10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on February 4, 1999
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one):
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 1998
OR
[ ] 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
(State or other jurisdiction of incorporation or organization)
22-2746503
(IRS Employer Identification No.)
394 Elizabeth Avenue
Somerset, NJ 08873
(Address of principal executive offices) (zip code)
(732) 271-9090
(Registrant's telephone number, including area code)
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:[ ]
As of February 1, 1999 there were 9,426,030 shares of the registrant's
no par value common stock outstanding.
Part I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
The accompanying notes are an integral part of these condensed consolidated
financial statements.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
EMCORE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Interim Financial Information
The accompanying unaudited condensed consolidated financial statements of
EMCORE Corporation (the "Company") reflect all adjustments considered necessary
by management to present fairly the Company's consolidated financial position as
of December 31, 1998 and December 31, 1997, and the consolidated results of
operations and the consolidated cash flows for the periods ended December 31,
1998 and December 31, 1997. All adjustments reflected in the accompanying
unaudited condensed consolidated financial statements are of a normal recurring
nature unless otherwise noted. Prior period balances have been reclassified to
conform with the current period financial statement presentation. The results of
operations for the three months ended December 31, 1998 are not necessarily
indicative of the results for the fiscal year ending September 30, 1999 or any
future interim period.
NOTE 2. Preferred Stock Private Placement
On November 30, 1998, the Company sold an aggregate of 1,550,000 shares of
Series I Redeemable Convertible Preferred Stock ("the Series I Preferred Stock")
for aggregate consideration of $21.7 million before deducting costs and
expenses, which amounted to approximately $500,000. The Series I Preferred Stock
was recorded net of issuance costs. The excess of the preference amount over the
carrying value is being accreted by periodic charges to accumulated deficit in
the absence of additional paid in capital. The shares of Series I Preferred
Stock are convertible, at any time, at the option of the holders thereof, unless
previously redeemed, into shares of common stock at an initial conversion price
of $14.00 per share of common stock, subject to adjustment in certain cases. The
market price of the Company's common stock was $12.875 on the date the Series I
Preferred Stock was issued. The Series I Preferred Stock is redeemable, in whole
or in part, at the option of the Company at any time the Company's stock has
traded at or above $28.00 per share for 30 consecutive trading days, at a price
of $14.00 per share, plus accrued and unpaid dividends, if any, to the
redemption date. The Series I Preferred stock carries a dividend of 2% per
annum. Dividends are being charged to accumulated deficit in the absence of
additional paid in capital. In addition, the Series I Preferred Stock is subject
to mandatory redemption by the Company at $14.00 per share plus accumulated and
unpaid dividends, if any, on November 17, 2003.
NOTE 3. Related Party Transactions
In February 1998, the Company and a subsidiary of Uniroyal Technology
Corporation formed Uniroyal Optoelectronics LLC, a joint venture, to
manufacture, sell and distribute HB LED wafers and package-ready devices. The
joint venture commenced operations in July 1998. The Company has a 49%
non-controlling minority interest. The Company's rights under the venture
agreement are protective and as such, the Company accounts for its interest in
the venture under the equity method of accounting. The Company's initial
investment in this venture amounted to $490,000. In November 1998, the Company
invested an additional $5.0 million into this venture. During the quarter ended
December 31, 1998, the Company sold two compound semiconductor production
systems to the venture totaling $3.0 million in revenues. The Company eliminated
gross profit of approximately $711,000 on such sales to the extent of its
minority interest. Such deferred gross profit will be recognized ratably over
the assigned life of the production systems purchased by the joint venture. For
the three months and the year ended December 31, 1998 and September 30, 1998,
respectively, the Company recognized a loss of $276,000 and $198,000 related to
this venture, which has been recorded as a component of other income and
expense. As of December 31, 1998, the Company's investment in this venture
amounted to $5,015,000.
The President of Hakuto Co. Ltd. ("Hakuto"), the Company's Asian
distributor, is a member of the Company's Board of Directors and Hakuto is a
minority shareholder of the Company. During the quarter ended December 31, 1998,
sales made through Hakuto amounted to approximately $3.1 million.
On January 27, 1999, the Company borrowed $3.0 million from its Chairman.
The loan bears interest at 8% per annum. The loan will be repaid from borrowings
under the Company's $5.0 million short-term note.
On January 29, 1999, the Company's Chairman has committed to provide $30
million of long-term financing of the Company through July 1, 2000. The
Chairman's financing commitment terminates if the Company completes a secondary
offering of a specified amount.
EMCORE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. Joint Ventures
In November 1998, the Company entered into a venture with Union Miniere
Inc. to undertake research and development aimed at new material application of
germanium substrates. The Company has a 50% non-controlling interest in the
venture. The Company will account for its interest in the venture under the
equity method of accounting. In November 1998, the Company invested $600,000 in
the venture. The Company is obligated to fund the venture's capital requirements
in proportion to its equity interest. As of December 31, 1998, no expenses have
been incurred by the joint venture and it is expected to commence in the second
quarter of fiscal 1999.
In November 1998, the Company also formed a venture with Optek Technology,
Inc. to produce, market and distribute packaged electronic semiconductor
components. The Company has a 50% non-controlling interest in the venture. The
Company will account for its interest in the venture under the equity method of
accounting. The Company is obligated to fund the venture's capital requirements
in proportion to its equity interest. As of December 31, 1998, neither party has
contributed capital to this venture, which is expected to commence in the second
quarter of fiscal 1999.
NOTE 5. Inventories
The components of inventories consisted of the following (in thousands):
As of As of
December 31, 1998 September 30, 1998
----------------- ------------------
Raw materials................ $10,694 $11,346
Work-in-process.............. 1,768 1,092
Finished goods............... 21 7
----------------- ------------------
Total........................ $12,483 $12,445
======= =======
EMCORE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. Earnings Per Share
The Company accounts for earnings per share under the provision of
Statement of Financial Accounting Standards No. 128 "Earnings per share" ("SFAS
No. 128"). For the quarter ended December 31, 1998, basic and diluted earnings
per share calculated pursuant to SFAS No. 128 has been restated to give effect
to the Securities and Exchange Commission's Staff Accounting Bulletin No. 98
which eliminated certain computational requirements of Staff Accounting Bulletin
No. 64.
Basic earnings per common share was calculated by dividing net loss
by the weighted average number of common shares outstanding during the period.
Diluted earnings per share was calculated by dividing net loss by the
sum of the weighted average number of common shares outstanding plus all
additional common shares that would have been outstanding if potentially
dilutive common shares had been issued. The following table reconciles the
number of shares utilized in the earnings per share calculations for the
three-month periods ending December 31, 1998 and 1997, respectively.
Three Months
Ended December 31,
1998 1997
---- ----
Net loss........................................ ($6,064) ($29,389)
Preferred stock dividends.................... (36) -
------- -
Periodic accretion of preferred stock
to redemption value.......................... (6) -
------- ---------
Net loss available to common shareholders....... ($6,106) ($29,389)
======== =========
Earnings per common share - basic............... ($0.65) ($4.15)
======== =====
Earnings per common share - diluted............. ($0.65) ($4.15)
======== =====
Common shares - basic .......................... 9,390 7,075
Effect of dilutive securities:
Stock options and warrants...................... - -
Preferred stocks................................ - -
-------- ---------
Common shares - diluted ........................ 9,390 7,075
======== =========
The effect of outstanding common stock purchase options and warrants and
the number of shares available to be issued upon the conversion of the Company's
Series I Preferred Stock have been excluded from its earnings per share
calculation since the effect of such securities is anti-dilutive.
EMCORE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. Subsequent Events
Joint Venture:
On January 21, 1999, GE Lighting and the Company agreed, subject to certain
conditions, to form a new joint venture to develop and market "white light"
light-emitting diodes. The new company, GELcore, LLC (the "GELcore venture"),
will develop and market LEDs as replacements for miniature automotive, compact
fluorescent, halogen and traditional incandescent lighting. Under terms of the
joint venture agreement, the Company will have a 49% non-controlling interest in
the GELcore venture.
In connection with the GELcore venture, General Electric will loan the
Company $7.8 million at 4.75% per annum. The proceeds will be used to fund part
of the Company's initial capital contribution in GELcore. This subordinated
debenture (the "Debenture") will mature seven years from the date of issuance
and is convertible into common stock of the Company at a conversion price of
$22.875 or 340,984 shares. The Debenture is convertible at any time at the
option of General Electric and may be called by the Company after three years,
if the price of the Company's common stock has traded at or above $34 for at
least thirty days. The Debenture's interest rate will be subject to adjustment
in the event the Company does not complete a public offering by June 30, 1999.
General Electric will also receive between 282,010 and 564,019 warrants to
purchase common stock at $22.875 per share. The warrants will be exercisable at
any time and will expire in seven years from the date of issuance. The number of
common stock purchase warrants to be issued is subject to the market price of
the Company's common stock upon the completion of a secondary offering or March
31, 1999, whichever occurs first.
Debt Facilities:
On March 31, 1997, the Company entered into a $10.0 million loan agreement
(the "1997 Agreement"). The Agreement bears interest at the rate of Prime plus
50 basis points (8.0% at both December 31, 1998 and September 30, 1998). As of
September 30, 1998 the Company had $9,950,000 outstanding under this facility.
In December 1998, the Company repaid $2.0 million of its obligation, resulting
in an outstanding balance at December 31, 1998 of approximately $8.0 million. In
January 1999, the Company borrowed the remaining balance of $2,050,000 available
under the 1997 Agreement.
On January 27, 1999, the Company borrowed $3.0 million from its Chairman.
The loan bears interest at 8% per annum. The loan will be repaid from borrowings
under the Company's $5.0 million short-term note.
On January 29, 1999, the Company's Chairman has committed to provide $30
million of long-term financing of the Company through July 1, 2000. The
Chairman's financing commitment terminates if the Company completes a secondary
offering of a specified amount.
On February 1, 1999, the Company entered into a $5.0 million short-term
note (the "Note") with First Union National Bank. The Note is due and payable in
May 1999. The Note bears interest at a rate equal to one-month LIBOR plus
three-quarters of one percent per annum.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Cautionary Statement Identifying Important Factors That Could Cause the
Company's Actual Results to Differ From Those Projected in Forward
Looking Statements:
In connection with the safe harbor provisions of the Private Securities
Litigation Perform Act of 1995, readers of this document are advised that it
contains both statements of historical facts and forward looking statements.
Management's Discussion and Analysis of Financial Condition and Results of
Operations includes forward-looking statements that reflect current expectations
or beliefs of EMCORE Corporation concerning future results and events. The words
"expects," "intends," "believes," "anticipates," "likely," "will," and similar
expressions identify forward-looking statements. These forward-looking
statements are subject to certain risks and uncertainties that could cause
actual results and events to differ materially from those anticipated in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, statements about future financial performance of the
Company and the effect of the acquisition of MicroOptical Devises, Inc. ("MODE")
on the Company's business, the uncertainty of additional funding; continued
acceptance of the Company's MOCVD technologies, as well as the market success of
optical VCSEL technologies; the Company's ability to achieve and implement the
planned enhancements of products and services on a timely and cost effective
basis and customer acceptance of those product introductions; product
obsolescence due to advances in technology and shifts in market demand;
competition and resulting price pressures; business conditions; economic and
stock market conditions, particularly in the U.S., Europe and Japan, and their
impact on sales of the Company's products and services; risks associated with
foreign operations, including currency and political risks; and such other risk
factors as may have been or may be included from time to time in the Company's
reports filed with the Securities and Exchange Commission.
OVERVIEW:
EMCORE designs, develops and manufactures compound semiconductor materials
and process technology and is a leading manufacturer of production systems used
to fabricate compound semiconductor wafers. EMCORE's products and technology
enable its customers, both in the U.S. and internationally, to manufacture
commercial volumes of high-performance electronic and optoelectronic devices.
EMCORE has recently established a number of strategic relationships through
joint ventures, long-term supply agreements and an acquisition in order to
facilitate the development and manufacture of new products in targeted growth
markets.
Prior to fiscal 1997, EMCORE's revenues consisted primarily of the sales of
metal organic chemical vapor deposition (MOCVD) systems. In fiscal 1997, EMCORE
expanded its product offerings to include compound semiconductor materials
(wafers and devices). EMCORE's two product lines, systems and materials, differ
significantly. Systems-related revenues include sales of EMCORE's TurboDisc
production systems as well as spare parts and services. The book to ship time
period on systems is approximately four to six months, and the average selling
price is in excess of $1.0 million. Materials revenues include wafers, devices
and process development technology. The materials sales cycle is generally
shorter than for systems and average selling prices vary significantly based on
the products and services provided. Generally, EMCORE achieves a higher gross
profit on its materials related products.
EMCORE recognizes revenue upon shipment. For systems, EMCORE incurs certain
installation and warranty costs subsequent to shipment which are estimated and
accrued at the time the sale is recognized. EMCORE reserves for estimated
returns and allowances at the time of shipment. For research contracts with the
U.S. government and commercial enterprises with durations greater than six
months, EMCORE recognizes revenue to the extent of costs incurred plus a pro
rata portion of estimated gross profit as stipulated in these contracts, based
on contract performance. EMCORE's research contracts require the development or
evaluation of new materials applications and have a duration of six to 36
months. Contracts with a duration of six months or less are accounted for on the
completed contract method. A contract is considered complete when all costs have
been incurred and the research reporting requirements to the customer have been
met.
EMCORE has recently established a number of strategic relationships through
joint ventures, long-term supply agreements and an acquisition as summarized
below.
o In January 1999, EMCORE signed a Transaction Agreement with General
Electric Lighting to form GELcore, a joint venture to develop and
market white light and colored high-brightness light-emitting diode
(HB LED) lighting products, and subject to certain conditions, the
parties expect this joint venture will be consummated by March 31,
1999. HB LEDs are solid state compound semiconductor devices that emit
light in a variety of colors. The global demand for HB LEDs is
experiencing rapid growth because LEDs have a long useful life
(approximately 10 years), consume 10% of the power consumed by
incandescent or halogen lighting and improve display visibility.
General Electric Lighting and EMCORE have agreed that this joint
venture will be the exclusive vehicle for each party's participation
in the solid state lighting market. GELcore seeks to combine EMCORE's
materials science expertise, process technology and compound
semiconductor production systems with General Electric Lighting's
brand name recognition, phosphor technology and extensive marketing
and distribution capabilities. GELcore's long-term goal is to develop
HB LED products to replace traditional lighting.
o In November 1998, EMCORE signed a long term purchase agreement with
Space Systems/Loral, a wholly owned subsidiary of Loral Space &
Communications. Under this agreement, which is contingent upon
EMCORE's compliance with Loral's product specification requirements,
EMCORE will supply compound semiconductor high-efficiency gallium
arsenide solar cells for Loral's satellites. EMCORE anticipates
completing this qualification in April 1999. Subject to the product
qualification, EMCORE received an initial purchase order for $5.25
million of solar cells.
o In November 1998, EMCORE formed UMCore, a joint venture with Union
Miniere Inc., a mining and materials company, to explore and develop
alternate uses for germanium using EMCORE's materials science and
production platform expertise and Union Miniere's access to and
experience with germanium.
o In October 1998, EMCORE formed Emtech, a joint venture with Optek
Technology, Inc., a packager and distributor of optoelectronic
devices, to market an expanded line of magneto resistive (MR) sensors
to the automotive and related industries. This joint venture seeks to
combine EMCORE's strength in producing devices with Optek's strength
in packaging and distributing devices to offer off-the-shelf products
and expand market penetration.
o In September 1998, EMCORE entered into an agreement with Lockheed
Martin to provide technical management and support of a Cooperative
Research and Development Agreement between Lockheed Martin and Sandia
for the advancement, transfer and commercialization of a new compound
semiconductor high-efficiency solar cell. EMCORE also signed a
four-year purchase agreement with AMP Incorporated to provide high
speed vertical cavity surface emitting lasers (VCSELs), initially for
use in transceivers for Gigabit Ethernet applications.
o In February 1998 EMCORE and a subsidiary of Uniroyal Technology
Corporation formed Uniroyal Optoelectronics LLC, a joint venture, to
manufacture, sell and distribute HB LED wafers and package-ready
devices. The joint venture commenced operations in July 1998.
Because we do not have a controlling economic and voting interest in the
Uniroyal, Union Miniere, Optek and General Electric Lighting joint ventures,
EMCORE will account for such joint ventures under the equity method of
accounting.
To expand its technology base into the data communications and
telecommunications markets, on December 5, 1997, EMCORE acquired MODE in a stock
transaction accounted for under the purchase method of accounting for a purchase
price of $32.8 million. EMCORE's acquisition of MicroOptical Devices, Inc.
(MODE), a development stage company, constituted a significant and strategic
investment for EMCORE to acquire and gain access to MODE's in-process research
and development of micro-optical technology. As part of this acquisition, EMCORE
incurred a one-time in-process research and development write-off of $29.3
million which is reflected in EMCORE's audited financial statements elsewhere in
this prospectus. EMCORE also recorded goodwill of approximately $3.4 million.
This is being charged against operations over a three-year period, and will
therefore impact financial results through December 2000.
EMCORE sells its products and has generated a significant portion of its
sales to customers outside the United States. In fiscal 1996, 1997, 1998 and the
first fiscal quarter of 1999, international sales constituted 42.5%, 42.0%,
39.1% and 35.1%, respectively, of revenues. In fiscal 1998, approximately
two-thirds of EMCORE's international sales were made to customers in Asia,
particularly in Japan. EMCORE anticipates that international sales will continue
to account for a significant portion of revenues.
As of December 31, 1998, EMCORE had an order backlog of $41.8 million
scheduled to be shipped through September 30, 1999. This represented an increase
of 81.4% since September 30, 1998 which primarily relates to increased systems
bookings in Asia and an initial order for solar cells from Loral, which is
subject to product qualification. EMCORE includes in backlog only customer
purchase orders that have been accepted by EMCORE and for which shipment dates
have been assigned within the 12 months to follow and research contracts that
are in process or awarded. Wafer and device agreements extending longer than one
year in duration are included in backlog only for the ensuing 12 months. EMCORE
receives partial advance payments or irrevocable letters of credit on most
production system orders.
RESULTS OF OPERATIONS:
REVENUES The Company's revenues decreased 18.1% from $12.4 million for the
three months ended December 31, 1997, to $10.1 million for the three months
ended December 31, 1998. The revenue decrease in the three-month period was
attributable to decreased revenues in the materials-related product lines, which
were impacted primarily by a decrease in process development fees and a decrease
due to the discontinuation of a wafer sales contract in October 1998. This
three-year contract is on hold pending evaluation by the customer. Revenues
relating to systems- and materials-related products accounted for 54.4% and
45.6%, respectively, for the three months ended December 31, 1997 and 72.0% and
28.0%, respectively, for the three months ended December 31, 1998. International
sales accounted for 44.2% of revenues for the three months ended December 31,
1997 and 35.1% of revenues for the three months ended December 31, 1998.
COST OF SALES/GROSS PROFIT Cost of sales includes direct material and labor
costs, allocated manufacturing and service overhead, and installation and
warranty costs. Gross profit decreased from 48.4% of revenue for the quarter
ended December 31, 1997, to 40.6% of revenue for the three months ended December
31, 1998. The gross profit percentage was negatively affected by a product mix
in favor of lower gross profit system products as well as under-absorbed
overhead due to lower overall revenues. During the three months ended December
31, 1998, the Company sold for approximately $3.0 million two compound
semiconductor production systems to a joint venture in which it has a 49%
minority interest. The Company eliminated $711,000 of gross profit on such
sales. Such deferred gross profit will be recognized ratably over the assigned
life of the production systems purchased by the joint venture.
SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative
expenses increased by 4.7% from $3.0 million for the three months ended December
31, 1997, to $3.1 million in the three months ended December 31, 1998. A
significant portion of the increase was largely due to increases in sales
personnel headcount to support both domestic and foreign markets and general
headcount additions to sustain the internal administrative support. As a
percentage of revenue, selling, general and administrative expenses increased
from 24.3% for the three months ended December 31, 1997 to 31.0% for the three
months ended December 31, 1998. This increase is a direct result of the decrease
in overall revenues.
GOODWILL AMORTIZATION The Company recognized approximately $284,000 of
goodwill amortization for the three months ended December 31, 1998 in connection
with the acquisition of MODE on December 5, 1997. As of December 31, 1998, the
Company has approximately $2.2 million of goodwill remaining which will be fully
amortized by October 31, 2000.
RESEARCH AND DEVELOPMENT Research and development expenses increased 108.9%
from $2.8 million in the three months ended December 31, 1997, to $5.9 million
in the three months ended December 31, 1998. As a percentage of revenue,
recurring research and development expenses increased from 23.0% for the first
quarter of the prior year to 58.5% for the first quarter of the current year.
The increase was primarily attributable to EMCORE's acquisition of MODE, startup
of its new Albuquerque, New Mexico facility and increased staffing and equipment
costs necessary to enhance current products and develop new product offerings.
Products introduced or under development include HB LEDs, high-efficiency solar
cells, new generation TurboDisc production systems, VCSELs and other
optoelectronic devices. During the three months ended, December 31, 1997, the
Company recognized a $29.3 million one-time non-cash charge for acquired
in-process research and development relating to the Company's December 5, 1997
purchase of MODE. For the three-months ended December 31, 1997 and 1998, the
Company incurred approximately $321,000 and $844,000, respectively, of research
and development costs associated with MODE's in-process (at the date of
acquisition) research and development projects. To maintain growth and to
continue to pursue market leadership in materials science technology, the
Company expects to continue to invest a significant amount of its resources in
research and development.
OPERATING LOSS The Company reported an operating loss of $5.2 million for
the three months ended December 31, 1998, as compared to a $29.2 million loss
for the three months ended December 31, 1997. The change in operating income is
due to the loss of gross profit on decreased revenues and a product mix geared
towards lower gross margin system related sales coupled with a higher fixed cost
infrastructure to support those revenues. In addition, the Company's operating
loss was impacted by increased research and development spending; the loss
generated from the operations of MODE, a company acquired in December 1997, and
the startup expenses associated with the opening of the Company's new
Albuquerque, New Mexico facility.
OTHER EXPENSE During fiscal 1996, the Company issued detachable warrants
along with subordinated notes to certain of its existing shareholders. In fiscal
1997, the Company also issued detachable warrants in return for a $10.0 million
demand note facility (the "Facility") guarantee by the Chairman of the Board of
the Company, who provided collateral for the Facility. The Company subsequently
assigned a value to these detachable warrants issued using the Black-Scholes
Option Pricing Model. The Company recorded the subordinated notes at a carrying
value that is subject to periodic accretions, using the interest method, and
reflected the Facility's detachable warrant value as a debt issuance cost. The
consequent expense of these warrant accretion amounts is charged to "Imputed
warrant interest, non-cash" and amount to approximately $96,000 and $316,000 for
the three months ended December 31, 1997 and December 31, 1998, respectively. In
June 1998, the Company issued 284,684 warrants to its Chairman and its Chief
Executive Officer for providing a guarantee in connection with the 1998
Agreement, an 18 month credit facility with First Union National Bank. The
Company subsequently assigned a value to these detachable warrants using the
Black-Scholes Option Pricing Model. As a result, the Company will record imputed
warrant interest, non-cash of approximately $1.3 million over the life of the
credit facility.
For the three months ended, December 31, 1998, stated interest expense, net
increased by $160,000 to $230,000 due to additional borrowing and lower interest
income. In the prior year, the Company was earning interest income on its
initial public offering proceeds.
NET LOSS The Company reported net loss of $6.1 million for the quarter
ended December 31, 1998, as compared to a $29.4 million loss for the quarter
ended December 31, 1997. For the quarter ended December 31, 1997, the decrease
in the year-to-date loss was attributable to the $29.3 million write-off of
acquired in-process research and development in connection with the acquisition
of MODE on December 5, 1997.
LIQUIDITY AND CAPITAL RESOURCES:
Cash and cash equivalents decreased by $2.7 million from $4.5 million at
September 30, 1998, to $1.8 million at December 31, 1998. For the three months
ended December 31, 1998, net cash used for operations amounted to $3.3 million,
primarily due to the Company's net losses, and decrease in accounts payable;
which was partially offset by the Company's non-cash depreciation and
amortization charges, and an increase in advance billings.
For the three months ended December 31, 1998, net cash used in investment
activities amounted to $11.5 million, primarily due to the purchase and
manufacture of new equipment for the facilitation of the Company's wafer and
device product lines, and clean room modifications and enhancements of
approximately $6.0 million, as well as investments in unconsolidated affiliates
of approximately $5.6 million.
Net cash provided by financing activities for the three months ended
December 31, 1998 amounted to approximately $12.1 million, primarily due to the
$21.2 million of net proceeds from the private placement of preferred stock and
short-term related party borrowings of $1.5 million. This was offset by debt
repayments of $10.5 million ($8.5 million on short-term related party debt and
$2.0 million on the $10.0 million bank loan).
On March 31, 1997, the Company entered into a $10.0 million loan agreement
with First Union National Bank (the "1997 Agreement"). The 1997 Agreement bears
interest at the rate of prime plus 50 basis points (8.0% at both December 31,
1998 and September 30, 1998). As of September 30, 1998 the Company had
$9,950,000 outstanding under this facility. In December 1998, the Company repaid
$2.0 million of its obligations, resulting in an outstanding balance at December
31, 1998 of approximately $8.0 million. In January 1999, the Company borrowed
the remaining balance of $2,050,000 available under the Company's 1997
Agreement.
EMCORE's Chairman has committed to provide up to $30.0 million of long term
financing to EMCORE through July 1, 2000. This commitment terminates upon
completion of any public offering of EMCORE's common stock, subject to a minimum
offering size requirement. On January 27, 1999 EMCORE borrowed $3.0 million from
its Chairman, Thomas J. Russell. The loan bears interest at 8% per annum. On
February 1, 1999 EMCORE entered into a $5.0 million short term note (the "Note")
with First Union National Bank. The loan from Thomas J. Russell was repaid from
borrowings under the Note. The Note is due and payable in May 1999. The Note
bears interest at the rate equal to one-month LIBOR plus three-quarters of one
percent per annum.
EMCORE believes that its current liquidity, together with available credit
facilities (including the Chairman's commitment), should be sufficient to meet
its cash needs for working capital through fiscal 2000. However, if the
available credit facilities, cash generated from operations and cash on hand are
not sufficient to satisfy EMCORE's liquidity requirements, EMCORE will seek to
obtain additional equity or debt financing. Additional funding may not be
available when needed or on terms acceptable to EMCORE. If EMCORE is required to
raise additional financing and if adequate funds are not available or not
available on acceptable terms, the ability to continue to fund expansion,
develop and enhance products and services, or otherwise respond to competitive
pressures would be severely limited. Such a limitation could have a material
adverse effect on EMCORE's business, financial condition or operations.
At December 31, 1998, the Company employed 310 full-time employees. None of
the Company's employees are covered by a collective bargaining agreement. The
Company considers its relationship with its employees to be good.
YEAR 2000:
Many currently installed computer systems and software products are coded
to accept or recognize only two digit entries in the date code field. These
systems and software products will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and/or software used by many companies and governmental agencies may
need to be upgraded to comply with such Year 2000 requirements or risk system
failure or miscalculations causing disruptions of normal business activities.
State Of Readiness. EMCORE has made a preliminary assessment of the Year
2000 readiness of its operating financial and administrative systems, including
the hardware and software that support such systems. EMCORE's assessment plan
consists of (1) quality assurance testing of its internally developed
proprietary software; (2) contacting third-party vendors and licensors of
material hardware, software and services that are both directly and indirectly
related to EMCORE's business; (3) contacting vendors of third-party systems; (4)
assessing repair or replacement requirements; (5) implementing repair or
replacement; and (6) creating contingency plans in the event of Year 2000
failures. EMCORE plans to perform a Year 2000 simulation on its systems during
the second quarter of l999 to test system readiness. Many vendors of material
hardware and software components of its systems have indicated that the products
used by EMCORE are currently Year 2000 compliant. EMCORE will require vendors of
its other material hardware and software components of its systems to provide
assurances of their Year 2000 compliance. EMCORE plans to complete this process
during the first half of 1999. Until such testing is completed and such vendors
and providers are contacted, EMCORE will not be able to completely evaluate
whether its systems will need to be revised or replaced.
Costs. To date, EMCORE has not incurred any material expenditures in
connection with identifying, evaluating or addressing Year 2000 compliance
issues. Most of EMCORE expenses have related to, and are expected to continue to
relate to, the operating costs associated with time spent by employees in the
evaluation process and Year 2000 compliance matters generally. At this time,
EMCORE does not possess the information necessary to estimate the potential
costs of revisions to its systems should such revisions be required or the
replacement of third-party software, hardware or services that are determined
not to be Year 2000 compliant. Although EMCORE does not anticipate that such
expenses will be material, such expenses if higher than anticipated could have a
material adverse effect on EMCORE's business, financial condition and results of
operations.
Risks. EMCORE is not currently aware of any Year 2000 compliance problems
relating to its systems that would have a material adverse effect on EMCORE
business, results of operations and financial condition, without taking into
account EMCORE efforts to avoid or fix such problems. There can be no assurance
that EMCORE will not discover Year 2000 compliance problems in its systems that
will require substantial revision. In addition, there can be no assurance that
third-party software, hardware or services incorporated into EMCORE material
systems will not need to be revised or replaced, all of which could be
time-consuming and expensive. The failure of EMCORE to fix or replace its
internally developed proprietary software or third-party software, hardware or
services on a timely basis could result in lost revenues, increased operating
costs, the loss of customers and other business interruptions, any of which
could have a material adverse effect on EMCORE business, result of operations
and financial condition. Moreover, the failure to adequately address Year 2000
compliance issues in its internally developed proprietary software could result
in claims of mismanagement, misrepresentation or breach of contract and related
litigation, which could be costly and time-consuming to defend. In addition, the
failure of governmental agencies, utility companies, third-party service
providers and others outside of EMCORE's control to be Year 2000 compliant could
result in systemic failure beyond EMCORE's control, such as a telecommunications
or electrical failure, which could have a material adverse effect on EMCORE's
business, results of operations and financial condition.
Contingency Plan. As discussed above, EMCORE is engaged in an ongoing Year
2000 assessment and has not yet developed any contingency plans. The results of
EMCORE's Year 2000 simulation testing and the responses received from
third-party vendors and service providers will be taken into account in
determining the nature and extent of any contingency plans.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits:
10.1 - Transaction Agreement, dated January
26, 1999, by and between the Company and
General Electric Company. Confidential
Treatment has been requested by the Company
with respect to portions of this document.
Such portions are indicated by "***."
27 - Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the
quarter ended December 31, 1998.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EMCORE CORPORATION
Date: February 4, 1999 By: /s/ Reuben F. Richards, Jr.
---------------------------------------------
Reuben F. Richards, Jr.
President and Chief Executive Officer
Date: February 4, 1999 By: /s/ Thomas G. Werthan
---------------------------------------------
Thomas G. Werthan
Vice President, Finance and Administration
EXHIBIT INDEX
Exhibit Description
------ -----------
10.1 - Transaction Agreement, dated
January 26, 1999, by and between the
Company and General Electric
Company. Confidential Treatmen
has been requested by the Company
with respect to portions of this
document. Such portions are
indicated by "***."
27 Financial Data Schedule