials for power
amplifiers for GSM, TDMA and CDMA multi-band wireless handsets and for
high-speed digital components for OC-192 data communication applications.
Solar Cells
Compound semiconductor solar cells are used to power satellites because
they are more resistant to radiation levels in space and convert substantially
more light to power, therefore weigh less per unit of power than silicon-based
solar cells. These characteristics increase satellite life, increase payload
capacity and reduce launch costs. In fiscal 2000, EMCORE announced the
manufacture and shipment of the world's highest efficiency dual-junction solar
cell for satellite applications. EMCORE also announced the production of
high-efficiency triple junction solar cells with a minimum average efficiency of
26%. EMCORE began shipping the triple junction solar cells in December 2000.
EMCORE is currently involved in several solar cell projects:
o EMCORE's solar cells were selected for use on two Space Technology
Research Vehicles (STRV 1c&1d). These microsatellites are scheduled to
be launched in November, 2001 by Arianspace. EMCORE's solar cells have
been selected for two European communication satellite programs
scheduled for launch in 2002. Additionally, EMCORE's solar cells are
being used for two Japanese scientific programs sponsored by the
National Space Development Agency of Japan (NASDA);
o EMCORE is also working with TRW, Boeing and Lockheed to identify
programs suitable for our high efficiency solar cells;
o In April 2000, EMCORE signed a Memorandum of Understanding with
Angewandte Solarenergie-ASE GmbH to provide solar cell material for
use in the manufacture of their solar cells. Under this agreement,
EMCORE will provide Epi processing and other services;
o In November 1999, EMCORE entered into a Technical Assistance Agreement
with Loral and Mitsubishi Electric Corporation;
o In November 1998, EMCORE signed a long-term supply agreement with
Space Systems/Loral, a wholly owned subsidiary of Loral Space &
Communications. Under this agreement, EMCORE supplies compound
semiconductor high efficiency gallium arsenide solar cells for Loral's
satellites. To date, EMCORE has received purchase orders from Space
Systems/Loral that total $32.3 million and services this agreement at
our new facility in Albuquerque, New Mexico;
o In November 1998, EMCORE received a $2.2 million contract under the
U.S. Air Force's Broad Agency Announcement Program for the development
of high-efficiency advanced solar cells; and
o In September 1998, EMCORE entered into an agreement with Lockheed
Martin Missiles and Space, a strategic business unit of Lockheed
Martin Corporation, to provide technical management and support of a
Cooperative Research and Development Agreement between Lockheed Martin
and Sandia National Laboratory for the advancement and
commercialization of a new compound semiconductor high efficiency
solar cell. Pursuant to this strategic agreement, (1) Lockheed Martin
will grant EMCORE a sub-license for all related intellectual property
developed on behalf of or in conjunction with Lockheed Martin and (2)
EMCORE and Lockheed Martin will jointly qualify and validate the high
efficiency solar cells for operational satellite use.
HB LEDs
High-brightness light-emitting diodes ("HB LEDs") are solid state compound
semiconductor devices that emit light. The global demand for HB LEDs is
experiencing rapid growth because HB LEDs have a long useful life, consume
approximately 10% of the power consumed by incandescent or halogen lighting and
improve display visibility. In February 1998, EMCORE and Uniroyal Technology
Corporation formed Uniroyal Optoelectronics, a joint venture to manufacture,
sell and distribute HB LED wafers and package-ready devices.
In May 1999, EMCORE and General Electric Lighting formed GELcore, a joint
venture to develop and market HB LED lighting products. General Electric
Lighting and EMCORE have agreed that this joint venture will be the exclusive
vehicle for each party's participation in solid state lighting. GELcore combines
EMCORE's materials science expertise, process technology and compound
semiconductor production systems with General Electric Lighting's brand name
recognition and extensive marketing and distribution capabilities. GELcore's
long-term goal is to develop products to replace traditional lighting. In
September 2000, GELcore acquired Ecolux, Inc. adding LED-signaling products to
its growing line of LED products.
MR Sensors
Magneto resistive ("MR") sensors are compound semiconductor devices that
possess sensing capabilities. MR sensors improve vehicle performance through
more accurate control of engine and crank shaft timing, which allows for
improved spark plug efficiency and reduced emissions. In January 1997, EMCORE
initiated shipments of compound semiconductor MR sensors using technology
licensed to EMCORE from General Motors. This license allows EMCORE to
manufacture and sell products to anyone using this technology. As of September
30, 2000, EMCORE has delivered over 10.7 million devices to General Motors
Powertrain for crank and cam speed and position sensing applications for 5
different engine builds under 20 different vehicle platforms.
Customers
EMCORE's rapidly expanding customer base includes many of the largest
semiconductor, telecommunications, consumer goods and computer manufacturing
companies in the world. A number of EMCORE's customers are listed below. In
addition, EMCORE has sold its products to more than a dozen of the largest
electronics manufacturers in Japan.
EMCORE has a comprehensive total quality management program with special
emphasis on total customer satisfaction. EMCORE seeks to encourage active
customer involvement with the design and operation of its production systems. To
accomplish this, EMCORE conducts user group meetings among its customers in
Asia, Europe and North America. At annual meetings, EMCORE's customers provide
valuable feedback on key operations, process oriented services, problems and
recommendations to help improve EMCORE products. This direct customer feedback
has enabled EMCORE to constantly update and improve the design of its systems
and processes. Changes that affect the reliability and capabilities of EMCORE's
systems are embodied in new designs to enable current and future customers to
utilize systems which EMCORE believes are high quality and cost-efficient.
Marketing and Sales
EMCORE markets and sells its wafers, devices and systems through its direct
sales force in North America, Europe, Taiwan and through representatives and
distributors elsewhere in Asia. To market and service its products in China,
Japan and Singapore, EMCORE relies on a single marketing, distribution and
service provider, Hakuto Co., Ltd. EMCORE's agreements with Hakuto expire in
March 2008. Hakuto has exclusive distribution rights for certain EMCORE products
in Japan. Hakuto has marketed and serviced EMCORE's products since 1988, is a
minority shareholder in EMCORE and the President of Hakuto is a member of
EMCORE's Board of Directors. In August 1999, EMCORE entered into a two-year
distribution agreement with DI Systems to market and service EMCORE's products
in South Korea. EMCORE has sales offices in California and Taiwan, ROC in order
to efficiently service EMCORE's rapidly expanding customer base in these areas.
EMCORE's sales and marketing, senior management and technical staff work
closely with existing and potential customers to provide compound semiconductor
products that meet their customers' needs. EMCORE seeks to match a customer's
requirements to an existing design or a modification of a standard design, such
as a change in platform or process design. When necessary, EMCORE will work with
the customer to develop the appropriate design process and to configure and
manufacture the production system to meet the customer's needs. Also, EMCORE
will produce samples to demonstrate conformance to the customer's
specifications. For production systems, the period of time from the initial
contact with the customer to the customer's placement of an order is typically
two to nine months or longer. EMCORE's sales cycle for wafers and devices
usually runs three to nine months, during which time EMCORE develops the formula
of elements necessary to meet the customer's specifications and qualifies the
materials which may also require the delivery of samples. EMCORE believes that
the marketing, management and engineering support involved in this process is
beneficial in developing competitive differentiation and long-term relationships
with its customers.
Service and Support
EMCORE maintains a worldwide service and support network responsible for
on-site maintenance and process monitoring on either a contractual or
time-and-materials basis. Customers may purchase annual service contracts under
which EMCORE is required to maintain an inventory of replacement parts and to
service the equipment upon the customer's request. EMCORE also sells replacement
parts from inventory to meet customer needs. EMCORE pursues a program of system
upgrades for customers to increase the performance of older systems. EMCORE
generally does not offer extended payment terms to its customers and generally
adheres to a warranty policy of one year. Consistent with industry practice,
EMCORE maintains an inventory of components for servicing systems in the field
and it believes that its inventory is sufficient to satisfy foreseeable
short-term customer requirements. EMCORE has a warehouse depot in Taiwan to
provide improved service to its Asian customers.
Research and Development
To maintain and improve its competitive position, EMCORE's research and
development efforts are focused on designing new proprietary processes and
products, improving the performance of existing systems, wafers and devices and
reducing costs in the product manufacturing process. EMCORE has dedicated 29
TurboDisc systems for both research and production that are capable of
processing virtually all compound semiconductor materials. The research and
development staff utilizes x-ray, optical and electrical characterization
equipment which provide instant data allowing for shortened development cycles
and rapid customer response. EMCORE expects that it will continue to expend
substantial resources on research and development.
EMCORE also competes for research and development funds. In view of the
high cost of development, EMCORE solicits research contracts that provide
opportunities to enhance its core technology base or promote the
commercialization of targeted products. EMCORE is also positioned to market
technology and process development expertise directly to customers who require
it for their own product development efforts.
Intellectual Property and Licensing
EMCORE's success and competitive position for production systems, wafers
and devices depend significantly on its ability to maintain trade secrets and
other intellectual property protections. Our strategy is to rely on both trade
secrets and patents. A "trade secret" is information that has value to the
extent it is not generally known, not readily ascertainable by others through
legitimate means and protected in a way that maintains its secrecy. Reliance on
trade secrets is only an effective business practice insofar as trade secrets
remain undisclosed and a proprietary product or process is not reverse
engineered or independently developed. In order to protect its trade secrets,
EMCORE takes certain measures to ensure their secrecy, such as executing
non-disclosure agreements with its employees, joint venture partners, customers
and suppliers. EMCORE also has an aggressive program to actively patent all
areas of its technology.
To date, EMCORE has been issued twelve (12) U.S. patents and others are
either pending (20 patent applications filed) or under in-house review (40
disclosures and draft patent applications). These U.S. patents will expire
between 2005 and 2013. None of these U.S. patents claim any material aspects of
current or planned commercial versions of EMCORE's systems, wafers or devices.
EMCORE only relies on trade secrets to protect its intellectual property when it
believes publishing patents would make it easier for others to reverse engineer
EMCORE's proprietary processes.
EMCORE is a licensee of certain VCSEL technology and associated patent
rights owned by Sandia Corporation. The Sandia license grants EMCORE:
o non-exclusive rights to develop, manufacture and sell products
containing Sandia VCSEL technologies under five U.S. patents that
expire between 2007 and 2015; and
o non-exclusive rights to employ a proprietary oxidation fabrication
method in the manufacture of VCSEL products under a sixth U.S. patent
that expires in 2014. EMCORE's success and competitive position as a
producer of VCSEL products depends on the continuation of its rights
under the Sandia license, the scope and duration of those rights and
the ability of Sandia to protect its proprietary interests in the
underlying technology and patents.
In 1992, EMCORE received a royalty bearing, non-exclusive license under a
patent held by Rockwell International Corporation which relates to an aspect of
the manufacturing process used by its TurboDisc systems. In October 1996, EMCORE
initiated discussions with Rockwell to receive additional licenses to permit
EMCORE to use this technology to manufacture and sell compound semiconductor
wafers and devices. In November 1996, EMCORE suspended these negotiations
because of litigation surrounding the validity of the Rockwell patent. EMCORE
also ceased making royalty payments to Rockwell under the license during the
pendency of the litigation. In January 1999, the case was settled and a judgment
was entered in favor of Rockwell. As a result, EMCORE may be required to pay
royalties to Rockwell for certain of its past sales of wafers and devices to its
customers who did not hold licenses directly from Rockwell. Management has
reviewed and assessed its likely royalty obligations and believes that it has
the appropriate amounts reserved at both September 30, 1999 and 2000. If EMCORE
is required to pay Rockwell amounts in excess of its reserves, its business,
financial condition and results of operations could be materially and adversely
affected.
Environmental Regulations
EMCORE is subject to federal, state and local laws and regulations
concerning the use, storage, handling, generation, treatment, emission, release,
discharge and disposal of certain materials used in its research and development
and production operations, as well as laws and regulations concerning
environmental remediation and employee health and safety. The production of
wafers and devices involves the use of certain hazardous raw materials,
including, but not limited to, ammonia, phosphine and arsene. If EMCORE's
control systems are unsuccessful in preventing release of these or other
hazardous materials, EMCORE could experience a substantial interruption of
operations. EMCORE has retained an environmental consultant to advise it in
complying with applicable environmental and health and safety laws and
regulations, and believes that it is currently, and in the past has been, in
compliance with all such laws and regulations.
Backlog
As of September 30, 2000, EMCORE had an order backlog of $125.0 million,
scheduled to be shipped through September 30, 2001. This represented an increase
of $81.9 million or 190% since September 30, 1999. This increase primarily
relates to increased production systems bookings, orders for solar cells from
Loral and epitaxial wafers from Motorola. EMCORE only includes in backlog
customer purchase orders that have been accepted by EMCORE and for which
shipment dates have been assigned within the 12 months to follow and research
contracts that are in process or awarded. Wafer and device agreements extending
longer than one year in duration are included in backlog only for the ensuing 12
months. EMCORE receives partial advance payments or irrevocable letters of
credit on most production system orders. EMCORE recognizes revenue from the sale
of its systems and materials upon shipment. For research contracts with the U.S.
government and commercial enterprises with durations greater than six months,
EMCORE recognizes revenue to the extent of costs incurred plus a portion of
estimated gross profit, as stipulated in such contracts, based on contract
performance.
Manufacturing
EMCORE's manufacturing operations are located at EMCORE's headquarters in
Somerset, New Jersey and in Albuquerque, New Mexico and include systems
engineering and production, wafer fabrication and design and production of
devices. Many of EMCORE's manufacturing operations are computer monitored or
controlled to enhance reliability and yield. EMCORE manufactures its own systems
and outsources some components and sub-assemblies, but performs all final system
integration, assembly and testing. EMCORE fabricates wafers and devices at its
facilities in Somerset, New Jersey and Albuquerque, New Mexico and has a
combined clean room area totaling approximately 41,000 square feet. EMCORE's
joint venture with Uniroyal Technology Corporation manufactures HB LED wafers
and package-ready devices at its Tampa, Florida manufacturing facility. In May
1998, EMCORE received ISO 9001 and QS 9002 quality certifications for its
Somerset, New Jersey facility. In November 1999, EMCORE received ISO 9001
quality certification for its newly completed solar cell facility in
Albuquerque, New Mexico. In September 2000, EMCORE received ISO 9001 quality
certification for its new Array Transceiver Division in Albuquerque, New Mexico.
In December 2000, EMCORE received ISO 9001 quality certification for its VCSEL
facility in Albuquerque, New Mexico.
Outside contractors and suppliers are used to supply raw materials and
standard components and to assemble portions of end systems from EMCORE
specifications. EMCORE depends on sole, or a limited number of, suppliers of
components and raw materials. EMCORE generally purchases these single or limited
source products through standard purchase orders. EMCORE also seeks to maintain
ongoing communications with its suppliers to guard against interruptions in
supply and has, to date, generally been able to obtain sufficient supplies in a
timely manner. EMCORE maintains inventories it believes are sufficient to meet
its near term needs. EMCORE implemented a vendor program through which it
inspects quality and reviews suppliers and prices in order to standardize
purchasing efficiencies and design requirements to maintain as low a cost of
sales as possible. However, operating results could be materially and adversely
affected by a stoppage or delay of supply, receipt of defective parts or
contaminated materials, and increase in the pricing of such parts or EMCORE's
inability to obtain reduced pricing from its suppliers in response to
competitive pressures.
Competition
The markets in which EMCORE competes are highly competitive. EMCORE
competes with several companies for sales of MOCVD systems including Aixtron
GmbH and Nippon-Sanso K.K. Ltd. The primary competitors for EMCORE's wafer
foundry include Epitaxial Products Inc., Hitachi-Cable, Kopin Corporation and
Quantum Epitaxial Designs, Inc. EMCORE's principal competitors for sales of
VCSEL-related products include Honeywell, Inc. and Mitel Corporation. The
principal competitors for MR sensors are Honeywell, Inc., Matshushita Electric
Industrial Co. Ltd., Siemens AG Osterreich, Electrotechnik and Asahi Kasei
Electronic Co., Ltd.. The principal competitors for HB LEDs and EMCORE's joint
ventures with Uniroyal Technology Corporation and General Electric Lighting
include the Phillips Electronics and Hewlett Packard Company joint venture,
Siemens AG's Osram GmbH subsidiary, Nichia Chemical Industries and Toshiba
Corporation. EMCORE also faces competition from manufacturers that implement
in-house systems for their own use. In addition, EMCORE competes with many
research institutions and universities for research contract funding. EMCORE
also sells its products to current competitors and companies with the capability
of becoming competitors. As the markets for EMCORE's products grow, new
competitors are likely to emerge and present competitors may increase their
market share.
EMCORE believes that the primary competitive factors in the markets in
which EMCORE's products compete are yield, throughput, performance, breadth of
product line, customer satisfaction, customer commitment to competing
technologies and, in the case of production systems, capital and direct costs
and size of installed base. Competitors may develop enhancements to or future
generations of competitive products that offer superior price and performance
factors. EMCORE believes that in order to remain competitive, it must invest
significant financial resources in developing new product features and
enhancements and in maintaining customer satisfaction worldwide.
Employees
At September 30, 2000, EMCORE had 625 employees, including 328 employees in
manufacturing operations, 185 employees in research and development and 112
employees in sales and general administration. This represents an increase of
257 employees or 70% from September 30, 1999. None of EMCORE's employees are
covered by a collective bargaining agreement. EMCORE considers its relationship
with its employees to be good.
Risk Factors
Our Rapid Growth Places A Strain on Our Resources.
We are experiencing rapid growth, having added a significant number of new
employees within the last year. We have also expanded our manufacturing
facilities in Albuquerque, New Mexico and in Somerset, New Jersey. This growth
has placed and will continue to place a significant strain on our management,
financial, sales and other employees and on our internal systems and controls.
If we are unable to effectively manage multiple facilities and multiple joint
ventures in geographically distant locations, our business, financial condition
and results of operations will be materially and adversely affected. We are also
in the process of installing new manufacturing software for all of our
facilities and are evaluating replacing our accounting and purchasing systems.
Most of the new manufacturing software is customized to our particular business
and manufacturing processes. It will take time and require evaluation to
eliminate any of the malfunctions in the software and to train personnel to use
the new software. In this transition we may experience delays in production,
cost overruns and disruptions in our operations.
We Expect To Continue to Incur Operating Losses.
We started operations in 1984 and as of September 30, 2000 had an
accumulated deficit of $108.9 million. We incurred net losses of $36.4 million
in fiscal 1998, $22.7 million in fiscal 1999 and $25.5 million in fiscal 2000.
We expect to continue to incur losses. To support our growth, we have increased
our expense levels and our investments in inventory and capital equipment. As a
result, we will need to significantly increase revenues and profit margins to
become and stay profitable. If our sales and profit margins do not increase to
support the higher levels of operating expenses and if our new product offerings
are not successful, our business, financial condition and results of operations
will be materially and adversely affected.
Since The Technology In The Compound Semiconductor
Industry Rapidly Changes, We Must Continually Improve
Existing Products, Design And Sell New Products And
Manage The Costs Of Research And DevelopmentIn Order
To Effectively Compete.
We compete in markets characterized by rapid technological change, evolving
industry standards and continuous improvements in products. Due to constant
changes in these markets, our future success depends on our ability to improve
our manufacturing processes, tools and products. For example, our TurboDisc
production systems must remain competitive on the basis of cost of ownership and
process performance. To remain competitive we must continually introduce
manufacturing tools with higher capacity and better production yields.
We have recently introduced a number of new products, and, in connection
with recent joint ventures and internal development, we will be introducing
additional new products in the near future. The commercialization of new
products involves substantial expenditures in research and development,
production and marketing. We may be unable to successfully design or manufacture
these new products and may have difficulty penetrating new markets. In addition,
many of our new products are being incorporated into our customers' new products
for new applications, such as high-speed computer networks.
Because it is generally not possible to predict the amount of time required
and the costs involved in achieving certain research, development and
engineering objectives, actual development costs may exceed budgeted amounts and
estimated product development schedules may be extended. Our business, financial
condition and results of operations may be materially and adversely affected if:
o we are unable to improve our existing products on a timely basis;
o our new products are not introduced on a timely basis;
o we incur budget overruns or delays in our research and development
efforts; or
o our new products experience reliability or quality problems.
Fluctuations In Our Quarterly Operating Results May
Negatively Impact Our Stock Price.
Our revenues and operating results may vary significantly from quarter to
quarter due to a number of factors particular to EMCORE and the compound
semiconductor industry. Not all of these factors are in our control. These
factors include:
o the volume and timing of orders for our products, particularly
TurboDisc systems, which have an average selling price in excess of $1
million;
o the timing of our announcements and introduction of new products and
of similar announcements by our competitors;
o downturns in the market for our customers' products;
o regional economic conditions, particularly in Asia where we derive a
significant portion of our revenues; and
o price volatility in the compound semiconductor industry.
These factors may cause our operating results for future periods to be
below the expectations of analysts and investors. This may cause a decline in
the price of our common stock.
Our Joint Venture Partners, Who Have Control
Of These Ventures, May Make Decisions That
We Do Not Agree With And That Adversely
Affect Our Net Income.
We do not have a majority interest in our joint ventures with Uniroyal
Technology Corporation or General Electric Lighting. These joint ventures are
governed by a board of managers with representatives from both the strategic
partner and us. Many fundamental decisions must be approved by both parties to
the joint venture, which means we will be unable to direct the operation and
direction of these joint ventures without the agreement of our joint venture
partners. If we are unable to agree on important issues with a joint venture
partner, the business of that joint venture may be delayed or interrupted, which
may, in turn, materially and adversely affect our business, financial condition
and results of operations.
We have devoted and will be required to continue to devote significant
funds and technologies to our joint ventures to develop and enhance their
products. In addition, our joint ventures will require that some of our
employees devote much of their time to joint venture projects. This will place a
strain on our management, scientific, financial and sales employees. If our
joint ventures are unsuccessful in developing and marketing their products, our
business, financial condition and results of operations may be materially and
adversely affected.
General Electric Lighting and EMCORE have agreed that our joint venture
will be the sole vehicle for each party's participation in the solid state
lighting market. General Electric Lighting and EMCORE have also agreed to
several limitations during the life of the venture and thereafter relating to
use that each of us can make of the joint venture's technology. One consequence
of these limitations is that in certain circumstances, such as a material
default by us, we would not be permitted to use the joint venture's technology
to compete against General Electric Lighting in the solid state lighting market.
Since A Large Percentage of Our Revenues Are
from Foreign Sales, Certain Export Risks May\
Disproportionately Affect Our Revenues.
Sales to customers located outside the United States accounted for
approximately 39.1% of our revenues in fiscal 1998, 52.6% of our revenues in
fiscal 1999 and 38.6% of our revenues in fiscal 2000. Sales to customers in Asia
represent the majority of our international sales. We believe that international
sales will continue to account for a significant percentage of our revenues.
Because of this, the following export risks may disproportionately affect our
revenues:
o political and economic instability may inhibit export of our systems
and devices and limit potential customers' access to U.S. dollars;
o shipping and installation costs of our systems may increase;
o we may experience difficulties in the timeliness of collection of
foreign accounts receivable and be forced to write off receivables
from foreign customers;
o a strong dollar may make our systems less attractive to foreign
purchasers who may decide to postpone making such capital
expenditures;
o tariffs and other barriers may make our systems and devices less cost
competitive;
o we may have difficulty in staffing and managing our international
operations;
o the laws of certain foreign countries may not adequately protect our
trade secrets and intellectual property; and
o potentially adverse tax consequences to our customers may make our
systems and devices not cost-competitive.
We Will Lose Sales If We Are Unable To Obtain
Government Authorization To Export Our Products.
Exports of our products to certain destinations, such as the People's
Republic of China, Malaysia and Taiwan, may require pre-shipment authorization
from U.S. export control authorities, including the U.S. Departments of Commerce
and State. Authorization may be conditioned on end-use restrictions. On certain
occasions, we have been denied authorization, particularly with respect to the
People's Republic of China. Failure to receive these authorizations may
materially and adversely affect our revenues and in turn our business, financial
condition and results of operations from international sales. Additionally,
export jurisdiction relating to exports of satellites and associated components
has not been definitively settled. Such exports may in the future require a
license from the Department of State. This may cause delays in shipping solar
cells abroad. Delays in receiving export licenses for solar cells may materially
and adversely affect our revenues and in turn our business, financial condition
and results of operations.
Our Products Are Difficult To Manufacture And
Small Manufacturing Defects Can Adversely Affect
Our Production Yields And Our Operating Results.
The manufacture of our TurboDisc systems is a highly complex and precise
process. We increasingly outsource the fabrication of certain components and
sub-assemblies of our systems, often to sole source suppliers or a limited
number of suppliers. We have experienced occasional delays in obtaining
components and subassemblies because the manufacturing process for these items
is very complex and requires long lead times. The revenues derived from sales of
our TurboDisc systems will be materially and adversely affected if we are unable
to obtain a high quality, reliable and timely supply of these components and
subassemblies. In addition, any reduction in the precision of these components
will result in sub-standard end products and will cause delays and interruptions
in our production cycle.
We manufacture all of our wafers and devices in our manufacturing
facilities and our joint venture with Uniroyal Technology Corporation plans to
manufacture HB LED wafers and package-ready devices at its facility. Minute
impurities, difficulties in the production process, defects in the layering of
the devices' constituent compounds, wafer breakage or other factors can cause a
substantial percentage of wafers and devices to be rejected or numerous devices
on each wafer to be non-functional. These factors can result in lower than
expected production yields, which would delay product shipments and may
materially and adversely affect our operating results. Because the majority of
our costs of manufacture are relatively fixed, the number of shippable devices
per wafer for a given product is critical to our financial results.
Additionally, because we manufacture all of our products at our facilities in
Somerset, New Jersey and Albuquerque, New Mexico, and our joint venture with
Uniroyal Technology Corporation will manufacture HB LED wafers and package-ready
devices at its sole facility in Tampa, Florida, any interruption in
manufacturing resulting from fire, natural disaster, equipment failures or
otherwise would materially and adversely affect our business, financial
condition and results of operations.
We Face Lengthy Sales and Qualifications Cycles
for Our Products and, In Many Cases, Must Invest
A Substantial Amount of Time and Funds Before
We Receive Orders.
Sales of our TurboDisc systems primarily depend upon the decision of a
prospective customer to increase its manufacturing capacity, which typically
involves a significant capital commitment by the customer. Customers usually
place orders with us on average two to nine months after our initial contact
with them. We often experience delays in obtaining system sales orders while
customers evaluate and receive internal approvals for the purchase of these
systems. These delays may include the time necessary to plan, design or complete
a new or expanded compound semiconductor fabrication facility. Due to these
factors, we expend substantial funds and sales, marketing and management efforts
to sell our compound semiconductor production systems. These expenditures and
efforts may not result in sales.
In order to expand our materials production capabilities, we have dedicated
a number of our TurboDisc systems to the manufacture of wafers and devices.
Several of our products are currently being tested to determine whether they
meet customer or industry specifications. During this qualification period, we
invest significant resources and dedicate substantial production capacity to the
manufacture of these new products, prior to any commitment to purchase by the
prospective customer and without generating significant revenues from the
qualification process. If we are unable to meet these specifications or do not
receive sufficient orders to profitably use the dedicated production capacity,
our business, financial condition and results of operations would be materially
and adversely affected.
Industry Demand For Skilled Employees, Particularly
Scientific And Technical Personnel With Compound
Semiconductor Experience, Exceeds The Number Of
Skilled Personnel Available.
Our future success depends, in part, on our ability to attract and retain
certain key personnel, including scientific, operational and management
personnel. We anticipate that we will need to hire additional skilled personnel
to continue to expand all areas of our business. The competition for attracting
and retaining these employees, especially scientists, is intense. Because of
this intense competition for these skilled employees, we may be unable to retain
our existing personnel or attract additional qualified employees in the future.
If we are unable to retain our skilled employees and attract additional
qualified employees to keep up with our expansion, our business, financial
condition and results of operations will be materially and adversely affected.
Protecting Our Trade Secrets And Obtaining Patent
Protection Is Critical To Our Ability To Effectively
Compete For Business.
Our success and competitive position depend on protecting our trade secrets
and other intellectual property. Our strategy is to rely both on trade secrets
and patents to protect our manufacturing and sales processes and products, but
reliance on trade secrets is only an effective business practice insofar as
trade secrets remain undisclosed and a proprietary product or process is not
reverse engineered or independently developed. We take certain measures to
protect our trade secrets, including executing non-disclosure agreements with
our employees, joint venture partners, customers and suppliers. If parties
breach these agreements or the measures we take are not properly 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
and adversely affect our business, financial condition and results of
operations.
Although we currently hold 12 U.S. patents, these patents do not protect
any material aspects of the current or planned commercial versions of our
systems, wafers or devices. We are actively pursuing patents on some of our
recent inventions, but these patents may not be issued. Even if these patents
are issued, they may be challenged, invalidated or circumvented. In addition,
the laws of certain other countries may not protect our intellectual property to
the same extent as U.S. laws.
We May Require Licenses To Continue To Manufacture
And Sell Certain Of Our Compound Semiconductor
Wafers And Devices, The Expense Of Which May
Adversely Affect Our Results Of Operations.
The compound semiconductor, optoelectronics, and fiberoptic 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 litigations relating to our intellectual
property, we cannot assure that:
o infringement claims (or claims for indemnification resulting from
infringement claims) will not be asserted against us,
o future assertions will not result in an injunction against the sale of
infringing products or otherwise significantly impair our business and
results of operations; or
o we will not be required to obtain licenses, the expense of which may
adversely affect our results of operations and profitability.
In October 1999, we were contacted by Rockwell International Corporation
regarding whether EMCORE required additional licenses from Rockwell to continue
to manufacture and sell MOCVD wafers and devices to customers who do not hold
licenses from Rockwell International Corporation. Since that time we have been
in discussions with Rockwell regarding the necessity and cost of obtaining such
a license. Although the patent to which Rockwell referred expired in January
2000, we may be required to pay additional royalties for certain of our past
sales of wafers and devices to customers. If we are required to pay significant
royalties in connection with these sales, our business, financial condition and
results of operations may be materially and adversely affected.
Interruptions In Our Business And A Significant Loss
Of Sales To Asia May Result If Our Primary Asian
Distributor Fails To Effectivel Market And Service
Our Products.
We rely on a single marketing, distribution and service provider, Hakuto
Co. Ltd. to market and service many of our products in Japan, China and
Singapore. Hakuto is one of our shareholders and Hakuto's president is a member
of our Board of Directors. We have distributorship agreements with Hakuto which
expire in March 2008 and give Hakuto exclusive distribution rights for certain
of our products in Japan. Hakuto's failure to effectively market and service our
products or termination of our relationship with Hakuto could result in
significant delays or interruption in our marketing and service programs in
Asia. This could materially and adversely affect our business, financial
condition and results of operations.
Our Management's Stock Ownership Gives Them
The Power To Control Business Affairs And Prevent
A Takeover That Could Be Beneficial To Unaffiliated
Shareholders.
Certain members of our management, specifically Thomas J. Russell, Chairman
of our Board, Reuben F. Richards, President, Chief Executive Officer and a
director, and Robert Louis-Dreyfus, a director, are former members of Jesup &
Lamont Merchant Partners, L.L.C. They collectively beneficially own more than
20% of our common stock. Accordingly, such persons will continue to hold
sufficient voting power to control our business and affairs for the foreseeable
future. This concentration of ownership may also have the effect of delaying,
deferring or preventing a change in control of our company, which could have a
material adverse effect on our stock price.
Unsuccessful Control Of The Hazardous Raw Materials
Used In Our Manufacturing Process Could Result In
Costly Remediation Fees, Penalties Or Damages Under
Environmental And Safety Regulations.
The production of wafers and devices involves the use of certain hazardous
raw materials, including, but not limited to, ammonia, phosphine and arsine. If
our control systems are unsuccessful in preventing a release of these materials
into the environment or other adverse environmental conditions occur, we could
experience interruptions in our operations and incur substantial remediation and
other costs. Failure to comply with environmental and health and safety laws and
regulations may materially and adversely affect our business, financial
condition and results of operations.
Our Business Or Our Stock Price Could Be Adversely
Affected By Issuance Of Preferred Stock.
Our board of directors is authorized to issue up to 5,882,352 shares of
preferred stock with such dividend rates, liquidation preferences, voting
rights, redemption and conversion terms and privileges as our board of
directors, in its sole discretion, may determine. The issuance of shares of
preferred stock may result in a decrease in the value or market price of our
common stock, or our board of directors could use the preferred stock to delay
or discourage hostile bids for control of us in which shareholders may receive
premiums for their common stock or to make the possible sale of the company or
the removal of our management more difficult. The issuance of shares of
preferred stock could adversely affect the voting and other rights of the
holders of common stock.
Certain Provisions Of New Jersey Law And Our Charter
May Make A Takeover Of Our Company Difficult Even If
Such Takeover Could Be Beneficial To Some Of Our
Shareholders.
New Jersey law and our certificate of incorporation, as amended, contain
certain provisions that could delay or prevent a takeover attempt that our
shareholders may consider in their best interests. Our board of directors is
divided into three classes. Directors are elected to serve staggered three-year
terms and are not subject to removal except for cause by the vote of the holders
of at least 80% of our capital stock. In addition, approval by the holders of
80% of our voting stock is required for certain business combinations unless
these transactions meet certain fair price criteria and procedural requirements
or are approved by two-thirds of our continuing directors. We may in the future
adopt other measures that may have the effect of delaying or discouraging an
unsolicited takeover, even if the takeover were at a premium price or favored by
a majority of unaffiliated shareholders. Certain of these measures may be
adopted without any further vote or action by our shareholders.
The Price Of Our Common Stock Has Fluctuated
Widely In The Last Year And May Fluctuate
Widely In The Future.
Our common stock is traded on the NASDAQ National Market, which has
experienced and may continue to experience significant price and volume
fluctuations that could adversely affect the market price of our common stock
without regard to our operating performance. In addition, we believe that
factors such as quarterly fluctuations in financial results, earnings below
analysts' estimates, and financial performance and other activities of other
publicly traded companies in the semiconductor industry could cause the price of
our common stock to fluctuate substantially. In addition, in recent periods, our
common stock, the stock market in general, and the market for shares of small
capitalization and semiconductor industry-related stocks in particular, have
experienced extreme price fluctuations which have often been unrelated to the
operating performance of affected companies. Any similar fluctuations in the
future could adversely affect the market price of our common stock.
Our stock price has fluctuated widely in the last year and may fluctuate
widely in the future. Since September 30, 1999, our stock price has been as high
as $86.50 per share and as low as $6.03 per share. Volatility in the price of
our common stock may be caused by other factors outside of our control and may
be unrelated or disproportionate to our operating results.
Forward-Looking Statements
Statements contained in this Annual Report on Form 10-K which are not
historical facts are forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended. A forward-looking
statement may contain words such as "plans," "hopes," "believes," "estimates,"
"will continue to be," "will be," "continue to," "expect to," "anticipate that,"
"to be" or "can impact."
Management cautions that forward-looking statements are subject to risks
and uncertainties that could cause our actual results to differ materially from
those projected in such forward-looking statements.
Further, our future business, financial condition and results of operations
could differ materially from those anticipated by such forward- looking
statements and are subject to risks and uncertainties including the risks set
forth above. Moreover, neither any other person nor we assumes responsibility
for the accuracy and completeness of the forward-looking statements. We are
under no duty to update any of the forward-looking statements after the date of
this Annual Report on Form 10-K to conform such statements to actual results or
to changes in our expectations.
Item 2. Properties
In July 2000, EMCORE announced that it completed its second phase of
expansion at its Somerset, NJ manufacturing facility and had moved its corporate
offices to a new facility located nearby. The expansion of the Somerset, NJ
manufacturing facility significantly increases production capacity for EMCORE's
existing photonics, RF materials, devices and MOCVD production tool lines; and
enables EMCORE to develop new product lines and meet the requirements of a
rapidly expanding customer base. Earlier in the year, EMCORE completed the first
phase expansion of its RF materials division which doubled production capacity
to meet market demand for its InGaP HBT and pHEMT products used in fiber optic
and wireless communication devices. The second phase of the expansion added
another 7,000 square feet of space which increases the electronic material
production capability by nearly 400%. The expansion accommodates the addition of
up to ten new Enterprise Electronic Materials MOCVD production tools, engineered
and manufactured by EMCORE, for the high volume production of pHEMTs and HBTs.
This will bring the total number of materials-related production tools in
operation at Somerset, NJ to eighteen, whereby 733,000 four-inch wafers or
305,000 six-inch wafers can be produced annually. The facility expansion also
more than doubles EMCORE's characterization capabilities to ensure the
unrestricted flow of high quality epitaxial materials. The second-phase
expansion also increases the manufacturing capacity of EMCORE's electronic
device division and MOCVD tool division. The electronic device division of
EMCORE has been expanded to augment EMCORE's capability to produce
photo-detectors for high-speed array transceivers. EMCORE is in the process of
purchasing this manufacturing building and an additional 140,000 square foot
building in the area to keep production in pace with the high demand for its
products. With the additional space, EMCORE's capital equipment division, which
manufactures market leading MOCVD tools, will have the capacity to triple the
amount of production tools manufactured per year.
In July 2000, EMCORE also announced plans to significantly expand its
Sandia Technology Park site, located in Albuquerque, New Mexico, into a campus
environment that will house EMCORE's solar cell, optical components and
networking products. Scheduled for completion by January 2001, this expanded
facility will triple the cleanroom manufacturing capacity of the plant to meet
increased product demand, EMCORE's expanding customer base and new product
lines. EMCORE has already purchased an additional two acres west of the site and
completed the build out of the remaining unoccupied portion of the existing
EMCORE facility adding an additional 36,000 square feet to the existing
50,000-square-foot facility. Construction of a new 36,000 square foot, 2-story
building has started and is expected to be completed by January 2001. This will
allow for one integrated manufacturing site for EMCORE's component module and
photovoltaic operations.
The existing 50,000 square foot facility in Albuquerque, New Mexico was
completed in October 1998, where 50% of the plant is occupied by EMCORE's
PhotoVoltaic division for the manufacture of advanced dual and triple junction
solar cells for satellite applications. EMCORE's MicroOptical Device (MODE)
division provides the building blocks for high-speed telecom and data
communications, including the Internet infrastructure, by designing and
manufacturing reliable and efficient high-speed laser components, subassemblies,
and modules. The expansion of these operations at a newly constructed, state of
the art facility will be paramount to the future development of industry leading
technologies for the communications industry.
The following chart contains certain information regarding each of EMCORE's
principal facilities. Each of these facilities contains office space, marketing
and sales, and research and development space. EMCORE also leases office space
in Santa Clara, California and Hsinchu, Taiwan. In addition to EMCORE's
facilities, Uniroyal Optoelectronics, a joint venture between EMCORE and
Uniroyal Technology Corporation, leases a 77,000 square foot office and
manufacturing facility in Tampa, Florida; 44,000 square feet is currently in use
and the remaining unoccupied portion of 33,000 square feet is expected to be
completed by July 2001.
Item 3. Legal Proceedings
EMCORE is not aware of any pending or threatened litigation against it that
could have a material adverse effect on its business, financial condition and
results of operations.
Item 4. Submission of matters to a vote of security holders
Not applicable.
PART II.
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters
EMCORE's common stock is traded on the NASDAQ National Market and is quoted
under the symbol "EMKR." The following table sets forth the quarterly high and
low sale prices for EMCORE's common stock during the three most recent fiscal
years. Stock prices have been adjusted to reflect a two-for-one (2:1) common
stock split that was effective on September 18, 2000.
Fiscal Year Ended September 30, 1998 High Low
First Quarter....................................... $11.6880 $ 7.7500
Second Quarter...................................... $ 9.8130 $ 5.5000
Third Quarter ...................................... $ 8.3750 $ 4.5000
Fourth Quarter ..................................... $ 6.7500 $ 3.0000
Fiscal Year Ended September 30, 1999
First Quarter...................................... $ 9.1880 $ 3.6250
Second Quarter...................................... $14.3750 $ 6.9380
Third Quarter ...................................... $11.5000 $ 6.4380
Fourth Quarter ..................................... $12.5000 $ 5.6250
Fiscal Year Ended September 30, 2000
First Quarter....................................... $19.6250 $ 6.0310
Second Quarter...................................... $86.5000 $15.3130
Third Quarter ...................................... $61.0000 $20.0000
Fourth Quarter ..................................... $62.5000 $28.5630
Fiscal Year Ended September 30, 2001
First Quarter (through December 1, 2000)............ $37.8125 $33.5000
The reported closing sale price of EMCORE's common stock on December 1,
2000 was $35.3125 per share. As of December 1, 2000, EMCORE had approximately
2,697 shareholders of record.
EMCORE has never declared or paid dividends on its common stock since its
formation. EMCORE currently does not intend to pay dividends on its common stock
in the foreseeable future so that it may reinvest its earnings in its business.
The payment of dividends, if any, in the future will be at the discretion of the
Board of Directors.
Recent Sales of Unregistered Securities
In 1999, EMCORE's Chairman personally guaranteed EMCORE's bank facility and
extended a line of credit to EMCORE. In recognition of these services, the Board
of Directors granted a warrant for 600,000 shares (adjusted for the 2:1 stock
split in September 2000) of common stock to the Chairman. The warrant was
immediately exercisable at $6.4700 per share and issued in March 2000. EMCORE
believes the issuance of the warrant was exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933, as amended.
Item 6. Selected Financial Data
The following selected consolidated financial data for the five most recent
fiscal years ended September 30, 2000 of EMCORE is qualified by reference to and
should be read in conjunction with the Financial Statements and the Notes
thereto, and Management's Discussion and Analysis of Financial Condition and
Results of Operations included elsewhere in this document. The Statement of
Operations data set forth below with respect to fiscal years 1998, 1999 and 2000
and the Balance Sheet data as of September 30, 1999 and 2000 are derived from
EMCORE's audited financial statements included elsewhere in this document. The
Statement of Income data for fiscal years 1996 and 1997 and the Balance Sheet
data as of September 30, 1996, 1997 and 1998 are derived from audited financial
statements not included herein. All share amounts have been restated to reflect
EMCORE's two-for-one (2:1) common stock split that was effective on September
18, 2000.
On December 5, 1997, EMCORE acquired MODE in a stock transaction accounted
for under the purchase method of accounting for a purchase price of $32.8
million. In connection with this transaction, EMCORE recorded a non-recurring,
non-cash charge of $19.5 million for acquired in-process research and
development, which affects the comparability of EMCORE's operating results and
financial condition.
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Overview
EMCORE, an ISO 9001 certified manufacturer, designs, develops and
manufactures compound semiconductor materials and is a leading developer and
manufacturer of the tools and manufacturing processes used to fabricate compound
semiconductor wafers and devices. EMCORE's vertically-integrated product
offering allows it to provide a complete compound semiconductor solution to its
customers. EMCORE assists its customers with device design, process development
and optimal configuration of TurboDisc production systems.
EMCORE recognizes revenue upon shipment. Systems-related revenues include
sales of EMCORE's TurboDisc production systems as well as components and
services. The book-to-ship time period on systems is approximately six to nine
months, and the average selling price is in excess of $1.0 million. For systems,
EMCORE incurs certain installation and warranty costs subsequent to shipment
which are estimated and accrued at the time the sale is recognized.
Materials-related revenues include wafers, devices and process development
technology. The materials sales cycle is generally shorter than systems-related
sales and average selling prices vary significantly based on the products and
services provided.
In order to facilitate the development and manufacture of new products in
targeted growth areas, EMCORE has established a number of strategic
relationships through joint ventures, long-term supply agreements and an
acquisition. The most significant strategic relationships are summarized below:
o In June 2000, EMCORE and JDS Uniphase executed a Joint Development
Manufacturing and Marketing Agreement (the "Agreement"). Under the
Agreement, EMCORE and JDS Uniphase will jointly develop, manufacture
and market a family of fiber optic array transceivers based on
EMCORE's laser technology that facilitate light to logic (electronic
signal in/modulated light signal out) for fiber optic communications
products used in switches, routers and computer backplanes for OC-192,
OC-768 and other proprietary network designs. EMCORE will manufacture
VCSEL arrays and design gigabit speed control circuits,
photodetectors, optical links and other components. JDS Uniphase will
handle all marketing, worldwide sales, application support, customer
service and distribution functions and will assist EMCORE with
technical support for the optical packaging and testing for the
products. The initial product to be developed and commercialized under
the Agreement with JDS Uniphase will be an array transceiver with
twelve channels each operating at 1.25 Gigabits/second, yielding a
compact, high speed data link. These products are designed to make
possible short distance links between dense wavelength division
multiplexing systems (DWDM), high-speed routers and SONET (long-haul
telecommunications) equipment. Recent industry forecasts indicate that
the market opportunity for high-speed optical transceivers, including
2.5 gigabit per channel arrays and 10 gigabit serial devices will
exceed $3.4 billion by the year 2004. EMCORE has completed alpha
testing and began shipping prototype array transceivers in December
2000;
o In May 2000, EMCORE signed an agreement with Motorola to meet their
requirements for epitaxial tools, wireless electronic materials and
technology. This relationship includes supplying Motorola with
epitaxial process technology and multiple MOCVD production tools, as
well as purchase orders for electronic device epitaxial wafers.
Motorola also announced that EMCORE was awarded their Standard
Supplier Designation, making EMCORE the only qualified supplier of
MOCVD tools for Motorola's compound semiconductor factories;
o In January 2000, EMCORE entered into a three-year supply agreement
with Agilent, a leading supplier of fiber optic transceivers and
integrated circuits for infrastructure products for the Internet.
Under this agreement, EMCORE will manufacture Gigarray(R) VCSEL arrays
for use in parallel optical transceivers. The initial purchase order
under the agreement is contingent upon EMCORE's development of a
component that meets Agilent's specifications. EMCORE began shipping
commercial product in December 2000;
o In May 1999, EMCORE and General Electric Lighting formed GELcore, a
joint venture to develop and market HB LED lighting products. General
Electric Lighting and EMCORE have agreed that this joint venture will
be the exclusive vehicle for each party's participation in solid state
lighting. GELcore seeks to combine EMCORE's materials science
expertise, process technology and compound semiconductor production
systems with General Electric Lighting's brand name recognition and
extensive marketing and distribution capabilities. GELcore's long-term
goal is to develop products to replace traditional lighting. EMCORE
has invested $17.5 million in GELcore and has seconded various
employees to the joint venture to assist in the development of
products. In September 2000, GELcore acquired Ecolux, Inc. adding
LED-signaling products to GELcore's growing line of LED products;
o In November 1998, EMCORE signed a long-term supply agreement with
Space Systems/Loral, a wholly owned subsidiary of Loral Space &
Communications. Under this agreement, EMCORE supplies compound
semiconductor high-efficiency gallium arsenide solar cells for Loral's
satellites. To date, EMCORE has received purchase orders from Space
Systems/Loral that total $19.5 million and services this agreement at
EMCORE's new facility in Albuquerque, New Mexico;
o In March 1997, EMCORE and a wholly owned subsidiary of Uniroyal
Technology Corporation formed Uniroyal Optoelectronics LLC, a joint
venture, to manufacture, sell and distribute HB LED wafers and
package-ready devices. This joint venture commenced operations in July
1998. EMCORE has invested over $17.6 million in Uniroyal
Optoelectronics and has seconded various employees to the joint
venture to assist in the development of products; and
o In December 1997, EMCORE acquired MicroOptical Devices, Inc. ("MODE")
in a stock transaction accounted for under the purchase method of
accounting for a purchase price of $32.8 million. This acquisition
allowed EMCORE to expand its technology base into the data
communications and telecommunications markets. MODE, a development
stage company, constituted a significant and strategic investment for
EMCORE to acquire and gain access to MODE's in-process research and
development of micro-optical technology. As part of this acquisition,
EMCORE recorded goodwill of approximately $13.2 million, which is
being charged against operations over a three-year period, impacting
financial results through December 2000. MODE's operations are located
in Albuquerque, New Mexico.
Because EMCORE does not have a controlling economic and voting interest in
the General Electric Lighting and Uniroyal Technology joint ventures, EMCORE
accounts for these joint ventures under the equity method of accounting and, as
such, our share of profits and losses are included below the operating income
line in our Statements of Operations.
EMCORE has generated a significant portion of its sales to customers
outside the United States. In fiscal years 1998, 1999 and 2000, international
sales constituted 39.1%, 52.6% and 38.6%, respectively, of revenues. EMCORE
anticipates that international sales will continue to account for a significant
portion of revenues. Historically, EMCORE has received substantially all
payments for products and services in U.S. dollars and therefore EMCORE does not
currently anticipate that fluctuations in any currency will have a material
effect on its financial condition or results of operations.
The following chart contains a breakdown of EMCORE's worldwide revenues by
geographic region.
As of September 30, 2000, EMCORE had an order backlog of $125.0 million
scheduled to be shipped through September 30, 2001. This represents an increase
of $81.9 million or 190.0% since September 30, 1999. Year-end backlog also
compares favorably to the sequential backlogs reported at June 30, 2000, March
31, 2000 and December 31, 1999 of $105.0 million, $84.0 million and $46.6
million, respectively. EMCORE includes in backlog only customer purchase orders
that have been accepted by EMCORE and for which shipment dates have been
assigned within the 12 months to follow and research contracts that are in
process or awarded. Wafer and device agreements extending longer than one year
in duration are included in backlog only for the ensuing 12 months. EMCORE
receives partial advance payments or irrevocable letters of credit on most
production system orders.
EMCORE has two reportable operating segments: the systems-related business
unit and the materials-related business unit. The systems-related business unit
designs, develops and manufactures tools and manufacturing processes used to
fabricate compound semiconductor wafer and devices. This business unit assists
our customers with device design, process development and optimal configuration
of TurboDisc production systems. Revenues for the systems-related business unit
consist of sales of EMCORE's TurboDisc production systems as well as spare parts
and services related to these systems. The materials-related business unit
designs, develops and manufactures compound semiconductor materials. Revenues
for the materials-related business unit include sales of semiconductor wafers,
devices, packaged devices, modules and process development technology. EMCORE's
vertically-integrated product offering allows it to provide a complete compound
semiconductor solution to its customers. The segments reported are the segments
of EMCORE for which separate financial information is available and for which
gross profit amounts are evaluated regularly by executive management in deciding
how to allocate resources and in assessing performance. EMCORE does not allocate
assets or operating expenses to the individual operating segments. There are no
intercompany sales transactions between the two operating segments.
Results of Operations
The following table sets forth the condensed consolidated Statement of
Operations data of EMCORE expressed as a percentage of total revenues for the
fiscal years ended September 30, 1998, 1999 and 2000:
Statement of Operations Data:
Fiscal Years Ended September 30,
1998 1999 2000
Revenues.................................... 100.0% 100.0% 100.0%
Cost of revenues............................ 56.4% 56.8% 58.7%
----------------------------------
Gross profit.............................. 43.6% 43.2% 41.3%
Operating expenses:
Selling, general and administrative....... 32.2% 24.7% 21.0%
Goodwill amortization..................... 8.3% 7.5% 4.2%
Research and development:
Recurring............................... 37.7% 35.5% 31.3%
One-time acquired in-process............ 44.6% - -
----------------------------------
Total operating expenses.............. 122.8% 67.7% 56.5%
----------------------------------
Operating loss........................... (79.2%) (24.5%) (15.2%)
Stated interest expense (income), net.... 2.2% 1.5% (4.3%)
Imputed warrant interest expense......... 1.4% 1.9% 0.8%
Equity in net loss of unconsolidated
affiliates............................. 0.4% 8.6% 12.7%
----------------------------------
Total other expenses................. 4.0% 12.0% 9.2%
----------------------------------
Loss before extraordinary item.............. (83.2%) (36.6%) (24.4%)
Extraordinary item.......................... - 2.3% -
----------------------------------
Net loss.................................... (83.2%) (38.9%) (24.4%)
==================================
Comparison of Fiscal Years Ended September 30, 1999 and 2000
Revenues. EMCORE's revenues increased 79.1% or $46.2 million from $58.3
million for the fiscal year ended September 30, 1999 to $104.5 million for the
fiscal year ended September 30, 2000. This increase in revenues was attributable
to both systems- and materials-related product lines. Systems-related revenues
increased 47.9% or $21.3 million from $44.5 million to $65.8 million. The number
of MOCVD production systems shipped increased 51.6% from 31 in fiscal year 1999
to 47 in fiscal year 2000. Management expects system shipments to increase over
85% in fiscal year 2001 to approximately 75 MOCVD systems. Materials-related
revenues increased 179.3% or $24.9 million from $13.9 million to $38.7 million.
This revenue growth was primarily related to sales of solar cells and sales of
pHEMT and HBT epitaxial wafers to wireless communication companies, which
increased 1,760.6% and 802.0%, respectively, from the prior year. As a
percentage of revenues, systems- and materials-related revenues accounted for
76.2% and 23.8%, respectively, for the fiscal year ended September 30, 1999 and
improved to 63.0% and 37.0%, respectively, for the fiscal year ended September
30, 2000. EMCORE expects the product mix between systems and materials to
continue to approach 50% as other new products are introduced and production of
commercial volumes of these materials commences. International sales accounted
for 52.6% of revenues for the fiscal year ended September 30, 1999 and 38.6% of
revenues for the fiscal year ended September 30, 2000. The increase in domestic
sales is a direct result of significant materials-related design wins at several
large U.S. semiconductor and telecommunication companies.
Gross Profit. EMCORE's gross profit increased 71.6% or $18.0 million from
$25.2 million for the fiscal year ended September 30, 1999 to $43.2 million for
the fiscal year ended September 30, 2000. Gross profit earned on systems-related
revenues increased 56.0% or $10.0 million from $18.0 million to $28.0 million.
This increase is due primarily to the rise in production system sales, discussed
above, as well as, improved manufacturing efficiencies. Component and service
related revenues continue to increase as EMCORE's production system installed
base approaches 300 MOCVD systems. Gross profit earned on materials-related
revenues increased 110.2% or $8.0 million from $7.2 million to $15.2 million.
Management expects gross profits on materials-related sales to increase
significantly due to recent yield improvements on manufacturing processes and
based upon expected increased production output due to EMCORE's strong order
backlog of material-related products.
Selling, General and Administrative. Selling, general and administrative
expenses increased by 52.4% or $7.6 million from $14.4 million for the fiscal
year ended September 30, 1999 to $22.0 million for the fiscal year ended
September 30, 2000. A significant portion of the increase was due to headcount
increases in marketing and sales personnel to support domestic and foreign
markets and other administrative headcount additions to sustain internal
support. As a percentage of revenue, selling, general and administrative
expenses decreased from 24.7% for the fiscal year ended September 30, 1999 to
21.0% for the fiscal year ended September 30, 2000.
Goodwill Amortization. Goodwill of $13.2 million was recorded in connection
with our acquisition of MODE in December 1997. EMCORE recognized $4.4 million of
goodwill amortization for the fiscal years ended September 30, 1999 and 2000,
each reflecting a full year of amortization. As of September 30, 2000, EMCORE
had approximately $0.7 million of net goodwill remaining, which will be fully
amortized by December 2000.
Research and Development. Recurring research and development expenses
increased 57.8% or $12.0 million from $20.7 million in the fiscal year ended
September 30, 1999 to $32.7 million in the fiscal year ended September 30, 2000.
As a percentage of revenue, recurring research and development expenses
decreased from 35.5% for the fiscal year ended September 30, 1999 to 31.3% for
the fiscal year ended September 30, 2000. During the quarter ended September 30,
2000, EMCORE incurred $7.0 million of additional research and development
expenses in connection with EMCORE's array transceiver program, manufacturing
process development and transponder development, which are being designed under
an agreement with JDS Uniphase. In addition, EMCORE accelerated certain fiber
optic and wireless programs to meet customer driven market windows. To maintain
growth and to continue to pursue market leadership in materials science
technology, management expects to continue to invest a significant amount of its
resources in research and development. In fiscal year 2001, management expects
research and development expenses to increase approximately 25%, but continue to
decrease as a percentage of revenues.
Interest Income/Expense. For the fiscal year ended September 30, 2000, net
interest changed $5.4 million from net interest expense of $0.9 million to net
interest income of $4.5 million. In March 2000, EMCORE completed the issuance of
an additional 2.0 million common stock shares (adjusted for 2:1 stock split)
through a public offering, which resulted in proceeds of $127.5 million, net of
issuance costs. A portion of the proceeds was used to repay all outstanding bank
loans, thereby reducing interest expense and generating interest income on the
retained proceeds. Higher interest rates in fiscal year 2000 also contributed to
increased interest income.
Imputed warrant interest expense, non-cash. In 1999, EMCORE's Chairman
personally guaranteed EMCORE's bank facility and extended a line of credit to
EMCORE. In recognition of these services during 2000, the Board of Directors
granted a warrant for 600,000 shares (adjusted for the 2:1 stock split in
September 2000) of common stock to the Chairman. The warrant was immediately
exercisable at $6.47 per share. As the warrant related to past services, the
fair value was charged as an expense in the Statement of Operations. EMCORE
assigned a fair value of $689,000 to the warrants, which was based upon EMCORE's
application of the Black-Scholes option-pricing model. The consequent expense
was charged to "imputed warrant interest expense, non-cash."
Equity in unconsolidated affiliates. Because EMCORE does not have a
controlling economic and voting interest in its joint ventures, EMCORE accounts
for these joint ventures under the equity method of accounting. For the fiscal
year ended September 30, 1999, EMCORE incurred a net loss of $2.2 million
related to the Uniroyal joint venture and a $2.5 million net loss related to the
GELcore joint venture. For the fiscal year ended September 30, 2000, EMCORE
incurred a net loss of $7.8 million related to the Uniroyal joint venture and a
$5.4 million net loss related to the GELcore joint venture.
Income Taxes. As a result of its losses, EMCORE did not incur any income
tax expense in both fiscal years 1999 and 2000. As of September 30, 2000, the
Company has net operating loss carryforwards for tax purposes of approximately
$44.0 million that expire in the years 2003 through 2020. The Company believes
that the consummation of certain equity transactions and a significant change in
the ownership during fiscal years 1995, 1998 and 1999 have constituted a change
in control under Section 382 of the Internal Revenue Code ("IRC"). Due to the
change in control, the Company's ability to use its federal net operating loss
carryovers and federal research credit carryovers to offset future income and
income taxes, respectively, are subject to annual limitations under IRC Sections
382 and 383.
Comparison of Fiscal Years Ended September 30, 1998 and 1999
Revenues. EMCORE's revenues increased 33.3% from $43.8 million for the
fiscal year ended September 30, 1998 to $58.3 million for the fiscal year ended
September 30, 1999. The revenue increase was attributable to increased revenues
in the systems-related product lines. Revenues from systems-related sales and
materials-related sales were $26.3 million and $17.4 million, respectively, for
the fiscal year ended September 30, 1998 and $44.5 million and $13.9 million,
respectively, for the fiscal year ended September 30, 1999. As a percentage of
revenues, systems- and materials-related revenues accounted for 60.2% and 39.8%,
respectively, for the fiscal year ended September 30, 1998 and 76.2% and 23.8%,
respectively, for the fiscal year ended September 30, 1999. International sales
accounted for 39.1% of revenues for the fiscal year ended September 30, 1998 and
52.5% of revenues for the fiscal year ended September 30, 1999.
Gross Profit. EMCORE's gross profit increased 32.0% from $19.1 million for
the fiscal year ended September 30, 1998 to $25.2 million for the fiscal year
ended September 30, 1999. As a percentage of revenue, gross profit decreased
slightly from 43.6% of revenue for the fiscal year ended September 30, 1998 to
43.2% of revenue for the fiscal year ended September 30, 1999. During the first
half of fiscal year 1999, EMCORE sold three compound semiconductor production
systems for approximately $5.3 million to a joint venture in which it has a 49%
minority interest. EMCORE deferred $1.3 million of gross profit on such sales.
Such deferred gross profit is being recognized ratably over the assigned life of
the production systems purchased by the joint venture.
Selling, General and Administrative. Selling, general and administrative
expenses increased by 2.5% from $14.1 million for the fiscal year ended
September 30, 1998 to $14.4 million for the fiscal year ended September 30,
1999. As a percentage of revenue, selling, general and administrative expenses
decreased from 32.2% for the fiscal year ended September 30, 1998 to 24.7% for
the fiscal year ended September 30, 1999.
Goodwill Amortization. Goodwill of $13.2 million was recorded in connection
with our acquisition of MODE on December 5, 1997. EMCORE recognized
approximately $4.4 million of goodwill amortization for the fiscal year ended
September 30, 1999, reflecting a full year of amortization. As of September 30,
1999, EMCORE had approximately $5.1 million of net goodwill remaining, which
will be fully amortized by December 2000.
Research and Development. Recurring research and development expenses
increased 25.6% from $16.5 million in the fiscal year ended September 30, 1998
to $20.7 million in the fiscal year ended September 30, 1999. As a percentage of
revenue, recurring research and development expenses decreased from 37.7% for
the fiscal year ended September 30, 1998 to 35.5% for the fiscal year ended
September 30, 1999. The increase in research and development spending was
primarily attributable to EMCORE's acquisition of MODE, the startup of our new
Albuquerque, New Mexico facility and increased staffing and equipment costs
necessary to enhance current products and develop new product offerings.
Products introduced or under development include HB LEDs, high efficiency solar
cells, new generation TurboDisc production systems, VCSELs, RF materials and
other optoelectronic devices. In fiscal year 1998, EMCORE recognized a $19.5
million one-time charge for acquired in-process research and development
relating to the purchase of MODE.
Other Expenses. During fiscal year 1996, EMCORE issued 5,151,766 detachable
warrants along with subordinated notes to certain of its existing shareholders.
EMCORE subsequently assigned a value to these detachable warrants issued using
the Black-Scholes option-pricing model. EMCORE recorded the subordinated notes
at a carrying value that is subject to periodic accretions, using the interest
method. In June 1998, EMCORE issued 569,368 warrants to its Chairman and its
Chief Executive Officer for providing a guarantee in connection with an $8.0
million 18-month credit facility with First Union National Bank entered into in
1998. EMCORE also assigned a value to these warrants using the Black-Scholes
option-pricing model. The consequent expense of the subordinated note accretion
and warrant value amortization is charged to "Imputed warrant interest expense,
non-cash" and equaled approximately $601,000 and $950,000 for the fiscal years
ended September 30, 1998 and 1999, respectively. The subordinated notes and the
18-month credit facility were repaid using a portion of the proceeds from the
public offering, which was completed in June 1999.
In order to fund its initial capital contribution for GELcore, EMCORE
borrowed $7.8 million from General Electric in the form of a convertible
subordinated debenture (the "Debenture"), with an interest rate of 4.75% and a
May 2006 maturity date. This Debenture was converted to common stock in March
2000. In connection with this funding of EMCORE's initial capital contribution,
General Electric received 564,020 warrants to purchase common stock at $11.44
per share. These warrants, which were to expire in 2006, were exercised in March
2000. EMCORE had assigned a value to these warrants using the Black-Scholes
option-pricing model. The warrant value of $2.6 million was included in other
assets and was being amortized over seven years. The consequent expense of the
warrant amortization was charged to "Imputed warrant interest expense, non-cash"
and equaled approximately $186,000 for the fiscal year ended September 30, 1999.
For the fiscal year ended September 30, 1999, stated interest expense, net
decreased by $107,000 to $866,000. On June 15, 1999, EMCORE completed the
issuance of an additional 6.0 million common stock shares through a public
offering, which resulted in proceeds of $52.0 million, net of issuance costs. A
significant portion of those proceeds was used to repay all outstanding bank
loans and subordinated notes.
Because EMCORE does not have a controlling economic and voting interest in
the Uniroyal Technology, Union Miniere and General Electric Lighting joint
ventures, EMCORE accounts for these joint ventures under the equity method of
accounting. For the fiscal year ended September 30, 1998, EMCORE incurred a net
loss of $198,000 related to the Uniroyal joint venture. For the fiscal year
ended September 30, 1999, EMCORE incurred a net loss of $2.2 million related to
the Uniroyal joint venture, a $2.5 million net loss related to the GELcore joint
venture and a $297,000 net loss related to the UMcore joint venture.
Income Taxes. As a result of its losses, EMCORE did not incur any income
tax expense in both fiscal years 1998 and 1999. As of September 30, 1999, EMCORE
has net operating loss carryforwards for tax purposes of approximately $24.0
million, which expire in the years 2003 through 2019. EMCORE believes that the
consummation of certain equity transactions and a significant change in the
ownership during fiscal years 1995, 1998 and 1999 has constituted a change in
control under Section 382 of the Internal Revenue Code. Due to the change in
control, EMCORE's ability to use its federal net operating loss carryovers and
federal research credit carryovers to offset future income and income taxes,
respectively, are subject to annual limitations under Sections 382 and 383 of
the Internal Revenue Code.
Extraordinary Item. On June 15, 1999, EMCORE repaid its outstanding bank
loans using a portion of the proceeds from the public offering. EMCORE also used
a portion of the net proceeds to repurchase its outstanding 6.0% subordinated
notes due 2001. The early extinguishment of debt resulted in an extraordinary
charge of $1.3 million or $0.07 per share in fiscal year 1999 that consisted of
$867,000 related to the discount on prepayment of the subordinated notes and
$467,000 related to the write-off of related deferred financing costs.
Quarterly Results of Operations
The following tables present EMCORE's unaudited results of operations
expressed in dollars and as a percentage of revenues for the eight most recently
ended fiscal quarters. EMCORE believes that all necessary adjustments,
consisting only of normal recurring adjustments, have been included in the
amounts below to present fairly the selected quarterly information when read in
conjunction with the consolidated financial statements and notes included
elsewhere in this document. EMCORE's results from operations may vary
substantially from quarter to quarter. Accordingly, the operating results for a
quarter are not necessarily indicative of results for any subsequent quarter or
for the full year.
EMCORE has experienced and expects to continue to experience significant
fluctuations in quarterly results. Factors which have had an influence on and
may continue to influence EMCORE's operating results in a particular quarter
include, but are not limited to, the timing of receipt of orders, cancellation,
rescheduling or delay in product shipment or supply deliveries, product mix,
competitive pricing pressures, EMCORE's ability to design, manufacture and ship
products on a cost effective and timely basis, including the ability of EMCORE
to achieve and maintain acceptable production yields for wafers and devices,
regional economic conditions and the announcement and introduction of new
products by EMCORE and by its competitors. The timing of sales of EMCORE's
TurboDisc production systems may cause substantial fluctuations in quarterly
operating results due to the substantially higher per unit price of these
products relative to EMCORE's other products. If the compound semiconductor
industry experiences downturns or slowdowns, EMCORE's business, financial
condition and results of operations may be materially and adversely affected.
Liquidity And Capital Resources
EMCORE has funded operations to date through sales of equity, bank
borrowings, subordinated debt and revenues from product sales. In June 1999,
EMCORE completed a secondary public offering and raised approximately $52.0
million, net of issuance costs. In March 2000, EMCORE completed an additional
public offering and raised approximately $127.5 million, net of issuance costs.
As of September 30, 2000, EMCORE had working capital of approximately $111.6
million, including $101.7 million in cash, cash equivalents and marketable
securities.
Operating activities generated $7.6 million in fiscal year 2000, an
increase of $22.8 million when compared to prior year's net cash used by
operations of $15.2 million. For the quarter ended September 30, 2000, EMCORE
experienced its second consecutive quarter of significant positive cash flow
from operating activities. The increase in cash for the year ended was primarily
due to increases in customer deposits, EMCORE's equity in net loss of
unconsolidated affiliates and non-cash depreciation and amortization expense.
These amounts were partially offset by EMCORE's net loss and increases in both
inventory and accounts receivable. Net cash used for investment activities
amounted to $104.6 million, which represents an increase of 234.7 or $73.3
million from the prior year. In fiscal year 2000, EMCORE's capital expenditures
totaled $33.8 million which was used primarily for capacity expansion at both
New Jersey and New Mexico's manufacturing facilities. EMCORE quadrupled its
production capacity for GaInP HBTs and pHEMTs to meet wireless and fiber optic
market demands. EMCORE's net investment in marketable securities totaled $50.9
million. During fiscal year 2000, EMCORE invested $20.0 million in its joint
ventures, $8.4 million into GELcore and $11.6 million into UOE. Net cash
provided by financing activities for the fiscal year ended September 30, 2000
amounted to approximately $140.7 million, primarily from the sale of 2.0 million
common stock shares to the public which resulted in proceeds of $127.5 million,
net of issuance costs.
In March 1997, EMCORE entered into a $10.0 million loan agreement with its
bank (the "Loan Agreement") that had an interest rate equal to the prime rate
plus 50 basis points. In December 1999, EMCORE's Loan Agreement was extended
through January 31, 2001. The Loan Agreement's financial covenants were modified
under the third amendment, and management believes that EMCORE will be able to
comply with such requirements. EMCORE was in compliance with all covenants and
no amounts were outstanding under this facility at September 30, 2000.
EMCORE's planned capital expenditures are expected to total approximately
$50.0 million during fiscal year 2001. EMCORE is currently engaged in
construction activities relating to a new 36,000 square foot, 2-story building
at the Sandia Technology Park site, in Albuquerque, New Mexico and completion of
the third and final stages of expansion at the Somerset, NJ, manufacturing
facilities. The 2001 expansion in Somerset, NJ involves an expected $12.0
million purchase of two buildings to be used for manufacturing of RF materials,
devices and MOCVD production tools. Capital spending in fiscal year 2001 also
includes upgrading manufacturing facilities, continued investment in analytical
and diagnostic research and development equipment, upgrading and purchasing
computer equipment and the manufacture of TurboDisc MOCVD production systems for
production of materials-related products.
EMCORE believes that its current liquidity, together with available credit,
should be sufficient to meet its cash needs for working capital through fiscal
year 2001. However, if the available credit facilities, cash generated from
operations and cash on hand are not sufficient to satisfy EMCORE's liquidity
requirements, EMCORE will seek to obtain additional equity or debt financing.
Additional funding may not be available when needed or on terms acceptable to
EMCORE. If EMCORE is required to raise additional financing and if adequate
funds are not available or not available on acceptable terms, the ability to
continue to fund expansion, develop and enhance products and services, or
otherwise respond to competitive pressures will be severely limited. Such a
limitation could have a material adverse effect on EMCORE's business, financial
condition or operations.
In 1992, EMCORE received a royalty bearing, non-exclusive license under a
patent held by Rockwell International Corporation which relates to an aspect of
the manufacturing process used by its TurboDisc systems. In October 1996, EMCORE
initiated discussions with Rockwell to receive additional licenses to permit
EMCORE to use this technology to manufacture and sell compound semiconductor
wafers and devices. In November 1996, EMCORE suspended these negotiations
because of litigation surrounding the validity of the Rockwell patent. EMCORE
also ceased making royalty payments to Rockwell under the license during the
pendency of the litigation. In January 1999, the case was settled and a judgment
was entered in favor of Rockwell. As a result, EMCORE may be required to pay
royalties to Rockwell for certain of its past sales of wafers and devices to its
customers who did not hold licenses directly from Rockwell. Management has
reviewed and assessed its likely royalty obligations and believes that it has
the appropriate amounts reserved at September 30, 2000. If EMCORE is required to
pay Rockwell amounts in excess of its reserves, its business, financial
condition and results of operations could be materially and adversely affected.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement establishes
accounting and reporting standards for derivative instruments and requires
recognition of all derivatives as assets or liabilities in the statement of
financial position and measurement of these instruments at fair value. The
statement, as amended, is effective for fiscal years beginning after June 15,
2000. EMCORE will be required to adopt this standard, as amended, in its fiscal
year ending September 30, 2001. Management believes that adopting this statement
will not have a material impact on the financial position, results of operations
or cash flows of EMCORE.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101. ("SAB 101") "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. The Company
will adopt SAB 101 by the fourth quarter of fiscal year 2001 and is currently
determining the impact such adoption will have on its consolidated financial
statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
During fiscal year 2000, EMCORE invested some of the proceeds from its
March 2000 public offering into high-grade corporate debt, commercial paper,
government securities and other investments at fixed interest rates that vary by
security. No other material changes in market risk were identified.
During fiscal year 2000, EMCORE repaid all outstanding bank term loans.
EMCORE has no debt outstanding as of September 30, 2000.
Item 8. Financial Statements and Supplementary Data
EMCORE CORPORATION
CONSOLIDATED BALANCE SHEETS
As of September 30, 1999 and 2000
(in thousands, except share data)
ASSETS 1999 2000
Current assets:
Cash and cash equivalents............................... $ 7,165 $50,849
Marketable securities................................... - 50,896
Accounts receivable, net of allowance for doubtful
accounts of $563 and $1,065 at September 30, 1999
and 2000, respectively................................ 11,423 18,240
Accounts receivable - related parties................... 2,480 2,334
Inventories, net........................................ 13,990 30,724
Prepaid expenses and other current assets............... 389 1,829
---------------------
Total current assets.................................. 35,447 154,872
Property, plant and equipment, net........................ 46,282 69,701
Goodwill, net............................................. 5,126 734
Investments in unconsolidated affiliates.................. 9,496 17,015
Other assets, net......................................... 3,260 1,580
---------------------
Total assets........................................... $99,611 $243,902
=====================
LIABILITIES and SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................ $ 5,359 $ 16,512
Accrued expenses........................................ 4,173 6,083
Advanced billings....................................... 4,350 20,278
Capitalized lease obligation - current.................. 713 72
Other current liabilities............................... 162 340
---------------------
Total current liabilities............................. 14,757 43,285
Convertible subordinated debenture........................ 7,800 -
Capitalized lease obligation, net of current portion...... 141 75
Other liabilities......................................... 1,097 1,220
---------------------
Total liabilities..................................... 23,795 44,580
---------------------
Commitments and contingencies
Mandatorily redeemable convertible preferred stock,
1,030,000 shares issued and outstanding at
September 30, 1999...................................... 14,193 -
Shareholders' equity:
Preferred stock, $0.0001 par, 5,882,353 shares
authorized.............................................. - -
Common stock, no par value, 100,000,000 shares
authorized, 26,707,614 shares issued and
outstanding at September 30, 1999; 33,974,698
shares issued and 33,968,426 outstanding at
September 30, 2000...................................... 152,426 314,780
Accumulated deficit....................................... (83,256) (108,864)
Notes receivable.......................................... (7,547) (6,355)
Treasury stock............................................ - (239)
---------------------
Total shareholders' equity.............................. 61,623 199,322
---------------------
Total shareholders' equity and mandatorily
redeemable preferred stock............................ 75,816 199,322
---------------------
Total liabilities, shareholders' equity and
mandatorily redeemable preferred stock................ $ 99,611 $243,902
=====================
The accompanying notes are an integral part of
these consolidated financial statements.
EMCORE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended September 30, 1998, 1999 and 2000
(in thousands, except per share data)
1998 1999 2000
Revenues:
Systems-related............................... $ 26,324 $44,477 $65,788
Materials-related............................. 17,436 13,864 38,718
-----------------------------
Total revenues.............................. 43,760 58,341 104,506
Cost of revenues:
Systems-related............................... 15,942 26,522 37,775
Materials-related............................. 8,734 6,636 23,526
-----------------------------
Total cost of revenues...................... 24,676 33,158 61,301
-----------------------------
Gross profit.............................. 19,084 25,183 43,205
Operating expenses:
Selling, general and administrative........... 14,082 14,433 21,993
Goodwill amortization......................... 3,638 4,393 4,392
Research and development - recurring.......... 16,495 20,713 32,689
Research and development - one time
acquired in-process, non-cash............... 19,516 - -
-----------------------------
Total operating expenses.................... 53,731 39,539 59,074
-----------------------------
Operating loss............................ (34,647) (14,356) (15,869)
Other (income) expense:
Interest income............................... (448) (751) (4,834)
Interest expense.............................. 1,421 1,617 342
Imputed warrant interest expense, non-cash.... 601 1,136 843
Equity in net loss of unconsolidated
affiliates.................................. 198 4,997 13,265
-----------------------------
Total other expenses........................ 1,772 6,999 9,616
Loss before extraordinary item.................. (36,419) (21,355) (25,485)
Extraordinary item - loss on early
extinguishment of debt...................... - 1,334 -
-----------------------------
Net loss........................................ $(36,419) $(22,689) $(25,485)
============================-
Per share data:
Weighted average basic and diluted shares
outstanding used in per share data
calculations.................................. 17,550 21,180 31,156
-----------------------------
Loss per basic and diluted share before
extraordinary item............................ $ (2.08) $ (1.03) $ (0.82)
=============================
Net loss per basic and diluted share............ $ (2.08) $ (1.09) $ (0.82)
=============================
The accompanying notes are an integral part of these
consolidated financial statements.
EMCORE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended September 30, 1998, 1999 and 2000
(in thousands)
1998 1999 2000
Cash flows from operating activities:
Net loss................................. $(36,419) $(22,689) $(25,485)
Adjustments to reconcile net loss
to net cash provided by (used
for) operating activities:
Acquired in-process research and
development, non-cash.................. 19,516 - -
Depreciation and amortization.......... 8,767 11,575 14,955
Provision for doubtful accounts........ 1,118 390 780
Provision for inventory valuation...... 120 40 313
Deferred gain on sale to unconsol-
idated affiliate....................... - 1,259 301
Non-cash charges on warrant issuances.. 601 1,136 843
Extraordinary loss on early
extinguishment of debt................. - 1,335 -
Equity in net loss of unconsolidated
affiliates............................. 198 4,997 13,265
Compensatory stock issuance............ 351 436 566
Change in assets and liabilities:
Accounts receivable - trade............ 2 (4,375) (7,597)
Accounts receivable - related
parties................................ 2,000 (1,980) 146
Inventories............................ (5,243) (1,585) (17,047)
Prepaid expenses and other current
assets................................. (64) (140) (1,440)
Other assets........................... (624) (69) (983)
Accounts payable....................... 7,950 (6,664) 11,153
Accrued expenses....................... (970) (24) 1,910
Advanced billings...................... 1,182 1,170 15,928
Unearned service revenue............... (72) (53) -
----------------------------------
Total adjustments........................ 34,832 7,448 33,093
----------------------------------
Net cash and cash equivalents (used
for) provided by operating activities.. (1,587) (15,241) 7,608
Cash flows from investing activities:
Purchase of property, plant, and
equipment.............................. (22,132) (17,110) (33,755)
Acquisition, cash acquired............. 193 - -
Investments in marketable securi-
ties, net.............................. - - (50,896)
Investments in unconsolidated
affiliates............................. (490) (14,203) (19,949)
(Funding) payments of restricted
cash................................... 250 62 -
----------------------------------
Net cash and cash equivalents used
for investing activities............... (22,179) (31,251) (104,600)
Cash flows from financing activities:
Proceeds from public stock offering,
net of issuance cost of $8,500......... - - 127,500
Proceeds from preferred stock
offering, net of issuance cost of
$500................................... - 21,200 -
Proceeds from public stock offer-
ing, net of issuance cost of
$5,000................................. - 52,000 -
Proceeds under convertible subordi-
nated debenture........................ - 7,800 -
Proceeds (payments) under bank
loans.................................. 17,950 (17,950) -
Proceeds (payments) under notes
payable - related party................ 7,000 (7,000) -
Payments on demand note facility
and subordinated debt.................. - (8,563) -
Proceeds from exercise of stock
purchase warrants...................... 23 2,164 10,874
Proceeds from exercise of stock
options................................ 83 376 2,197
Payments on capital lease obliga-
tions.................................. (487) (573) (715)
Purchase of treasury stock............. - - (239)
Dividends paid on preferred stock...... - (253) (133)
Proceeds from shareholders' notes
receivable............................. - - 1,192
----------------------------------
Net cash and cash equivalents
provided by financing activities....... 24,569 49,201 140,676
----------------------------------
Net increase in cash and cash
equivalents............................ 803 2,709 43,684
Cash and cash equivalents, beginning
of year................................ 3,653 4,456 7,165
----------------------------------
Cash and cash equivalents, end of
year................................... $ 4,456 $ 7,165 $ 50,849
Supplemental disclosures of cash flow
information:
Cash paid for interest................. $ 1,347 $ 1,739 $ 351
Non-cash Investing and Financing
Activities:
Common stock issued on the exercise
of warrants in exchange for subordi-
nated notes............................ 72 - 7,800
Issuance of common stock on the
exercise of warrants in exchange for
notes receivable....................... 7,458 - -
Issuance of common stock, common
stock purchase options and warrants
in connection with the acquisition
of MicroOptical Devices, Inc........... 32,329 - -
Conversion of mandatorily redeem-
able convertible preferred stock to
common stock........................... - 7,280 14,420
Reference is made to Note 8 - Debt Facilities - for disclosure relating to
certain non-cash warrant issuance. Reference is made to Note 11 - Stockholders'
Equity - for disclosure relating to certain non-cash equity transactions.
The accompanying notes are an integral part of
these consolidated financial statements.
EMCORE Corporation
Notes to Consolidated Financial Statements
As of September 30, 1999 and 2000 and
for the years ended September 30, 1998, 1999 and 2000
NOTE 1. Description of Business
EMCORE Corporation (the "Company"), a New Jersey Corporation, designs,
develops and manufactures compound semiconductor materials and is a leading
developer and manufacturer of the tools and manufacturing processes used to
fabricate compound semiconductor wafers and devices. EMCORE's products and
technology enable its customers, both in the United States and internationally,
to manufacture commercial volumes of high-performance electronic devices using
compound semiconductors. EMCORE has recently established a number of strategic
relationships through joint ventures, long-term supply agreements and an
acquisition in order to facilitate the development and manufacture of new
products in targeted growth markets. EMCORE's products are used for a wide
variety of applications in the communications (satellite, data,
telecommunications and wireless), consumer and automotive electronics, computers
and peripherals, and lighting markets. The Company offers its customers a
complete, vertically integrated solution for the design, development and
production of compound semiconductor wafers and devices.
NOTE 2. Summary of Significant Accounting Policies
Principles of Consolidation. The consolidated financial statements include
the accounts of the Company and it's wholly owned subsidiary. The equity method
of accounting is used for unconsolidated affiliates where the Company exercises
significant influence, generally when ownership is at least 20% and not more
than 50%. All intercompany accounts and transactions are eliminated upon
consolidation. Prior period balances have been reclassified to conform to the
current period financial statement presentation.
Cash and Cash Equivalents. The Company considers all highly liquid
short-term investments purchased with an original maturity of three months or
less to be cash equivalents.
Marketable Securities. The Company accounts for its investment in
marketable securities as available for sale securities in accordance with the
provisions of SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Unrealized gains and losses for these securities are
excluded from earnings and reported net of tax as a separate component of
shareholders' equity. Realized gains and losses on sales of investments, as
determined on a specific identification basis, are included in the consolidated
statements of operations. Fair values are determined by reference to market
prices for securities as quoted based on publicly traded exchanges. At September
30, 2000, the Company's available for sale marketable securities were comprised
of debt securities. The fair value of these debt securities at September 30,
2000 approximated cost. At September 30, 2000, the Company's available for sale
debt securities were comprised of $25.4 million of U.S. government debt
securities, $13.3 million of corporate debt securities, $11.2 million of
municipal bonds and $1.0 million of other debt securities. The contractual
maturities for all available for sale debt securities will occur during fiscal
2001. The Company did not record any realized gains or losses on sales of
available-for-sale debt securities during fiscal 2000.
Inventories. Inventories are stated at the lower of cost or market with
cost being determined using the first-in, first-out (FIFO) method. Reserves are
established for slow moving or obsolete inventory based upon historical and
anticipated usage.
Property, Plant and Equipment. Property, plant and equipment are stated at
cost. Significant renewals and betterments are capitalized. Maintenance and
repairs, which do not extend the useful lives of the respective assets, are
expensed. Depreciation is recorded using the straight-line method over the
estimated useful lives of the applicable assets, which range from three to forty
years. Leasehold improvements are amortized using the straight-line method over
the term of the related leases or the estimated useful lives of the
improvements, whichever is less. Depreciation expense includes the amortization
of capital lease assets. When assets are retired or otherwise disposed of, the
assets and related accumulated depreciation accounts are adjusted accordingly,
and any resulting gain or loss is recorded in current operations.
Long-Lived Assets. The carrying amount of long-lived assets are reviewed on
a regular basis for the existence of facts or circumstances, both internally and
externally, that suggest impairment. To date no such impairment has been
indicated. The Company determines if the carrying amount of a long-lived asset
is impaired based on anticipated undiscounted cash flows before interest. In the
event of an impairment, a loss is recognized based on the amount by which the
carrying amount exceeds fair value of the asset. Fair value is determined
primarily using the anticipated cash flows before interest, discounted at a rate
commensurate with the risk involved.
Other Assets. Included in other assets are various deferred costs and
warrant valuation costs. The deferred costs are primarily related to obtaining
product patents that enhance and maintain the Company's intellectual property
position. These patent costs are being amortized on a straight-line basis over
five years or the remaining life of the patent, whichever is less. Total patent
amortization expense amounted to approximately $79,000, $143,000 and $219,000
for the years ended September 30, 1998, 1999 and 2000, respectively. In May
1999, EMCORE issued 564,020 common stock purchase warrants to General Electric
for financing EMCORE's initial capital contribution in the GELcore joint venture
through the issuance of a $7.8 million convertible subordinated debenture. The
warrants were assigned a value of $2.6 million using the Black-Scholes option
pricing model and were included in other assets as a deferred financing cost.
The asset was being amortized over the life of the subordinated debenture. In
March 2000, General Electric converted the subordinated debenture into 681,968
shares of common stock. In conjunction with recording the conversion, the
unamortized warrant value of approximately $2.3 million was charged against
common stock as an equity issuance cost. Amortization expense related to these
warrants, recorded as imputed warrant interest expense, amounted to $186,000 and
$154,000 for the years ended September 30, 1999 and 2000, respectively.
Goodwill. Goodwill is amortized using the straight-line method over three
years. The Company, as applicable, evaluates whether there has been a permanent
impairment in the value of goodwill. Any impairment would be recognized when the
sum of expected undiscounted cash flows derived from the acquired business is
less than its carrying value.
Income Taxes. The Company recognizes deferred taxes by the asset and
liability method of accounting for income taxes. Under the asset and liability
method, deferred income taxes are recognized for differences between the
financial statement and tax bases of assets and liabilities at enacted statutory
tax rates in effect for the years in which the differences are expected to
reverse. The effect on deferred taxes of a change in tax rates is recognized in
income in the period that includes the enactment date. In addition, valuation
allowances are established when necessary to reduce deferred tax assets to the
amounts expected to be realized. The primary sources of temporary differences
are depreciation and amortization of intangible assets.
Revenue and Cost Recognition - Systems- and Materials-related Revenues.
Revenue from systems sales is recognized upon shipment, when title passes to the
customer. Subsequent to product shipment, the Company incurs certain
installation costs at the customer's facility and warranty costs that are
estimated and accrued at the time the sale is recognized. Materials and service
revenues are recognized when goods are shipped or services are rendered to the
customer. Service revenue under contracts with specified service terms is
recognized as earned over the service period in accordance with the terms of the
applicable contract. Costs in connection with the procurement of the contracts
are charged to expense as incurred.
Revenue and Cost Recognition - Contract Revenue. The Company's research
contracts require the development or evaluation of new materials applications
and have a duration of six to thirty-six months. For research contracts with the
U.S. Government and commercial enterprises with a duration greater than six
months, the Company recognizes revenue to the extent of costs incurred plus the
estimated gross profit as stipulated in such contracts, based upon contract
performance. Contracts with a duration of six months or less are accounted for
on the completed contract method. A contract is considered complete when all
costs, except insignificant items, have been incurred, and the research
reporting requirements to the customer have been met. Contract costs include all
direct material and labor costs and those indirect costs related to contract
performance, such as indirect labor, supplies, tools, repairs and depreciation
costs, as well as coverage of certain general and administrative costs.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined. Revenues from contracts amounted to
approximately $438,000, $1.4 million and $2.5 million for the years ended
September 30, 1998, 1999 and 2000, respectively.
Research and Development. Research and development costs are charged to
expense as incurred.
Fair Value of Financial Instruments. The Company estimates the fair value
of its financial instruments based upon discounted cash flow analyses using the
Company's incremental borrowing rate on similar instruments as the discount
rate. As of September 30, 1999 and 2000, the carrying values of the Company's
cash, cash equivalents, marketable securities, accounts receivables and accounts
payable as reflected on the Company's accompanying balance sheet approximates
fair value.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements. Estimates also affect the reported amounts of revenues
and expenses during the reporting period. Actual results may differ from those
estimates. The Company's most significant estimates relate to accounts
receivable and inventory valuation reserves, warranty and installation accruals
and the valuation of long-lived assets.
Concentration of Credit Risk. Financial instruments, which may subject the
Company to a concentration of credit risk, consist primarily of cash
equivalents, marketable securities and accounts receivable. Marketable
securities consist primarily of high-grade corporate debt, commercial paper,
government securities and other investments at interest rates that vary by
security. The Company's cash equivalents consist primarily of money market
funds. The Company has maintained cash balances with certain financial
institutions in excess of the $100,000 insured limit of the Federal Deposit
Insurance Corporation. The Company performs ongoing credit evaluations of its
customers' financial condition and generally requires no collateral from its
customers. To reduce credit risk and to fund manufacturing costs, the Company
requires periodic prepayments or irrevocable letters of credit on most
production system orders. The Company maintains reserves for potential credit
losses based upon the credit risk of specified customers, historical trends and
other information. The Company's credit losses generally have not exceeded its
expectations. Although such losses have been within management's expectations to
date, there can be no assurance that such reserves will continue to be adequate.
Recent Financial Accounting Pronouncements
In June 1998, the FASB issued SFAS No.133, Accounting for Derivatives
Instruments and Hedging Activities. This statement establishes accounting and
reporting standards for derivative instruments and requires recognition of all
derivatives as assets or liabilities in the statement of financial position and
measurement of these instruments at fair value. The statement, as amended, is
effective for fiscal years beginning after June 15, 2000. The Company is
required to adopt this standard, as amended, effective January 1, 2001.
Management believes that adopting this statement will not have a material impact
on the financial position, results of operations, or cash flows of the Company.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101. ("SAB 101") "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. The Company
will adopt SAB 101 by the fourth quarter of fiscal year 2001 and is currently
determining the impact such adoption will have on its consolidated financial
statements.
NOTE 3. Earnings Per Share
The Company accounts for earnings per share under the provision of
Statement of Financial Accounting Standards No. 128 "Earnings per Share." Basic
earnings per common share was calculated by dividing net loss by the weighted
average number of common stock shares outstanding during the period. The effect
of outstanding common stock purchase options and warrants, the number of shares
available to be issued upon the conversion of the Company's Series I Preferred
Stock and the number of shares to be issued upon conversion of the convertible
subordinated debenture have been excluded from the earnings per share
calculation since the effect of such securities is anti-dilutive. The following
table reconciles the number of shares utilized in the earnings per share
calculations.
NOTE 4. Joint Ventures
In May 1999, General Electric Lighting and the Company formed GELcore, a
joint venture to develop and market High Brightness Light-Emitting Diode ("HB
LED") lighting products. General Electric Lighting and the Company have agreed
that this joint venture will be the exclusive vehicle for each party's
participation in solid state lighting. Under the terms of the joint venture
agreement, the Company has a 49% non-controlling interest in the GELcore venture
and accounts for its investment under the equity method of accounting. In fiscal
year 2000, the Company invested an additional $9.7 million in this venture and
recognized a loss of $5.4 which has been recorded as a component of other income
and expense. As of September 30, 2000, the Company's net investment in this
joint venture amounted to $9.6 million.
In March 1997, the Company and a subsidiary of Uniroyal Technology
Corporation formed Uniroyal Optoelectronics LLC, a joint venture, to
manufacture, sell and distribute HB LED wafers and package-ready devices. Under
the terms of the joint venture agreement, the Company has a 49% non-controlling
interest in this joint venture and accounts for its investment under the equity
method of accounting. In fiscal year 2000, the Company invested an additional
$11.6 million in this venture and recognized a loss of $7.8 million which has
been recorded as a component of other income and expense. As of September 30,
2000, the Company's net investment in this joint venture amounted to $7.5
million.
NOTE 5. Inventories
The components of inventories consisted of the following:
(in thousands) As of September 30,
1999 2000
Raw materials $ 9,146 $19,594
Work-in-process 3,620 8,831
Finished goods 1,224 2,299
----------------------
Total $13,990 $30,724
======================
NOTE 6. Property, Plant and Equipment
Major classes of property and equipment are summarized below:
(in thousands) As of September 30,
1999 2000
Land $ 1,029 $ 1,502
Building 9,179 16,427
Equipment 41,225 56,216
Furniture and fixtures 4,880 7,373
Leasehold improvements 10,764 17,472
Property and equipment
under capital lease 2,164 2,171
-----------------------
69,241 101,161
Less: accumulated depreciation and
amortization (22,959) (31,460)
-----------------------
Total $46,282 $69,701
=======================
At September 30, 2000, minimum future lease payments due under the capital
leases are as follows:
(in thousands)
Period ending:
September 30, 2001 $95
September 30, 2002 43
September 30, 2003 17
September 30, 2004 7
September 30, 2005 1
---------
Total minimum lease payments 163
Less: amount representing interest
(imputed interest rate of 14.4%) (16)
---------
Net minimum lease payments 147
Less: current portion 72
---------
Long-term portion $75
=========
Depreciation on owned property and equipment amounted to approximately $4.7
million, $6.6 million and $8.0 million for the years ended September 30, 1998,
1999 and 2000, respectively. Accumulated amortization on assets accounted under
capital leases amounted to approximately $834,000 and $1.3 million as of
September 30, 1999 and 2000, respectively.
Included in equipment are twenty-seven systems and twenty-nine systems with
a combined net book value of approximately $15.6 million and $21.0 million at
September 30, 1999 and 2000, respectively. Such systems are utilized for the
production of compound semiconductor wafers and package-ready devices for sale
to third parties, systems demonstration purposes, system sales support, in-house
materials applications, internal research and contract research funded by third
parties.
NOTE 7. Accrued Expenses
Accrued expenses consisted of the following:
(in thousands) As of September 30,
1999 2000
Salary and other compensation costs.... $1,631 $2,614
Installation and warranty costs........ 929 1,277
Other.................................. 1,613 2,192
---------------------
Total $4,173 $6,083
=====================
NOTE 8. Debt Facilities
Convertible Subordinated Debenture
In May 1999, in connection with the GELcore venture, General Electric
funded the Company's initial capital contribution of $7.8 million in GELcore.
The funding was in the form of a subordinated debenture (the "Debenture") with
an interest rate of 4.75%. The Debenture was to mature in 2006 and was
convertible into common stock of the Company at the conversion price of $11.44
or 681,968 shares. In addition, General Electric also received 564,020 warrants
to purchase common stock at $11.44 per share. These warrants are exercisable at
any time and expire in 2006. These warrants were valued using Black Scholes
model, resulting in a valuation of $2.6 million, which was included in other
assets as a deferred financing cost. The asset was being amortized over the life
of the Debenture. In March 2000, General Electric converted the subordinated
debenture into 681,968 shares of common stock. In conjunction with recording the
conversion, the unamortized warrant value of approximately $2.3 million was
charged against common stock as an equity issuance cost.
Bank Loans
In March 1997, EMCORE entered into a $10.0 million loan agreement with its
bank (the "Loan Agreement") that had an interest rate equal to the prime rate
plus 50 basis points. In December 1999, EMCORE's Loan Agreement was extended
through January 31, 2001. The Loan Agreement's financial covenants were modified
under this amendment, and management believes that EMCORE will be able to comply
with such requirements. EMCORE was in compliance with all covenants and no
amounts were outstanding under this facility at September 30, 2000.
Extraordinary Items:
On June 15, 1999, the Company repaid its outstanding bank loans using a
portion of the proceeds from its June 1999 public offering. The Company also
used a portion of the net proceeds to repurchase its outstanding 6.0%
subordinated notes due 2001. The early extinguishment of debt resulted in an
extraordinary charge of $1.3 million or $0.06 per share in fiscal year 1999 that
consisted of the following:
(in thousands)
Extraordinary items:
Discount on prepayment of 6% subordinated notes due 2001.......... $ 867
Write-off of related deferred financing costs..................... 467
------
Net extraordinary loss............................................ $1,334
======
NOTE 9. Commitments and Contingencies
The Company leases its main manufacturing facility of 80,000 square feet
under an operation lease expiring in 2005. The Company leases certain equipment
under non-cancelable operating leases. Facility and equipment rent expense under
such leases amounted to approximately $637,000, $761,000 and $921,000 for the
years ended September 30, 1998, 1999 and 2000, respectively.
Future minimum rental payments under the Company's non-cancelable operating
leases with an initial or remaining term of one year or more as of September 30,
2000 are as follows:
(in thousands)
Period ending: Operating
------------
September 30, 2001 $570
September 30, 2002 280
September 30, 2003 276
September 30, 2004 92
September 30, 2005 -
------------
Total minimum lease payments $1,218
------------
In 1992, EMCORE received a royalty bearing, non-exclusive license under a
patent held by Rockwell International Corporation which relates to an aspect of
the manufacturing process used by its TurboDisc systems. In October 1996, EMCORE
initiated discussions with Rockwell to receive additional licenses to permit
EMCORE to use this technology to manufacture and sell compound semiconductor
wafers and devices. In November 1996, EMCORE suspended these negotiations
because of litigation surrounding the validity of the Rockwell patent. EMCORE
also ceased making royalty payments to Rockwell under the license during the
pendency of the litigation. In January 1999, the case was settled and a judgment
was entered in favor of Rockwell. As a result, EMCORE may be required to pay
royalties to Rockwell for certain of its past sales of wafers and devices to its
customers who did not hold licenses directly from Rockwell. Management has
reviewed and assessed its likely royalty obligations and believes that it has
the appropriate amounts reserved at both September 30, 1999 and 2000. If EMCORE
is required to pay Rockwell amounts in excess of its reserves, its business,
financial condition and results of operations could be materially and adversely
affected.
The Company is from time to time involved in litigation incidental to the
conduct of its business. Management and its counsel believe that such pending
litigation will not have a material adverse effect on the Company's results of
operations, cash flows or financial condition.
NOTE 10. Income Taxes
The Company accounts for its income taxes under the provisions of Statement
of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes." Under the asset and liability method of SFAS 109, deferred tax assets
and liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates in effect for the
year in which those temporary differences are expected to be recovered or
settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
The principal differences between the U.S. statutory and effective income
tax rates were as follows:
For the years ended September 30,
1998 1999 2000
US statutory income tax benefit rate (34.0)% (34.0)% (34.0)%
State rate, net of federal benefit (5.9)% (5.9)% (5.9)%
Acquired in-process research and development 18.2% - -
Change in valuation allowance 19.8% 35.0% 33.9%
Non-deductible amortization 3.4% 4.8% 6.0%
Other (1.5)% 0.1% -
-------------------------------
Effective tax rate - - -
===============================
As a result of its losses, the Company did not incur any income tax expense
during the years ended September 30, 1998, 1999 and 2000. The components of the
Company's net deferred taxes were as follows:
(in thousands) For the years ended
September 30,
Deferred tax assets: 1999 2000
Federal net operating loss carryforwards $11,800 $13,557
Research credit carryforwards (state and federal) 1,554 2,937
Inventory reserves 133 179
Accounts receivable reserves 191 362
Fixed assets 2,325 -
Interest 386 287
Accrued installation reserve 146 177
Accrued warranty reserve 157 256
State net operating loss carryforwards 1,336 2,268
Other 569 158
Valuation reserve - federal (15,430) (13,455)
Valuation reserve - state (2,936) (4,263)
-----------------------
Total deferred tax assets 231 2,463
Deferred tax liabilities:
Fixed assets and intangibles (231) (2,463)
-----------------------
Net deferred taxes $ - $ -
-----------------------
The Company has established a valuation reserve as it has not determined
that it is more likely than not that the net deferred tax asset is realizable,
based upon the Company's past earnings history.
As of September 30, 2000, the Company has net operating loss carryforwards
for tax purposes of approximately $44.0 million that expire in the years 2003
through 2020. The Company believes that the consummation of certain equity
transactions and a significant change in the ownership during fiscal years 1995,
1998 and 1999 have constituted a change in control under Section 382 of the
Internal Revenue Code ("IRC"). Due to the change in control, the Company's
ability to use its federal net operating loss carryovers and federal research
credit carryovers to offset future income and income taxes, respectively, are
subject to annual limitations under IRC Sections 382 and 383.
NOTE 11. Stockholders' Equity
Preferred Stock: The Company's certificate of incorporation authorizes
the Board of Directors to issue up to 5,882,352 shares of preferred stock of the
Company upon such terms and conditions having such rights, privileges and
preferences as the Board of Directors may determine.
Public Offerings: On June 15, 1999, the Company completed the issuance
of an additional 6.0 million common stock shares through a public offering,
which resulted in proceeds of $52.0 million, net of issuance costs of $5.0
million. On January 19, 2000, the Company filed a shelf registration statement
(the "Shelf Registration Statement") with the Securities and Exchange Commission
to offer from time to time up to 4.0 million shares of common stock. The Shelf
Registration Statement became effective on February 4, 2000. On March 1, 2000,
the Company completed the issuance of 2.0 million common stock shares under the
Shelf Registration Statement that resulted in proceeds of $127.5 million, net of
issuance costs of $8.5 million. A portion of the proceeds was used to repay all
outstanding bank indebtedness. The majority of the funds will be used to expand
manufacturing capacity for new data communications and wireless products, to
fund additional investments in the Company's joint ventures and for other
general corporate purposes.
Private Placement Offering: On November 30, 1998, the Company sold an
aggregate of 1,550,000 shares of Series I Redeemable Convertible Preferred Stock
(the "Series I Preferred Stock") for aggregate consideration of $21.7 million
before deducting costs and expenses, which amounted to approximately $500,000.
The Series I Preferred Stock was recorded net of issuance costs. The excess of
the preference amount over the carrying value was being accreted by periodic
charges to accumulated deficit. The Series I Preferred Stock carried a dividend
of 2% per annum that was charged to accumulated deficit. In June 1999, 520,000
shares of the Series I Preferred Stock were converted into common stock. During
the six-month period ended March 31, 2000, the remaining 1,030,000 shares of the
Series I Preferred Stock were converted into common stock.
Common Stock: In February 1999, an amendment to the Certificate of
Incorporation increased the number of no par value common stock shares that the
Company is authorized to issue to 50,000,000 million shares. The Certificate of
Incorporation was amended, effective December 22, 2000, to effect a two-for-one
(2:1) split of the common stock. As a result, as of the effective date of the
amendment, the Certificate of Incorporation authorizes the Company to issue up
to 100,000,000 shares of common stock, with no par value. The amendment did not
change the number of authorized shares or other provisions relating to the
preferred stock. All references in these financial statements to common stock
and per share data have been adjusted to reflect the common stock split that was
effective on September 18, 2000.
Future Issuances: At September 30, 2000, the Company has reserved a total
of 6,712,968 shares of its common stock for future issuances as follows:
NOTE 12. Stock Options and Warrants
All share amounts have been restated to reflect EMCORE's two-for-one (2:1)
common stock split that was effective on September 18, 2000.
Stock Option Plan. As of September 30, 2000, the Company's Amended and
Restated Incentive and Non-Statutory Stock Option Plan (the " Option Plan") has
authorized the grant of options for up to 4,194,118 shares of the Company's
common stock. As of September 30, 2000, 34,862 options were available for
issuance under the Company's Option Plan. Certain options under the Option Plan
are intended to qualify as incentive stock options pursuant to Section 422A of
the Internal Revenue Code.
During fiscal 2000, options with respect to 1,858,602 were granted pursuant
to the Company's option plan at exercise prices ranging from $7.00 to $60.00 per
share.
Stock options generally vest over three to five years and are exercisable
over a ten-year period. As of September 30, 1998, 1999 and 2000, options with
respect to 481,863, 554,439 and 1,581,805 were exercisable, respectively.
The following table summarizes the activity under the Option Plan:
At September 30, 2000, stock options outstanding were as follows:
In connection with the Company's acquisition of MODE in December 1997, we
assumed 402,000 common stock purchase options with exercise prices ranging from
$0.21 to $0.30. The MODE options have a term of 10 years from the date of grant,
with such options expiring at various dates through July 31, 2007. The options
vest, with continued service, over a four-year period; 25% in year one and 75%
equally over the remaining 36 months. As of September 30, 2000, there are
142,554 options outstanding at a weighted average exercise price of $0.23.
The following table summarizes the activity of options assumed in the MODE
acquisition:
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock Based Compensation" ("SFAS 123"). SFAS 123
establishes financial and reporting standards for stock based compensation
plans. The Company has adopted the disclosure only provisions of this standard
and has elected to continue to apply the provision of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees". Had the
Company elected to recognize compensation expense for stock options based on the
fair value at the grant dates of awards, net loss and net loss per share would
have been as follows:
The weighted average fair value of the Company's stock options was
calculated using Black-Scholes with the following weighted-average assumptions
used for grants: no dividend yield; expected volatility of 60% for fiscal year
1998, 76% for fiscal year 1999 and 100% for fiscal year 2000; a risk-free
interest rate of 5.6%, 5.8% and 5.9% for fiscal years 1998, 1999 and 2000,
respectively; and expected lives of 5 years. The weighted average fair value of
options granted during the years ended September 30, 1998, 1999 and 2000 were
$7.50, $9.05 and $17.90 per share, respectively. Stock options granted by the
Company prior to its initial public offering were valued using the minimum value
method under FASB No. 123.
Warrants. Set forth below is a summary of the Company's outstanding
warrants at September 30, 2000:
Underlying Exercise Expiration
Security Price Warrants Date
Common Stock (1) $2.04 44,250 May 1, 2001
Common Stock (2) $2.16 14,796 August 21, 2006
Common Stock (3) $5.10 1,892,890 September 1, 2001
Common Stock (4) $5.69 455,494 May 1, 2001
---------
2,407,430
=========
(1) issued in connection with EMCORE's May 1996 Subordinated note issuance.
(2) issued in connection with EMCORE's December 1997 acquisition of
MicroOptical Devices, Inc.
(3) issued in connection with EMCORE's September 1996 subordinated debt
issuance and October 1996 debt guarantee.
(4) issued in connection with EMCORE's June 1998 bank loan agreement.
NOTE 13. Related Parties
In December 1997, the Company and a wholly owned subsidiary of Uniroyal
Technology Corporation formed Uniroyal Optoelectronics LLC, a joint venture, to
manufacture, sell and distribute High Brightness (HB) LED wafers and
package-ready devices (see Note 4). During the fiscal year ended September 30,
1999, EMCORE sold three compound semiconductor production systems to the venture
totaling $5.3 million in revenues. During the fiscal year ended September 30,
2000, EMCORE sold two compound semiconductor production systems to the venture
totaling $2.7 million in revenues. As of September 30, 2000, EMCORE had a
remaining deferred gross profit of approximately $1.6 million on such sales to
the extent of its ownership interest. Such deferred gross profits will be
recognized ratably over the assigned life of the production systems purchased by
the joint venture. During the years ended September 30, 1999 and 2000, sales
made to the joint venture approximated $5.9 million and $3.9 million,
respectively. As of September 30, 1999 and 2000, the Company had an outstanding
related party receivable of $1.8 and $0.6 million, respectively.
In May 1999, EMCORE and General Electric Lighting formed GELcore, a joint
venture to develop and market HB LED lighting products. As of September 30, 1999
and 2000, the Company had an outstanding related party receivable of $0.7
million and $1.8 million, respectively.
The President of Hakuto Co. Ltd. ("Hakuto"), the Company's Asian
distributor, is a member of the Company's Board of Directors and Hakuto is a
minority shareholder of the Company. During the years ended September 30, 1999
and 2000, sales made through Hakuto approximated $10.2 million and $12.4
million, respectively.
In 1999, the Company's Chairman personally guaranteed the Company's bank
facility and extended a line of credit to the Company. In recognition of these
services during 2000, the Company's Board of Directors granted a warrant for
600,000 shares of common stock to the Chairman. The warrant was immediately
exercisable at $6.47 per share. The warrant was issued in 2000, and as it
related to past services, the fair value was charged as an expense in the
Statement of Operations. The Company assigned a fair value of $689,000 to the
warrants, which was based upon the Company's application of the Black-Scholes
option-pricing model. The consequent expense was charged to "Imputed warrant
interest expense, non-cash."
NOTE 14. Segment Data and Related Information
EMCORE has two reportable operating segments: the systems-related business
unit and the materials-related business unit. The systems-related business unit
designs, develops and manufactures tools and manufacturing processes used to
fabricate compound semiconductor wafer and devices. Revenues for the
systems-related business unit consists of sales of EMCORE's TurboDisc production
systems as well as spare parts and services. Our systems-related business unit
assists our customers with device design, process development and optimal
configuration of TurboDisc production systems. The materials-related business
unit designs, develops and manufactures compound semiconductor materials.
Revenues for the materials-related business unit include sales of semiconductor
wafers, devices and process development technology. EMCORE's
vertically-integrated product offering allows it to provide a complete compound
semiconductor solution to its customers.
The segments reported below are the segments of the Company for which
separate financial information is available and for which gross profit amounts
are evaluated regularly by executive management in deciding how to allocate
resources and in assessing performance. The accounting policies of the operating
segments are the same as those described in the summary of accounting policies
(see Note 2). The Company does not allocate assets or operating expenses to the
individual operating segments. There are no intercompany sales transactions
between the two operating segments.
The Company's reportable operating segments are business units that offer
different products. The reportable segments are each managed separately because
they manufacture and distribute distinct products and services.
Information about reported segment gross profit is as follows:
(in thousands)
1998 1999 2000
Revenues:
Systems-related........................ $26,324 $44,477 $65,788
Materials-related...................... 17,436 13,864 38,718
-------------------------------
Total revenues....................... 43,760 58,341 104,506
Cost of sales:
Systems-related......................... 15,942 26,522 37,775
Materials-related....................... 8,734 6,636 23,526
-------------------------------
Total cost of sales................... 24,676 33,158 61,301
-------------------------------
Gross profit:
Systems-related......................... 10,382 17,955 28,013
Materials-related....................... 8,702 7,228 15,192
-------------------------------
Total gross profit.................... $19,084 $25,183 $43,205
-------------------------------
Gross margin:
Systems-related......................... 39.4% 40.4% 42.6%
Materials-related....................... 49.9% 52.1% 39.2%
-------------------------------
Total gross margin.................... 43.6% 43.2% 41.3%
-------------------------------
EMCORE has generated a significant portion of its sales to customers
outside the United States. In fiscal 1998, 1999 and 2000, international sales
constituted 39.1%, 52.6% and 38.6%, respectively, of revenues. EMCORE
anticipates that international sales will continue to account for a significant
portion of revenues. Historically, EMCORE has received substantially all
payments for products and services in U.S. dollars and therefore EMCORE does not
anticipate that fluctuations in any currency will have a material effect on its
financial condition or results of operations.
The following chart contains a breakdown of EMCORE's worldwide revenues by
geographic region.
All long-lived assets are located in the North America region. Significant sales
in the Asia region are predominately made in Japan and Taiwan. Sales to
customers that accounted for at least 10% of total EMCORE revenues are outlined
below. In fiscal year 1999, no individual customer had sales equal to or in
excess of 10% of total fiscal year 1999 revenues.
For the fiscal years ended September 30,
1998 1999 2000
Customer A 17.3% - -
- ---------------------------------------------------------------------
Customer B 12.8% - -
- ---------------------------------------------------------------------
Customer C - - 14.0%
- ---------------------------------------------------------------------
Customer D - - 12.5%
- ---------------------------------------------------------------------
NOTE 15. Employee Benefits
The Company has a savings plan (the "Savings Plan") that qualifies as a
deferred salary arrangement under Section 401(k) of the Internal Revenue Code.
Under the Savings Plan, participating employees may defer a portion of their
pretax earnings, up to the Internal Revenue Service annual contribution limit.
Effective August 1, 1997, the Company began contributing to the Savings Plan.
All employer contributions are made in the Company's common stock. For the years
ended September 30, 1998, 1999 and 2000, the Company contributed approximately
$252,000, $376,000 and $527,000, respectively to the Savings Plan.
The Company adopted an Employee Stock Purchase Plan (the "Purchase Plan")
on February 16, 2000. The Purchase Plan provides employees of the Company with
an opportunity to purchase common stock through payroll deductions. The purchase
price is set at 85% of the lower of the fair market value of common stock at the
beginning of the participation period, the first Trading Day on or after January
1st, or at the end of the participation period, the last Trading Day on or
before December 31st of such year. The beginning of the first participation
period began on April 1, 2000. Contributions are limited to 10% of an employee's
compensation. The participation periods have a 12-month duration, with new
participation periods beginning in January of each year. The Board of Directors
has reserved 1,000,000 shares of common stock for issuance under the Purchase
Plan. As of September 30, 2000, no shares of common stock had yet been purchased
under the Purchase Plan.
NOTE 16. Quarterly Financial Data (Unaudited)
All share amounts have been restated to reflect EMCORE's two-for-one (2:1)
common stock split that was effective on September 18, 2000.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Shareholders of EMCORE Corporation
Somerset, New Jersey
We have audited the accompanying consolidated balance sheets of EMCORE
Corporation (the "Company") as of September 30, 1999 and 2000, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended September 30, 2000. Our audits also
included the financial statement schedule listed in the Index at Item 14(a)(2).
These financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in
all material respects, the financial position of EMCORE Corporation as of
September 30, 1999 and 2000, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 2000 in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financials statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
November 15, 2000
Statement of Management Responsibility for Financial Statements
To the Shareholders of
EMCORE Corporation:
Management has prepared and is responsible for the consolidated financial
statements and related information in the Annual Report. The financial
statements, which include amounts based on judgment, have been prepared in
conformity with generally accepted accounting principles consistently applied.
Management has developed, and continues to strengthen, a system of internal
accounting and other controls for the Company. Management believes these
controls provide reasonable assurance that assets are safeguarded from loss or
unauthorized use and that the Company's financial records are a reliable basis
for preparing the financial statements. Underlying the concept of reasonable
assurance is the premise that the cost of control should not exceed the benefit
derived.
The Board of Directors, through its audit committee, is responsible for
reviewing and monitoring the Company's financial reporting and accounting
practices. The audit committee meets regularly with management and independent
accountants - both separately and together. The independent accountants have
free access to the audit committee to review the results of their audits, the
adequacy of internal accounting controls and the quality of financial reporting.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item is incorporated herein by reference
to EMCORE's 2000 Proxy Statement, which will be filed on or before January 28,
2001.
Item 11. Executive Compensation
The information required by this item is incorporated herein by reference
to EMCORE's 2000 Proxy Statement, which will be filed on or before January 28,
2001.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated herein by reference
to EMCORE's 2000 Proxy Statement, which will be filed on or before January 28,
2001.
Item 13. Certain Relationships and Related Transactions
The information required by this term is incorporated herein by reference
to EMCORE's 2000 Proxy Statement, which will be filed on or before January 28,
2001.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
14(a)(1) Financial Statements Page
Reference
Included in Part II, Item 8 of this report:
Consolidated Balance Sheets as of September 30, 1999 and 2000
Consolidated Statements of Operations for the years ended
September 30, 1998, 1999 and 2000
Consolidated Statements of Shareholders' Equity for the years
ended September 30, 1998, 1999 and 2000
Consolidated Statements of Cash Flows for the years ended
September 30, 1998, 1999 and 2000
Notes to Financial Statements
Independent Auditors' Report
14(a)(2) Financial Statement Schedule
Located immediately following the signature page of this report:
Schedule I - UNIROYAL OPTOELECTRONICS, LLC - Financial Statements as of
October 1, 2000 and September 26, 1999, for the Fiscal Years Ended October 1,
2000 and September 26, 1999, for the Period February 20, 1998 (date of
incorporation) to September 27, 1998 and for the Period February 20, 1998 (date
of incorporation) to October 1, 2000 and Independent Auditors' Report
Schedule II - Valuation and qualifying accounts and reserves
Other schedules have been omitted since they are either not required or not
applicable.
14(a)(3) Exhibits
Exhibit No. Description
3.1 Restated Certificate of Incorporation, dated December 21, 2000.*
3.2 Amended By-Laws, as amended December 6, 2000.*
4.1 Specimen certificate for shares of common stock (incorporated by
reference to Exhibit 4.1 to Amendment No. 3 to the 1997 S-1).
4.2 Form of $11.375 Warrant (incorporated by reference to Exhibit 4.2 to
EMCORE's filing on Form 10-K, dated December 29, 1998).
10.1 1995 Incentive and Non-Statutory Stock Option Plan (incorporated by
reference to Exhibit 10.1 to Amendment No. 1 to the 1997 S-1).
10.2 1996 Amendment to Option Plan (incorporated by reference to Exhibit
10.2 to Amendment No. 1 to the 1997 S-1).
10.3 Specimen Incentive Stock Option Agreement (incorporated by reference
to Exhibit 10.3 to Amendment No. 1 to the 1997 S-1).
10.4 Second Amended and Restated Distribution Agreement dated as of March
31, 1998 between EMCORE and Hakuto (incorporated by reference to
Exhibit 10.4 to EMCORE's filing on Form 10-K/A, dated May 17, 1999).
Confidential Statement has been requested by EMCORE for portions of
this document. Such portions are indicated by "[*]" .
10.5 Amendment to Lease for premises at 394 Elizabeth Avenue, Somerset, New
Jersey 08873 (incorporated by reference to Exhibit 10.5 to Amendment
No. 1 to the 1997 S-1).
10.6 Registration Rights Agreement relating to September 1996 warrant
issuance (incorporated by reference to Exhibit 10.6 to Amendment No. 1
to the 1997 S-1).
10.7 Registration Rights Agreement relating to December 1996 warrant
issuance (incorporated by reference to Exhibit 10.7 to Amendment No. 1
to the 1997 S-1).
10.8 Form of 6% Subordinated Note Due May 1, 2001 (incorporated by
reference to Exhibit 10.8 to Amendment No. 1 to the 1997 S-1).
10.9 Form of 6% Subordinated Note Due September 1, 2001 (incorporated by
reference to Exhibit 10.9 to Amendment No. 1 to the 1997 S-1).
10.10 Form of $4.08 Warrant (incorporated by reference to Exhibit 10.10 to
Amendment No. 1 to the 1997 S-1).
10.11 Form of $10.20 Warrant (incorporated by reference to Exhibit 10.12 to
Amendment No. 1 to the 1997 S-1).
10.12 Consulting Agreement dated December 6, 1996 between EMCORE and Norman
E. Schumaker (incorporated by reference to Exhibit 10.14 to Amendment
No. 1 to the 1997 S-1).
10.13 Purchase Order issued to EMCORE by General Motors Corporation on
November 17, 1996. (incorporated by reference to Exhibit 10.15 to
Amendment No. 1 to the 1997 S-1). Confidential treatment has been
requested by EMCORE with respect to portions of this document. Such
portions are indicated by "[*] ".
10.14 Acquisition Agreement, dated as of December 5, 1997, between EMCORE
and MicroOptical Devices, Inc. (incorporated by reference to Exhibit 2
to EMCORE's filing on Form 8-K, dated December 22, 1997).
10.15 Purchase Agreement, dated November 30, 1998, by and between EMCORE,
Hakuto UMI and UTC (incorporated by reference to Exhibit 10.15 to
EMCORE's filing on Form 10-K, dated December 29, 1998).
10.16 Registration Rights Agreement, dated November 30, 1998 by and between
EMCORE, Hakuto, UMI and UTC (incorporated by reference to Exhibit
10.16 to EMCORE's filing on Form 10-K, dated December 29, 1998).
10.17 Long Term Purchase Agreement dated November 24, 1998 by and between
EMCORE and Space Systems/Loral, Inc. (incorporated by reference to
Exhibit 10.17 to EMCORE's filing on Form 10-K/A, dated May 17, 1999).
Confidential treatment has been requested by EMCORE for portions of
this document. Such portions are indicated by "[*]".
10.18 Note Purchase Agreement dated as of May 26, 1999 by and between EMCORE
and GE Capital Equity Investments, Inc. (incorporated by reference to
Exhibit 10.18 to Amendment No. 2 to the 1998 S-3 filed on June 9,
1999).
10.19 Registration Rights Agreement dated as of May 26, 1999 by and between
EMCORE and GE Capital Equity Investments, Inc. (incorporated by
reference to Exhibit 10.19 to Amendment No. 2 to the 1998 S-3 filed on
June 9, 1999).
10.20 $22.875 Warrant issued to General Electric Company (incorporated by
reference to Exhibit 10.20 to Amendment No. 2 to the 1998 S-3 filed on
June 9, 1999).
10.21 Transaction Agreement dated January 20, 1999 between General Electric
Company and EMCORE (incorporated by reference to Exhibit 10.1 to
EMCORE's filing on Form 10-Q/A, dated May 17, 1999). Confidential
treatment has been requested by EMCORE for portions of this document.
Such portions are indicated by "[*]".
10.22 Third Amendment to Revolving Loan and Security Agreement, dated as of
December 1, 1999 between EMCORE and First Union National Bank
(incorporated by reference to Exhibit 10.22 to EMCORE's filing on Form
10-K, dated December 29, 1999).
10.23 Joint Development, Manufacturing and Marketing Agreement for High
Speed Array Transceivers dated June 16, 2000 between JDS Uniphase
Corporation and EMCORE Corporation. Confidential treatment has been
requested by EMCORE for portions of this document. Such portions are
indicated by "{redact}".*
21 Subsidiaries of the registrant.*
23.1 Consent of Deloitte & Touche LLP.*
23.2 Consent of Deloitte & Touche LLP.*
27 Financial Data Schedule.*
- ---------------
* Filed herewith
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Township of Somerset, State of
New Jersey, on December 28, 2000.
EMCORE CORPORATION
BY /S/ REUBEN F. RICHARDS, JR.
--------------------------------------------
Name: Reuben F. Richards, Jr.
TITLE: President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report on Form 10-K has been signed below by the following persons on behalf of
EMCORE Corporation in the capacities indicated, on December 28, 2000.
Signature Title
/s/ THOMAS J. RUSSELL Chairman of the Board and Director
- ----------------------------------
Thomas J. Russell
/s/ REUBEN F. RICHARDS, JR. President, Chief Executive Officer
- ---------------------------------- and Director (Principal Executive
Reuben F. Richards, Jr. Officer)
/s/ THOMAS G. WERTHAN Vice President, Chief Financial
- ---------------------------------- Officer and Director (Principal
Thomas G. Werthan Accounting and Financial Officer)
/s/ RICHARD A. STALL Director
- ----------------------------------
Richard A. Stall
/s/ ROBERT LOUIS-DREYFUS Director
- ----------------------------------
Robert Louis-Dreyfus
/s/ HUGH H. FENWICK Director
- ----------------------------------
Hugh H. Fenwick
/s/ SHIGEO TAKAYAMA Director
- ----------------------------------
Shigeo Takayama
/s/ CHARLES T. SCOTT Director
- ----------------------------------
Charles T. Scott
/s/ JOHN HOGAN Director
- ----------------------------------
John Hogan
Schedule I
UNIROYAL OPTOELECTRONICS, LLC
(A Development Stage Company)
Financial Statements as of October 1, 2000 and September 26, 1999, for the
Fiscal Years Ended October 1, 2000 and September 26, 1999, for the Period
February 20, 1998 (date of incorporation) to September 27, 1998 and for the
Period February 20, 1998 (date of incorporation) to October 1, 2000 and
Independent Auditors' Report.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Uniroyal Optoelectronics, LLC:
We have audited the accompanying balance sheets of Uniroyal Optoelectronics, LLC
(a development stage company, (the "Company") as of October 1, 2000 and
September 26, 1999, the related statements of operations and of cash flows for
the years ended October 1, 2000 and September 26, 1999, for the period February
28, 1998 (date of incorporation) to September 27, 1998, and for the period
February 20, 1998 (date of incorporation) to October 1, 2000, and the related
statements of changes in members' equity for the years ended October 1, 2000 and
September 26, 1999, and for the period February 20, 1998 (date of incorporation)
to September 27, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of October 1, 2000 and
September 26, 1999, and the results of its operations and its cash flows for the
years ended October 1, 2000 and September 26, 1999, for the period February 20,
1998 (date of incorporation) to September 27, 1998, and for the period February
20, 1998 (date of incorporation) to October 1, 2000, in conformity with
accounting principles generally accepted in the United States of America.
The Company is in the development stage at October 1, 2000. As discussed in Note
1 to the financial statements, successful completion of the Company's
development program and, ultimately, the attainment of profitable operations is
dependent upon future events, including maintaining adequate financing to
fulfill its development activities and achieving a level of sales adequate to
support the Company's cost structure.
Deloitte and Touche LLP
Certified Public Accountants
Tampa, Florida
December 5, 2000
UNIROYAL OPTOELECTRONICS, LLC
(A Development Stage Company)
BALANCE SHEETS
(In thousands)
October 1, September 26,
2000 1999
ASSETS
Current assets:
Cash and cash equivalents $ 470 $ 456
Trade accounts receivable 91 12
Inventories (Note 3) 2,028 448
Prepaid expenses and other current assets 304 90
Due from affiliate (Note 8) 1,233 -
--------- ---------
Total current assets 4,126 1,006
Property, plant and equipment - net (Note 4) 30,748 21,434
Deposits 29 34
--------- ---------
TOTAL ASSETS $ 34,903 $ 22,474
========= =========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Current obligations under capital leases (Note 5) $ 3,807 $ 3,345
Trade accounts payable 2,479 1,026
Accrued expenses:
Compensation and benefits 241 244
Due to affiliate (Note 8) - 1,345
Other 135 52
--------- ---------
Total current liabilities 6,662 6,012
Long-term obligations under capital leases (Note 5) 13,322 14,839
--------- ---------
Total liabilities 19,984 20,851
--------- ---------
Commitments and contingencies (Note 7)
Members' equity (Note 6):
Capital contributions 35,956 6,500
Deficit accumulated during the development stage (21,037) (4,877)
--------- ---------
Total members' equity 14,919 1,623
--------- ---------
TOTAL LIABILITIES AND MEMBERS' EQUITY $ 34,903 $ 22,474
========= =========
See notes to financial statements.
Supplemental Disclosures:
Interest payments (net of capitalized interest) were approximately $1,344,000
for the year ended October 1, 2000. There were no payments of interest expense
(net of capitalized interest) for the year ended September 26, 1999 or for the
period February 20, 1998 (date of incorporation) to September 27, 1998.
Purchases of property, plant and equipment and financing activities for the
fiscal years ended October 1, 2000 and September 26, 1999 do not include
$2,600,000 and $18,450,000, respectively, related to property acquired under
capitalized leases. There were no purchases of property, plant and equipment
under capitalized leases during the period February 20, 1998 (date of
incorporation) to September 27, 1998.
See notes to financial statements.
UNIROYAL OPTOELECTRONICS, LLC
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS For the
Fiscal Years Ended October 1, 2000 and September 26,
1999,
for the Period February 20, 1998 (date of incorporation)
to September 27, 1998 and for the Period
February 20, 1998 (date of incorporation) to October 1, 2000
1. THE COMPANY
Uniroyal Optoelectronics, LLC (the "Company") is in the development stage.
The Company will ultimately engage in the production of wafers for high
brightness light emitting diodes (LEDs) and package-ready dies for use in
the lighting, signage and transportation industries. The Company
anticipates commercial production at its newly constructed Tampa, Florida
facility during the first half of Fiscal 2001.
On February 20, 1998, the Company was organized as a State of Delaware
limited liability corporation. The Company operates under a joint venture
agreement between Optoelectronics, Inc. (wholly-owned subsidiary of
Uniroyal Technology Corporation ("UTC")) (51% owner), and Emcore
Corporation ("Emcore") (49% owner).
The Company is subject to the risks and difficulties experienced by any new
business such as obtaining adequate capital or financing, limited operating
history, competition and lack of distribution channels. The Company's
operations to date have been conducted primarily for the purpose of
financial planning, raising capital, acquiring property, plant, equipment
and other operating assets, recruiting and training personnel, developing
markets and starting up production. The Company's success is dependent upon
its ability to maintain adequate financing to fulfill its development
activities and to achieve a level of sales adequate to support the
Company's cost structure. Financial support from one or both owners will
continue as necessary to meet the financial obligations of the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year End
The Company's fiscal year ends on the Sunday following the last Friday in
September. The dates on which the fiscal year ended for the fiscal years
since inception were October 1, 2000 ("Fiscal 2000"), September 26, 1999
("Fiscal 1999") and September 27, 1998 ("Fiscal 1998").
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments purchased
with an original maturity of three months or less.
Financial Instruments
The carrying value of all current assets and liabilities approximates the
fair value because of their short-term nature. The fair values of the
Company's capital lease obligations approximate their carrying value due to
interest rates which are comparable to current market rates.
Trade Accounts Receivable
The Company grants credit to its customers generally in the form of
short-term trade accounts receivable. The creditworthiness of customers is
evaluated prior to the sale of inventory. There are no significant
concentrations of credit risk to the Company.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using standard costs (which approximate actual costs) for raw materials and
supplies.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. The cost of property,
plant and equipment held under capital leases is equal to the lower of the
net present value of the minimum lease payments or the fair value of the
leased assets at the inception of the lease. Depreciation is computed under
the straight-line method based on the cost and estimated useful lives of
the related assets including assets held under capital leases. Interest
costs applicable to the construction of the Tampa, Florida facility have
been capitalized to the cost of the related assets. Interest capitalized
during Fiscal 2000 and Fiscal 1999 approximated $287,000 and $791,000,
respectively.
Start-up Costs
The Company follows the American Institute of Certified Public Accountant
Statement of Position 98-5, Reporting Costs of Start-Up Activities. This
statement requires that the cost of start-up activities and organizational
costs be expensed as incurred.
Income Taxes
The limited liability corporation is considered a partnership for Federal
and State income tax purposes. Accordingly, the equity owners account for
their pro rata share of the Company's income, deductions and credits in
their separate tax returns. As a result, income tax expenses, assets and
liabilities are not recognized in the financial statements of the Company.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The
accounting for changes in the fair value of a derivative (that is, gains
and losses) depends upon the intended use of the derivative and resulting
designation. In July 1999, FASB issued SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of SFAS No. 133, which postponed the effective date of SFAS No. 133
for one year. SFAS No. 133 will now be effective for the Company beginning
in Fiscal 2001. In June 2000, FASB issued SFAS No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities, an amendment
to SFAS No. 133. The Company currently does not anticipate there will be a
material impact on the results of operations or financial position upon
adoption of SFAS No. 133 as amended by SFAS No. 138.
3. INVENTORIES
Inventories consist of raw materials and supplies at October 1, 2000 and
September 26, 1999 at a value of $2,028,000 and $448,000, respectively.
There was no inventory at September 27, 1998.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (in thousands):
1. OBLIGATIONS UNDER CAPITAL LEASES
During both Fiscal 2000 and Fiscal 1999, the Company entered into
non-cancelable capital lease agreements for certain leasehold
improvements, machinery and equipment. Future minimum capital lease
obligations during subsequent fiscal years ending in September are as
follows (in thousands):
Fiscal Year
2001 $ 5,141
2002 5,428
2003 5,428
2004 4,125
2005 220
-----------
Total minimum lease payments 20,342
Less imputed interest at 8.5% - 9.6% (3,213)
-----------
Present value of minimum capital lease payments 17,129
Current portion 3,807
-----------
Long-term obligations under capital leases $ 13,322
===========
Interest incurred (including capitalized interest) totaled approximately
$1,580,000, $791,000 and $11,000 for Fiscal 2000, Fiscal 1999 and Fiscal
1998, respectively.
UTC has guaranteed all of the above capital lease obligations.
The Company's property held under capitalized leases included in property,
plant and equipment (Note 4) consisted of the following (in thousands):
October 1, September 26,
2000 1999
Leasehold improvements $ 5,429 $ 5,426
Machinery, equipment and office
furnishings 18,249 5,066
Construction in progress - 9,755
------- -------
23,678 20,247
Less accumulated amortization (2,117) (181)
------- -------
Total $21,561 $20,066
======= =======
1. MEMBERS' EQUITY
The members of the Company include Uniroyal Optoelectronics, Inc. and
Emcore Corporation. Initial capital contributions to the Company included
$510,000 from Uniroyal Optoelectronics, Inc. and $490,000 from Emcore and
were made in July 1998. In Fiscal 1999, Emcore made additional capital
contributions to the Company of $5,500,000. During Fiscal 2000, Uniroyal
Optoelectronics, Inc. contributed $17,828,000 in cash while Emcore
contributed an additional $11,628,000 in cash. As of year end, accumulated
capital contributions totaled $18,338,000, or 51%, for Uniroyal
Optoelectronics, Inc. and $17,618,000, or 49%, for Emcore.
Earnings and losses are allocated to the members in amounts equivalent to
their ownership percentages.
2. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases equipment and warehouse and office space under various
lease agreements, certain of which are subject to escalations based upon
increases in specified operating expenses or increases in the Consumer
Price Index. The approximate future minimum rentals under non-cancelable
operating leases during subsequent fiscal years ending in September are as
follows (in thousands):
Fiscal Year
2001 $ 382
2002 391
2003 401
2004 395
2005 393
Subsequent years 1,174
-----
Total $3,136
=====
Rent expense was approximately $399,000, $370,000 and $56,000 for Fiscal
2000, Fiscal 1999 and Fiscal 1998, respectively.
1. RELATED PARTY TRANSACTIONS
UTC
The Company is party to an administrative agreement with UTC, in which UTC
will provide management, legal, accounting, tax, information systems,
treasury, human resource, risk management, environmental and all other
support services that may be necessary for the operations of the Company.
The management fee to the Company is calculated as the greater of $25,000
per month or 3.5% of monthly net sales. Fees under this agreement
approximated $300,000, $300,000 and $50,000 for Fiscal 2000, Fiscal 1999
and Fiscal 1998, respectively.
The Company's employees participate in health and welfare benefit plans
administered by UTC. Costs for these plans are charged to the Company based
upon various methods including actual cost per employee, headcount
allocations and ratios of compensation expense. Expenses included in the
statements of operations were approximately $284,000, $51,000 and $5,000
for Fiscal 2000, Fiscal 1999 and Fiscal 1998, respectively.
UTC administers all of the insurance programs for the Company. Costs of
these programs are allocated to the Company based on various factors
including percentage of assets, employee base and sales and historical loss
experience. Included in the statements of operations for Fiscal 2000 and
Fiscal 1999 were approximately $96,000 and $31,000, respectively, of such
costs. No insurance charges were allocated to the Company in Fiscal 1998.
UTC provides a savings plan under Section 401(k) of the Internal Revenue
Code. The savings plan allows all eligible employees to defer up to 15% of
their income on a pre-tax basis through contributions to the savings plan.
For every dollar an employee contributes, UTC may contribute an amount
equal to 25% of each participant's before-tax obligation up to 6% of the
participant's compensation. Such employee compensation may be made in cash
or in UTC common stock. The expenses allocated to the Company by UTC
pertaining to this savings plan were approximately $635,000, $11,000 and
$1,000 for Fiscal 2000, Fiscal 1999 and Fiscal 1998, respectively.
Included in due from affiliate as of October 1, 2000 is a capital
contribution of approximately $1,849,000 made in cash by UTC on October 3,
2000. Amount is partially offset by charges from UTC relating to benefit
plans, property insurance programs and UTC administration fees.
Included in due to affiliate as of September 26, 1999, are amounts due UTC
for items paid on behalf of the Company of approximately $963,000, amounts
due UTC for the UTC administrative agreement of approximately $300,000, and
charges from UTC relating to the benefit plans, property insurance programs
and savings plans totaling approximately $82,000.
Emcore
Under a supply agreement dated July 31, 1998, Emcore will provide product
for the Company as required until the Company's facility in Tampa, Florida
is ready for commercial production. During Fiscal 2000, approximately
$1,600,000 of the Company's net sales were for products supplied by Emcore
at a cost of approximately $1,600,000. During Fiscal 1999, approximately
$479,000 of the Company's net sales were for products supplied by Emcore at
an approximate cost of $428,000. There were no sales in Fiscal 1998.
During Fiscal 2000, the Company purchased approximately $1,444,000 of
inventory from Emcore for use in testing and completing the Company's
manufacturing processes. Corresponding purchases totaled approximately
$125,000 for Fiscal 1999. Also during Fiscal 2000, the Company spent
approximately $4,612,000 for MOCVD epitaxy reactors and approximately
$289,000 for machine parts and supplies purchased from Emcore. There were
no such expenditures during Fiscal 1999 or Fiscal 1998.
During Fiscal 2000, Emcore provided technical and administrative services
to the Company at a cost of approximately $207,000. Similar services
provided in Fiscal 1999 totaled approximately $311,000. There were no such
services provided by Emcore in Fiscal 1998.
At October 1, 2000, approximately $110,000 of net payables to Emcore is
included in accounts payable in connection with Emcore inventory provided
to the Company. This corresponding amount at September 26, 1999 was
approximately $110,000.
Schedule II
EMCORE CORPORATION
Valuation and Qualifying Accounts and Reserves
For the years ended September 30, 1998, 1999 and 2000