10-K: Annual report pursuant to Section 13 and 15(d)
Published on December 30, 2002
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, 2002
/ / 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 (I.R.S. Employer Identification No.)
of 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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of common stock held by non-affiliates of the
registrant as of March 28, 2002 was approximately $228,315,543 (based on the
closing sale price of $9.61 per share).
The number of shares outstanding of the registrant's no par value common stock
as of December 20, 2002 was 36,833,069.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the 2003 Annual
Meeting of Shareholders (to be filed with the Securities and Exchange Commission
on or before January 28, 2003) are incorporated by reference in Part III of this
Form 10-K.
EMCORE Corporation
FORM 10-K
For the fiscal year ended September 30, 2002
INDEX
Part I page
- ------ ----
Item 1. Business............................................................4
Item 2. Properties.........................................................31
Item 3. Legal Proceedings..................................................31
Item 4. Submission of Matters to a Vote of Security
Holders............................................................31
Part II
- -------
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters............................................................32
Item 6. Selected Financial Data............................................33
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................35
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...............................................................51
Item 8. Financial Statements and Supplementary Data........................52
Consolidated Statements of Operations for the years ended
September 30, 2002, 2001 and 2000..................................52
Consolidated Balance Sheets as of September 30, 2002 and
2001...............................................................53
Consolidated Statements of Shareholders' Equity for the years
ended September 30, 2002, 2001 and 2000............................54
Consolidated Statements of Cash Flows for the years ended
September 30, 2002, 2001 and 2000..................................55
Notes to Consolidated Financial Statements.........................57
Independent Auditors' Report.......................................78
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures..........................................79
Part III
- --------
Item 10. Directors and Executive Officers of the Registrant.................79
Item 11. Executive Compensation.............................................79
Item 12. Security Ownership of Certain Beneficial Owners and Management.....79
Item 13. Certain Relationships and Related Transactions.....................79
Item 14. Controls and Procedures............................................79
Part IV
- -------
Item 15. Exhibits, Financial Statement Schedules and Reports on Form
8-K................................................................80
SIGNATURES.........................................................82
2
Forward-Looking Statements
--------------------------
This Annual Report on Form 10-K includes forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. These forward-looking statements are based largely on our current
expectations and projections about future events and financial trends affecting
the financial condition of our business. Words such as "expects", "anticipates",
"intends", "plans", "believes" and "estimates", and variations of these words
and similar expressions, identify these forward-looking statements. These
forward-looking statements include, without limitation, any and all statements
or implications regarding:
o EMCORE Corporation's (EMCORE) ability to remain competitive and a
leader in its industry and the future growth of EMCORE, the
industry and the economy in general;
o the expected level and timing of benefits to EMCORE from its
restructuring and realignment efforts, including:
o expected cost reductions and their impact on EMCORE's financial
performance,
o expected improvement to EMCORE's product and technology
development programs, and
o the belief that restructuring and realignment efforts will
position EMCORE well in the current business environment and
prepare it for future growth with increasingly competitive new
product offerings and long-term cost structure;
o the anticipated cost of restructuring and realignment efforts;
o the possibility of charges to be recorded by EMCORE to reduce the
carrying value of excess and obsolete inventory and doubtful
accounts;
o difficulties in integrating recent or future acquisitions into
EMCORE's operations;
o EMCORE's ability to obtain or maintain quality system Certificates of
Registration; and
o guidance provided by EMCORE regarding its expected financial
performance in current or future periods, including, without
limitation, with respect to anticipated revenues for any period in
fiscal 2003 and subsequent periods.
These forward-looking statements involve risks and uncertainties that could
cause actual results to differ materially from those projected, including
without limitation, the following:
o EMCORE's restructuring and realignment efforts may not be successful
in achieving expected benefits, may be insufficient to align
EMCORE's operations with customer demand and the changes affecting
our industry, or may be more costly than currently anticipated;
o due to the current economic slowdown, in general, and setbacks in our
customers' businesses, in particular, our ability to predict
EMCORE's financial performance for future periods is far more
difficult than in the past; and
o other risks and uncertainties described in EMCORE's filings with the
Securities and Exchange Commission (SEC) (including under the
heading "Risk Factors" in this Annual Report), such as:
o cancellations, rescheduling or delays in product shipments;
o manufacturing capacity constraints;
o lengthy sales and qualification cycles;
o difficulties in the production process;
o changes in semiconductor industry growth;
o increased competition; and
o delays in developing and commercializing new products.
We assume no obligation to update the matters discussed in this Annual Report,
except as required by applicable law or regulation.
3
PART I
Item 1. Business
Company Overview
- ----------------
EMCORE Corporation, a New Jersey corporation established in 1984, offers a
versatile portfolio of compound semiconductor products for the broadband,
wireless communications and solid-state lighting markets. EMCORE's integrated
solutions philosophy embodies state-of-the-art technology, material science
expertise and a shared vision of our customer's goals and objectives to be
leaders and pioneers in the world of compound semiconductors. EMCORE's solutions
include: optical components for high-speed data and telecommunications; solar
cells and solar panels for global satellite communications; electronic materials
for high bandwidth communications systems, such as Internet access and wireless
telephones; metal organic chemical vapor deposition (MOCVD) production systems
for the growth of GaN, InGaN, AlGaN, GaAs, AlGaAs, InP, InGaP, InGaAlP, InGaAsP
and SiC epitaxial materials used in numerous applications, including data and
telecommunications modules, cellular telephones, solar cells and high-brightness
light-emitting diodes (HB-LEDs). For further information about EMCORE, visit
http://www.emcore.com. The information on EMCORE's web site is not incorporated
by reference into and is not made a part of this report.
Industry Overview
- -----------------
Recent advances in information technologies have created a growing need for
efficient and high-performance electronic systems that operate at very high
frequencies, require increased storage capacity, have augmented computational
and display capabilities and can be produced cost-effectively in commercial
volumes. In the past, manufacturers of electronic systems have relied on
advances in silicon semiconductor technology to meet many of these demands;
however, the new 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 electronic systems. Many compound
semiconductor materials have unique physical properties that allow electrons to
move at least four times faster through them 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;
o increased tolerance to high temperatures; and
o light emitting and detecting optoelectronic properties.
Compound semiconductor devices can be used to perform individual functions
as discrete devices, such as vertical cavity surface emitting lasers (VCSELs),
photodetectors, solar cells, HB-LEDs, radio frequency (RF) materials, electronic
materials and magneto resistive (MR) sensors. Compound semiconductor devices can
also be combined into integrated circuits, such as transmitters, receivers and
alphanumeric displays. Although compound semiconductors are generally 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. Furthermore, the unique properties of compound
semiconductors enable a wide variety of optoelectronic applications for
fiber-optic transmission, display, and power generation. The markets targeted
include data, satellite and wireless communications, telecommunications,
lighting, consumer and automotive electronics and computers and peripherals.
4
The following factors have driven electronic systems' manufacturers who
require high-performance products and applications to compound semiconductor
systems and device solutions:
o launch of new wireless services and wireless high-speed data
systems;
o replacement of electrical backplanes with laser-based
optical backplanes in data and telecommunication systems;
o conversion to more efficient solar cells in satellite power
systems;
o widespread deployment of fiber optic networks and the
increased use of optical systems within these networks;
o increased 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 increased use of high-performance electronic devices in
automobiles; and
o the conversion to HB-LEDs from incandescent, halogen and
compact fluorescent lighting.
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 another element,
such as arsenic, phosphorous, nitrogen or antimony. 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 its compounds.
Many of the unique properties of compound semiconductor devices are
achieved by the layering of different 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
the 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) MOCVD. The
production systems that use these methods typically require expensive reactant
materials, use of certain toxic chemicals and tight control over numerous
manufacturing parameters that can pose technical, training and safety challenges
more rigorous than in methods used to manufacture of silicon devices. Although
the first three methods can yield wafers having high thickness uniformity with
acceptable electronic and optical properties, none of these methods can be
easily scaled up to high volume production, which is necessary for the
commercial viability of compound semiconductor devices. Compound semiconductor
wafers fabricated using the MOCVD method generally possess a better combination
of uniformity, 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.
5
The following chart summarizes (i) principal markets for, (ii) examples of
applications for, (iii) some products that incorporate, and (iv) certain
benefits and characteristics of compound semiconductor devices produced on
EMCORE's MOVCD production systems:
6
The EMCORE Solution
- -------------------
EMCORE provides a broad range of compound semiconductor products and
services intended to meet its customers' diverse technology requirements.
Founded in 1984, EMCORE pioneered the development of a complete line of MOCVD
production systems and is currently the industry's only fully integrated
commercial supplier of the complete spectrum of compound semiconductor products.
EMCORE combines materials science expertise and process engineering aptitude to
provide MOCVD production systems, epitaxial wafers, package-ready devices,
packaged VCSELs and fiber optic modules to customers around the world.
EMCORE has two reportable operating segments: the systems-related business
and the materials-related business. The systems-related business is our
TurboDisc(R) MOCVD product line, which designs, develops and manufactures
systems and manufacturing processes. Revenues for the systems-related business
are derived primarily from sales of TurboDisc systems, as well as spare parts,
services and related products. The materials-related business is comprised of
our Photovoltaics, Optical Devices and Components and Electronic Materials and
Devices product lines. Revenues for the materials-related business are derived
primarily from the sales of solar cell products (including epitaxial material
(epi), cells, covered interconnect solar cells (CICs) and panels), VCSELs and
VCSEL-based transceiver and transponder modules, RF materials (including
heterojunction bipolar transistors (HBTs) and enhancement-mode pseudomorphic
high electron mobility transistors (pHEMTS)), MR sensors and process development
technology. The segments reported are the segments of EMCORE for which separate
financial information is available and are evaluated regularly by executive
management in deciding how to allocate resources and in assessing performance.
EMCORE's compound semiconductor product lines include:
o TurboDisc(R)MOCVD - EMCORE develops and manufactures advanced MOCVD
production systems and engineers and designs next-generation systems
to improve efficiency and lower production costs. Through 18 years of
development and manufacturing experience, EMCORE has developed
extensive materials science, process technology and MOCVD production
system manufacturing expertise to address its customers' needs and
believes that its proprietary TurboDisc deposition technology makes
possible one of the most cost-effective production processes for the
commercial volume manufacture of high-performance compound
semiconductor materials and devices. This technology coupled with
EMCORE's process expertise, provides the production platform for
various types of compound semiconductor materials 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. Customers can take advantage of
EMCORE's vertically integrated approach by purchasing custom-designed
materials and devices from EMCORE, or they can manufacture their own
products in-house using a TurboDisc MOCVD production system configured
to their specific needs.
o Photovoltaics - EMCORE manufactures advanced high-efficiency,
multijunction solar cells, CICs and solar panels. With smaller, more
efficient power generation, EMCORE's photovoltaic products help enable
satellite weight reduction, wing area reduction, improved radiation
tolerance and higher light to power conversion, which increases
payload capacity and economic return.
o Optical Devices and Components - EMCORE designs and manufactures
VCSELs which provide enhanced performance benefits to market
applications such as Internet access, onboard photonics, Gigabit
Ethernet and fiber optic switching, as well as Fibre Channel and
storage area network (SAN) applications. EMCORE also designs, develops
and manufactures high-speed optical transmitter modules, receiver
modules and transponders. EMCORE's line of VCSEL and PIN (the "P",
"I", "N" represent P-type, intrinsic and n-type semiconductor
materials, respectively) photodiode-based parallel optic modules are
designed for high speed optical networking applications, including VSR
OC-192 interconnection and high-speed optical backplanes used in data
switching and routing.
o Electronic Materials and Devices - Using TurboDisc MOCVD production
systems, EMCORE manufactures electronic materials, including pHEMTs
and HBTs for wireless communication instruments, and devices such as
MR sensors. Materials and devices are produced on a foundry basis in
partnership with specific customers according to their requirements
and under strict confidentiality.
7
In January 1999, General Electric Lighting and EMCORE formed GELcore
(GELcore), a joint venture to develop and market HB-LED lighting products.
HB-LEDs are solid state compound semiconductor devices that emit light and are
used in miniature packages for everyday applications such as indicator lights on
automobiles, traffic lights, computers and other electronic equipment. 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. Under
the terms of the joint venture agreement, EMCORE has a 49% non-controlling
interest in the GELcore venture and accounts for its investment under the equity
method of accounting.
See Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations for information on EMCORE's financial results by segment
and product line revenues.
EMCORE's Strategy
- -----------------
EMCORE's objective is to maximize shareholder value by capitalizing on its
position in MOCVD process technology to become the leading supplier of compound
semiconductor materials, devices and production systems. The key elements of
EMCORE's strategy include:
I. Apply EMCORE's Core Materials and Manufacturing Expertise Across
Multiple Product 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.
EMCORE uses the most appropriate semiconductor process technology when designing
solutions to a customer's particular application. For example, EMCORE recently
introduced its Enterprise(R) 300LDM MOCVD production tool designed to achieve
high quality materials and high yields for consumer electronic applications.
This new tool produces devices for several applications, including DVDs and
CD-ROMs that allow for high data storage capacity. Engineered specifically for
the high-volume production of long-wavelength infrared and visible lasers,
VCSELs and InP-based electronic materials, EMCORE's 300LDM provides customers
with unparalleled run-to-run process control and is designed to accomplish
excellent uniformity of thickness, doping and epitaxial layer composition.
II. Target Potential High Growth Market Opportunities.
EMCORE's strategy is to target potential 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 focuses its efforts in high-growth areas in
communication infrastructure by providing complete solutions based on widely
accepted platforms such as Synchronous Optical Network (SONET), Asynchronous
Transfer Mode (ATM) and Gigabit Ethernet. EMCORE's Optical Devices and
Components product line manufactures high-speed optical transmitter modules,
receiver modules and transponders utilizing EMCORE's leading-edge VCSEL and PIN
photodiode array components for the data communications and telecommunications
markets. EMCORE's modules, designed to help solve the data bottle necking
problems for distances under 300 meters in central office and point-of-presence
environments, provide a cost effective alternative to more costly comparable
serial interconnects.
III. Pursue Strategic Acquisitions and Partnerships with Industry Leading
Companies.
EMCORE seeks to identify and develop long-term relationships with leading
companies in each of the industries it serves. EMCORE develops these
relationships in a number of ways that include long-term, high-volume supply
agreements, joint ventures, acquisitions and other arrangements. Recently,
acquisitions have been a focus in order to enhance technologies.
8
Recent acquisitions include:
- In March 2002, EMCORE acquired certain assets, including equipment and
intellectual property, of the Applied Solar Division of Tecstar, Inc.
and its subsidiary, Tecstar Power Systems, Inc. (this acquired
business is referred to herein as "Tecstar"). Tecstar provides CICs
and solar panel lay-down services and has a flight heritage dating
back to 1958. Consequently, this acquisition augments EMCORE's
capability to penetrate the satellite communications' market by
providing EMCORE with the capacity to manufacture complete solar
panels using EMCORE's solar cells, thereby enabling EMCORE to provide
satellite manufacturers with proven integrated satellite power
solutions that considerably improve satellite economics. Satellite
manufacturers and solar array integrators can now rely on EMCORE as a
single supply source that meets all of their satellite power needs
with proven flight heritage.
- In December 2002, EMCORE acquired certain assets of privately held
Alvesta Corporation (Alvesta) of Sunnyvale, California. Alvesta is an
industry leader in the research and development of parallel optic
transceivers for fiber optic communication networks. Alvesta pioneered
four channel parallel optic transceivers for the Optical
Internetworking Forum, 10G Fibre Channel, 10 Gigabit Ethernet and
Infiniband applications. Alvesta's product revenues from sales of its
four-channel products were approximately $5 million in 2001. The
transaction included the acquisition of intellectual property and
inventory. In addition, EMCORE hired several Alvesta product
designers.
EMCORE is currently pursuing additional strategic acquisitions to acquire
new technologies, products and service offerings to broaden our market
penetration in the communications sector.
IV. Continually Invest in Research and Development to Maintain Technology
Leadership.
Through substantial investment in research and development, EMCORE seeks to
expand its leadership position in compound semiconductor production systems,
materials 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 and
fiber optic module design expertise, including the development of new low-cost,
high-volume wafers, devices and modules for its customers. In order to remain a
leader in our market segments, EMCORE not only addresses our customers' current
needs, but we also work with them regarding their evolving requirements. In
addition, EMCORE's development efforts are focused on continually lowering the
production costs of its products. For example, continuing EMCORE's standing as
the world leader in GaN production platforms, EMCORE formally released in fiscal
2001 the E300 GaNzilla(TM), one of the most powerful tools available for the
production of high brightness blue and green LEDs. Similarly, EMCORE recently
released the latest version of its high-efficiency advanced triple junction
solar cells, which now incorporates a monolithic integrated diode. In March
2002, EMCORE introduced its first 10 Gigabit per second (Gbps) Transmit Optical
Subassembly (TOSA) and Receive Optical Subassembly (ROSA).
V. Target Positive Cash Flows From Operations.
Management is committed to reducing EMCORE's cost structure by focusing on
lowering the breakeven points for each of its product lines. During fiscal 2002,
EMCORE proceeded with a restructuring program, consisting of the realignment of
all engineering, manufacturing and sales/marketing operations, as well as
workforce reductions. Included in the provision for restructuring and impairment
charges recorded in fiscal 2002 were severance and fringe benefit charges
related to employee termination costs for 330 employees. We expect this program
to lower our expenditures by approximately $4.9 million per quarter in fiscal
2003. EMCORE also essentially eliminated all outside contractor and temporary
employees and significantly reduced overall expenditures for materials, software
and capital assets. As part of the ongoing effort to cut costs, EMCORE
implemented a program to focus research and development efforts on projects that
can be expected to generate returns within one year. As a result, EMCORE has
been able to reduce overall research and development costs without, we believe,
jeopardizing future revenue opportunities. These combined actions should result
in a cost reduction of approximately $6.0 million to $8.0 million per quarter in
fiscal 2003, which we believe should enable us to achieve our goal of having
positive cash flow from operations by the end of fiscal 2003, assuming revenues
in fiscal 2003 are consistent with revenues in fiscal 2002.
9
EMCORE's Product Lines
- ----------------------
TurboDisc(R) MOCVD
EMCORE is an industry leader in MOCVD system manufacturing for the
production of advanced epitaxial materials. Headquartered in Somerset, New
Jersey, EMCORE pioneered the use of stainless steel growth chambers in the
mid-1980s to enhance the safety of the MOCVD process and allow the use of
automated loading systems to transport wafers into the growth chamber.
Since its founding in 1984, EMCORE's proprietary TurboDisc technology has
used a unique high-speed rotating disc in a stainless steel growth chamber with
integrated vacuum-compatible loading chambers. To produce an epitaxial wafer, a
bare substrate, such as gallium arsenide, indium phosphide or germanium, is
placed on a wafer carrier in the TurboDisc growth chamber and heated to high
temperatures. Based on a predetermined formula, metal organic materials and
hydride gases are introduced 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 repeatable manner.
TurboDisc technology not only ensures uniformity of deposition across the
wafer, but also offers flexibility for diverse applications. Our E450 system for
solar cells and E300 GaNzilla system for LEDs, are among the largest production
systems with high throughput and low cost of ownership commercially available.
The precise control of reactant gas flow leads to exceptional material
utilization efficiency.
EMCORE's MOCVD production systems, focused on the III-V semiconductor
industry, are configured specifically for end-market applications such as
HB-LEDs and advanced electronic materials and devices. This approach provides
customers with expedited ramping times from install to material production,
resulting in, we believe, the most cost effective solutions in the industry.
EMCORE's tool-development strategy is supplemented by expertise in epi growth
and device manufacturing. With a large staff of expert epi growers, EMCORE
integrates feedback about the critical parameters involved with the growth of
high quality materials into its design of MOCVD production systems. This
knowledge has enabled EMCORE to develop MOCVD systems that produce the materials
results required to meet stringent device performance standards. In order to
meet our objective of being a provider of complete solutions to the
high-performance equipment market, we offer several MOCVD systems that
manufacture a variety of products. The following table illustrates the
flexibility of EMCORE's product line, listing each MOCVD system and the
associated market applications.
EMCORE's MOCVD Systems Product Applications
- ----------------------------- --------------------------------------------------
Pioneer 75 University and research & development, various
applications
Discovery 180 LDM VCSELs, laser diodes, AlGaAs and InGaAs detectors
Discovery 180 GaN Blue and green LEDs, blue lasers, GaN electronic
devices
Enterprise 300 LDM Laser diodes
Enterprise 300 GaNzilla Blue and green LEDs, blue lasers, GaN electronic
devices
Enterprise 450 EM Electronic materials such as pHEMTs, HBTs, FETs,
E-mode devices
Enterprise 450 LED High-brightness red, orange and yellow LEDs
EMCORE believes its TurboDisc MOCVD production systems, which have an
average selling price in excess of $1.2 million, 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, maintenance and spare parts and the clean room space required
for the equipment. Capital costs include the cost of acquisition and
installation of the process equipment.
10
EMCORE also believes that its MOCVD products are well positioned to take
advantage of recent trends in the LED marketplace, particularly in the Asian
marketplace where EMCORE has derived a significant portion of its revenues. LEDs
are being designed into miniature packages in everyday applications such as
indicator lights on automobiles, computers, cellphones and other electronic
equipment. LEDs offer substantial advantages over small incandescent bulbs,
including longer life, lower maintenance costs and energy consumption and
smaller space requirements. Handset manufacturers recently have begun to use
blue or white backlighting in new models, rather than the traditional
yellow-green backlighting that has been common during the last several years. We
believe that LED chips produced on our MOCVD production systems meet the blue
and/or white lighting characteristics that the market is now demanding. In
addition, we believe that the development of full color displays for mobile
handsets will increase demand for white LEDs in order to maximize the
effectiveness of the full color display. We believe our E300 GaNzilla MOCVD
system is the world's most powerful tool available for the production of high-
brightness blue and green LEDs, offering one of the highest throughputs in the
industry for the growth of GaN materials.
We are consistently focused on development efforts on further improving the
efficiency, as well as lowering the manufacturing cost, of our products and
improving other performance characteristics of devices for certain markets.
EMCORE's latest generation of TurboDisc products for GaAs and InP materials were
released in fiscal 2001 with many innovations including:
o new reactor design to improve source efficiency, greater up-time and
lower maintenance;
o digital control system to reduce electronic noise;
o modular component design to simplify component and design upgrades;
and,
o improved temperature control with the ability to monitor and control
the deposition temperature to within 1 to 2 degrees Celsius.
In fiscal 2001, EMCORE introduced with positive customer acceptance, the
E300 GaNzilla featuring a reactor design with greater source efficiency and
larger batch size than our previous GaN reactors. This product release has been
highly successful with 14 reactors sold through fiscal 2002 and installed in 3
continents.
Photovoltaics
EMCORE serves the global communications market by providing advanced solar
cell products and solar panels for application in the space industry. Compound
semiconductor solar cells are used to power satellites because they are more
resistant to radiation levels in space and convert substantially more power from
light, therefore weighing less per unit of power than silicon-based solar cells.
These characteristics increase satellite life, increase payload capacity and
reduce launch costs. Solar cells are typically the largest single cost component
of a satellite.
A solar cell works as follows: the "photovoltaic effect" is the basic
physical process through which a solar cell converts sunlight into electricity.
Sunlight is composed of photons, or particles of solar energy. These photons
contain various amounts of energy corresponding to the different wavelengths of
the solar spectrum. When photons strike a solar cell, they may be reflected or
absorbed, or they may pass right through the cell. Only the absorbed photons
generate electricity. When this happens, the energy of the photon is transformed
into an electric current. Special electrical properties of the solar cell
provide the voltage needed to drive the current through an external load (such
as a solar array for a spacecraft).
EMCORE designs and manufactures multi-junction compound semiconductor solar
cells for commercial satellite applications in its facility in Albuquerque, New
Mexico. This facility includes an automated manufacturing system that monitors
production processes, uses electronic run cards and provides real-time
production rates and yields for process engineering. EMCORE currently
manufactures the most efficient commercially available radiation resistant solar
cell in the world, using an advanced triple-junction cell design and with an
average beginning of life efficiency of 27.5%. Satellite success and
corresponding revenues depend on power efficiency and the satellite's capacity
to transmit data.
11
In March 2002, EMCORE acquired Tecstar, which provides CICs and solar panel
lay-down services. Consequently, this acquisition augments EMCORE's capability
to penetrate the satellite communications market by providing EMCORE with the
capacity to manufacture complete solar panels using EMCORE's solar cells,
thereby enabling EMCORE to provide satellite manufacturers with proven
integrated satellite power solutions that considerably improve satellite
economics. Satellite manufacturers and solar array integrators can now rely on
EMCORE as a single supply source that meets all of their satellite power needs
with proven flight heritage. Furthermore, EMCORE obtained significant patents in
this acquisition that will enable EMCORE to significantly improve the
engineering and design of solar cell products. EMCORE will continue Tecstar's
impressive flight heritage and solar component manufacturing expertise, which
dates back to 1958 when the Vanguard satellite with Tecstar solar cells was
launched. Tecstar's solar panel technology has flown on numerous successful
satellite missions, including Lockheed Martin's Chinastar, Loral's Telstar
satellite and Orbital Sciences' ORBCOMM Constellation. EMCORE is currently
completing the process of qualifying its advanced solar cells with Tecstar's
proven solar panel processes for Low Earth Orbits (LEO) and Geosynchronous Earth
Orbits (GEO). The combination of Tecstar's demonstrated success with well-known
space programs and EMCORE's solar cell technology should enable EMCORE to
dramatically improve satellite economics. Through well-established partnerships
with major satellite manufacturers and a proven qualification process, EMCORE
believes it can play a vital role in the evolution of telecommunications and
data communications around the world.
Recent Highlights:
- EchoStar VIII was successfully launched in August 2002. EchoStar VIII
is the first high-power GEO satellite in orbit powered by EMCORE
high-efficiency solar cells.
- In July 2002, EMCORE was awarded a contract by ESA/ASTRIUM to supply
high efficiency solar panels for use in the CRYOSAT Satellite program,
the purpose of which is to investigate climate change behavior
patterns.
Optical Devices and Components
Over the past several years, communication networks have experienced
dramatic growth in data transmission traffic due to worldwide Internet access,
e-mail and e-commerce. These communication networks include those used by local
and long distance carriers as well as Internet service providers. The bulk of
this traffic is routed through the optical networking infrastructure. Optical
fiber offers substantially greater capacity, is less error prone and is easier
to administer than copper wire. SONET is the primary standard for high-speed
transmission of communication over optic fiber. More recently, the demand for
system bandwidth is being addressed by a technique called Wavelength Division
Multiplexing (WDM). WDM increases bandwidth by allowing several optical signals,
each of a different wavelength, to be transmitted simultaneously on a signal
optic fiber. To ensure that routing and switching of information occurs
accurately, ATM is utilized on top of the SONET optical base. ATM is designed to
efficiently integrate voice, data and video and easily scale bandwidth. More
recently, performance improvements in processors require high-speed data
interconnect and networking applications. Fibre Channel is capable of
transmitting data at rates exceeding 1 Gbps in both directions simultaneously
and is used for achieving high-speed data transfer among workstations,
mainframes, data storage devices and other peripherals. EMCORE's objective is to
be a leading supplier of high-performance optical devices and components for the
global communications market. EMCORE's Optical Devices and Components groups are
located in Albuquerque, New Mexico.
VCSELs
EMCORE designs, develops and manufactures high-speed VCSELs and PIN
photodiode components and subassemblies for the data communications and
telecommunications markets. EMCORE offers a complete product line of VCSEL and
PIN photodiode solutions, including bare die, packaged components and optical
subassemblies for integration into Gigabit Ethernet, Fibre Channel, Infiniband,
WDM, ATM systems, and high-speed telecom applications, including VSR OC-192 and
high speed optical backplanes.
12
VCSELs are revolutionary compound semiconductor microlaser diodes that emit
light vertically from the surface of a fabricated wafer. They combine the
ability of batch process and on-wafer tests like LEDs and the superior
electro-optical performance of traditional edge-emitting lasers. In addition,
the cylindrical laser beam profile allows an easy and efficient coupling of the
light into a multi-mode fiber. The manufacturability for both wafer processing
and packaging enables a cost-effective high-bandwidth fiber optic communication
solution.
There are two major fabrication processes for VCSELs: ion-implantation and
selective oxidation. Compared to implant VCSELs, the oxide VCSELs provide many
superior characteristics, which include lower turn-on current, higher
efficiency, higher speed, better performance linearity and stability and better
reliability. Currently, the implant VCSELs are still widely used for
applications with transmission speeds up to 1 Gbps. However, the oxide VCSEL is
preferable for applications requiring data rates higher than 1 Gbps, which is
the trend in the datacom industry. EMCORE established a consistent manufacturing
process for the oxide VCSEL fabrication process despite the inherent challenges
of this manufacturing technique compared to the implant process. EMCORE is the
leading high-volume manufacturer of oxide VCSELs.
VCSELs have many advantages, including ultra-high modulation rates for
advanced information processing, extremely low power consumption, high fiber
optic coupling efficiencies, circular output beams and photolithography-defined
geometries. Key features of EMCORE's VCSELs, arrays and subassemblies are:
o fast transmission speed ranging from 1 to 10 Gbps, transitioning to 20
Gbps per channel;
o consistent manufacturing process resulting in VCSELs with consistent
output power and threshold current over a wide operating temperature
range;
o greater device uniformity enabling simplification of circuit design
and seamless integration into OEM systems; and,
o significant performance advantages over traditional laser diodes,
including greater control over beam size and wavelength, reduced
manufacturing complexity and packaging costs, and lower power
consumption.
EMCORE's strategy is to capitalize on its oxide VCSEL manufacturing
platform and expertise, by providing the industry with 1 Gbps, 2.5 Gbps, 10 Gbps
(OC-192), and 40 Gbps (OC-768) solutions through single-channel serial,
multi-channel parallel or WDM approaches. Leading electronic systems
manufacturers are integrating VCSELs into a broad array of end-market
applications including Internet access, digital cross-connect telecommunications
switches, Infiniband optical bus, fiber optic switching and routing, such as
Gigabit Ethernet and SAN.
VCSEL-based array transceivers and transponders
VCSEL-based array transceivers and transponders, EMCORE's primary fiber
optic products, are penetrating telecommunication markets as solutions for
low-cost, VSR OC-192 10 Gbps SONET optical links. The Optical Internetworking
Forum (of which EMCORE is a member) approved the specifications for VSR OC-192
optical links based on VCSEL arrays in December 2000. Array transceivers are the
preferred solutions of original equipment manufacturers for high-speed optical
backplanes which are replacing traditional electrical backplanes as bandwidth
requirements have exceeded the limits practical for copper connections.
EMCORE has successfully developed and delivered commercially available
high-speed array transceivers and transponders for the data and
telecommunications markets. We work closely with our customers' systems design
teams to better understand product applications in new and existing systems.
EMCORE's transceivers and transponders offer OEMs several advantages, including
products that:
o have fast transmission speeds up to 40 Gbps aggregate throughput;
o are designed for high volume manufacturing;
o utilize EMCORE's leading-edge VCSEL array and PIN photodiode array
components; and
o deliver significant cost-performance and application flexibility
advantages over traditional serial solutions.
13
Photodetectors
Photodetectors are discrete semiconductor devices that detect light in
order to convert an optical signal into an electrical signal. Similar to VCSELs,
photodetectors combine the ability of batch processing and on-wafer testing with
superior electro-optical performance. The large aperture size readily permits
efficient coupling of light from a multi-mode fiber.
EMCORE has successfully developed an 850 nm 1x12 photodetector array at
operating speeds of 1.25 Gbps and 2.7 Gbps per channel. In addition, 850 nm
singlets and 1x4 arrays at 10 Gbps have been developed. The arrays perform light
to logic conversions for data transmissions over multi-mode fiber ribbon cable.
The long-wavelength 1310 nm photodetector product is geared largely toward the
high-speed telecom medium range market/application using single-mode fiber.
Furthermore, EMCORE can produce devices that are hermetically sealed, ensuring
high reliability regardless of the nature of device packaging.
Since EMCORE first introduced its new family of fiber optic products to the
market, EMCORE has had several accomplishments that have provided the
marketplace with high-speed solutions to alleviate data congestion. Some of
these recent achievements include:
- In March 2002, EMCORE released transmitting optical subassembly (TOSA)
and receiving optical subassembly (ROSA) products operating at a data
rate of 10 Gbps. EMCORE offers TOSAs and ROSAs in both LC and SC
coupling formats. These OSAs are built upon EMCORE's photodetectors
and award-winning 10 Gbps VCSELs (2001 Circle of Excellence Product
Award by Photonics Spectrum), demonstrating superior electro-optical
performance and reliability. The design and processes of these
subassemblies are highly leveraged by and compatible with those of the
standard products for 2.5 Gbps. This design philosophy for the
products and processes provides, we believe, the most cost-effective
solutions. Most of the leading OEMs have selected EMCORE's 10 Gbps
TOSAs and ROSAs as the key components for their small-form-factor and
low-cost transceivers and transponders. These XFP and XPAK
transceivers will be widely used in applications such as 10 Gigabit
Ethernet, 10 Gigabit Fibre Channel, and proprietary links.
- In July 2002, EMCORE received a prestigious R&D 100 Award in a
competition sponsored annually by R&D Magazine. The award was in
recognition of advanced fiber optic module development work,
accomplished by EMCORE in conjunction with Sandia National
Laboratories, for the MTR8500 VSR OC-192 Parallel Array Transponder.
The MTR8500, which provides VSR interconnections over parallel fiber
links at SONET OC-192 data rates, was the first commercially available
300-pin transponder compliant with the Optical Internetworking Forum's
VSR-1 Implementation Agreement (OIF-VSR4-0.10).
- During fiscal 2002, EMCORE announced the expansion of its optical
device product portfolio with the commercial availability of two new
1310 nm, high speed, high performance PIN diodes designed for use in
OC-48 and OC-192 data and telecom applications. The 2.5 GHz, 1X12 PIN
diode array and 10 GHz PIN diode singlet are designed to meet all
requirements of "Telcordia 468" standard including chip-level
hermeticity, and therefore, offer significant cost savings as a result
of their minimal packaging requirements. Furthermore, PIN diodes from
EMCORE feature a high degree of responsivity, low capacitance, low
dark current, and high bandwidth.
14
Electronic Materials and Devices
The manufacturing process for electronic materials is based on EMCORE's
proprietary TurboDisc technology which 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 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.
Electronic Materials
RF materials are compound semiconductor materials used in wireless
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 AlGaAs pHEMT materials
including E-mode devices that are used for power amplifiers for next generation
wireless infrastructure such as 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. In
addition, recent developments and transfers to production of enhancement mode
pHEMT technologies have demonstrated their continued competitiveness for handset
applications. EMCORE believes that its ability to produce high volumes of RF
materials at a low cost will encourage their adoption in new applications and
products.
EMCORE's Somerset, New Jersey manufacturing facility has six TurboDisc
MOCVD production systems dedicated to electronic materials production. EMCORE
also equipped its wafer fabrication area with state of the art cassette to
cassette characterization equipment.
Electronic Devices
MR sensors are compound semiconductor devices that possess sensing
capabilities. MR sensors improve vehicle performance through more accurate
control of engine and crank shaft timing, which allows for improved spark plug
efficiency and reduced emissions. In January 1997, EMCORE initiated shipments of
compound semiconductor MR sensors using technology licensed to EMCORE from
General Motors. This license allows EMCORE to manufacture and sell products
using this technology. Through fiscal 2002, EMCORE had delivered more than 15
million devices to General Motors Powertrain for crank and cam speed and
position sensing applications.
15
HB-LED Joint Venture
HB-LEDs are solid state compound semiconductor devices that emit light and
are used in miniature packages in everyday applications such as indicator lights
on automobiles, computers and other electronic equipment. HB-LEDs offer
substantial advantages over small incandescent bulbs, including longer life,
lower maintenance costs and energy consumption and smaller space requirements.
Groups of HB-LEDs can make up single or full-color electronic displays.
Presently, HB-LED chips produced on EMCORE's MOCVD production systems are used
for backlighting in applications such as wireless handsets, computer monitors
and automotive dashboard lighting. In addition, they are used in consumer
products and office equipment as indicator lighting, in full color displays,
message advertising and informational signs, landscape lighting and traffic
signals. Some of our customers manufacture HB-LED components that emit white
light using blue or ultraviolet HB-LEDs produced on EMCORE's MOCVD production
systems. By passing blue HB-LED light through certain conversion materials such
as phosphors, or by using blue in combination with HB-LEDs of other appropriate
colors, white light emission can be obtained.
In January 1999, EMCORE and General Electric Lighting formed GELcore LLC
(GELcore), a joint venture to develop and market HB-LED lighting products. Under
the terms of the joint venture agreement, EMCORE has a 49% non-controlling
interest in the joint venture. Both parties 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 and device design
expertise with General Electric Lighting's brand name recognition, phosphor
technology and extensive marketing and distribution capabilities. GELcore's
current product line includes traffic lights, channel letters, flashlights and
other signage and display products incorporating HB-LEDs. GELcore's long-term
goal is to develop products to replace traditional lighting. In September 2000,
GELcore acquired Ecolux, Inc., adding HB-LED signaling products to its growing
line of LED products. EMCORE believes that Ecolux is currently receiving the
majority of contracts for which it submits bids for the replacement of
traditional traffic lights with HB-LEDs.
Recent highlight: In July 2002, EMCORE announced that it received a patent
for its invention of a semiconductor laser separation technique for gallium
nitride-based and other materials grown on sapphire substrates. The new
technique, which uses a patterned laser projection to separate the processed
wafer into several thousand individual devices, solves many challenges inherent
with current separation techniques. The new method designed by EMCORE, which has
been successfully employed in a high-volume HB-LED manufacturing production
facility for over 2 years, will expedite manufacturing times of GaN-based blue
and green HB-LEDs and improve GaN materials device yields and throughput. It
will also have a significant impact on the cost and manufacturability of all
devices on sapphire substrate. The new device separation technique from EMCORE
virtually eliminates yield loss, requires low maintenance and significantly
improves device fabrication cycle times. Using EMCORE's method, device
separation is achieved by laser ablation, where a laser beam is passed through
optical elements and masks to produce a patterned laser projection. The
patterned laser projection is then directed at the wafer surface and applied for
a specified time at a specified power to achieve a precise cut into the wafer
and dramatically increase the number of devices that can be achieved from a
single wafer.
Government Research Contract Funding
- ------------------------------------
EMCORE derives a portion of its revenue from funding of research contacts
with the U.S. Government (Government). These contracts typically cover work
performed from over several months up to four years. These contracts may be
modified or terminated at the convenience of the Government. Therefore, these
programs may be subject to Government budgetary fluctuations. The contracts
generally provide that we may elect to retain title to inventions made in the
course of research with the Government obtaining a non-exclusive license to
practice such inventions for Government purposes. For the fiscal years ended
September 30, 2002, 2001, and 2000, Government funding represented 4%, 1% and 2%
of total revenue, respectively.
Recent highlight: In June 2002, EMCORE signed a contract with Defense
Advanced Research Projects Agency (DARPA) under which it will participate in the
Department of Defense agency's mission to develop wide bandgap
semiconductor-based high power, high frequency electronics for use in military
applications based on EMCORE's GaN technology. The contract consists of a $3.0
million baseline project to be completed over an 18-month period, and $1.0
million of additional work to be performed at the Government's option over a
subsequent 10-month period. The Government has not yet exercised this option.
EMCORE will recognize revenue to the extent of costs incurred plus the estimated
gross profit as stipulated within the contract, based upon contract performance.
16
Customers
- ---------
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, photodetectors, RF and
electronic materials, solar cells, HB-LEDs and MR sensors. EMCORE's customer
base includes many of the largest semiconductor, telecommunications, consumer
goods and computer manufacturing companies in the world. Some of our customers
include Agere Systems, Inc., Agilent Technologies Ltd., Anadigics Inc.,
Boeing-Spectrolab, Corning, Inc., General Motors Corp., Hewlett Packard Co.,
Honeywell International, Inc., Infineon Technologies AG, Loral Space &
Communications Ltd., LumiLeds Lighting (a joint venture between Philips Lighting
and Agilent Technologies), Motorola, Inc., Nortel Networks Corp., Siemens AG's
Osram GmbH subsidiary, TriQuint Semiconductor, Inc., Tyco, Inc., many of the
largest electronics manufacturers in Japan and a number of Taiwanese, Chinese
and Korean companies. EMCORE also sells to a number of other customers whose
names cannot be identified because of confidentiality obligations.
EMCORE has a comprehensive total quality management program with special
emphasis on total customer satisfaction. EMCORE seeks to encourage active
customer involvement with the design and operation of its production systems. To
accomplish this, EMCORE conducts user group meetings among its customers in
Asia, Europe and North America. At annual meetings, EMCORE's customers provide
valuable feedback on key operations, process oriented services, problems and
recommendations to improve EMCORE products. This direct customer feedback has
enabled EMCORE to constantly update and improve the design of its systems and
processes. Changes that affect the reliability and capabilities of EMCORE's
systems are embodied in new designs to enable current and future customers to
utilize systems which EMCORE believes are high quality and cost-efficient.
Marketing and Sales
- -------------------
EMCORE actively markets its products through select advertising and
participation at trade shows. Our customers work directly with our internal
sales force and senior management for sales in North America, Europe and Taiwan.
To market, sell, and service certain of our products in Japan and China, EMCORE
relies on Hakuto Co., Ltd. Hakuto has exclusive distribution rights for certain
systems-related products in China and Japan through March 2008. Hakuto has
marketed and serviced EMCORE's products since 1988 via six branch offices and
owns approximately 4% of EMCORE's common stock. Until he retired in 2002, the
President of Hakuto had also been a member of EMCORE's Board of Directors since
1997. EMCORE uses DI Systems to market and service EMCORE's systems-related
products in South Korea and Nissho Iwai Corporation to market photovoltaic
products in Japan, Korea and India.
In addition to EMCORE's three manufacturing facilities, it also maintains
one domestic sales office located in Santa Clara, California and two overseas
sales offices located in France and Taiwan. These offices were opened to
efficiently service and provide engineering support closer to EMCORE's customer
base in these areas. As a result of the introduction of many new products during
fiscal 2002, EMCORE's management perceives the need for more frequent
interaction with our customers. As a result, EMCORE is considering opening
additional overseas sales offices to facilitate business transactions and act as
a liaison between our Asia Pacific customers and our U.S. corporate office.
EMCORE allows each product line to maximize its reach into each market
segment. While there are common technologies used by each product line, the
customers and market segments are much more diverse. Each product line has a
marketing and sales organization that can focus completely on the customer
needs, the service required both before and after the order is received, as well
as on the competitive threats each product and market segment faces. With
regards to systems-related products, EMCORE seeks to match customer's
requirements to an existing design or a modification of a standard 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. EMCORE will also produce samples to demonstrate conformance to
the customer's specifications. For production systems, the sales cycle is
typically lengthy and requires continued participation from salespersons, field
engineers and product designers. The period of time from the initial contact
with the customer to the customer's placement of an order is typically three to
nine months or longer. EMCORE's sales cycle for materials-related products
usually runs three months to in excess of a year, during which time EMCORE
develops the formula of
17
elements necessary to meet the customer's specifications and qualifies the
materials, which may also require the delivery of samples. Accordingly, EMCORE
is able to develop strategic, and therefore long lasting, customer relationships
and technologies that are industry leading and that customers want, which EMCORE
believes will enable it to ultimately achieve EMCORE's objective of becoming
market leaders as well as technology leaders in each of its product lines.
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 pursues a program of
system upgrades for customers to increase the performance of older systems.
EMCORE generally does not offer extended payment terms to customers and adheres
to a warranty policy of 1 year or less. 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 operates warehouse depots in Taiwan and
in Europe to provide improved timely service to its overseas customers. As of
September 30, 2002, EMCORE employed 26 field service engineers and staff who
install MOCVD systems and provide on-site support.
Backlog
- -------
As of September 30, 2002, EMCORE had a backlog believed to be firm of
approximately $45 million, consisting of approximately $26 million of
system-related orders and $19 million of materials-related orders. This compares
to a backlog of $75 million as reported at the end of the prior year. The
decrease in backlog was primarily attributable to decreased demand experienced
within EMCORE's systems-related product line, which resulted in a significantly
lower number of new orders booked in fiscal 2002 as compared to fiscal 2001. The
current economic climate has reduced capital spending dramatically during the
past year, particularly in the data and telecommunication sectors, where EMCORE
has traditionally sold a significant portion of systems-related and
material-related products. Historically, significant portions of our
materials-related revenues are not reported in backlog since our customers have
reduced lead times. Many of our materials-related sales usually occur within the
same month when the purchase order is received. The backlog does not include
orders for product that have not met qualification specifications, nor does it
include anticipated service or component orders, estimated at $8 million
annually, since these orders have very short lead times. We believe the entire
backlog could be filled during fiscal 2003. However, especially given the
current market environment, customers may delay shipment of certain orders until
fiscal 2004. Backlog also could be adversely affected if customers unexpectedly
cancel purchase orders accepted by us.
Manufacturing
- -------------
EMCORE's operations include MOCVD system engineering and manufacture, wafer
fabrication, design and device production, solar panel engineering and assembly
and fiber optic module design and manufacture. Many of EMCORE's manufacturing
operations are computer monitored or controlled to enhance reliability and
yield. EMCORE manufactures its own MOCVD systems. EMCORE outsources the
manufacture of some components and sub-assemblies, but performs all final system
integration, assembly and testing. As of September 30, 2002, EMCORE had 350
employees involved in manufacturing. The location of and products manufactured
at EMCORE's facilities are summarized below:
Location EMCORE product line
- ------------------------------ -----------------------------------------------
Somerset, New Jersey - TurboDisc MOCVD (production systems)
(headquarters) - Electronic Materials and Devices (HBTs,
pHEMTs and MR sensors)
Albuquerque, New Mexico - Photovoltaics (solar cells)
- Optical Devices and Components (VCSELs and
fiber optic modules)
City of Industry, California - Photovoltaics (CICs and solar panels)
18
EMCORE fabricates electronic materials and devices at its facilities in New
Jersey and New Mexico, which have a combined clean room area totaling
approximately 41,000 square feet. Unlike silicon semiconductor technology, which
could involve up to a 100-step manufacturing process, our materials-related
products are manufactured in a four-part process: epitaxial deposition,
fabrication, testing and packaging. Up to 80% of the manufacturing process is
completed in our internally manufactured MOCVD production systems. The epitaxial
deposition process represents the growth of thin layers of SiC, GaN or other
materials on a polished wafer, depending on the nature of the device under
production. Following epitaxy, chips are fabricated in a clean room environment.
The final steps involve testing and cutting prior to shipment to the customer.
The manufacturing process also involves extensive quality assurance systems
and performance testing. Both EMCORE's New Jersey and New Mexico facilities have
acquired and maintain certification status for their Quality Management Systems.
The New Jersey facility, which is used by EMCORE's TurboDisc MOCVD and
Electronic Materials and Devices groups, is registered to ISO 9001 + QS
9000-1998. The New Mexico facility, which is used by EMCORE's Photovoltaics and
Optical Devices and Components groups and the California facility, which is also
used by the Photovoltaics group are registered to ISO 9001.
Sources of Raw Materials
- ------------------------
Outside contractors and vendors are used to supply raw materials and
standard components and to assemble portions of end systems from EMCORE
specifications. In certain cases, EMCORE depends on sole, or a limited number
of, vendors of components and raw materials; however, EMCORE is continually
reviewing efforts to mitigate risks. We generally do not carry significant
inventories of any raw materials. EMCORE maintains inventories it believes are
sufficient to meet its near term needs. Because we often do not account for a
significant part of our vendors' business, we may not have access to sufficient
capacity from these vendors in periods of high demand. EMCORE maintains ongoing
communications with its vendors to try to ensure against interruptions in supply
and has, to date, generally been able to obtain sufficient supplies in a timely
manner. EMCORE implemented a vendor program to inspect quality and review
suppliers and prices in order to standardize purchasing efficiencies and design
requirements in order to maintain as low a cost of sales as possible. If we were
to change any of our limited or sole source vendors, we would be required to
re-qualify each new vendor. Re-qualification could prevent or delay product
shipments that could negatively affect our results of operations. In addition,
our reliance on these vendors may negatively affect our production if the
components vary in quality or quantity. If we are unable to obtain timely
deliveries of sufficient components of acceptable quality, or if the prices of
components for which we do not have alternative sources increase, our business,
financial condition, results of operations and cash flows could be materially
and adversely affected.
Research and Development
- ------------------------
The semiconductor industry is characterized by rapid changes in process
technologies with increasing levels of functional integration. To maintain and
improve its competitive position, EMCORE invests significant resources in
research and development. Our 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 23 TurboDisc systems and five device fabrication facilities for both
research and production that are capable of processing virtually all-compound
semiconductor materials. Nine of those TurboDisc systems and two device
fabrication areas are dedicated fully to research and development efforts and
are used by a staff of over 65 scientists, engineers, technicians and staff, 36
of which have a Ph.D. degree. The research and development staff utilizes x-ray,
optical and electrical characterization equipment that provides instant data
allowing for shortened development cycles and rapid customer response. During
fiscal years 2002, 2001 and 2000, EMCORE invested $41.0 million, $53.4 million
and $32.7 million towards our product research and development activities. As
part of the ongoing effort to cut costs, EMCORE implemented a program to focus
research and development efforts on projects that can be expected to generate
returns within one year. As a result, EMCORE has been able to reduce overall
research and development costs without, we believe, jeopardizing future revenue
opportunities. EMCORE believes that several research and development projects
have the potential to greatly improve its competitive position and to drive its
revenue growth in the next few years. For example:
o During fiscal 2002, EMCORE's E300 GaNzilla system has seen market
penetration in every major geographical market area with tools
shipping within North America and to Europe and Asia. The initial
system installations have proven to the market the versatility of our
E300 GaNzilla system and its ability
19
to perform in a robust and stable mode for production. We have
continuously improved our blue (470 nm) and green (525 nm) HB-LED
growth processes throughout the year, resulting in typical emission
powers of 3.0 mW and 2.0 mW, respectively, for standard die conditions
from both the E300 and D180 GaN reactor platforms. We have also
started work on ultraviolet HB-LEDs (~ 400 nm), intended for
solid-state-lighting, where we have achieved 30 mW power from a
flip-chip design structure. Furthermore, we have developed AlGaN-based
solar-blind detectors for a government-sponsored contract, achieving
almost 50% external quantum efficiency in the 250-280 nm wavelength
detection range.
o EMCORE is currently designing new products for the high-performance
optical communications market. In the field of optical devices and
components, EMCORE has been the leader in the development of
high-speed VCSELs. The 10 Gbps VCSEL chips and packages have been
successfully developed and released to production. These high-speed
VCSELs can be produced as singlets or as arrays for much higher
bandwidth transceivers. EMCORE has invested significant resources in
developing VCSELs operating near 1310 nm wavelength. Steady progress
has been made. The success of this project will lead to a low-cost key
component for OC-48 and OC-192 transceiver components. Along with its
VCSEL efforts, EMCORE developed 850 nm and 1310 nm photodetector
arrays, which operate at speeds of up to 10 Gbps and are designed to
work with these VCSEL devices. EMCORE has invested aggressively in the
development of array transceiver products that capitalize on its VCSEL
and photodetector components. By manufacturing these components
in-house, EMCORE is able to reduce the overall cost of the transceiver
module. With the VSR OC-192 transponder and 12 x 2.7 Gbps array
transceiver successfully qualified and implemented by OEMs, EMCORE
plans to continue with this roadmap to introduce a family of
state-of-the-art products for VSR fiber optics modules. Through its
acquisition of Alvesta, EMCORE has added four-channel transceivers and
transponders to its fiber optic product offering.
o In the field of solar cells, development of advanced device structures
and growth techniques are enabling both an increase in solar cell
efficiency from EMCORE's current industry leading 27.5% solar cell to
a 28.5% product and the integration of a true monolithic bypass diode
on the solar cell.
o For electronic materials, EMCORE has continued to develop advanced HBT
and pHEMT structures using next generation materials, such as InGaAsN
and InP.
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 and promote the
commercialization of targeted EMCORE 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 in sales of semiconductor
production systems, wafers and devices depends significantly on its ability to
obtain intellectual property protection for its research and development
efforts. EMCORE's strategy is to rely on both patents and trade secrets to
protect its intellectual property. To date, EMCORE has 28 U.S. patents and three
foreign patents, and others are either pending (65 patent applications filed) or
under in-house review (2 disclosures and draft patent applications). Included in
these amounts are patents and patent applications acquired from Tecstar. The
U.S. patents will expire between 2005 and 2018. These patents (granted and
filed) claim material aspects of current or planned commercial versions of
EMCORE's systems, wafers or devices. In addition, EMCORE actively markets and
licenses its intellectual property.
Some recently issued patents and filed patent applications include:
o U.S. Patent No. 6,413,839 granted on July 2, 2002 entitled
"Semiconductor Device Separation" covers the device separation
technique for gallium nitride-based and other materials grown on
sapphire substrates, and
20
o U.S. Patent No. 6,197,121 granted on March 6, 2001 entitled "Chemical
Vapor Deposition Apparatus" covers material aspects of our current
reactor technology, and
o The 12 x 1.25 Gbps array transceiver project for VSR fiber optics
modules have generated eight patent applications to date.
EMCORE 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. 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
partitioning the non-essential flow of information between its different groups
and executing non-disclosure agreements with its employees, joint venture
partners, customers and suppliers.
As is typical in our industry, we have, from time to time, received, and
may continue to receive in the future, letters from third parties, asserting
patent rights or other intellectual property rights against certain of our
products and processes. None of the claims to date has resulted in the
commencement of any litigation against us. From time to time, EMCORE licenses
from third parties technology and patent rights to manufacture and sell its
products. For example, 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.
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 arsine. EMCORE has
in-house professionals to address compliance with applicable environmental and
health and safety laws and regulations.
If EMCORE's control systems are unsuccessful in preventing release of these
or other hazardous materials, EMCORE could experience a substantial interruption
of operations and could be subject to significant liability for clean-up and
other claims. On May 7, 2002, EMCORE received a warning letter from the US
Environmental Protection Agency regarding alleged failure in the Albuquerque
facility to maintain the paperwork required of a Large Quantity Generator as
required by the Resource Conservation and Recovery Act of 1976 (RCRA). EMCORE is
in the process of implementing a comprehensive program to address the concerns
raised by this letter. EMCORE believes that it is currently in compliance with
all applicable environmental laws, including RCRA, except such violations as
could not reasonably be expected to have a material effect on the financial
condition or results of operations of EMCORE.
Competition
- -----------
The semiconductor industry is intensely competitive and is characterized by
rapid technological change, price erosion and substantial foreign competition.
EMCORE faces actual and potential competition from a number of established
domestic and international compound semiconductor companies. Many of these
companies have greater engineering, manufacturing, marketing and financial
resources than we have. EMCORE competes with primarily
21
two competitors for sales of MOCVD systems: Aixtron GmbH and Nippon-Sanso K.K.
Ltd. EMCORE also faces competition from manufacturers that implement in-house
systems for their own use. We believe our systems segment currently enjoys a
favorable position in today's markets due to our pioneering technology and
engineering development breakthroughs that have provided our customers with a
level of process control, reliability and lower manufacturing costs formerly
unavailable in the MOCVD industry. For photovoltaics products, EMCORE primarily
competes with Boeing-Spectrolab, Sharp Electronics and RWE Solar. The primary
competitors for EMCORE's Electronic Materials wafer foundry include
Hitachi-Cable, Kopin Corporation and IQE. Competition is also strong in the
optical market due to the high potential market growth, which attracts both
larger and smaller competitors. EMCORE's principal competitors for sales of
VCSEL-related products include Honeywell, Inc. and Avalon Photonics for serial
optics and Agilent, Infineon and Stratos Lightwave for parallel optics. The
principal competitors for MR sensors are Honeywell, Inc., Matsushita Electric
Industrial Co. Ltd., Siemens AG Osterreich, Electrotechnik and Asahi Kasei
Electronic Co., Ltd.. The principal competitors for HB-LEDs and EMCORE's joint
venture with General Electric Lighting include LumiLeds Lighting, a joint
venture between Agilent Technologies and Philips Lighting, Siemens AG's Osram
GmbH subsidiary, Nichia Corporation and Toyoda Gosei Co., Ltd. In addition,
Epistar, Arima, UEC and other Asian based companies in recent years have begun
production of LEDs.
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. Furthermore, in the EU,
political and legal requirements encourage the purchase of EU-produced goods,
which can put EMCORE at a competitive disadvantage as against European
competitors.
There are substantial barriers to entry by new competitors across EMCORE's
product lines. These barriers include: the large number of existing patents,
time and costs to be incurred to develop products, technical difficulty in
manufacturing semiconductor products, lengthy sales and qualification cycles,
and difficulties in hiring and retaining skilled employees with the required
scientific and technical backgrounds. EMCORE believes that the primary
competitive factors in the markets in which EMCORE's products compete are yield,
throughput, performance, breadth of product line, product heritage, 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.
Investments
- -----------
In February 2002, EMCORE purchased $1.0 million of preferred stock of
Archcom Technology, Inc., a venture-funded, start-up optical networking
components company that designs, manufactures, and markets a series of high
performance lasers and photodiodes for datacom and telecom industries. EMCORE
does not exercise significant influence over financial and operating policies,
and the investment represents less than 20% of ownership. Therefore, EMCORE
accounts for this investment under the cost method of accounting.
Employees
- ---------
At September 30, 2002, EMCORE had 558 employees, including 350 employees in
manufacturing operations, 62 employees in research and development, 144
employees in sales, general and administration and 2 temporary employees. This
represented a decrease of 309 employees or 36% from September 30, 2001. Due to
dramatically reduced capital spending during the past year, EMCORE announced a
restructuring that included workforce reductions during fiscal 2002. The
workforce, all of whom were entitled to termination benefits, was reduced in
both of EMCORE's business segments. Management does not believe that the
restructuring will have a material impact on future revenues. Our ability to
attract and retain qualified personnel is essential to our continued success.
None of EMCORE's employees are covered by a collective bargaining agreement, nor
have we ever experienced any labor-related work stoppage. We believe our
employee relations are good.
22
Risk Factors
- ------------
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW. IF ANY OF THE
FOLLOWING RISKS ACTUALLY OCCURS, OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF
OPERATIONS COULD BE MATERIALLY AND ADVERSELY AFFECTED. WE CAUTION THE READER
THAT THESE RISK FACTORS MAY NOT BE EXHAUSTIVE. WE OPERATE IN A CONTINUALLY
CHANGING BUSINESS ENVIRONMENT, AND NEW RISK FACTORS EMERGE FROM TIME TO TIME. WE
CANNOT PREDICT SUCH NEW RISK FACTORS, AND WE CANNOT ASSESS THE EFFECT, IF ANY,
OF SUCH NEW RISK FACTORS ON OUR BUSINESSES OR THE EXTENT TO WHICH ANY FACTOR, OR
COMBINATION OF FACTORS, MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
PROJECTED IN ANY FORWARD-LOOKING STATEMENTS CONTAINED IN THIS REPORT.
ACCORDINGLY, FORWARD-LOOKING STATEMENTS SHOULD NOT BE RELIED UPON AS A
PREDICTION OF ACTUAL RESULTS. IN ADDITION, OUR MANAGEMENT'S ESTIMATES OF FUTURE
OPERATING RESULTS ARE BASED ON THE CURRENT COMPLEMENT OF BUSINESSES, WHICH IS
CONSTANTLY SUBJECT TO CHANGE AS MANAGEMENT IMPLEMENTS ITS FIX, SELL OR GROW
STRATEGY.
We May Continue To Incur Operating Losses.
We started operations in 1984 and as of September 30, 2002, we had an
accumulated deficit of $250.9 million. We incurred net losses of $129.8 million
in fiscal 2002, $12.3 million in fiscal 2001 and $25.5 million in fiscal 2000.
In addition, as a result of the continuing downturn in the economy, we expect
that overall revenues will remain flat, or at best, modestly increase in fiscal
2003 compared to fiscal 2002. While we have reduced our cost structure
substantially, we may continue to lose money. Many of our expenses, particularly
those relating to capital equipment, debt service and manufacturing overhead are
fixed. Accordingly, lower revenue causes our fixed production costs to be
allocated across reduced production volumes, which adversely affects our gross
margin and profitability. Therefore, we expect to continue to incur operating
losses until revenues increase. We cannot currently predict whether or when
demand will strengthen across our product lines or how quickly our customers
will consume their inventories of our products.
Reduced Customer Lead Times Means We Are Less Able To Forecast Revenues And, As
A Result, May Be Unable To Accurately Predict Growth And Manage Our Cost.
Several of our customers have reduced the lead times they give us when
ordering product from us. While this trend has enabled us to reduce inventory,
it also restricts our ability to forecast revenues. 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, results of operations and cash flows could be materially and
adversely affected.
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, India, Russia, Malaysia and Taiwan, may require pre-shipment
authorization from U.S. export control authorities, including the U.S.
Departments of Commerce and State. Authorization may be conditioned on end-use
restrictions. 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, results of operations and cash flows
from international sales.
Our photovoltaics business is particularly sensitive to export control
issues. All of our photovoltaic products are export-controlled and subject to
the jurisdiction of the U.S. Department of Commerce. In addition, many of our
potential customers are located in countries, like Russia, India and Argentina,
for which export licenses are required. Moreover, given the current global
political climate, obtaining export licenses may be more difficult and
time-consuming than in the past. Failure to obtain export licenses for
photovoltaic shipments could significantly reduce revenues of our
materials-related segment and could have a material adverse effect on our
financial condition, results of operations and cash flows.
23
We Have Substantial Debt And If We Are Unable To Generate Sufficient Cash Flow
Or Otherwise Obtain Funds, We May Not Be Able To Pay Our Debt And Other
Obligations.
In May 2001, we sold $175.0 million of convertible subordinated notes due
in 2006 in a private placement for resale to qualified institutional buyers.
Approximately, $161.7 million of these notes is currently outstanding. We also
have approximately $3.6 million of guarantee obligations in respect of the
GELcore joint venture. In addition, we may incur additional debt in the future.
This significant amount of debt could, among other things:
o make it difficult for us to make payments on the notes and any other
debt we may have;
o make it difficult for us to obtain any necessary future financing for
working capital, capital expenditures, debt service requirements or
other purposes;
o require us to dedicate a substantial portion of our cash flow from
operations to service our debt, which would reduce the amount of our
cash flow available for other purposes, including working capital and
capital expenditures;
o limit our flexibility in planning for, or reacting to, changes in our
business; and
o make us more vulnerable in the event of a further or continued
downturn in our business.
Furthermore, if our cash flow is inadequate to meet our obligations or we
are unable to generate sufficient cash flow or otherwise obtain funds necessary
to make required payments on the notes or our other obligations, we would be in
default under the terms thereof. Default under the note indenture would permit
the holders of the notes to accelerate the maturity of the notes and could cause
defaults under future indebtedness we may incur. Any such default would have a
material adverse effect on our business, prospects, financial condition, results
of operations and cash flows. In addition, we cannot assure you that we would be
able to repay amounts due in respect of the notes if payment of the notes were
to be accelerated following the occurrence of an event of default as defined in
the note indenture.
Our Success Depends On Our Ability To Introduce New Products On A Timely Basis.
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, systems and products. To remain competitive we must
continually introduce new and improved products as well as production systems
with higher capacity and better production yields. Furthermore, we have reduced
research and development spending in fiscal 2002, and we expect to reduce it
further in fiscal 2003, which could negatively impact our ability to introduce
new products. Our business, financial condition, results of operations and cash
flows 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 or do not
achieve sufficient market penetration; or
o our new products experience reliability or quality problems.
Shifts In Industry-wide Demands And Inventories Could Result In Significant
Inventory Write-downs.
The life cycles of some of our products depend heavily upon the life cycles
of the end products into which our products are designed. Products with short
life cycles require us to manage production and inventory levels closely. We
cannot assure investors that obsolete or excess inventories, which may result
from unanticipated changes in the estimated total demand for our products and/or
the estimated life cycles of the end products into which our products are
designed, will not affect us beyond the inventory charges that we have already
taken during fiscal year 2002.
24
The Time And Costs Of Developing New Products May Exceed Our Budget And Our
Products May Not Be Commercially Successful.
We have recently introduced a number of new products and expect to 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.
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, results of operations and cash flows could suffer if we incur budget
overruns or delays in our research and development efforts.
We May Engage In Acquisitions That May Harm Our Operating Results, Dilute Our
Shareholders And Cause Us To Incur Debt.
We may pursue acquisitions to acquire new technologies, products or service
offerings. Future acquisitions by us may involve the following:
o use of significant amounts of cash;
o potentially dilutive issuances of equity securities on
potentially unfavorable items; and
o incurrence of debt on potentially unfavorable terms, as well as,
amortization expenses related to other intangible assets.
In addition, acquisitions involve numerous risks, including:
o inability to achieve anticipated synergies;
o difficulties in the integration of the operations, technologies,
products and personnel of the acquired company;
o diversion of management's attention from other business concerns;
o risks of entering markets in which we have no or limited prior
experience; and
o potential loss of key employees of the acquired company or of
EMCORE.
From time to time, we have engaged in discussions with acquisition
candidates regarding potential acquisitions of product lines, technologies and
businesses. If acquisitions occur, we cannot be certain that our business,
operating results and financial condition will not be materially and adversely
affected.
With the Tecstar acquisition, EMCORE has fully integrated the production of
solar panels using EMCORE's solar cells. However, if EMCORE is unable to secure
contractual solar panel supply agreements for recently approved satellite
builds, EMCORE's revenues could be significantly reduced and it could have an
adverse effect on our financial condition, results of operations and cash flows
for the materials-related segment of our business.
Our Rapid Growth Places A Strain On Our Resources.
We have experienced rapid growth, even after giving effect to our recent
downsizing and restructuring. For example, in March 2002, we acquired Tecstar
located in City of Industry, California and hired approximately 80 former
Tecstar employees. 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 a joint venture in geographically distant locations, our
business, financial condition, results of operations and cash flows could be
materially and adversely affected.
25
Our Industry Is Rapidly Changing.
The compound semiconductor industry is changing rapidly due to, among other
things, continuous technological improvements in products and evolving industry
standards. This industry is marked by the continuous introduction of new
products and increased capacity for services similar to those provided by us.
Future technological advances in the compound semiconductor industry may result
in the availability of new products or increase the efficiency of existing
products. If a technology becomes available that is more cost effective or
creates a superior product, we may be unable to access such technology or its
use may involve substantial capital expenditures, which we may be unable to
finance. There can be no assurance that existing, proposed or as yet undeveloped
technologies will not render our technology less profitable or that we will have
available the financial and other resources necessary to compete effectively
against companies possessing such technologies. There can be no assurance that
we will be able to adapt to technological changes or offer competitive products
on a timely or cost effective basis.
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 and payments 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;
o price volatility in the compound semiconductor industry; and
o changes in product mix.
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 Partner, Who Has Control Of The Venture, 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 venture with General
Electric Lighting. A board of managers governs this joint venture with
representatives from both General Electric Lighting 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 this joint venture
without the agreement of our joint venture partner. If we are unable to agree on
important issues with the 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, results of operations and
cash flows.
We have devoted and will be required to continue to devote significant
funds and technologies to our joint venture to develop and enhance their
products. In addition, our joint venture 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 venture
is unsuccessful in developing and marketing their products, our business,
financial condition, results of operations and cash flows 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 how
each of us can make use of the joint venture's technology. One consequence of
these limitations is that in certain circumstances, such as a material default
by us or certain sales of our interest in the joint venture, we would not be
permitted to use the joint venture's technology to compete against General
Electric Lighting in the solid state lighting market.
26
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 33.0% of our revenues in fiscal 2002, 47.7% of our revenues in
fiscal 2001 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 in a
country or region in which our customers are located;
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 may be burdensome to
comply with; and
o potentially adverse tax consequences to our customers may make our
systems and devices not cost-competitive.
Our Operating Results Could Be Harmed If We Lose Access To Sole Or Limited
Sources Of Materials Or Services.
We currently obtain some components and services for our products from
limited or single sources. We generally do not carry significant inventories of
any raw materials. Because we often do not account for a significant part of our
vendors' business, we may not have access to sufficient capacity from these
vendors in periods of high demand. In addition, we risk having important
suppliers terminate product lines, change business focus or even go out of
business. If we were to change any of our limited or sole source vendors, we
would be required to re-qualify each new vendor. Re-qualification could prevent
or delay product shipments that could negatively affect our results of
operations. In addition, our reliance on these vendors may negatively affect our
production if the components vary in quality or quantity. If we are unable to
obtain timely deliveries of sufficient components of acceptable quality or if
the prices of components for which we do not have alternative sources increase,
our business, financial condition, results of operations and cash flows could be
materially and adversely affected.
Our Products Are Difficult To Manufacture And Our Production Could Be Disrupted
If We Are Unable To Avoid Manufacturing Difficulties.
We manufacture all of our wafers and devices in our manufacturing
facilities. 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. We have
experienced difficulties in achieving planned yields in the past, particularly
in pre-production and upon initial commencement of full production volumes,
which have adversely affected our gross margins. Because the majority of our
costs of manufacture are relatively fixed, the number of shippable devices per
wafer for a given product is critical to our financial results. Therefore, it is
critical for us to improve the number of shippable product per wafer and
increase the production volume of wafers in order to maintain and improve our
results of operations. Additionally, because we manufacture all of our products
at our facilities in Somerset, New Jersey, Albuquerque, New Mexico and City of
Industry, California, any interruption in manufacturing resulting from fire,
natural disaster, equipment failures or otherwise could materially and adversely
affect our business, financial condition, results of operations and cash flows.
27
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 between three to nine months, or longer, 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, results of operations and cash flows could be
materially and adversely affected.
Our historical and future budgets for operating expenses, capital
expenditures, operating leases and service contracts are based upon our
assumptions as to the anticipated market acceptance of our products. Because of
the lengthy lead time required for our product development and the changes in
technology that typically occur during such period, it is difficult to estimate
customer demand for a product accurately. If our products do not achieve
expected customer demand, our business, financial condition, results of
operation and cash flows could 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. 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 the extent
necessary to keep up with any expansion, our business, financial condition,
results of operations and cash flows may 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.
Reliance on trade secrets is only an effective business practice insofar as
trade secrets remain undisclosed and a proprietary product or process is not
reverse engineered or independently developed. We take certain measures to
protect our trade secrets, including executing non-disclosure agreements with
our employees, our joint venture partner, customers and suppliers. If parties
breach these agreements or the measures we take are not properly implemented, we
may not have an adequate remedy. Disclosure of our trade secrets or reverse
engineering of our proprietary products, processes or devices could materially
and adversely affect our business, financial condition, results of operations
and cash flows.
There is also no assurance that any patents will afford us commercially
significant protection of our technologies or that we will have adequate
resources to enforce our patents. We are actively pursuing patents on some of
our recent inventions. In addition, the laws of certain other countries may not
protect our intellectual property to the same extent as U.S. laws.
28
Our Failure To Obtain Or Maintain The Right To Use Certain Intellectual Property
May Adversely Affect Our Financial Results.
The compound semiconductor, optoelectronics, and fiber optic communications
industries are characterized by frequent litigation regarding patent and other
intellectual property rights. From time to time we have received and may receive
in the future, notice of claims of infringement of other parties' proprietary
rights and licensing offers to commercialize third party patent rights. Although
we are not currently involved in any litigation relating to our intellectual
property, there can be no assurance that:
o infringement claims (or claims for indemnification resulting from
infringement claims) will not be asserted against us or that such
claims will not be successful;
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;
o any patent owned by us will not be invalidated, circumvented or
challenged; or
o we will not be required to obtain licenses, the expense of which may
adversely affect our results of operations and profitability.
In addition, effective copyright and trade secret protection may be
unavailable or limited in certain foreign countries. Litigation, which could
result in substantial cost to us and diversion of our resources, may be
necessary to defend our rights or defend us against claimed infringement of the
rights of others.
Interruptions In Our Business And A Significant Loss Of Sales To Asia May Result
If Our Primary Asian Distributor Fails To Effectively Market And Service Our
Products.
We rely on a single marketing, distribution and service provider, Hakuto
Co. Ltd. to market and service many of our systems-related products in China and
Japan. Hakuto is one of our shareholders and until this year, Hakuto's president
was a member of our Board of Directors since 1997. We have distributorship
agreements with Hakuto which expire in March 2008 and give Hakuto exclusive
distribution rights for certain of our systems-related products in Japan and
China. 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, results of
operations and cash flows.
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, Jr., 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, gallium, phosphine and
arsine. If our control systems are unsuccessful in preventing a release of these
materials into the environment or other adverse environmental conditions 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, results of operations and cash flows.
29
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 EMCORE 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, 2001, our stock price has been as high
as $17.04 per share and as low as $0.98 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.
The Markets In Which We Compete Are Highly Competitive. An Increase In
Competition Would Limit Our Ability To Maintain Or Increase Our Market Share.
We face substantial competition from a number of companies, many of which
have greater financial, marketing, manufacturing and technical resources. Larger
competitors could spend more on research and development, which could give those
competitors an advantage in meeting customer demand. We expect that existing and
new competitors will improve the design of their existing products and will
introduce new products with enhanced performance characteristics. The
introduction of new products or more efficient production of existing products
by our competitors could result in price reductions and increases in expenses,
and reduce market acceptance of our products, which could diminish our market
share and gross margins.
30
Item 2. Properties
The following chart contains certain information regarding each of EMCORE's
principal facilities. Each of these facilities contains office space, marketing
and sales, and research and development space. EMCORE also leases office space
in Santa Clara, California, France and Taiwan.
(1) All leases have the option to be renewed by EMCORE, subject to inflation
adjustments.
Item 3. Legal Proceedings
We are involved in lawsuits, claims, investigations and proceedings that
arise in the ordinary course of business. There are no matters pending that we
expect to be material in relation to our business, consolidated financial
condition, results of operations or cash flows.
Item 4. Submission of matters to a vote of security holders
Not applicable.
31
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 two most recent fiscal
years.
high low
Fiscal year ended September 30, 2001 ---- ---
First Quarter................................. $55.38 $28.25
Second Quarter................................ $52.50 $20.00
Third Quarter................................. $44.13 $19.60
Fourth Quarter................................ $30.64 $7.69
Fiscal year ended September 30, 2002
First Quarter................................. $17.04 $7.67
Second Quarter................................ $16.97 $7.59
Third Quarter................................. $10.48 $3.60
Fourth Quarter................................ $6.00 $1.42
The reported closing sale price of EMCORE's common stock on December 20,
2002 was $2.40 per share. As of December 20, 2002, EMCORE had approximately
7,272 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.
On January 25, 2001, EMCORE purchased all of the outstanding shares of
Analytical Solutions, Inc. (ASI), a New Mexico corporation that provides failure
analysis and related services. In consideration for this purchase, EMCORE issued
a total of 40,775 common shares to the 14 former ASI shareholders in a private
placement under Section 4(2) of the Securities Act. In May 2002, Emcore sold all
of the outstanding shares of ASI back to one of its original shareholders in
return for a promissory note in the principal amount of approximately $3.0
million and bearing interest at 5.71% per annum. This note matures on May 3,
2008 and is to be repaid through the issuance of credits against future ASI
services over the term of the note.
Equity Compensation Plan Information
The following table sets forth, as of September 30, 2002, the number of
securities outstanding under each of EMCORE's stock option plans, the weighted
average exercise price of such options, and the number of options available for
grant under such plans.
32
Item 6. Selected Financial Data
The following selected consolidated financial data for the five most recent
fiscal years ended September 30, 2002 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 Annual Report. The Statement of
Operations data set forth below with respect to fiscal years 2002, 2001 and 2000
and the Balance Sheet data as of September 30, 2002 and 2001 are derived from
EMCORE's audited financial statements included elsewhere in this document. The
Statement of Operations data for fiscal years 1999 and 1998 and the Balance
Sheet data as of September 30, 2000, 1999 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.
Significant transactions that affect the comparability of EMCORE's
operating results and financial condition:
- 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. In connection with
this transaction, EMCORE recorded a non-recurring, non-cash charge of
$19.5 million for acquired in-process research and development.
- Effective October 1, 2000, EMCORE changed its revenue recognition
policy to defer the portion of revenue related to installation and
final acceptance until such installation and final acceptance are
completed. This change was made in accordance with the implementation
of U.S. SEC Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements (SAB 101). Previously, EMCORE had recognized 100
percent of revenue for products at such time as the product
specifications had been met and the title and risks and rewards of
ownership had transferred to the customer since EMCORE has
historically completed such installation services successfully and
since such services have required minimal costs to complete. The
effect of this change is reported as the cumulative effect of a change
in accounting principle in the year ended September 30, 2001. This net
effect reflects the deferral as of October 1, 2000 of $3.6 million of
revenue and accrued installation expense previously recognized. EMCORE
recognized the revenue included in the cumulative effect adjustment
during the year ended September 30, 2001.
- In March 2002, EMCORE acquired Tecstar. The total cash purchase price,
including related acquisitions costs, was approximately $25.1 million.
The results of operations from this acquisition have been included in
EMCORE's consolidated results of operations from the acquisition
closing date.
- During fiscal 2002, EMCORE recorded pre-tax charges to income totaling
$51.2 million, which included restructuring and impairment charges of
$36.7 million and other charges of $14.5 million, as described below:
1. Due to dramatically reduced capital spending during fiscal 2002,
EMCORE proceeded with a restructuring program, consisting of the
realignment of all engineering, manufacturing and sales/marketing
operations, as well as workforce reductions. Included in the
provision for restructuring and impairment charges were severance
charges of $1.9 million related to employee termination costs for
330 employees.
2. EMCORE also recorded $34.8 million of non-cash impairment charges
related to its fixed assets. Of this charge, $11.3 million
related to certain manufacturing assets of which EMCORE plans to
dispose. The remainder of the impairment charge related
principally to EMCORE's Electronic Materials and Devices and
Optical Devices and Components groups.
3. During the second quarter of fiscal year 2002, EMCORE recorded a
$11.9 million inventory write-down charge to cost of revenues and
a $2.6 million additional reserve for doubtful accounts.
33
34
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This report contains forward-looking statements that involve risks and
uncertainties. These statements relate to our future plans, objectives,
expectations and intentions. These statements may be identified by the use of
words such as "expects", "anticipates", "intends", "plans" and similar
expressions. Our actual results could differ materially from those discussed in
these statements. Factors that could contribute to these differences include
those discussed under "Risk Factors", "Forward-Looking Statements" and elsewhere
in this report. The cautionary statements made in this report should be read as
being applicable to all forward-looking statements wherever they appear in this
report. This discussion should be read in conjunction with the Consolidated
Financial Statements, including the related notes.
EMCORE Corporation designs, develops and manufactures compound
semiconductor wafers and devices and is a leading developer and manufacturer of
the MOCVD systems and manufacturing processes used to fabricate compound
semiconductor wafers, devices and modules. Compound semiconductors are composed
of two or more elements and usually consist of a metal, such as gallium,
aluminum or indium, and another element such as arsenic, phosphorus or nitrogen.
Many compound semiconductors have unique physical properties that enable
electrons to move through them at least four times faster than through
silicon-based devices and are therefore well suited to serve the growing need
for efficient, high performance electronic systems.
EMCORE is currently the only fully integrated commercial supplier of
compound semiconductor equipment and products. We offer a comprehensive
portfolio of products and systems for the broadband, wireless communications and
solid state lighting markets. We have developed extensive fiber optic module
design, solar panel design, materials science expertise, process technology and
MOCVD production system manufacturing expertise to address our customers' needs.
Customers can take advantage of our vertically integrated solutions approach by
purchasing custom-designed wafers and devices from us, or by manufacturing their
own devices in-house using one of our MOCVD production systems configured to
their specific needs. Our products and systems enable our customers to cost
effectively introduce new and improved high performance products to the market
faster in high volumes.
Growth in our industry had been driven by the widespread deployment of
fiber optic networks, introduction of new wireless networks and services,
build-out of satellite communication systems, increasing use of more power
efficient lighting sources, increasing use of electronics in automobiles and
emergence of advanced consumer electronic applications. In addition, until
recently the demands for higher volumes of a broad range of higher performance
devices have resulted in manufacturers increasingly outsourcing their needs for
compound semiconductor wafers and devices. We believe our expertise in materials
science and process technology provides us with a competitive advantage to
manufacture compound semiconductor wafers, devices and modules in high volumes.
EMCORE has two reportable operating segments: the systems-related business
and the materials-related business. The systems-related business is our
TurboDisc(R) MOCVD product line, which designs, develops and manufactures
systems and manufacturing processes. Revenues for the systems-related business
are derived primarily from sales of TurboDisc systems, as well as spare parts,
services and related products. The materials-related business is comprised of
our Photovoltaics, Optical Devices and Components and Electronic Materials and
Devices product lines. Revenues for the materials-related business are derived
primarily from the sales of solar cell products (including epitaxial material
(epi), cells, covered interconnect solar cells (CICs) and panels), VCSELs and
VCSEL-based transceiver and transponder modules, RF materials (including
heterojunction bipolar transistors (HBTs) and enhancement-mode pseudomorphic
high electron mobility transistors (pHEMTS)), MR sensors and process development
technology. The segments reported are the segments of EMCORE for which separate
financial information is available and are evaluated regularly by executive
management in deciding how to allocate resources and in assessing performance.
35
Systems-Related
EMCORE is a leading provider of compound semiconductor technology processes
and MOCVD production systems. We believe that our proprietary TurboDisc
deposition technology makes possible one of the most cost-effective production
processes for the commercial volume manufacture of high-performance compound
semiconductor wafers and devices, which are integral to solid state lighting and
global communications applications. Although overall demand for MOVCD systems
appears to have declined significantly in fiscal 2002, we believe our overall
market share has recently increased as a result of aggressive market penetration
of new and higher-end products. For example, EMCORE recently introduced its
Enterprise(R) 300LDM MOCVD production tool designed to achieve high quality
materials and high yields for consumer electronic applications. This new tool
produces devices for several applications including DVD and CD-ROMs, which
allows for high capacity data storage. Engineered specifically for the high
volume production of long wavelength infrared and visible lasers, VCSELs and
InP-based electronic materials, EMCORE's 300LDM provides customers with
run-to-run process control and is designed to accomplish excellent uniformity of
thickness, doping and composition of epitaxial layers. In addition, continuing
EMCORE's standing as the world leader in GaN production platforms, EMCORE
introduced the E300 GaNzilla(TM), the most powerful tool available for the
production of high brightness blue and green LEDs. It offers the highest
throughput in the industry for the growth of GaN materials. As a result of
providing customers with MOCVD production systems that enable the lowest cost of
ownership for the manufacture of compound semiconductor materials, EMCORE
experienced an increase in average selling prices from an average of $1.2
million in fiscal 2001 to $1.4 million in fiscal 2002.
Materials-Related
EMCORE offers a broad array of compound semiconductor wafers and devices,
including photovoltaic products, optical devices and components and electronic
materials and devices.
Photovoltaics. Solar panels are typically the largest single cost component
of a satellite. Our compound semiconductor solar cells have achieved
industry-leading efficiencies. Solar cells provide the electrical power for
a satellite and their efficiency dictates the amount of power and bears
upon the weight, launch costs and potential revenues of the satellite. In
March 2002, EMCORE acquired certain assets, including equipment and
intellectual property, of the Applied Solar Division of Tecstar, Inc. and
its subsidiary, Tecstar Power Systems, Inc. (this acquired business is
referred to herein as "Tecstar"). With the Tecstar acquisition, EMCORE has
fully integrated the production of solar panels using EMCORE's solar cells.
The Tecstar acquisition has augmented EMCORE's capability to penetrate the
satellite communications sector and enables EMCORE to provide satellite
manufacturers with proven integrated satellite power solutions that
considerably improve satellite economics. Satellite manufacturers and solar
array integrators can now rely on EMCORE as a single supply source that
meets all of their satellite power needs. EMCORE is currently completing
the process of qualifying its advanced solar cells with Tecstar's proven
solar panel processes for LEO and GEO orbits. The combination of Tecstar's
demonstrated success with well-known space programs and EMCORE's
industry-leading solar cell technology should enable EMCORE to dramatically
improve satellite economics. With well-established partnerships with major
satellite manufacturers and a proven qualification process, EMCORE believes
it will play an important role in the evolution of telecommunications and
data communications around the world.
Optical Devices and Components. The proliferation of the Internet and the
growth in volume of data being sent over local and wide area networks has
placed a strain on the networking infrastructure. The demand for increased
bandwidth has resulted in a need for both faster and more expansive
networks. EMCORE's family of VCSELs and VCSEL array transceiver and
transponder products, as well as our photodiode array components, serve the
high-speed data communications network and telecommunications markets,
including the Gigabit Ethernet, Fibre Channel, VSR OC-192, the emerging VSR
OC-768 and related markets. EMCORE's strategy is to manufacture the
otherwise high cost optical components and subassemblies in-house, using
our proprietary technologies, to reduce the overall cost of our transceiver
and transponder modules. EMCORE plans to capitalize on its oxide VCSEL
manufacturing platform and expertise, by providing the industry with 1
Gbps, 2.5 Gbps, 10 Gbps (OC-192), and 40 Gbps (OC-768) solutions through
single-channel serial, multi-channel parallel or wavelength-divisional
multiplexing approaches. Leading electronic systems manufacturers are
integrating VCSELs into a broad array of end-market applications including
Internet access, digital cross-connect telecommunications switches,
Infiniband optical bus, and fiber
36
optic switching and routing, such as Gigabit Ethernet and SAN. EMCORE's
optical devices and components are designed to help solve the data bottle
necking problems for distances under 300 meters in central office and
point-of-presence environments and provide a cost effective alternative to
more costly comparable serial interconnects.
Electronic Materials and Devices. RF materials are compound semiconductor
materials used in wireless 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 AlGaAs pHEMT materials including E-mode devices
that are used for power amplifiers for next generation wireless
infrastructure such as 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. EMCORE also manufactures MR sensors that are compound
semiconductor devices that possess sensing capabilities. MR sensors improve
vehicle performance through more accurate control of engine and crank shaft
timing, which allows for improved spark plug efficiency and reduced
emissions. In January 1997, EMCORE initiated shipments of compound
semiconductor MR sensors using technology licensed to EMCORE from General
Motors. This license allows EMCORE to manufacture and sell products using
this technology. Through fiscal 2002, EMCORE had delivered more than 15
million devices to General Motors Powertrain for crank and cam speed and
position sensing applications.
HB-LED Joint Venture
In January 1999, General Electric Lighting and EMCORE formed GELcore
(GELcore), a joint venture to develop and market HB-LED lighting products.
HB-LEDs are solid state compound semiconductor devices that emit light and are
used in miniature packages for everyday applications such as indicator lights on
automobiles, traffic lights, computers and other electronic equipment. 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. Under
the terms of the joint venture agreement, EMCORE has a 49% non-controlling
interest in the GELcore venture and accounts for its investment under the equity
method of accounting.
Segment Data and Related Information
In fiscal 2002, EMCORE completed the installation of sophisticated
accounting and manufacturing software, which assists management with the
allocation of operating expenses by segment. For comparative purposes,
management compiled fiscal 2001 operating expenses by segment for disclosure
below. Fiscal 2000 results include only financial data relative to revenues and
gross margin. Operating expenses in fiscal 2000 were not allocated between the
two business segments. The accounting policies of the operating segments are the
same as those described in the summary of accounting policies; see footnote 2 to
the financial statements. There are no intercompany sales transactions between
the two operating segments.
37
Unaudited information about reported segments is as follows:
EMCORE's reportable operating segments are businesses that offer different
products. The reportable segments are each managed separately because they
manufacture and distribute distinct products and services. The table below
outlines EMCORE four different product lines:
Management is committed to reducing EMCORE's cost structure by focusing on
lowering the breakeven points for each of its product lines. During fiscal 2002,
EMCORE proceeded with a restructuring program, consisting of the realignment of
all engineering, manufacturing and sales/marketing operations, as well as
workforce reductions. Included in the provision for restructuring and impairment
charges recorded in fiscal 2002 were severance and fringe benefit charges
related to employee termination costs for 330 employees. We expect this program
to lower our expenditures by approximately $4.9 million per quarter in fiscal
2003. EMCORE also essentially eliminated all outside contractor and temporary
employees and significantly reduced overall expenditures for materials, software
and capital assets. As part of the ongoing effort to cut costs, EMCORE
implemented a program to focus research and development efforts on projects that
can be expected to generate returns within one year. As a result, EMCORE has
been able to reduce overall research and development costs without, we believe,
jeopardizing future revenue opportunities. These combined actions should result
in a cost reduction of approximately $6.0 million to $8.0 million per quarter in
fiscal 2003, which we believe should enable us to achieve our goal of having
positive cash flow from operations by the end of fiscal 2003, assuming revenues
in fiscal 2003 are consistent with revenues in fiscal 2002.
Customers
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, photodetectors, RF and
electronic materials, solar cells, HB-LEDs and MR sensors. EMCORE's customer
base includes many of the largest semiconductor, telecommunications, consumer
goods and computer manufacturing companies in the world. Some of our customers
include Agere Systems, Inc., Agilent Technologies Ltd., Anadigics Inc.,
Boeing-Spectrolab, Corning, Inc., General
38
Motors Corp., Hewlett Packard Co., Honeywell International, Inc., Infineon
Technologies AG, Loral Space & Communications Ltd., LumiLeds Lighting (a joint
venture between Philips Lighting and Agilent Technologies), Motorola, Inc.,
Nortel Networks Corp., Siemens AG's Osram GmbH subsidiary, TriQuint
Semiconductor, Inc., Tyco, Inc., many of the largest electronics manufacturers
in Japan and a number of Taiwanese, Chinese and Korean companies. EMCORE also
sells to a number of other customers whose names cannot be identified because of
confidentiality obligations.
During fiscal 2002, revenues from Motorola represented 12.9% of total
revenue. In addition, Loral Space and Boeing-Spectrolab also accounted for a
considerable portion of the revenues in the materials-related segment. In fiscal
2001, no customers accounted for more than 10% of total revenue. In fiscal 2000,
revenues from three customers, Hakuto Co., Ltd. (EMCORE's distributor which
represents sales to several Japanese customers), Loral Space and Communications
Ltd., and a customer with whom EMCORE signed a non-disclosure agreement
accounted for greater than 10% of total revenue.
EMCORE has generated a significant portion of its sales to customers
outside the United States. EMCORE anticipates that international sales will
continue to account for a significant portion of revenues. Historically, EMCORE
has received most 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 consolidated revenues by
geographic region:
In fiscal 2002, sales to Asia declined dramatically primarily because of a
large decrease in capital spending by our customers and a consequent decrease in
demand for our systems-related products.
Application of Critical Accounting Policies
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reported period. Actual results could differ
from those estimates. The significant accounting policies, which we believe are
the most critical to the understanding of reported financial results, include
the following:
o Accounts Receivable - EMCORE maintains allowances for doubtful
accounts for estimated losses resulting from the inability of our
customers to make required payments. If the financial condition of our
customers were to deteriorate, additional allowances may be required.
o Inventories - Inventories are stated at the lower of cost or market
with cost being determined using the first-in, first-out (FIFO)
method. EMCORE provides estimated inventory allowances for obsolete
and excess inventory based on assumptions about future demand and
market conditions. If future demand or market conditions are different
than those projected by management, adjustments to inventory
allowances may be required.
o Impairment of Long-lived Assets - EMCORE reviews long-lived assets for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable; see footnote 5
to the financial statements. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment recognized is
measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less cost
to sell.
39
o Revenue Recognition and Cumulative Effect of a Change in Accounting
Principle.
Revenues from systems-related sales are recognized upon shipment where
product has met customer's specifications and when the title and
ownership have passed to the customer. EMCORE's billing terms on
system sales generally include a holdback of 10-20 percent on the
total purchase price subject to completion of the installation and
final acceptance process at the customer site. Effective October 1,
2000, EMCORE changed its revenue recognition policy to defer this
portion of revenue related to installation and final acceptance until
such installation and final acceptance has been completed. This change
was made in accordance with the implementation of U.S. Securities and
Exchange Commission Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" (SAB 101). Since EMCORE had
historically completed such installation services successfully which
required minimal costs to complete, EMCORE previously recognized 100%
of revenue and accrued estimated installation costs for systems upon
shipment as the product specifications had been met and title and
ownership had transferred to the customer. The effect of this change
was reported as the cumulative effect of a change in accounting
principle in the year ended September 30, 2001. This net effect
reflected the deferral as of October 1, 2000 of $3.6 million of
revenue and accrued installation expense previously recognized. EMCORE
recognized the revenue included in the cumulative effect adjustment
during the year ended September 30, 2001.
Revenues from materials-related sales are recognized when the product
meets the customer's specifications and when title and ownership have
passed to the customer. For new applications of EMCORE's products
where performance cannot be assessed prior to meeting specifications
at the customer's site, no revenue is recognized until such
specifications are met.
As a result of the acquisition of Tecstar in 2002, EMCORE records
revenues from solar panel contracts using the percentage-of-completion
method where the elapsed time from award of a contract to completion
of performance tends to exceed 6 months. Revenue is recognized in
proportion to actual costs incurred compared to total anticipated
costs expected to be incurred for each contract. If estimates of costs
to complete long-term contracts indicate a loss, a provision is made
for the total loss anticipated. EMCORE has numerous contracts that are
in various stages of completion. Such contracts require estimates to
determine the appropriate cost and revenue recognition. EMCORE uses
all available information in determining dependable estimates of the
extent of progress towards completion, contract revenues and contract
costs. Estimates are revised as additional information becomes
available.
EMCORE's research contracts require the development or evaluation of
new materials applications and generally have a duration of 6 to 48
months. Contracts with a duration of six months or less are accounted
for on the completed contract method. Contracts of greater than 6
months contain interim milestones, reporting and invoicing
requirements and are billed on the type of contract in place. For
"Cost-Plus-Fixed-Fee" research contracts with the Government, EMCORE
recognizes revenue to the extent of costs incurred plus the estimated
gross profit as stipulated in such contracts, based upon contract
performance. For other long-term contracts, EMCORE recognizes the
revenues and associated costs on these contracts as each major
milestone in the contract is met. A contract is considered complete
when all significant costs 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 Government contracts amounted to
approximately $3.3 million, $2.5 million and $1.9 million for the
years ended September 30, 2002, 2001 and 2000, respectively.
EMCORE also provides service for its products. Revenue from time and
materials based service arrangements is recognized as the service is
performed. Revenue from service contracts is recognized ratably over
the term of such service contracts. Service revenue is insignificant
for all periods presented.
In rare occurrences, at the customer's written request, EMCORE enters
into bill and hold transactions whereby title transfers to the
customer, but the product does not ship until a specified later date.
EMCORE recognizes revenues associated with the sale of product from
bill and hold arrangements when the product is complete, ready to
ship, and all bill and hold criteria have been met.
The impact of and any associated risks relating to these policies on our
business operations is discussed above and throughout Management's Discussion
and Analysis of Financial Condition and Results of Operations where such
policies affect our reported and expected financial results.
40
Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 143 "Accounting for Asset
Retirement Obligations". SFAS No. 143 addresses financial accounting and
reporting for obligations and costs associated with the retirement of tangible
long-lived assets. EMCORE is required to implement SFAS No. 143 in fiscal year
2003. Although EMCORE currently is still evaluating the impact that the adoption
of SFAS No. 143 will have on its results of operations, financial position and
cash flows, 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 October 2001, the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 replaces SFAS No. 121
and establishes accounting and reporting standards for long-lived assets to be
disposed of by sale. This standard applies to all long-lived assets, including
discontinued operations. SFAS No. 144 requires that those assets be measured at
the lower of carrying amount or fair value less cost to sell. SFAS No. 144 also
broadens the reporting of discontinued operations to include all components of
an entity with operations that can be distinguished from the rest of the entity
that will be eliminated from the ongoing operations of the entity in a disposal
transaction. EMCORE is required to implement SFAS No. 144 in fiscal year 2003.
Although EMCORE currently is still evaluating the impact that the adoption of
SFAS No. 144 will have on its results of operations, financial position and cash
flow, 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 April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
4, 44 and 64, Amendment of FASB Statement 13, and Technical Corrections". SFAS
No. 145 rescinds the provisions of SFAS No. 4 that requires companies to
classify certain gains and losses from debt extinguishments as extraordinary
items, eliminates the provisions of SFAS No. 44 regarding transition to the
Motor Carrier Act of 1980 and amends the provisions of SFAS No. 13 to require
that certain lease modifications be treated as sale leaseback transactions. The
provisions of SFAS No. 145 related to lease modification are effective for
transactions occurring after May 15, 2002. The provisions of SFAS No. 145
related to classification of debt extinguishment are effective for fiscal years
beginning after May 15, 2002. Commencing October 1, 2002, EMCORE is classifying
debt extinguishment costs within income from operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 nullifies Emerging
Issues Task Force (EITF) No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)". The principal difference between SFAS No.
146 and EITF No. 94-3 relates to its requirements for recognition of a liability
for a cost associated with an exit or disposal activity. SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. Under EITF No. 94-3, a liability for
an exit cost was recognized at the date of an entity's commitment to an exit
plan. SFAS No. 146 is effective for exit and disposal activities that are
initiated after December 31, 2002. Management believes that adopting this
statement will not have a material impact on the financial position, results of
operations or cash flows of EMCORE.
41
Results of Operations
- ---------------------
The following table sets forth the condensed consolidated Statements of
Operations Data of EMCORE expressed as a percentage of total revenues for the
fiscal years ended September 30, 2002, 2001 and 2000:
Comparison of Fiscal Years Ended September 30, 2002 and 2001
Revenues. EMCORE's revenues decreased 52% or $96.8 million from $184.6
million for the year ended September 30, 2001 to $87.8 million for the year
ended September 30, 2002. Excluding results of Tecstar, which was acquired
mid-year in March 2002, revenues for fiscal 2002 would have decreased an
additional $10.3 million from the prior year. The decline in revenues was
primarily attributable to decreased demand for TurboDisc systems. International
sales accounted for 33% of revenues in fiscal year 2002 and 48% of revenues in
fiscal year 2001. Due to continuing adverse general market conditions and
weakened demand for certain of our products, we expect that overall revenues
will remain flat, or at best, modestly increase in fiscal 2003 compared to
fiscal 2002.
For the years ended September 30, 2002 and 2001, systems-related revenues
decreased 73% or $95.2 million from $131.1 million reported in the prior year to
$35.9 million. Sales in the systems-related segment represented 41% and 71% of
EMCORE's total revenues in fiscal 2002 and 2001, respectively. The number of
MOCVD production systems shipped during the year decreased 81% from 89 systems
in fiscal 2001 to 17 systems in fiscal 2002. The current economic climate has
reduced customer capital spending dramatically during the past year,
particularly in the data and telecommunication sectors, where EMCORE has
traditionally sold a significant portion of systems. Component and service
revenue in fiscal 2002 of $7.3 million decreased slightly as expected when
compared to $9.0 million earned in the prior year. Based on EMCORE's backlog of
system orders, management expects systems-related revenues to increase in fiscal
2003 compared to fiscal 2002 in absolute dollars and as a percentage of overall
revenues.
42
For the years ended September 30, 2002 and 2001, materials-related revenues
decreased 3% or $1.6 million from $53.5 million reported in the prior year to
$51.9 million. Sales in the materials-related segment represented 59% and 29% of
EMCORE's total revenues in fiscal 2002 and 2001, respectively. On a product line
basis, sales of photovoltaic products increased $3.4 million or 17%, electronic
materials and devices decreased $0.5 million or 2%, and optical devices and
components decreased $4.5 million or 33%, from the prior year. Excluding results
of Tecstar, materials-related revenues decreased 22% or $11.9 million from $53.5
million reported in the prior year.
Photovoltaic products include the sale of epi wafers, solar cells, CICs and
solar panels. Sales in the photovoltaic group represented 27% and 11% of
EMCORE's total revenues in fiscal 2002 and 2001, respectively. The increase in
annual revenue is attributable to the additional sales due to the acquisition of
Tecstar. Excluding results of Tecstar, photovoltaics revenues for fiscal 2002
would have decreased $6.9 million or 34% from the prior year. This decrease is
attributable to the continued weakness in satellite infrastructure spending. Due
to continuing adverse general market conditions and weakened demand for certain
of our products, we expect that overall revenues will remain flat, or at best,
modestly increase in fiscal 2003 compared to fiscal 2002.
Sales of electronic materials and devices include RF materials and MR
sensors and represented 22% and 11% of EMCORE's total revenues in fiscal 2002
and 2001, respectively. RF materials are compound semiconductor materials that
enable circuits and devices to operate at radio frequencies and are primarily
used in cellular phones and base stations. Motorola was the largest customer for
the materials-related segment and revenues from Motorola represented
approximately 13% of EMCORE's total fiscal 2002 revenues. EMCORE broadened its
relationship with Motorola by selling them two EMCORE systems, which may be used
for both research and development and as an internal source of production for
electronic materials. In light of the fact that Motorola has developed the
capacity to supply a portion of their needs internally and due to the delayed
introduction of InGaP HBTs into GSM handsets, RF materials related revenues
decreased each quarter in fiscal 2002. This market is highly competitive, raw
materials are extremely expensive and average selling prices have been declining
over the past two years. As a result of continued weakness in market conditions
for wireless infrastructure spending, we expect RF materials related revenue to
decline in fiscal 2003 from fiscal 2002 and become less significant or strategic
to overall EMCORE revenues. Revenues from our mature MR sensors product line
decreased $1.8 million from the prior year as a result of the phase out of
certain automotive models at General Motors. Our contract with General Motors
expires in fiscal 2004 and we may stop production of MR sensors in connection
therewith.
Sales of optical devices and components include revenues from VCSELs,
photodetectors and VCSEL-based array transceivers and transponders. Sales of
optical devices and components represented 10% and 7% of EMCORE's total revenues
in fiscal 2002 and 2001, respectively. Although, sales of these devices did not
contribute significantly to revenue in either fiscal year, EMCORE continues to
work with customers to optimize our designs in packaged solutions. We expect
these products to generate more revenues in fiscal 2003 as our customers
introduce new product lines into which are products are integrated.
Revenue from Government contracts relating to electronic materials and
devices increased $0.8 million or 33% from $2.5 million in fiscal 2001 to $3.3
million in fiscal 2002. We anticipate that Government contract revenue will
increase during fiscal 2003 as a result of new contract awards received in the
second half of fiscal 2002.
Gross Profit (Loss). EMCORE's experienced a gross loss of $0.6 million for
the year ended September 30, 2002 compared to a gross profit of $70.1 million
for the year ended September 30, 2001, representing a decrease of 101%, or $70.7
million. For the years ended September 30, 2002 and 2001, gross margins
decreased from positive 38% to negative 1%. The decline in gross profit occurred
in both the systems-related and materials-related segments. Write-off charges of
approximately $11.9 million which related to excess and obsolete inventory
contributed to the lower gross margins. With the downturn in the markets served
by EMCORE, management evaluated its inventory levels in light of actual and
forecasted revenue. The inventory charge related to reserves for excess
inventory that EMCORE believed it was carrying as a result of the market
conditions. EMCORE continues to monitor its reserves. Excluding the inventory
charge, gross profit in fiscal 2002 would have been $11.3 million, or 13% of
revenues. We anticipate that gross profit will continue to be affected in the
near term as a result of flat sales. Exclusive of non-recurring charges,
management expects gross margins to increase slightly in fiscal 2003 as a result
of savings from fiscal 2002 restructuring efforts.
43
For the years ended September 30, 2002 and 2001, EMCORE experienced a gross
profit of $10.2 million on systems-related revenues compared to a gross profit
of $58.4 million, representing a decrease of 83%, or $48.2 million. For the year
ended September 30, 2002 and 2001, gross margins for systems-related revenues
decreased to 29% from 45%. This decrease is due primarily to the decrease in
sales of MOCVD production systems and specific inventory write-down charges of
$4.2 million recorded in the second quarter. Excluding the inventory charge,
gross profit in fiscal 2002 would have been $14.4 million, or 40% of revenues.
For the years ended September 30, 2002 and 2001, EMCORE experienced a gross
loss of $10.9 million on materials-related revenues compared to a gross profit
of $11.7 million, representing a decrease of 193%, or $22.6 million. For the
years ended September 30, 2002 and 2001, gross margins for materials-related
revenues decreased to a negative 21% from a positive 22%. The most significant
factors contributing to this decrease in gross margin were: a) unabsorbed
overhead costs associated with lower revenues due to customer delayed product
launches; b) specific inventory write-down charges of $7.7 million recorded in
the second quarter; and c) higher than expected costs incurred integrating
Tecstar's California operations with EMCORE's New Mexico's operations. During
fiscal 2002, EMCORE developed significantly more photovoltaic and optical
devices and components than in fiscal 2001. The inventory charge was related to
reserves for excess raw material and finished goods inventory that EMCORE
believed it was carrying as a result of market conditions; see footnote 5 to the
financial statements. Regarding unabsorbed expenses, EMCORE has a significant
amount of fixed expenses relating to capital equipment and manufacturing
overhead in its new facilities where materials-related products are
manufactured. By December 2001, EMCORE's manufacturing facilities for its
materials-related businesses were all completed and placed into service with the
anticipation of expanding market prospects. Lower than forecasted
materials-related revenues caused these fixed expenses to be allocated across
reduced production volumes, adversely affecting gross profit and margins.
Excluding the inventory charge, gross loss in fiscal 2002 would have been $3.1
million, or negative 6% of revenues.
Selling, General and Administrative. EMCORE's selling, general and
administrative expenses (SG&A) decreased 5%, or $1.6 million, from $29.8 million
for the year ended September 30, 2001 to $28.2 million for the year ended
September 30, 2002. The decrease was primarily related to a $0.9 million
salary-related fiscal 2001 accrual reversed in fiscal 2002 and restructuring
savings, involving headcount reduction and a cutback on marketing expenditures,
offset slightly by a $2.6 million additional reserve for doubtful accounts. As a
percentage of revenue, SG&A increased from 16% for the year ended September 30,
2001 to 32% in 2002 as a result of lower revenues that more than offset
decreased SG&A expenses. Exclusive of further non-recurring charges, management
expects SG&A in fiscal year 2003 in absolute dollars to decrease as a result of
implemented cost control and restructuring programs.
Goodwill Amortization. In June 2001, SFAS No. 142, "Goodwill and Other
Intangible Assets" was approved by the FASB. Amortization of goodwill, including
goodwill recorded in past business combinations and indefinite lived intangible
assets, would cease upon adoption of this statement. EMCORE adopted SFAS No. 142
on October 1, 2001 and completed its transition test for impairment during the
quarter ended March 31, 2002. No impairment adjustment was deemed necessary by
management. Had SFAS No. 142 been in effect for the year ended September 30,
2001, EMCORE's net loss would have decreased by $1.1 million or $0.03 per share.
Research and Development. EMCORE's research and development expenses (R&D)
decreased 23%, or $12.4 million, from $53.4 million for the year ended September
30, 2001 to $41.0 million for the year ended September 30, 2002. This decrease
was due primarily to the deferral or elimination of certain non-critical
research and development projects. As a percentage of revenue, R&D increased
from 29% for the twelve months ended September 30, 2001 to 47% in 2002 as a
result of lower revenues. Exclusive of non-recurring charges, management expects
R&D in fiscal year 2003 in absolute dollars to continue to decrease as a result
of implemented cost control and restructuring programs.
Impairment and Restructuring Charges. EMCORE recorded pre-tax charges to
income totaling $36.7 million in fiscal 2002 representing both impairment and
restructuring charges.
Restructuring Charges
- ---------------------
During fiscal 2002, EMCORE proceeded with a restructuring program
consisting of the realignment of all engineering, manufacturing and
sales/marketing operations, as well as workforce reductions. Included in the
provision for impairment and restructuring charges were severance and fringe
benefit charges of $1.9 million related to employee termination costs for 330
employees. The workforce was reduced in both of EMCORE's business segments, all
of which were entitled to termination benefits. Of the severance charges
recorded in the second
44
quarter, $1.1 million related to EMCORE's systems-related business segment and
$0.8 million related to the materials-related business segment.
Headcount at September 30, 2002 was 558 employees, a reduction of 309
employees, or 36%, since September 2001. Management does not believe that the
restructuring will have a material impact on future revenues. As of September
30, 2002, substantially all cash outlays for the employee termination costs have
been paid.
Impairment Charges
- ------------------
During the second quarter of fiscal year 2002, EMCORE recorded $34.8
million of non-cash impairment charges related to its fixed assets. Of this
charge, $11.3 million related to certain manufacturing assets that are to be
disposed. Management has committed to a plan to dispose of these assets, through
either abandonment or sale. Such decision was made based upon the continued
downturn in the economic environment that affected certain business units
causing these manufacturing assets to become idle. EMCORE expects to complete
its disposal of these assets by mid fiscal 2003. The carrying value of these
assets before write-down to net realizable value was $11.5 million.
The remainder of the impairment charge related principally to EMCORE's
Electronic Materials and Devices and the Optical Devices and Component groups.
During the past two years, EMCORE had completed new facilities for these
businesses in anticipation of expanding market prospects. Business forecasts
updated in the second quarter indicated significantly diminished prospects for
these units, primarily based on the downturn in the telecommunications industry.
As a result of these circumstances, management determined that the long-lived
assets of these groups should be assessed for impairment. Based on the outcome
of this assessment, pursuant to SFAS 121, "Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to be Disposed Of", EMCORE recorded
a $23.5 million non-cash asset impairment charge to fixed assets in the second
quarter of 2002. This entire charge related to the materials-related segment.
The fair values of the assets were determined based upon a calculation of the
present value of the expected future cash flows to be generated by these
facilities.
Of the impairment charges recorded in the second quarter, $4.0 million
related to EMCORE's systems-related business segment and $30.8 million related
to the materials-related business segment.
Interest Income/Expense. For the year ended September 30, 2002, net
interest changed $8.1 million from net interest income of $2.0 million to net
interest expense of $6.1 million. The decrease in net interest income is a
result of interest expense being incurred on the $175 million 5% convertible
subordinated notes due in May 2006 and by lower interest rates on decreased
investments in marketable securities.
Other Expense. In March 2001, a net gain of $5.9 million was recorded
related to the settlement of litigation. In August 2001, EMCORE received
approximately 2.0 million shares of common stock in Uniroyal Technology
Corporation (UTCI) from the sale of the Uniroyal Optoelectronics LLC (UOE) joint
venture to UTCI and recorded a net gain of approximately $10.0 million. EMCORE's
basis in the UTCI stock was $7.10 per share or approximately $14.0 million. In
the quarter ended December 31, 2001, management determined that an
other-than-temporary impairment of the UTCI investment existed. Accordingly,
EMCORE took a charge of $13.3 million to establish a new cost basis, which was
recorded as other expense in the consolidated statement of operations. In August
2002, UTCI and its subsidiaries filed voluntary petitions for reorganization
under Chapter 11 of the U.S. Bankruptcy Code. Given this event, EMCORE wrote
down its remaining investment in UTCI to zero. The total loss associated with
the UTCI investment totaled $14.0 million in fiscal 2002.
During fiscal 2002, EMCORE invested approximately $0.4 million in Qusion
Technologies, Inc. (Qusion), a Princeton, New Jersey start-up specializing in
monolithic integration of optical components. During the later part of fiscal
2002, it was determined that significant additional investment would be required
to continue development of Qusion's products. In September 2002, EMCORE and its
other investment partners determined they would no longer provide such
additional funding. Consequently, Qusion decided to close the business. EMCORE
purchased all of Qusion's intellectual property and wrote off its entire
investment.
Equity in Net Loss of Unconsolidated Affiliates. Because EMCORE has not had
a controlling economic and voting interest in its joint ventures, EMCORE
accounts for these joint ventures under the equity method of accounting. For
fiscal 2002, EMCORE incurred a net loss of $2.7 million related to the GELcore
joint venture. For fiscal 2001, EMCORE incurred a net loss of $7.4 million
related to the UOE joint venture, which was sold in August 2001, and a $4.9
million net loss related to the GELcore joint venture.
45
Income Taxes. As a result of its losses, EMCORE did not incur any income
tax expense in either of the years ended September 30, 2002 and 2001. As of
September 30, 2002, EMCORE has net operating loss carryforwards for tax purposes
of approximately $212.0 million that expire in the years 2003 through 2022. In
fiscal 2002, $1.7 million of net operating loss carryforwards expired and
approximately $0.6 million are due to expire in fiscal 2003.
Comparison of Fiscal Years Ended September 30, 2001 and 2000
Revenues. EMCORE's revenues increased 76.7%, or $80.1 million, from $104.5
million for fiscal 2000 to $184.6 million for fiscal 2001. This increase in
revenues was attributable to both systems-related and materials-related
segments. Systems-related revenues increased 99.3%, or $65.4 million, from $65.8
million to $131.1 million. The number of MOCVD production systems shipped
increased 89.4% from 47 in fiscal year 2000 to 89 in fiscal year 2001.
Materials-related revenues increased 38.1%, or $14.8 million, from $38.7 million
to $53.5 million. Sales of solar cells increased 10%, pHEMT and HBT epitaxial
wafers increased 27% and VCSELs increased 302%, from the prior year. As a
percentage of revenues, systems-related and materials-related revenues accounted
for 71.0% and 29.0%, respectively, for fiscal 2001 and 63.0% and 37.0%,
respectively, for fiscal 2000. International sales accounted for 47.7% of
revenues for fiscal 2001 and 38.6% of revenues for fiscal 2000. The dollar
increase in domestic sales was a direct result of significant materials-related
design wins at several large U.S. semiconductor and telecommunication companies.
Effective October 1, 2000, EMCORE changed its revenue recognition policy to
defer the portion of revenue related to installation and final acceptance until
such installation and final acceptance are completed. This change was made in
accordance with the implementation of SAB 101. Since EMCORE had historically
completed such installation services successfully which required minimal costs
to complete, EMCORE previously recognized 100% of revenue for products upon
shipment as the product specifications had been met and the title and risks and
rewards of ownership had transferred to the customer. The effect of this change
was reported as the cumulative effect of a change in accounting principle in
fiscal 2001. This net effect reflected the deferral as of October 1, 2000 of
$3.6 million of revenue and accrued installation expense previously recognized.
EMCORE recognized the revenue included in the cumulative effect adjustment
during fiscal 2001.
Gross Profit. EMCORE's gross profit increased 62.3%, or $26.9 million, from
$43.2 million for fiscal 2000 to $70.1 million for fiscal 2001. Gross profit
earned on systems-related revenues increased 108.5%, or $30.4 million, from
$28.0 million to $58.4 million. This increase is due primarily to the rise in
production system sales, discussed above, and improved manufacturing
efficiencies. Component and service related revenues continue to increase as
EMCORE's production system installed base now exceeds 400 MOCVD systems. Gross
profit earned on materials-related revenues decreased 23.1%, or $3.5 million,
from $15.2 million to $11.7 million. EMCORE has a significant amount of fixed
expenses relating to capital equipment and manufacturing overhead in its new
facilities. EMCORE experienced a reduction in materials-related revenues during
the third and fourth quarters of fiscal 2001, which caused these fixed expenses
to be allocated across reduced production volumes, adversely affecting gross
profit.
Selling, General and Administrative. SG&A increased by 35.7%, or $7.9
million, from $22.0 million for fiscal 2000 to $29.9 million for fiscal 2001. A
significant portion of the increase was due to increased commission payments as
a result of higher sales and headcount increases in marketing and sales
personnel to support domestic and foreign markets and new product lines. As a
percentage of revenue, SG&A decreased from 21.0% for fiscal 2000 to 16.2% for
fiscal 2001.
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 fiscal 2000, which reflected a full year of
amortization. During the three months ended December 31, 2000, EMCORE amortized
$0.7 million, the remaining portion of this goodwill. In January 2001, EMCORE
purchased ASI/TSI and allocated approximately $3.1 million to goodwill that was
being amortized using the straight-line method over a period of five years, or
$155,000 per quarter. As of September 30, 2001, EMCORE had approximately $2.7
million of net goodwill remaining. In June 2001, SFAS No. 142, "Goodwill and
Other Intangible Assets" was approved by the FASB. Amortization of goodwill,
including goodwill recorded in past business combinations and indefinite lived
intangible assets, ceased upon EMCORE's adoption of this statement on October 1,
2001.
46
Research and Development. R&D increased 63.3%, or $20.7 million, from $32.7
million in fiscal 2000 to 53.4 million in fiscal 2001. As a percentage of
revenue, recurring R&D decreased from 31.3% for fiscal 2000 to 28.9% for fiscal
2001. 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 R&D.
Interest Income/Expense. For fiscal 2001, net interest changed $2.4 million
from net interest income of $4.5 million to net interest income of $2.0 million.
The decrease in net interest income was a result of additional interest expense
being incurred from the 5% convertible subordinated notes due in 2006 coupled
with lower interest rates on investments in marketable securities.
Other Income. In March 2001, a net gain of $5.9 million was recorded
related to the settlement of litigation. In August 2001, EMCORE sold its
minority ownership position in the UOE joint venture to UTCI and received
approximately 2.0 million shares of UTCI common stock as consideration for this
transaction. The net gain from the sale approximated $10.0 million.
Equity in Net Loss of Unconsolidated Affiliates. Because EMCORE did 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
fiscal 2001, EMCORE incurred a net loss of $7.4 million related to the UOE joint
venture and a $4.9 million net loss related to the GELcore joint venture. For
fiscal 2000, EMCORE incurred a net loss of $7.8 million related to the UOE 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 2000 and 2001.
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 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. See Item 6. Selected Financial Data for a listing of
certain significant transactions that affect the comparability of EMCORE's
operating results and financial condition.
47
Statements of Operations
48
Liquidity and Capital Resources
Working Capital
At September 30, 2002, EMCORE had working capital of approximately $111.8
million, which included $84.2 million in cash, cash equivalents and marketable
securities. Working capital at September 30, 2001 and 2000 was $201.2 million
and $111.6 million, respectively. EMCORE has funded operations to date through
product sales, sales of equity, subordinated debt and borrowings under revolving
credit facilities. Significant transactions include:
o In May 2001, EMCORE issued $175.0 million of 5% convertible
subordinated notes due in May 2006, at par, less issuance costs of
$6.2 million;
o In March 2000, EMCORE raised approximately $127.5 million, net of
issuance costs, from an addition equity offering;
o In June 1999, EMCORE raised approximately $52.0 million, net of
issuance costs, from a secondary public offering.
Net Cash Provided By (Used For) Operations
In fiscal 2001, net cash used for operations totaled $46.6 million, a
decrease of $54.2 million from fiscal 2000, when net cash provided by operating
activities was $7.6 million. In fiscal 2002, net cash used for operations
improved 28% from fiscal 2001 to approximately $33.6 million. This net cash
usage related primarily to the combined operations of EMCORE's Photovoltaics and
Optical Devices and Components product lines. The most significant factors
contributing to this operating cash usage were: a) unabsorbed overhead costs
associated with lower revenues due to customer delayed product launches; b)
higher than expected costs incurred integrating Tecstar's California operations
with EMCORE's New Mexico's operations; c) the push-out and cancellation of
orders from certain customers forced EMCORE to hold onto higher inventory levels
than expected; and d) extended payment terms delayed cash receipts from certain
sales.
Included in EMCORE's net loss of $129.8 million were non-cash items of
$51.2 million related to impairment and restructuring charges, $14.4 million of
realized losses from the write-down of investments in UTCI and Qusion and $16.9
million in depreciation and amortization expenses; see footnotes 2 and 5 to the
financial statements. During fiscal 2002, EMCORE proceeded with a restructuring
program, consisting of the realignment of all engineering, manufacturing and
sales/marketing operations, as well as workforce reductions. This restructuring
should result in a cost reduction of approximately $6.0 million to $8.0 million
per quarter in fiscal 2003, which we believe should enable us to achieve our
goal of having positive cash flow from operations by the end of fiscal 2003,
assuming revenues in fiscal 2003 are consistent with revenues in fiscal 2002.
Net Cash Used For Investment Activities
In fiscal 2002, 2001 and 2000, net cash used for investment activities
totaled $0.6 million, $117.0 million and $104.6 million, respectively.
o Capital expenditures - Capital expenditures for fiscal 2002 were $6.2
million compared with $89.3 million in fiscal 2001 and $33.8 million
in fiscal 2000. As part of our ongoing effort to conserve cash,
EMCORE's capital expenditures in fiscal 2002 consisted almost solely
of sustaining capital purchases. In fiscal 2001 and 2000, capital
expenditures were used primarily for capacity expansion at both New
Jersey and New Mexico manufacturing facilities. EMCORE estimates
sustaining capital expenditures in fiscal 2003 to be approximately
$6.0 million.
o Acquisitions - EMCORE acquired Tecstar in fiscal 2002 for a total cash
purchase price of approximately $25.1 million and in January 2001,
EMCORE purchased ASI/TSI both located in Albuquerque, New Mexico that
used $1.7 million of cash; see footnote 4 to the financial statements.
o Investments - In February 2002, EMCORE purchased $1.0 million of
preferred stock of Archcom Technology, Inc., a venture-funded,
start-up optical networking components company that designs,
manufactures, and markets a series of high performance lasers and
photodiodes for datacom and telecom industries; see footnote 2 to the
financial statements. Investments in EMCORE's joint ventures in fiscal
2002, 2001 and 2000 were approximately $2.0 million, $6.3 million and
$19.9 million, respectively; see
49
footnote 6 to the financial statements. In fiscal 2003, EMCORE expects
to invest approximately $5.0 million into the GELcore joint venture.
o Repayment of loan - In November 2001, EMCORE received payment from
UTCI of $5.0 million for a related party loan made in August 2001; see
footnote 13 to the financial statements.
o Marketable securities - In fiscal 2002, EMCORE's net investment in
marketable securities decreased by $28.7 million in order to fund
operations. EMCORE is expected to continue to fund operations by
liquidating marketable securities.
Net Cash Provided By Financing Activities
Net cash provided by financing activities for fiscal 2002 amounted to
approximately $5.7 million of which $4.2 million related to proceeds received
from the exercise of common stock warrants which were due.
Financing Transactions
In May 2001, EMCORE issued $175.0 million aggregate principal amount of its
5% convertible subordinated notes due in May 2006. Net proceeds received by
EMCORE, after costs of issuance, were approximately $168.8 million. Interest is
payable in arrears semiannually on May 15 and November 15 of each year, which
began on November 15, 2001. The notes are convertible into EMCORE common stock
at a conversion price of $48.76 per share, subject to certain adjustments, at
the option of the holder. The notes may be redeemed at EMCORE's option, on or
after May 20, 2004 at specific redemption prices. There are no financial
covenants related to these notes. For the years ended September 30, 2002 and
2001, interest expense relating to the notes approximated $8.8 million and $3.5
million, respectively. In the event of default, the principal amount of the
notes would automatically become immediately due and payable. Each of the
following would constitute an event of default under the notes:
o failure to pay principal or premium, if any, on any note when due,
whether or not prohibited by the subordination provision of the notes;
o failure to pay any interest on any note when due if such failure
continues for 30 days, whether or not prohibited by the subordination
provision of the notes;
o failure to perform any other covenant required of us in the note if
such failure continues for 60 days after notice is given in accordance
with the notes;
o failure to pay the purchase price of any note when due, whether or not
prohibited by the subordination provisions of the notes;
o failure to provide timely notice of a change in control; and
o certain event in bankruptcy, insolvency or reorganization of EMCORE.
After any such acceleration, but before a judgement or decree based on
acceleration, the holders of a majority in aggregate principal amount of the
notes may, under certain circumstances, rescind and annul such acceleration.
In May 2002, the Board of Directors authorized EMCORE from time to time to
repurchase a portion of the notes in one or more open market transactions, in
accordance with certain guidelines. In December 2002, EMCORE purchased, in
multiple transactions, $13.3 million principal amount of the notes at prevailing
market prices, for an aggregate of approximately $6.4 million. As a result of
the transaction, EMCORE will record a gain from operations of approximately $6.6
million after netting unamortized debt issuance costs of approximately $0.3
million. In accordance with the provision of SFAS No. 145, EMCORE will record
gains from early debt extinguishment within income from operations.
In March 2001, EMCORE entered into a $20.0 million Amended and Restated
Revolving Loan and Security Agreement with a bank. There have been no borrowings
under this facility since inception and management had no plans to use this
facility. EMCORE canceled this facility in May 2002.
In fiscal 2000, EMCORE guaranteed 49% of GELcore's unsecured three-year
$7.5 million debt facility obtained from GE Canada, Inc. which matures in August
2003.
As of September 30, 2002, EMCORE had a remaining 2.0 million shares of
common stock available on a filed shelf registration statement with the SEC.
50
Contractual Obligations
EMCORE's contractual obligations over the next five years are summarized in
the table below:
(1) Due in May 2006. In December 2002 EMCORE repurchased $13.3 million of
convertible subordinated notes. At December 2002, total long-term debt
outstanding was $161.7 million.
Conclusion
EMCORE believes that its current liquidity should be sufficient to meet its
cash needs for working capital through fiscal year 2003. However, if cash
generated from operations and cash on hand are not sufficient to satisfy
EMCORE's liquidity requirements, EMCORE will seek to obtain additional equity or
debt financing. Additional funding may not be available when needed or on terms
acceptable to EMCORE. If EMCORE is required to raise additional financing and if
adequate funds are not available or not available on acceptable terms, the
ability to continue to fund expansion, develop and enhance products and
services, or otherwise respond to competitive pressures may be severely limited.
Such a limitation could have a material adverse effect on EMCORE's business,
financial condition, results of operations and cash flow.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Although EMCORE occasionally enters into transactions denominated in
foreign currencies, the total amount of such transactions is not material.
Accordingly, fluctuations in foreign currency values would not have a material
adverse effect on our future financial condition or results of operations.
51
Item 8. Financial Statements and Supplementary Data
The accompanying notes are an integral part of these
consolidated financial statements.
52
The accompanying notes are an integral part of these
consolidated financial statements.
53
The accompanying notes are an integral part of these
consolidated financial statements.
54
55
Reference is made to footnote 8 - Debt Facilities - for disclosure relating
to certain non-cash warrant issuance.
Reference is made to footnote 11 - Shareholders' Equity - for disclosure
relating to certain non-cash equity transactions.
The accompanying notes are an integral part of
these consolidated financial statements.
56
EMCORE Corporation
Notes to Consolidated Financial Statements
As of September 30, 2002 and 2001 and
for the years ended September 30, 2002, 2001 and 2000
NOTE 1. Description of Business
EMCORE Corporation (EMCORE) offers a versatile portfolio of compound
semiconductor products for the broadband and wireless communications and
solid-state lighting markets. EMCORE's integrated solutions 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 world of
compound semiconductors. EMCORE's solutions include: optical components for high
speed data and telecommunications; solar cells and solar panels for global
satellite communications; electronic materials for high bandwidth communications
systems, such as Internet access and wireless telephones; MOCVD production
systems for the growth of GaN, InGaN, AlGaN, GaAs, AlGaAs, InP, InGaP, InGaAlP,
InGaAsP and SiC epitaxial materials used in numerous applications, including
data and telecommunications modules, cellular telephones, solar cells and
HB-LEDs.
NOTE 2. Summary of Significant Accounting Policies
Principles of Consolidation.
The consolidated financial statements include the accounts of EMCORE and its
wholly owned subsidiaries. The equity method of accounting is used for
unconsolidated affiliates where EMCORE 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.
EMCORE considers all highly liquid short-term investments purchased with an
original maturity of three months or less to be cash equivalents.
Marketable Securities. EMCORE accounts for its investment in marketable
securities as available-for-sale securities in accordance with the provisions of
Statement of Financial Accounting Standards (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 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, 2002, EMCORE's available-for-sale marketable
securities were primarily in debt securities. The fair value of the debt
securities approximated cost. At September 30, 2002, EMCORE's debt securities
consisted of $20.2 million of corporate debt securities, $18.0 million of
municipal bonds and $3.3 million of asset-backed securities. The contractual
maturities for all available-for-sale debt securities will occur during fiscal
2003. EMCORE recorded approximately $0.2 million of net realized gains on sales
of available-for-sale debt securities during fiscal 2002.
In August 2001, EMCORE sold its minority ownership position in its joint venture
with Uniroyal Technology Corporation (UTCI) in exchange for approximately 2.0
million shares of UTCI common stock. EMCORE's cost basis in the UTCI stock was
$7.10 per share or approximately $14.0 million. In the quarter ended December
31, 2001, management determined that an other-than-temporary impairment of the
UTCI investment existed. Accordingly, EMCORE took a charge of $13.3 million to
establish a new cost basis, which was recorded as other expense in the
consolidation statement of operations. In August 2002, UTCI and its subsidiaries
filed voluntary petitions for reorganization under Chapter 11 of the U.S.
Bankruptcy Code. Given this event, EMCORE wrote down its remaining investment in
UTCI to zero. The total loss associated with the UTCI investment totaled $14.0
million in fiscal 2002.
57
Concentration of Credit Risk.
Financial instruments, which may subject EMCORE to a concentration of credit
risk, consist primarily of cash and cash equivalents, marketable securities and
accounts receivable. EMCORE's cash and cash equivalents consist primarily of
money market funds. Marketable securities consist primarily of high-grade debt
securities and other investments at interest rates that vary by security. EMCORE
has maintained cash balances with certain financial institutions in excess of
the $100,000 insured limit of the Federal Deposit Insurance Corporation. EMCORE
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, EMCORE generally requires a down payment on large
equipment orders and international sales are generally secured by irrevocable
letters of credit from commercial banks. EMCORE maintains an allowance for
doubtful accounts based upon the credit risk of specified customers, historical
trends and other information. EMCORE's credit losses generally have not exceeded
expectations. Although such losses have typically been within management's
expectations to date, there can be no assurance that such allowances will
continue to be adequate.
Fair Value of Financial Instruments.
The carrying amounts of cash and cash equivalents, account receivables and
payables and accrued expenses approximate fair value because of the short
maturity of these instruments. The carrying amount of long-term receivables
approximates fair value, as the effective rates for these instruments are
comparable to market rates at year-end. The carrying amount of marketable
securities and investments approximates fair market value. As of September 30,
2002, the fair market value of the convertible subordinated debenture
approximated $81 million. This fair value was estimated based on the quoted
market prices for the same or similar debt issuance.
Inventories.
Inventories are stated at the lower of cost or market with cost being determined
using the first-in, first-out (FIFO) method. Costs included in inventories
consist of materials, labor and manufacturing overhead which are related to the
purchase and production of inventories.
Property, Plant and Equipment.
Property, plant and equipment are stated at cost. Significant improvements and
betterments are capitalized if they extend the useful life of the asset. Routine
maintenance and repairs are expensed when incurred. Plant and equipment are
depreciated 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 leased 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.
EMCORE reviews long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable; see footnote 5. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell.
Goodwill.
All goodwill relates to EMCORE's materials-related business. In January 2001,
EMCORE purchased Analytical Solutions, Inc. and Training Solutions, Inc.
(ASI/TSI) for approximately $4.0 million and allocated approximately $3.1
million to goodwill. At September 30, 2001, after nine months of amortization,
EMCORE had approximately $2.7 million of net goodwill remaining. In June 2001,
SFAS No. 142, "Goodwill and Other Intangible Assets" was approved by the
Financial Accounting Standards Board (FASB). Amortization of goodwill, including
goodwill recorded in past business combinations and indefinite lived intangible
assets, would cease upon adoption of this statement. EMCORE adopted SFAS No. 142
on October 1, 2001 and completed its transition test for impairment during the
quarter ended March 31, 2002. No impairment adjustment was deemed necessary by
management. In May 2002, EMCORE sold ASI/TSI back to the original owner; see
footnote 4.
In March 2002, EMCORE acquired certain assets, including equipment and
intellectual property, of the Applied Solar Division of Tecstar, Inc. and its
subsidiary, Tecstar Power Systems, Inc. (this acquired business is referred to
herein as "Tecstar") and allocated approximately $20.4 million to goodwill; see
footnote 4. Had SFAS No. 142 been in effect for the years ended September 30,
2001 and 2000, EMCORE's net loss for those periods would have decreased by $1.1
million or $0.03 per share and by $4.4 million or $0.14 per share, respectively.
58
Other Intangible Assets.
Other intangible assets include patents, acquired workforce and other
intangibles. In January 2001, EMCORE allocated $275,000 to acquired workforce in
connection with the ASI/TSI acquisition. At September 30, 2001, after
amortization, net acquired workforce totaled $238,000. On October 1, 2001,
EMCORE reclassified this amount to goodwill in accordance with SFAS No. 142.
Patent costs include costs related to obtaining product patents that enhance and
maintain EMCORE's intellectual property position. Patent costs, net of
accumulated amortization, totaled $1.3 million as of September 30, 2002 and
2001. Patent costs are 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 $450,000, $346,000 and $219,000 for the years
ended September 30, 2002, 2001, and 2000, respectively. In March 2002, in
connection with the Tecstar acquisition, EMCORE allocated $1.9 million of the
purchase price towards intellectual property. This intellectual property is
being amortized on a straight-line basis over five years and total amortization
expense in fiscal 2002 approximated $206,000.
Other Assets. Included in other assets are various deferred costs, related party
receivables and an investment. The deferred costs are primarily related to $6.2
million of financing costs associated with the May 2001 issuance of $175.0
million convertible subordinated notes due in 2006. These financing costs are
being amortized on a straight-line basis over the five-year life of the notes.
Total capitalized financing costs, net of amortization, were $4.4 million and
$5.7 million at September 30, 2002 and 2001, respectively. Total amortization
expense related to these financing costs amounted to approximately $1.3 million
and $0.5 million for the years ended September 30, 2002 and 2001, respectively.
Related party receivables at September 30, 2002 primarily consisted of a $3.3
million loan and accrued interest due from the Chief Executive Officer issued in
fiscal 2001 and a $3.0 million six-year promissory note due from ASI/TSI issued
in fiscal 2002; see footnotes 4 and 13. In August 2001, EMCORE made a $5.0
million aggregate principal amount bridge loan to UTCI, the proceeds of which
were to be used by UTCI for working capital and other corporate purposes. In
November 2001, UTCI repaid the loan and accrued interest in cash. In February
2002, EMCORE invested $1.0 million in Archcom Technology, Inc., a
venture-funded, start-up optical networking components company that designs,
manufactures, and markets a series of high performance lasers and photodiodes
for datacom and telecom industries. EMCORE does not exercise significant
influence over financial and operating policies, and the investment represents
less than 20% of ownership. Therefore, EMCORE accounts for this investment under
the cost method of accounting.
Customer Deposits.
This represents deposits on orders, predominately systems-related.
Product Warranty Costs.
EMCORE's products generally carry a one-year warranty. A reserve is established
at the time of sale to cover estimated warranty costs; see footnote 7. EMCORE's
estimate of warranty cost is based on its history of warranty repairs. While
most new products are extensions of existing technology, the estimate could
change if new products require a significantly different level of repair than
similar products have required in the past. Total warranty expense amounted to
approximately $2.3 million, $1.0 million and $0.5 million for the years ended
September 30, 2002, 2001 and 2000, respectively. The increase in warranty
expense in fiscal 2002 was attributable to new products sold primarily related
to EMCORE's Photovoltaics product line.
Research and Development.
Research and development costs are charged to expense as incurred.
Income Taxes.
Income taxes are accounted for using the asset and liability method under which
deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
basis of existing assets and liabilities and operating losses and tax credit
carry forwards. The effect on deferred taxes for a change in tax rates is
recognized as income in the period that includes the enactment date. Management
provides valuation allowances against the deferred tax asset for amounts which
are considered "more likely than not" to be realized.
59
Stock Options.
EMCORE accounts for its employee stock option-based compensation plans under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations. Accordingly, no compensation expense is
recognized for stock option-based compensation unless the quoted market price of
the stock at the grant date is in excess of the amount the employee must pay to
acquire the stock. EMCORE has not recognized any stock option-based compensation
expense in any of the periods presented. Pro forma disclosures of net earnings
and earnings per share, as if the fair value based method of accounting had been
applied, are presented in footnote 12.
Revenue Recognition and Cumulative Effect of a Change in Accounting Principle.
Revenues from systems-related sales are recognized upon shipment where product
has met customer's specifications and when the title and ownership have passed
to the customer. EMCORE's billing terms on system sales generally include a
holdback of 10-20 percent on the total purchase price subject to completion of
the installation and final acceptance process at the customer site. Effective
October 1, 2000, EMCORE changed its revenue recognition policy to defer this
portion of revenue related to installation and final acceptance until such
installation and final acceptance has been completed. This change was made in
accordance with the implementation of U.S. Securities and Exchange Commission
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
(SAB 101). Since EMCORE had historically completed such installation services
successfully which required minimal costs to complete, EMCORE previously
recognized 100% of revenue and accrued estimated installation costs for systems
upon shipment as the product specifications had been met and title and ownership
had transferred to the customer. The effect of this change was reported as the
cumulative effect of a change in accounting principle in the year ended
September 30, 2001. This net effect reflected the deferral as of October 1, 2000
of $3.6 million of revenue and accrued installation expense previously
recognized. EMCORE recognized the revenue included in the cumulative effect
adjustment during the year ended September 30, 2001.
Revenues from materials-related sales are recognized when the product meets the
customer's specifications and when title and ownership have passed to the
customer. For new applications of EMCORE's products where performance cannot be
assessed prior to meeting specifications at the customer's site, no revenue is
recognized until such specifications are met.
As a result of the acquisition of Tecstar in 2002, EMCORE records revenues from
solar panel contracts using the percentage-of-completion method where the
elapsed time from award of a contract to completion of performance tends to
exceed 6 months. Revenue is recognized in proportion to actual costs incurred
compared to total anticipated costs expected to be incurred for each contract.
If estimates of costs to complete long-term contracts indicate a loss, a
provision is made for the total loss anticipated. EMCORE has numerous contracts
that are in various stages of completion. Such contracts require estimates to
determine the appropriate cost and revenue recognition. EMCORE uses all
available information in determining dependable estimates of the extent of
progress towards completion, contract revenues and contract costs. Estimates are
revised as additional information becomes available.
EMCORE's research contracts require the development or evaluation of new
materials applications and generally have a duration of 6 to 48 months.
Contracts with a duration of six months or less are accounted for on the
completed contract method. Contracts of greater than 6 months contain interim
milestones, reporting and invoicing requirements and are billed on the type of
contract in place. For "Cost-Plus-Fixed-Fee" research contracts with the
Government, EMCORE recognizes revenue to the extent of costs incurred plus the
estimated gross profit as stipulated in such contracts, based upon contract
performance. For other long-term contracts, EMCORE recognizes the revenues and
associated costs on these contracts as each major milestone in the contract is
met. A contract is considered complete when all significant costs 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
Government contracts amounted to approximately $3.3 million, $2.5 million and
$1.9 million for the years ended September 30, 2002, 2001 and 2000,
respectively.
EMCORE also provides service for its products. Revenue from time and materials
based service arrangements is recognized as the service is performed. Revenue
from service contracts is recognized ratably over the term of such service
contracts. Service revenue is insignificant for all periods presented.
60
In rare occurrences, at the customer's written request, EMCORE enters into bill
and hold transactions whereby title transfers to the customer, but the product
does not ship until a specified later date. EMCORE recognizes revenues
associated with the sale of product from bill and hold arrangements when the
product is complete, ready to ship, and all bill and hold criteria have been
met.
EMCORE accounts for shipping and handling under the provision of EITF 00-10,
"Accounting for Shipping and Handling Fees and Costs". This EITF requires that
all amounts billed to a customer in a sales transaction related to shipping and
handling be classified as revenues. The related costs associated with shipping
and handling are included as a component of cost of revenues.
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 may differ from those estimates.
EMCORE's most significant estimates relate to accounts receivable allowances,
inventory valuation reserves, the valuation of goodwill, intangibles and other
long-lived assets, warranty accruals and revenue recognition when utilizing the
percentage-of-completion method.
Comprehensive Income.
SFAS No. 130, "Reporting Comprehensive Income", establishes standards for
reporting and display of comprehensive income and its components in financial
statements. It requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in the
financial statement that is displayed with the same prominence as other
financial statements. Comprehensive income consists of net earnings, the net
unrealized gains or losses on available for sale marketable securities and
foreign currency translation adjustments and is presented in the consolidated
statements of shareholders' equity.
Currency Translation.
Assets and liabilities of EMCORE's Taiwan operations are translated from
Taiwanese new dollars into U.S. dollars at the rate of exchange in effect at the
balance sheet date. Revenues and expenses are translated at average exchange
rates prevailing during the year. Resulting translation adjustments are
reflected in shareholders' equity as a component of comprehensive income or
loss.
Recent Financial Accounting Pronouncements.
In August 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations". SFAS No. 143 addresses financial accounting and reporting for
obligations and costs associated with the retirement of tangible long-lived
assets. EMCORE is required to implement SFAS No. 143 in fiscal year 2003.
Although EMCORE currently is still evaluating the impact that the adoption of
SFAS No. 143 will have on its results of operations, financial position and cash
flows, 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 October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 replaces SFAS No. 121 and
establishes accounting and reporting standards for long-lived assets to be
disposed of by sale. This standard applies to all long-lived assets, including
discontinued operations. SFAS No. 144 requires that those assets be measured at
the lower of carrying amount or fair value less cost to sell. SFAS No. 144 also
broadens the reporting of discontinued operations to include all components of
an entity with operations that can be distinguished from the rest of the entity
that will be eliminated from the ongoing operations of the entity in a disposal
transaction. EMCORE is required to implement SFAS No. 144 in fiscal year 2003.
Although EMCORE currently is still evaluating the impact that the adoption of
SFAS No. 144 will have on its results of operations, financial position and cash
flow, management believes that adopting this statement will not have a material
impact on the financial position, results of operations or cash flows of EMCORE.
61
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements 4,
44 and 64, Amendment of FASB Statement 13, and Technical Corrections". SFAS No.
145 rescinds the provisions of SFAS No. 4 that requires companies to classify
certain gains and losses from debt extinguishments as extraordinary items,
eliminates the provisions of SFAS No. 44 regarding transition to the Motor
Carrier Act of 1980 and amends the provisions of SFAS No. 13 to require that
certain lease modifications be treated as sale leaseback transactions. The
provisions of SFAS No. 145 related to lease modification are effective for
transactions occurring after May 15, 2002. The provisions of SFAS No. 145
related to classification of debt extinguishment are effective for fiscal years
beginning after May 15, 2002. Commencing October 1, 2002, EMCORE is classifying
debt extinguishment costs within income from operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS No. 146 nullifies Emerging Issues Task
Force (EITF) No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)". The principal difference between SFAS No. 146 and EITF No.
94-3 relates to its requirements for recognition of a liability for a cost
associated with an exit or disposal activity. SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. Under EITF No. 94-3, a liability for an exit
cost was recognized at the date of an entity's commitment to an exit plan. SFAS
No. 146 is effective for exit and disposal activities that are initiated after
December 31, 2002. Management believes that adopting this statement will not
have a material impact on the financial position, results of operations or cash
flows of EMCORE.
NOTE 3. Earnings (Loss) Per Share
EMCORE accounts for earnings (loss) per share under the provision of SFAS No.
128 "Earnings Per Share". Basic earnings (loss) per share is calculated by
dividing net earnings (loss) applicable to common stock by the weighted average
number of common stock shares outstanding for the period. Diluted earnings per
share reflects the potential dilution that could occur if EMCORE's outstanding
stock options were exercised (calculated using the treasury stock method). The
effect of outstanding common stock purchase options and warrants, the
convertible preferred stock and the convertible subordinated notes have been
excluded from the diluted earnings per share calculation since the effect of
such securities is anti-dilutive. The following table lists the number of shares
used in the earnings per share calculations.
62
NOTE 4. Acquisitions and Divestitures
In January 2001, EMCORE purchased ASI/TSI both located in Albuquerque, New
Mexico. These two companies provide engineering support and analytical services
in the form of performance analysis, failure analysis, cross sectioning and
parts qualification to a wide array of high technology companies. The total
consideration for these two companies was approximately $4.0 million, which was
paid in both cash and EMCORE's common stock. The acquisition was recorded using
the purchase method of accounting. EMCORE allocated approximately $3.1 million
to goodwill and the remaining purchase price was primarily allocated to fixed
assets. In May 2002, EMCORE sold ASI/TSI back to the original owners. ASI/TSI
will continue to provide engineering support and analytical services to EMCORE.
The total consideration received for these two companies was approximately $3.0
million in the form of a six-year promissory note with an interest rate of 5.71%
per annum. Total consideration approximated net book value at the time of the
sale resulting in no material gain or loss from this sale. Principal and
interest payments owed to EMCORE are payable as credits for services provided by
the companies. To the extent these credits are not used in a particular year,
they expire, except for a small portion that carryforward.
In March 2002, EMCORE acquired certain assets of Tecstar. This acquisition
vertically integrated all aspects of satellite solar panel construction within
EMCORE and enables EMCORE to further penetrate the satellite communications
market. The total cash purchase price, including related acquisitions costs, was
approximately $25.1 million. The results of operations from this acquisition
have been included in EMCORE's consolidated results of operations from the
acquisition closing date. Revenues associated with the Tecstar acquisition
approximated $10.3 million in fiscal 2002. The purchase price allocation was as
follows:
Property and equipment $2,242
Other assets 558
Intellectual property 1,900
Goodwill 20,384
------
Total $25,084
=======
NOTE 5. Impairment and Restructuring Charges
During fiscal 2002, EMCORE recorded pre-tax charges to income totaling $51.2
million, which included impairment and restructuring charges of $36.7 million
and other charges of $14.5 million, as described below.
Restructuring Charges
During fiscal 2002, EMCORE proceeded with a restructuring program, consisting of
the realignment of all engineering, manufacturing and sales/marketing
operations, as well as workforce reductions. Included in the provision for
restructuring and impairment charges were severance and fringe benefit charges
of $1.9 million related to employee termination costs for 330 employees. The
workforce was reduced in both of EMCORE's business segments, all of which were
entitled to termination benefits. Of the severance charges recorded in the
second quarter, $1.1 million related to EMCORE's systems-related business
segment and $0.8 million related to the materials-related business segment.
Headcount at September 30, 2002 was 558 employees, a reduction of 309 employees,
or 36%, since September 2001. Management does not believe that the restructuring
will have a material impact on future revenues. As of September 30, 2002,
substantially all cash outlays for the employee termination costs have been
paid.
Impairment Charges
During the second quarter of fiscal year 2002, EMCORE recorded $34.8 million of
non-cash impairment charges related to its fixed assets. Of this charge, $11.3
million related to certain manufacturing assets that are to be disposed.
Management has committed to a plan to dispose of these assets, through either
abandonment or sale. Such decision was made based upon the continued downturn in
the economic environment that affected certain business units causing these
manufacturing assets to become idle. EMCORE expects to complete its disposal of
these assets by mid fiscal 2003. The carrying value of these assets before
write-down to net realizable value was $11.5 million.
The remainder of the impairment charge related principally to EMCORE's
Electronic Materials and Devices and Optical Devices and Components groups.
During the past two years, EMCORE had completed new facilities for these
businesses in anticipation of expanding market prospects. Business forecasts
updated in the second quarter indicated significantly diminished prospects for
these units, primarily based on the downturn in the telecommunications industry.
As a result of these circumstances, management determined that the long-lived
assets
63
of these groups should be assessed for impairment. Based on the outcome of this
assessment, pursuant to SFAS 121, "Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets to be Disposed Of", EMCORE recorded a $23.5
million non-cash asset impairment charge to fixed assets in the second quarter
of 2002. This entire charge related to the materials-related segment. The fair
values of the assets were determined based upon a calculation of the present
value of the expected future cash flows to be generated by these facilities.
Of the impairment charges recorded in the second quarter, $4.0 million related
to EMCORE's systems-related business segment and $30.8 million related to the
materials-related business segment.
Other Charges
During the second quarter of fiscal year 2002, EMCORE recorded a $11.9 million
charge to cost of revenues, of which $4.2 million related to EMCORE's systems
business segment and $7.7 million related to the materials business segment.
Consistent with the downturn in the markets served by EMCORE, management
evaluated its inventory levels in light of actual and forecasted revenue. The
inventory charge related to reserves for excess inventory that EMCORE believed
it was carrying as a result of the market conditions. EMCORE will continue to
monitor its reserves. Included in selling, general, and administrative expense
was a $2.6 million charge related to a loss provision for accounts receivable
for customers whose current financial condition and payment history indicate
payment is doubtful.
NOTE 6. Joint Ventures
GELcore
In January 1999, General Electric Lighting and EMCORE 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. Under the terms
of the joint venture agreement, EMCORE has a 49% non-controlling interest in the
GELcore venture and accounts for its investment under the equity method of
accounting. In fiscal 2002 and 2001, EMCORE contributed approximately $2.0
million and $3.9 million, respectively, to the joint venture. For the years
ended September 30, 2002, 2001, and 2000, EMCORE recognized a loss of $2.7
million, $4.9 million and $5.5 million, respectively, related to this joint
venture which was been recorded as a component of other income and expense. As
of September 30, 2002 and 2001, EMCORE's net investment in this joint venture
amounted to approximately $8.5 million and $9.2 million, respectively.
Uniroyal Optoelectronics
In March 1997, EMCORE and a subsidiary of Uniroyal Technology Corporation formed
Uniroyal Optoelectronics LLC (UOE), a joint venture, to manufacture, sell and
distribute HB-LED wafers and package-ready devices. Under the terms of the joint
venture agreement, EMCORE had a 49% non-controlling interest in this joint
venture and accounted for its investment under the equity method of accounting.
For the year ended September 30, 2001, EMCORE contributed $2.4 million to the
joint venture. For the years ended September 30, 2001, and 2000, EMCORE
recognized a loss of $7.4 million and $7.8 million, respectively, related to
this joint venture which has been recorded as a component of other income and
expense.
In August 2001, EMCORE sold its minority ownership position in the UOE joint
venture to UTCI in exchange for approximately 2.0 million shares of UTCI common
stock. EMCORE's cost basis in the UTCI stock was $7.10 per share or
approximately $14.0 million. EMCORE recorded a net gain on the disposition of
its interest in UOE of $10.0 million in the fourth quarter of fiscal year 2001.
The gain was recorded as a component of other income and expense. EMCORE's
reported net loss for the year ended September 30, 2001 and 2000 would have been
reduced by approximately $9.0 million each year if the disposition had occurred
on the first day of each respective period. For the year ended September 30,
2001, the reduction in net loss was comprised of a reduction in equity in losses
of unconsolidated affiliates of $7.4 million and the recognition of $1.6 million
in deferred gross profit on sales of equipment to the joint venture. For the
year ended September 30, 2000, the reduction in net loss was comprised of a
reduction in equity in losses of unconsolidated affiliates of $7.8 million and
the recognition of $1.2 million in deferred gross profit on sales of equipment
to the joint venture. The pro forma statements of operations figures above do
not include the approximate gain on sale of $10.0 million.
64
The unaudited pro forma financial information in the paragraph above is based
upon available information and certain assumptions that management believes are
reasonable. The unaudited pro forma consolidated financial data above does not
purport to represent what EMCORE's financial position or results of operations
would have been had the UOE disposition in fact occurred as of the date or at
the beginning of the periods presented, or to project EMCORE's financial
position or results of operations for any future date or period.
In the quarter ended December 31, 2001, management determined that an
other-than-temporary impairment of the UTCI investment existed. Accordingly,
EMCORE took a charge of $13.3 million to establish a new cost basis, which was
recorded as other expense in the consolidation statement of operations. In
August 2002, UTCI filed voluntary petitions for reorganization under Chapter 11
of the U.S. Bankruptcy Code. Given this event, EMCORE wrote down its remaining
investment in UTCI to zero. The total loss associated with the UTCI investment
totaled $14.0 million in fiscal 2002.
NOTE 7. Balance Sheet Data
o Inventories
The components of inventories consisted of the following:
During the second quarter of fiscal 2002, EMCORE recorded a $11.9 million
inventory charge related to reserves for excess raw material and finished
goods inventory that EMCORE believed it was carrying as a result of market
conditions; see footnote 5.
o Property, Plant and Equipment
Major classes of property and equipment and their estimated useful lives
are summarized below:
65
During the second quarter of fiscal 2002, EMCORE recorded $34.8 million of
non-cash impairment charges related to its fixed assets. Of this charge,
$11.3 million related to certain manufacturing assets to be disposed of;
see footnote 5.
At September 30, 2002, minimum future lease payments due under the capital
leases are as follows:
Depreciation expense on owned property and equipment amounted to
approximately $16.3 million, $17.1 million and $8.0 million for fiscal
2002, 2001 and 2000, respectively. Accumulated amortization on assets
accounted under capital leases amounted to approximately $0.3 million and
$0.2 million as of September 30, 2002 and 2001, respectively.
Included in equipment are 23 systems and 34 systems with a combined net
book value of approximately $26.5 million and $24.8 million at September
30, 2002 and 2001, 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.
o Accrued Expenses
Accrued expenses consisted of the following:
66
NOTE 8. Debt Facilities
Convertible Subordinated Notes
- ------------------------------
In May 2001, EMCORE issued $175.0 million aggregate principal amount of its 5%
convertible subordinated notes due in May 2006. Net proceeds received by EMCORE,
after costs of issuance, were approximately $168.8 million. Interest is payable
in arrears semiannually on May 15 and November 15 of each year, which began on
November 15, 2001. The notes are convertible into EMCORE common stock at a
conversion price of $48.76 per share, subject to certain adjustments, at the
option of the holder. The notes may be redeemed at EMCORE's option, on or after
May 20, 2004 at specific redemption prices. There are no financial covenants
related to these notes. For the years ended September 30, 2002 and 2001,
interest expense relating to the notes approximated $8.8 million and $3.5
million, respectively. In the event of default, the principal amount of the
notes would automatically become immediately due and payable. Each of the
following would constitute an event of default under the notes:
o failure to pay principal or premium, if any, on any note when due,
whether or not prohibited by the subordination provision of the notes;
o failure to pay any interest on any note when due if such failure
continues for 30 days, whether or not prohibited by the subordination
provision of the notes;
o failure to perform any other covenant required of us in the note if
such failure continues for 60 days after notice is given in accordance
with the notes;
o failure to pay the purchase price of any note when due, whether or not
prohibited by the subordination provisions of the notes;
o failure to provide timely notice of a change in control; and
o certain event in bankruptcy, insolvency or reorganization of EMCORE.
After any such acceleration, but before a judgement or decree based on
acceleration, the holders of a majority in aggregate principal amount of the
notes may, under certain circumstances, rescind and annul such acceleration.
In May 2002, the Board of Directors authorized EMCORE from time to time to
repurchase notes in one or more open market transactions, in accordance with
certain guidelines established by the Board; see footnote 17.
Bank Loans
- ----------
In March 2001, EMCORE entered into a $20.0 million Amended and Restated
Revolving Loan and Security Agreement with a bank. There have been no borrowings
under this facility since inception and management had no plans to use this
facility. EMCORE canceled this facility in May 2002.
NOTE 9. Commitments and Contingencies
EMCORE leases certain facilities and equipment under non-cancelable operating
leases. Facility and equipment rent expense under such leases amounted to
approximately $1.1 million, $0.8 million and $0.9 million for the years ended
September 30, 2002, 2001 and 2000, respectively. In January 2001, EMCORE
purchased its 80,000 sq. ft Somerset, NJ manufacturing building for RF
materials, MR sensors and MOCVD production systems.
Future minimum rental payments under EMCORE's non-cancelable operating leases
with an initial or remaining term of one year or more as of September 30, 2002
are as follows:
67
In January 2001, EMCORE switched to a self-insurance medical and dental health
plan for health care coverage of its employees. EMCORE's maximum self-insured
exposure is $75,000 per claim with certain maximum aggregate policy limits per
claim year. EMCORE has accrued amounts equal to the actuarially determined
liabilities. The actuarial valuations are based on historical information along
certain assumptions about future events. Changes in assumptions for such matters
as medical costs and changes in actual experience could cause these estimates to
change in the near team.
In April 2001, EMCORE entered into a settlement agreement with Rockwell
Technologies, LLC which released us from any liability relating to our
manufacture and past sales of epitaxial wafers, chips and devices under
Rockwell's US Patent No. 4,368,098. EMCORE had adequate reserves recorded prior
to the settlement agreement.
In March 2001, EMCORE recorded a net gain of $5.9 million related to the
settlement of litigation. EMCORE 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 EMCORE's
results of operations, cash flows or financial condition.
In fiscal 2000, GELcore entered into a Recovery Loan Agreement (GELcore Credit
Facility) with General Electric Canada, Inc., an affiliate of GE, which is the
owner of a 51% controlling share of GELcore. The GELcore Credit Facility
provides for borrowings of up to Can$7.5 million (US$ 4.7 million at September
30, 2002) at a rate of interest based on prevailing Canadian interest rates.
Amounts outstanding under the GELcore Cerdit Facility are payable on demand, and
the GELcore Credit Facility expires in August 2003. EMCORE has guaranteed 49%
(i.e. its proportionate share) of GELcore's obligations under the GELcore Credit
Facility. As of September 30, 2002, US$ 2.1 million was outstanding under the
GELcore Credit Facility.
NOTE 10. Income Taxes
EMCORE accounts for its income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes". Under the asset and liability method of SFAS No.
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
basis. 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 No. 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:
68
As a result of its losses, EMCORE did not incur any income tax expense during
the years ended September 30, 2002, 2001 and 2000. The components of EMCORE's
net deferred taxes were as follows:
EMCORE 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
EMCORE's past earnings history.
As of September 30, 2002, EMCORE had net operating loss (NOL) carryforwards for
tax purposes of approximately $212.0 million that expire in the years 2003
through 2022. In fiscal 2002, $1.7 million of NOL carryforwards expired and
approximately $0.6 million are due to expire in fiscal 2003. As of September 30,
2002, EMCORE had federal research credit carryovers for tax purposes of
approximately $1.2 million that expire in the years 2003 through 2022. EMCORE
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, EMCORE's ability to use its federal NOL 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.
In fiscal 2002, the Business Tax Reform Act was passed in the State of New
Jersey. This legislation is effective for tax years beginning on or after
January 1, 2002. Key provisions include:
o Taxpayers would pay an "Alternative Minimum Assessment" ("AMA"), which
would be based upon either New Jersey Gross Receipts at a rate of .003
or New Jersey Gross Profits at a rate of .006, if the AMA exceeds the
tax based on net income. An election must be made in the first year to
use either the Gross Profits method or Gross Receipts method and must
be kept in place for five years; at which time the election may be
changed.
o Net operating losses would be suspended for calendar years 2002 and
2003; the carryover period of expiring NOLs would be extended for two
years.
o Research and experimental deductions currently allowed would be
limited.
o Nexus definitions would be extended to require filing by any
corporation deriving income from New Jersey sources.
o All non-business income earned by corporations based in New Jersey
that is not taxed elsewhere would be subject to New Jersey tax and
sourced to New Jersey.
EMCORE is evaluating the impact that this legislation will have on its results
of operations, financial position and cash flow.
69
NOTE 11. Shareholders' Equity
Preferred Stock: EMCORE's certificate of incorporation authorizes the Board of
Directors to issue up to 5,882,352 shares of preferred stock of EMCORE upon such
terms and conditions having such rights, privileges and preferences as the Board
of Directors may determine.
Public Offerings: 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 of $5.0 million. On
January 19, 2000, EMCORE filed a shelf registration statement (Shelf
Registration Statement) with the SEC 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, EMCORE 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.
Common Stock: In February 1999, an amendment to the certificate of incorporation
increased the number of no par value common stock shares that EMCORE is
authorized to issue to 50 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 EMCORE to issue up to 100 million 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, 2002, EMCORE has reserved a total of
7,405,830 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 Plans. EMCORE maintains two incentive stock option plans: the 2000
Stock Option Plan (2000 Plan) and the 1995 Incentive and Non Statutory Stock
Option Plan (1995 Plan and, together with the 2000 Plan, the Option Plans). The
1995 Plan authorizes the grant of options to purchase up to 2,744,118 shares of
EMCORE's common stock, and as of September 30, 2002, no options were available
for issuance thereunder. The 2000 Plan authorizes the grant of options to
purchase up to 4,750,000 shares of EMCORE's common stock, and as of September
30, 2002, 1,477,026 options were available for issuance thereunder. Certain
options under the Option Plans are intended to qualify as incentive stock
options pursuant to Section 422A of the Internal Revenue Code.
During fiscal 2002, 3,140,800 options were granted pursuant to the 2000 Plan at
exercise prices ranging from $7.86 to $12.30 per share.
Stock options generally vest over three to five years and are exercisable over a
ten-year period. As of September 30, 2002, 2001 and 2000, options with respect
to 2,493,083, 1,793,047 and 1,581,805 were exercisable, respectively.
70
The following table summarizes the activity under the Option Plans:
At September 30, 2002, stock options outstanding were as follows:
In connection with EMCORE's acquisition of MicroOptical Devices, Inc. (MODE) in
December 1997, EMCORE 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, 2002, there are 1,920 options outstanding at a weighted
average exercise price of $0.23. The following table summarizes the activity of
options assumed in the MODE acquisition:
71
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock Based
Compensation". SFAS 123 establishes financial and reporting standards for stock
based compensation plans. EMCORE 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
EMCORE 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 EMCORE's stock options was calculated using
Black-Scholes with the following weighted-average assumptions used for grants:
no dividend yield; expected volatility of 112%, 104% and 100% for fiscal years
2002, 2001 and 2000, respectively; a risk-free interest rate of 2.6%, 3.9% and
5.9% for fiscal years 2002, 2001 and 2000, respectively; and expected lives of 5
years. The weighted average fair value of options granted during the years ended
September 30, 2002, 2001 and 2000 were $7.14, $27.29 and $17.90 per share,
respectively. Stock options granted by EMCORE prior to its initial public
offering were valued using the minimum value method under SFAS No. 123.
On September 30, 2002, EMCORE offered to all employees holding options with an
exercise price of at least $4.00 per share the opportunity to exchange certain
outstanding options granted under the Option Plans for new options. On October
30, 2002, EMCORE accepted all 2,476,140 tendered options to purchase shares of
common stock and canceled all such options. In accordance with the terms and
subject to the conditions of the offer, employees have the right to receive new
options equal to the number of options turned in, as adjusted for any future
stock splits, stock dividends and similar events on or about May 1, 2003 with an
exercise price equal to the closing sales price of EMCORE's common stock on the
day granted. Vesting terms for the new options remain the same as the tendered
options.
72
Warrants.
In October 2001, 822,256 warrants issued in connection with EMCORE's October
1996 debt guarantee were exercised at $5.10 per share totaling $4.2 million in
proceeds. Set forth below is a summary of EMCORE's outstanding warrants at
September 30, 2002:
(1) issued in connection with EMCORE's June 1998 bank loan agreement.
(2) issued in connection with EMCORE's December 1997 acquisition of MODE.
(3) issued in connection with EMCORE's IP agreement with Sandia
Laboratories.
NOTE 13. Related Parties
In January 1999, EMCORE and General Electric Lighting formed GELcore, a joint
venture to develop and market HB- LED lighting products. As of September 30,
2002 and 2001, EMCORE had an outstanding receivable balance from GELcore
totaling $0.5 million.
In March 1997, EMCORE and a subsidiary of UTCI formed UOE, a joint venture, to
manufacture, sell and distribute HB-LED wafers and package-ready devices. In
August 2001, EMCORE sold its minority ownership position in the UOE joint
venture to UTCI in exchange for approximately 2.0 million shares of UTCI common
stock. For the years ended September 30, 2002, 2001 and 2000, sales made to UOE
amounted to approximately $1.1 million, $4.8 million and $3.9 million,
respectively. As of September 30, 2002 and 2001, EMCORE had an outstanding
receivable balance from UOE totaling $1.2 million. The balance at September 30,
2002 has been 100% reserved for since UTCI filed voluntary petitions for
reorganization under Chapter 11 of the U.S. Bankruptcy Code.
In August 2001, EMCORE made a $5.0 million aggregate principal amount bridge
loan to UTCI, the proceeds of which were to be used by UTCI for working capital
and other corporate purposes. In November 2001, UTCI repaid the loan and accrued
interest in cash.
In May 2002, EMCORE sold ASI/TSI back to one of its original owners. ASI/TSI
will continue to provide engineering support and analytical services to EMCORE.
The total consideration received for these two companies was approximately $3.0
million in the form of a six-year promissory note with an interest rate of 5.71%
per annum, which is recorded within other assets. Principal and interest
payments owed to EMCORE are payable as credits for services provided by the
companies. To the extent these credits are not used in a particualr year, they
expire, except for a small portion that carryforward.
During fiscal 2002, EMCORE invested approximately $0.4 million in Qusion, a
Princeton, New Jersey start-up specializing in monolithic integration of optical
components. EMCORE did not exercise significant influence over financial and
operating policies, and the investment represents less than 20% of ownership,
therefore, EMCORE accounted for this investment under the cost method of
accounting. EMCORE's Chief Executive Officer was also a member of Qusion's Board
of Directors and held options to purchase 50,000 shares of Qusion's common
stock. During the later part of fiscal 2002, it was determined that significant
additional investment would be required to continue development of Qusion's
products. In September 2002, EMCORE and other investment partners determined
they would no longer provide such additional funding. Consequently, Qusion
decided to close the business. EMCORE purchased all of Qusion's intellectual
property and wrote off its entire investment.
To market, sell, and service certain product in Japan and China, EMCORE relies
on Hakuto Co., Ltd. for marketing, product distribution and service. Hakuto has
exclusive distribution rights for certain systems-related products in China and
Japan through March 2008. Hakuto has marketed and serviced EMCORE's products
since 1988 via six branch offices and owns approximately 4% of EMCORE's common
stock. Until he retired in 2002, the President of Hakuto had also been a member
of EMCORE's Board of Directors since 1997. For the years ended September 30,
73
2002, 2001 and 2000, sales made through Hakuto amounted to approximately $2.5
million, $14.5 million and $16.2 million, respectively, which represents sales
to several Japanese customers.
From time to time, prior to July 2002, EMCORE has lent money to certain of its
executive officers and directors. Pursuant to due authorization from EMCORE's
Board of Directors, EMCORE lent $3.0 million to the Chief Executive Officer
(CEO) in February 2001. The promissory note matures on February 22, 2006 and
bears interest (compounded annually) at a rate of (a) 5.18% per annum through
May 23, 2002 and (b) 4.99% from May 24, 2002 through maturity. All interest is
payable at maturity. The note is partially secured by a pledge of shares of
EMCORE's common stock. Accrued interest at September 30, 2002 totaled $250,000
and is recorded with the loan principal within other assets. In addition, the
CEO repaid a loan in the principal amount of $215,000 in December 2001. This
loan did not bear interest and was repaid through payment of a bonus by EMCORE
to the CEO, in accordance with the terms of the loan. During fiscal 2002, the
highest amount of the CEO's indebtedness to EMCORE was $3.3 million. In
addition, pursuant to due authorization of the Company's Board of Directors,
EMCORE lent $85,000 to the Chief Financial Officer (CFO) of EMCORE in December
1995. The promissory note executed by the CFO does not bear interest and
provides for offset of the loan via bonuses payable to the CFO over a period of
up to 25 years. The balance outstanding on the loan is currently $82,000, and no
larger amount has been outstanding since the beginning of fiscal 2002.
NOTE 14. Segment Data and Related Information
EMCORE has two reportable operating segments: the systems-related business and
the materials-related business. The systems-related business is our TurboDisc(R)
MOCVD product line, which designs, develops and manufactures systems and
manufacturing processes. Revenues for the systems-related business are derived
primarily from sales of TurboDisc systems, as well as spare parts, services and
related products. The materials-related business is comprised of our
Photovoltaics, Optical Devices and Components and Electronic Materials and
Devices product lines. Revenues for the materials-related business are derived
primarily from the sales of solar cell products (including epitaxial material
(epi), cells, covered interconnect solar cells (CICs) and panels), VCSELs and
VCSEL-based transceiver and transponder modules, RF materials (including
heterojunction bipolar transistors (HBTs) and enhancement-mode pseudomorphic
high electron mobility transistors (pHEMTS)), MR sensors and process development
technology. The segments reported are the segments of EMCORE for which separate
financial information is available and are evaluated regularly by executive
management in deciding how to allocate resources and in assessing performance.
In fiscal 2002, EMCORE completed the installation of sophisticated accounting
and manufacturing software, which assists management with the allocation of
operating expenses by segment. For comparative purposes, management compiled
fiscal 2001 operating expenses by segment for disclosure below. Fiscal 2000
results include only financial data relative to revenues and gross margin.
Operating expenses in fiscal 2000 were not allocated between the two business
segments. The accounting policies of the operating segments are the same as
those described in the summary of accounting policies; see footnote 2. There are
no intercompany sales transactions between the two operating segments.
74
Unaudited information about reported segments is as follows:
EMCORE's reportable operating segments are businesses that offer different
products. The reportable segments are each managed separately because they
manufacture and distribute distinct products and services. The table below
outlines EMCORE four different product lines:
EMCORE has generated a significant portion of its sales to customers outside the
United States. In fiscal 2002, 2001 and 2000, international sales constituted
47.7%, 38.6% and 52.5%, 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 consolidated revenues by
geographic region.
75
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 2001, no individual customer had sales equal to or in
excess of 10% of total fiscal year revenues.
NOTE 15. Employee Benefits
EMCORE has a savings plan (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. All employer
contributions are made in EMCORE's common stock. For the years ended September
30, 2002, 2001 and 2000, EMCORE contributed approximately $714,000, $830,000 and
$527,000, respectively, in common stock, to the Savings Plan.
EMCORE adopted an Employee Stock Purchase Plan (Purchase Plan) in fiscal 2000.
The Purchase Plan provides employees of EMCORE 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. 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
500,000 shares of common stock for issuance under the Purchase Plan. In January
2002, 48,279 shares of common stock were purchased under the fiscal 2001
Purchase Plan. In January 2001, 16,534 shares of common stock were purchased
under the fiscal 2000 Purchase Plan.
NOTE 16. Quarterly Financial Data (Unaudited)
76
Effective October 1, 2000, EMCORE changed its revenue recognition policy to
defer the portion of revenue related to installation and final acceptance until
such installation and final acceptance are completed. This change was made in
accordance with the implementation of SAB 101. Since EMCORE had historically
completed such installation services successfully which required minimal costs
to complete, EMCORE previously recognized 100% of revenue for products upon
shipment as the product specifications had been met and the title and risks and
rewards of ownership had transferred to the customer. The effect of this change
was reported as the cumulative effect of a change in accounting principle in
fiscal 2001. This net effect reflects the deferral as of October 1, 2000 of $3.6
million of revenue and accrued installation expense previously recognized.
EMCORE recognized the revenue included in the cumulative effect adjustment
during fiscal 2001. The quarters ended December 31, 2000, March 31, 2001 and
June 30, 2001 have been restated to reflect the adoption of SAB 101.
NOTE 17. Subsequent Events
Joint Venture - In November 2002, EMCORE contributed an additional $1.9 million
to GELcore.
Convertible Subordinated Notes - In December 2002, EMCORE purchased, in multiple
transactions, $13.3 million principal amount of the notes at prevailing market
prices, for an aggregate of approximately $6.4 million. As a result of the
transaction, EMCORE will record a gain from operations of approximately $6.6
million after netting unamortized debt issuance costs of approximately $0.3
million. In accordance with the provision of SFAS No. 145, EMCORE will record
gains from early debt extinguishment within income from operations.
Acquisition - On December 11, 2002, EMCORE acquired certain assets of
privately-held Alvesta Corporation of Sunnyvale, California. Alvesta Corporation
is an industry leader in the research and development of parallel optic
transceivers for fiber optic communication networks. Alvesta pioneered four
channel parallel optic transceivers for the Optical Internetworking Forum, 10G
Fibre Channel, 10 Gigabit Ethernet and Infiniband applications. Alvesta's
product revenues from sales of its four-channel products were approximately $5
million in 2001. The transaction included the acquisition of intellectual
property and inventory. In addition, EMCORE hired Alvesta's key design team.
77
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, 2002 and 2001, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended September 30, 2002. Our audits also
included the financial statement schedule listed in the Index at Item 15(a)(2).
These financial statements and the financial statement schedule are the
responsibility of EMCORE'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, such consolidated financial statements present fairly, in all
material respects, the financial position of EMCORE Corporation as of September
30, 2002 and 2001, and the results of its operations and its cash flows for each
of the three years in the period ended September 30, 2002 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 financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for revenue to conform to the U.S. Securities
and Exchange Commission Staff Accounting Bulletin No. 101, "Revenue Recognition
in Financial Statements".
/s/ DELOITTE & TOUCHE LLP
Parsippany, New Jersey
November 13, 2002
(Except Note 17, dated December 30, 2002)
78
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
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 2002 Proxy Statement, which will be filed on or before January 28,
2003.
Item 11. Executive Compensation
The information required by this item is incorporated herein by reference
to EMCORE's 2002 Proxy Statement, which will be filed on or before January 28,
2003.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated herein by reference
to EMCORE's 2002 Proxy Statement, which will be filed on or before January 28,
2003.
Item 13. Certain Relationships and Related Transactions
The information required by this term is incorporated herein by reference
to EMCORE's 2003 Proxy Statement, which will be filed on or before January 28,
2003.
Item 14. Controls and Procedures
(a) Evaluation of disclosure controls and procedures
The term "disclosure controls and procedures" is defined in Rules 13a-14(c)
and 15d-14(c) of the Exchange Act. These rules refer to the controls and other
procedures of a company that are designed to ensure that information required to
be disclosed by a company in the reports that it files under the Exchange Act is
recorded, processed, summarized and reported within required time periods. Our
Chief Executive Officer and our Chief Financial Officer have evaluated the
effectiveness of our disclosure controls and procedures as of a date within 90
days before the filing of this annual report (the "Evaluation Date"), and they
have concluded that, as of the Evaluation Date, such controls and procedures
were effective at ensuring that required information will be disclosed on a
timely basis in our reports filed under the Exchange Act.
(b) Changes in internal controls
We maintain a system of internal accounting controls that are designed to
provide reasonable assurance that our books and records accurately reflect our
transactions and that our established policies and procedures are followed.
Subsequent to the Evaluation Date, there were no significant changes to our
internal controls or in other factors that could significantly affect our
internal controls.
79
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
15(a)(1) Financial Statements Page
Reference
---------
Included in Part II, Item 8 of this report:
Consolidated Statements of Operations for the years
ended September 30, 2002, 2001 and 2000...........................52
Consolidated Balance Sheets as of September 30, 2002 and 2001........53
Consolidated Statements of Shareholders' Equity for the years ended
September 30, 2002, 2001 and 2000..................................54
Consolidated Statements of Cash Flows for the years ended
September 30, 2002, 2001 and 2000..................................55
Notes to Consolidated Financial Statements...........................57
Independent Auditors' Report.........................................78
15(a)(2) Financial Statement Schedule
Located immediately following the certification pages of this report:
Schedule II - Valuation and qualifying accounts and reserves
Other schedules have been omitted since they are either not required or
not applicable.
15(a)(4) Exhibits
Exhibit No. Description
3.1 Restated Certificate of Incorporation, dated December 21, 2001
(incorporated by reference to Exhibit 3.1 the registrant's
annual report on Form 10-K for the fiscal year ended September
30, 2000).
3.2 Amended By-Laws, as amended December 6, 2000 (incorporated by
reference to Exhibit 3.2 to the registrant's annual report on
Form 10-K for the fiscal year ended September 30, 2000).
4.1 Indenture, dated as of May 7, 2001, between the registrant and
Wilmington Trust Company, as Trustee (incorporated by
reference to Exhibit 4.1 to the registrant's quarterly report
on Form 10-Q for the fiscal quarter ended March 31, 2001).
4.2 Note, dated as of May 7, 2001, in the amount of $175,000,000
(incorporated by reference to Exhibit 4.2 to the registrant's
quarterly report on Form 10-Q for the fiscal quarter ended
March 31, 2001).
10.1 Specimen certificate for shares of common stock (incorporated
by reference to Exhibit 4.1 to Amendment No. 3 to the
Registration Statement on Form S-1 (File No. 333-18565) filed
with the Commission on February 24, 1997).
10.2 Form of $11.375 (pre-split) Warrant (incorporated by reference
to Exhibit 4.2 to the registrant's annual report on Form 10-K
for the fiscal year ended September 30, 1998).
10.3 Registration Rights Agreement, dated November 30, 1998 by and
between the registrant, Hakuto, UMI and UTC (incorporated by
reference to Exhibit 10.16 to the registrant's annual report
on Form 10-K for the fiscal year ended September 30, 1998).
80
10.4 Registration Rights Agreement, dated as of May 26, 1999, by
and between EMCORE Corporation and GE Capital Equity
Investments, Inc. (incorporated by reference to Exhibit 10.19
to Amendment No. 2 to the Registration Statement on Form S-3
(File No. 333-71791) filed with the Commission on June 9,
1999).
10.5 Registration Rights Agreement, dated as of May 7, 2001, among
EMCORE and the Credit Suisse First Boston Corporation, on
behalf of the initial purchasers (incorporated by reference to
Exhibit 10.1 to the registrant's quarterly report on Form 10-Q
for the fiscal quarter ended March 31, 2001).
10.6 Transaction Agreement dated January 20, 1999 between General
Electric Company and the registrant (incorporated by reference
to Exhibit 10.1 to EMCORE's filing on Form 10-Q/A, filed on
May 17, 1999). Confidential treatment has been requested by
EMCORE for portions of this document. Such portions are
indicated by "[*]".
10.7 1995 Incentive and Non-Statutory Stock Option Plan
(incorporated by reference to Exhibit 10.1 to the Amendment
No. 1 to the Registration Statement on Form S-1 filed on
February 6, 1997).
10.8 1996 Amendment to Option Plan (incorporated by reference to
Exhibit 10.2 to Amendment No. 1 to the Registration Statement
on Form S-1 filed on February 6, 1997).
10.9 MicroOptical Devices 1996 Stock Option Plan (incorporated by
reference to Exhibit 99.1 to the Registration Statement on
Form S-8 filed on February 6, 1998).
10.10 2000 Stock Option Plan (incorporated by reference to Exhibit
4.2 to the Registration Statement on Form S-8 filed on May 11,
2001).
10.11 2000 Employee Stock Purchase Plan (incorporated by reference
to Exhibit 4.3 to the Registration Statement on Form S-8 filed
on May 18, 2000).
10.12 Transition Agreement and Release, dated as of March 29, 2002,
between the registrant and Paul Rotella (incorporated by
reference to Exhibit 10.1 to the registrant's quarterly report
on Form 10-Q for the fiscal quarter ended March 31, 2002).
10.13 Severance Agreement and Release, dated as of April 18, 2002,
between the registrant and Craig Farley (incorporated by
reference to Exhibit 10.2 to the registrant's quarterly report
on Form 10-Q for the fiscal quarter ended March 31, 2002).
10.14 Amended and Restated Note, dated as of May 23, 2002 between
the registrant and Reuben F. Richards, Jr. (incorporated by
reference to Exhibit 10.1 to the registrant's quarterly report
on Form 10-Q for the fiscal quarter ended June 30, 2002).
10.15 Amended and Restated Stock Pledge Agreement, dated as of May
23, 2002 between the registrant and Reuben F. Richards, Jr.
(incorporated by reference to Exhibit 10.2 to the registrant's
quarterly report on Form 10-Q for the fiscal quarter ended
June 30, 2002).
10.16 Membership Interest Purchase Agreement, dated as of August 2,
2001, by and among Uniroyal Technology Corporation, Uniroyal
Compound Semiconductor, Inc., Uniroyal Optoelectronics, LLC
and the registrant (incorporated by reference to Exhibit 2.1
to the registrant's quarterly report on Form 10-Q for the
fiscal quarter ended June 30, 2001.
21 Subsidiaries of the Registrant.*
23.1 Consent of Deloitte & Touche LLP.*
81
99.1 Certification of the Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
99.2 Certification of the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
________________
* Filed herewith
15 (b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized on December
30, 2002.
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
the registrant in the capacities indicated, on December 30, 2002.
82
I, Reuben F. Richards, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of EMCORE Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: December 30, 2002 /s/ REUBEN F. RICHARDS, JR.
--------------------------------
Reuben F. Richards, Jr.
President and CEO
83
I, Thomas G. Werthan, certify that:
1. I have reviewed this annual report on Form 10-K of EMCORE Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: December 30, 2002 /s/ THOMAS G. WERTHAN
------------------------------
Thomas G. Werthan
Chief Financial Officer
84
Schedule II
85