10-K/A: Annual report pursuant to Section 13 and 15(d)
Published on May 17, 1999
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(MARK ONE):
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 1998
[ ] 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)
394 ELIZABETH AVENUE, SOMERSET, NJ 08873
(Address of principal executive offices) (zip 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of common stock held by non-affiliates of the
registrant as of December 23, 1998 was approximately $100,427,286 (based on the
closing sale price of $18.25 per share).
The number of shares outstanding of the registrant's no par value common stock
as of December 23, 1998 was 9,385,618.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the 1999 Annual
Meeting of Shareholders held February 16, 1999 are incorporated by reference in
Part III of this Form 10-K/A.
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 Reform Act of 1995, readers of this document are advised that it
contains both statements of historical facts and forward looking statements.
This report 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 which
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
Devices, 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 microlaser 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.
PART I
ITEM 1. BUSINESS
COMPANY OVERVIEW
EMCORE designs, develops, and manufactures compound semiconductor materials
and is a leading developer and manufacturer of the tools and manufacturing
processes used to fabricate compound semiconductor wafers and devices. EMCORE's
products and technology enable its customers, both in the United States and
internationally, to manufacture commercial volumes of high-performance
electronic devices using compound semiconductors. EMCORE has recently
established a number of strategic relationships through joint ventures,
long-term supply agreements and an acquisition in order to facilitate the
development and manufacture of new products in targeted growth markets. EMCORE's
products are used for a wide variety of applications in the communications
(satellite, data, telecommunications and wireless), consumer and automotive
electronics, computers and peripherals, and lighting markets. EMCORE's customers
include AMP Incorporated, Hewlett Packard, General Motors, Hughes-Spectrolab,
Lucent Technologies, Inc., Siemens AG and 12 of the largest electronics
manufacturers in Japan.
INDUSTRY OVERVIEW
Recent advances in information technologies have created a growing need for
efficient, high-performance electronic systems that operate at very high
frequencies, have increased storage capacity and computational and display
capabilities, and can be produced cost-effectively in commercial volumes. In the
past, electronic systems manufacturers have relied on advances in silicon
semiconductor technology to meet many of these demands. However, the newest
generation of high-performance electronic and optoelectronic applications
require certain functions that are generally not achievable using silicon-based
components.
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Compound semiconductors have emerged as an enabling technology to meet the
complex requirements of today's advanced information systems. Many compound
semiconductor materials have unique physical properties that allow electrons to
move at least four times faster than through silicon-based devices. Advantages
of compound semiconductor devices over silicon devices include:
- operation at higher speeds;
- lower power consumption;
- less noise and distortion; and
- optoelectronic properties that enable these devices to emit and detect
light.
Compound semiconductor devices can be used to perform individual functions
as discrete devices, such as solar cells, HB LEDs, VCSELs, MR sensors and RF
materials. Compound semiconductor devices can also be combined into integrated
circuits, such as transmitters, receivers and alpha-numeric displays. Although
compound semiconductors are more expensive to manufacture than silicon-based
devices, electronics manufacturers are increasingly integrating compound
semiconductor devices into their products in order to achieve higher performance
in applications targeted for a wide variety of markets. These include satellite
communications, data communications, telecommunications, wireless
communications, consumer and automotive electronics, computers and peripherals,
and lighting.
The following factors have resulted in an increased demand for compound
semiconductor products and systems that enable electronic systems manufacturers
to reach the market faster with large volumes of high-performance products and
applications:
- rapid build-out of satellite communications systems;
- widespread deployment of fiber optic networks and the increasing use of
optical systems within these networks;
- launch of new wireless services and wireless high speed data systems;
- increasing use of infrared emitters and optical detectors in computer
systems;
- emergence of advanced consumer electronics applications, such as DVDs and
flat panel displays;
- increasing use of high-performance electronic devices in automobiles; and
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- the anticipated conversion to HB LEDs from incandescent, halogen and
compact fluorescent lighting.
The following chart summarizes the principal markets, examples of
applications for compound semiconductor devices, products incorporating these
devices and certain benefits and characteristics of these devices.
COMPOUND SEMICONDUCTOR PROCESS TECHNOLOGY
Compound semiconductors are composed of two or more elements and usually
consist of a metal such as gallium, aluminum or indium and a non-metal such as
arsenic, phosphorous or nitrogen. The resulting compounds include gallium
arsenide, indium phosphide, gallium nitride, indium antimonide and indium
aluminum phosphide. The performance characteristics of compound semiconductors
are dependent on the composition of these compounds. Many of the unique
properties of compound semiconductor devices are
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achieved by the layering of different compound semiconductor materials in the
same device. This layered structure creates an optimal configuration to permit
the conversion of electricity into light.
Accordingly, the composition and properties of each layer and the control
of the layering process, or epitaxy, are fundamental to the performance of
advanced electronic and optoelectronic compound semiconductor devices. The
variation of thickness and composition of layers determines the intensity and
color of the light emitted or detected and the efficiency of power conversion.
The ability to vary the intensity, color and efficiency of light generation and
detection enables compound semiconductor devices to be used in a broad range of
advanced information systems.
Compound semiconductor device manufacturers predominantly use four methods
to deposit compound materials: molecular beam epitaxy, vapor phase epitaxy,
liquid phase epitaxy and metal organic chemical vapor deposition (MOCVD). The
use of molecular beam epitaxy technology can yield wafers having high thickness
uniformity. Compound semiconductor materials fabricated using liquid phase
epitaxy or vapor phase epitaxy technologies often have high electronic and
optical properties. However, due to the nature of the underlying processes,
these methods are not easily scaled up to high volume production, which is
necessary for the commercial viability of compound semiconductor devices. All of
the methods used to manufacture compound semiconductor devices pose technical,
training and safety challenges that are not present in the manufacture of
silicon devices. These production systems typically require expensive reactant
materials, the use of certain toxic chemicals, and tight control over numerous
manufacturing parameters. The key differences between MOCVD and the three other
methods is that compound semiconductor wafers fabricated using MOCVD generally
possess a better combination of uniformity and optical and electronic properties
and are easier to produce in high volumes than wafers manufactured by the three
more traditional methods. Currently, MOCVD technology is being used to
manufacture a broad range of compound semiconductor devices.
Historically, manufacturers who use compound semiconductor devices in their
products have met research, pilot production and capacity needs with in-house
systems and technologies. However, as the need for the production of commercial
volumes of high-performance compound semiconductor devices and the variety of
these devices grows, manufacturers are often unable to meet these requirements
using in-house solutions. In response to these growing demands for higher
volumes of a broad range of higher performance devices, manufacturers are
increasingly turning to outside vendors to meet their needs for compound
semiconductor wafers and devices.
THE EMCORE SOLUTION
EMCORE provides its customers with a broad range of compound semiconductor
products and services intended to meet its customers' diverse technology
requirements. EMCORE has developed extensive materials science expertise,
process technology and MOCVD production systems to address these needs and
believes that its proprietary TurboDisc deposition technology makes possible one
of the most cost-effective production processes for the commercial volume
manufacture of high-performance compound semiconductor wafers and devices. This
platform technology provides the basis for the production of various types of
compound semiconductor wafers and devices and enables EMCORE to address the
critical need of manufacturers to cost-effectively get to market faster with
high volumes of new and improved high-performance products. EMCORE's compound
semiconductor products and services include:
- materials and process development;
- design and development of devices;
- MOCVD production systems; and
- manufacture of wafers and devices in high volumes.
Customers can take advantage of EMCORE's vertically integrated approach by
purchasing custom-designed wafers and devices from EMCORE or manufacturing their
own devices in-house using a TurboDisc production system configured to their
specific needs.
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STRATEGY
EMCORE's objective is to capitalize on its position in MOCVD process
technology and production systems to become the leading supplier of compound
semiconductor wafers, devices and production systems. The key elements of
EMCORE's strategy include:
Apply Core Technology Across Multiple Applications. EMCORE continually
leverages its proprietary core technology to develop compound semiconductor
products for multiple applications in a variety of markets. These activities
include developing new products for targeted applications as well as expanding
existing products into new applications. For example, EMCORE's MR sensors,
currently used by General Motors as crank shaft sensors, also have other
potential product applications, including as sensors in brushless motors and
antilock brakes. Other existing products which EMCORE intends to introduce in
new applications include VCSELs for communications products and HB LEDs for
broader lighting applications.
Target High Growth Opportunities. EMCORE's strategy is to target high
growth opportunities where performance characteristics and high volume
production efficiencies can give compound semiconductors a competitive advantage
over other devices. Historically, while technologically superior, compound
semiconductors have not been widely deployed because they are more expensive to
manufacture than silicon-based semiconductors and other existing solutions.
EMCORE believes that as compound semiconductor production costs are reduced, new
customers will be compelled to use these solutions because of their higher
performance characteristics. For example, EMCORE has reduced the average cost of
compound semiconductor solar cells to the point that they are replacing
silicon-based solar cells because of the compound semiconductor solar cells'
higher overall efficiency and lower weight.
Partner with Key Industry Participants. EMCORE seeks to identify and
develop long-term relationships with leading companies in targeted industries.
EMCORE develops these relationships in a number of ways including through
long-term high-volume supply agreements, joint ventures, and distribution and
other arrangements. For example, EMCORE has agreed to enter into, subject to
certain conditions, a joint venture with General Electric Lighting for the
development and marketing of white light and colored HB LED products for
automotive, traffic, flat panel display and other lighting applications, and has
entered into a long term supply agreement with AMP Incorporated for VCSELs to be
used in its transceivers for Gigabit Ethernet and other applications. EMCORE
intends to actively seek similar strategic relationships with other key
customers and industry participants in order to further expand its technological
and production base.
Continue Investment to Maintain Technology Leadership. Through substantial
investment in research and development, EMCORE seeks to expand its leadership
position in compound semiconductor production systems, wafers and devices.
EMCORE works with its customers to identify specific performance criteria and
uses this information to enhance the performance of its production systems and
to further expand its process and materials science expertise, including the
development of new low cost, high-volume wafers and devices for its customers.
In addition, EMCORE's development efforts are focused on continually lowering
the production costs of its solutions. EMCORE's joint venture with Union Miniere
Inc. represents an initiative to explore means to use germanium to improve
product performance, identify new product applications and lower the cost and
complexity of production of EMCORE's wafers and devices.
PRODUCTS
PRODUCTION SYSTEMS
EMCORE is a leading supplier of MOCVD compound semiconductor production
systems, with more than 230 systems shipped as of March 31, 1999. According to
VLSI Research, Inc., in 1997 EMCORE's share of the MOCVD production systems
market was over 25%. EMCORE believes that its TurboDisc systems offer
significant ownership advantages over competing systems and that the high
throughput capabilities of its TurboDisc systems make possible superior
reproducibility of thickness, composition, electronic properties and layer
accuracy required for electronic and optoelectronic devices. Each system can be
customized for the customer's throughput, wafer size and process chemistry
requirements. EMCORE's
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production systems also achieve a high degree of reliability with an average
time available for production, based on customer data, of approximately 95%.
EMCORE believes its TurboDisc systems enable the lowest cost of ownership
for the manufacture of compound semiconductor materials. The major components of
the cost of ownership include yield, throughput, direct costs and capital costs.
Yield primarily relates to material uniformity, which is a function of the
precision of the physical and chemical processes by which atomic layers are
deposited. Throughput, the volume of wafers produced per unit of time, includes
both the time required for a process cycle and the handling time between process
steps. Direct costs include consumables used in manufacturing and processing and
the clean room space required for the equipment. Capital costs include the cost
of acquisition and installation of the process equipment.
EMCORE's proprietary TurboDisc technology utilizes a unique high speed
rotating disk in a stainless steel growth chamber with integrated
vacuum-compatible loading chambers. To produce a wafer, a bare substrate, such
as gallium arsenide, sapphire or germanium, is placed on a wafer carrier in the
TurboDisc growth chamber and subjected to high temperatures. Based on a
predetermined formula, metal organic gases are released into the growth chamber.
These gases decompose on the hot, rapidly spinning wafer. Semiconductor
materials are then deposited on the substrate in a highly uniform manner. The
resulting wafer thus carries one or more ultra-thin layers of compound
semiconductor material such as gallium arsenide, gallium nitride, or indium
aluminum phosphide. The TurboDisc technology not only produces uniformity of
deposition across the wafer, but also offers flexibility for diverse
applications with improved material results and increased production rates. The
unique precision control of reactant gas flow in the TurboDisc technology
platform allows users to scale easily from research to commercial volumes with
substantially reduced time and effort. Upon removal from the growth chamber, the
wafer is transferred to a device processing facility for various steps such as
photolithography, etching, masking, metallization and dicing. Upon completion of
these steps, the devices are then sent for packaging by the customer or other
third parties and inclusion in the customer's product.
EMCORE offers the following family of TurboDisc systems:
EMCORE's next generation of TurboDisc products is being designed to provide
a number of innovations including:
- new reactor design to improve efficiency;
- cassette-to-cassette wafer handling to increase automation;
- digital control system to reduce noise;
- real-time process control and data acquisition on WindowsNT platform;
- modular component design to ease outsourcing and upgrading; and
- improved temperature control.
WAFERS AND DEVICES
Since its inception, EMCORE has worked closely with its customers to design
and develop materials processes for use in production systems for its customers'
end-use applications. EMCORE has leveraged its process and materials science
knowledge base to manufacture a broad range of compound semiconductor wafers and
devices such as solar cells, HB LEDs, VCSELs, MR sensors and RF materials.
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Within most of these product lines, EMCORE has established strategic
relationships through joint ventures, long-term supply agreements and an
acquisition. A summary of these relationships is found below.
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Solar Cells. Compound semiconductor solar cells are used to power
satellites because they are more resistant to radiation levels in space, convert
substantially more light to power and therefore weigh less per unit of power
than silicon-based solar cells. These characteristics increase satellite life,
increase payload capacity and reduce launch costs. EMCORE is currently involved
in four solar cell projects:
- In November 1998, EMCORE signed a four-year purchase agreement with Space
Systems/Loral, a wholly owned subsidiary of Loral Space & Communications.
Under this agreement, which is contingent upon our compliance with
Loral's product specification requirements, EMCORE will supply compound
semiconductor high efficiency gallium arsenide solar cells for Loral's
satellites. Subject to satisfactorily completing these product
qualification requirements, EMCORE has received an initial purchase order
from Space Systems/Loral.
- In August 1998, EMCORE and Union Miniere Inc., a mining and materials
company, entered into a long term supply agreement for germanium, which
EMCORE uses to fabricate solar cells. In addition to their solar cell
relationship, in November 1998, EMCORE formed UMCore, a joint venture
with Union Miniere to explore and develop alternate uses for germanium
using EMCORE's material science and production platform expertise and
Union Miniere's access to and experience with germanium. UMCore commenced
research and development operations in January 1999.
- In September 1998, EMCORE entered into an agreement with Lockheed Martin
Missiles and Space, a strategic business unit of Lockheed Martin
Corporation, to provide technical management and support of a Cooperative
Research and Development Agreement between Lockheed Martin and Sandia
National Laboratory for the advancement and commercialization of a new
compound semiconductor high efficiency solar cell. Pursuant to this
strategic agreement, (1) Lockheed Martin will grant EMCORE a sub-license
for all related intellectual property developed on behalf of or in
conjunction with Lockheed Martin, and (2) EMCORE and Lockheed Martin will
jointly qualify and validate the high efficiency solar cells for
operational satellite use.
- In the summer of 1998, EMCORE received a $2.2 million contract under the
U.S. Air Force's Broad Agency Announcement Program for the development of
high-efficiency advanced solar cells.
HB LEDs. High-brightness light-emitting diodes (HB LEDs) are solid state
compound semiconductor devices that emit light. The global demand for HB LEDs is
experiencing rapid growth because LEDs have a long useful life (approximately 10
years), consume approximately 10% of the power consumed by incandescent or
halogen lighting and improve display visibility. In February 1998, EMCORE and
Uniroyal Technology Corporation formed Uniroyal Optoelectronics, a joint venture
to manufacture, sell and distribute HB LED wafers and package-ready devices.
In January 1999, EMCORE signed a transaction agreement with General
Electric Lighting to form GELcore, a joint venture to develop and market HB LED
lighting products. General Electric Lighting and EMCORE have agreed that this
joint venture will be the exclusive vehicle for each party's participation in
solid state lighting. GELcore seeks to combine EMCORE's materials science
expertise, process technology and compound semiconductor production systems with
General Electric Lighting's brand name recognition and extensive marketing and
distribution capabilities. GELcore's long-term goal is to develop products to
replace traditional lighting.
VCSELs. VCSELs are semiconductor lasers that emit light in a cylindrical
beam. Leading electronic systems manufacturers are integrating VCSELs into a
broad array of end-market applications including Internet access, digital
cross-connect telecommunications switches, DVD, and fiber optic switching and
routing, such as Gigabit Ethernet. VCSELs offer significant advantages over
traditional laser diodes, including:
- greater control over beam size and wavelength;
- reduced manufacturing complexity and packaging costs;
- lower power consumption; and
- higher frequency performance.
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In December 1997, EMCORE acquired MODE, a development stage company,
primarily dedicated to the research and development of enabling VCSEL
technologies. In February 1998, EMCORE announced Gigalase, its first commercial
high speed VCSEL laser. In September 1998, EMCORE signed a four-year purchase
agreement with AMP Incorporated to provide VCSELs for a family of optical
transceivers for the Gigabit Ethernet, FibreChannel and ATM markets. In December
1998, EMCORE announced its second VCSEL product, Gigarray, a micro-optical laser
array.
MR Sensors. MR sensors are compound semiconductor devices that possess
sensing capabilities. MR sensors improve vehicle performance through more
accurate control of engine and crank shaft timing, which allows for improved
spark plug efficiency and reduced emissions. In January 1997, EMCORE initiated
shipments of compound semiconductor MR sensors using technology licensed to
EMCORE from General Motors. This license allows EMCORE to manufacture and sell
products using this technology to anyone. As of September 30, 1998, EMCORE has
delivered over five million devices to General Motors Powertrain for crank and
cam speed and position sensing applications for three engine builds.
In October 1998, EMCORE formed Emtech, a joint venture with Optek
Technology, Inc., a packager and distributor of optoelectronic devices, to
market an expanded line of MR sensors to the automotive and related industries.
This joint venture seeks to combine EMCORE's strength in producing devices with
Optek's strength in packaging and distributing devices to offer off-the-shelf
products and expand market penetration.
RF materials. Radio frequency materials are compound semiconductor
materials which transmit and receive communications. Compound semiconductor RF
materials have a broader bandwidth and superior performance at high frequencies
than silicon-based materials. EMCORE currently produces RF materials for use as
power amplifiers in cellular phone handsets. In addition, EMCORE is exploring
opportunities to market these materials for additional uses in fiber optics and
satellite communications. EMCORE believes that its ability to produce high
volumes of RF materials at a low cost will facilitate their adoption in new
applications and new products.
CUSTOMERS
EMCORE's customers include many of the largest semiconductor,
telecommunications, consumer goods and computer manufacturing companies in the
world. In fiscal 1998, sales to Hughes-Spectrolab accounted for 17.3% of
EMCORE's revenues, and sales to General Motors accounted for 12.8% of EMCORE's
revenues. A number of EMCORE's customers are listed below. In addition, EMCORE
has sold its products to 12 of the largest electronics manufacturers in Japan.
AMP Incorporated Motorola
The Boeing Company Northrop Grumman
General Motors Philips AG
Hewlett Packard Polaroid
Honeywell Rockwell International
Hughes-Spectrolab Samsung
Hyundai Electronics Sharp U.S.A.
IBM Siemens AG
LG Semiconductor Texas Instruments
L.M. Ericsson AB Thomson CSF
Lucent Technologies Westinghouse Electric
EMCORE has a comprehensive total quality management program with special
emphasis on total customer satisfaction. EMCORE seeks to encourage active
customer involvement with the design and operation of its production systems. To
accomplish this, EMCORE conducts user group meetings among its customers in
Asia, Europe and North America. At annual meetings, EMCORE's customers provide
valuable feedback on key operations, process oriented services, problems and
recommendations to improve EMCORE products. This direct customer feedback has
enabled EMCORE to constantly update and improve the design of its systems and
processes. Changes that affect the reliability and capabilities of EMCORE's
systems are embodied in new designs to enable current and future customers to
utilize systems which EMCORE believes are high quality and cost-efficient.
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MARKETING AND SALES
EMCORE markets and sells its wafers, devices and systems through its direct
sales force in Europe, North America and Taiwan and through representatives and
distributors elsewhere in Asia. To market and service its products in China,
Japan and Singapore, EMCORE relies on a single marketing, distribution and
service provider, Hakuto. EMCORE's agreements with Hakuto have a term of 10
years, expiring March 2008. Hakuto has exclusive distribution rights for certain
of EMCORE's products in Japan. Hakuto has marketed and serviced EMCORE's
products since 1988, is a minority shareholder in EMCORE, and the President of
Hakuto is a member of EMCORE's board of directors. EMCORE recently opened sales
offices in Taiwan and California in order to be closer to its customers.
EMCORE's sales and marketing staff, senior management and technical staff
work closely with existing and potential customers to provide compound
semiconductor solutions for its customers' needs. The sales process begins by
understanding the customer's requirements and then attempting to match these
requirements with the optimal solution. EMCORE seeks to match the customer's
requirements to an existing design or a modification of a standard design, such
as a change in platform or process design. When necessary, EMCORE will work with
the customer to develop the appropriate design process and to configure and
manufacture the production system to meet the customer's needs. Also, EMCORE
will produce samples to demonstrate conformance to the customer's
specifications. For production systems, the amount of time from the initial
contact with the customer to the customer's placement of an order is typically
two to nine months or longer. EMCORE's sales cycle for wafers and devices
usually runs three to nine months, during which time EMCORE develops the formula
of materials necessary to meet the customer's specifications and qualifies the
materials, which may also require the delivery of samples. EMCORE believes that
the high level of marketing, management and engineering support involved in this
process is beneficial in developing competitive differentiation and long-term
relationships with its customers.
The following chart contains a breakdown of EMCORE's worldwide revenues and
percentages by geographic region. Historically, EMCORE has received all payments
for products and services in U.S. dollars.
SERVICE AND SUPPORT
EMCORE maintains a worldwide service and support network responsible for
on-site maintenance and process monitoring on either a contractual or
time-and-materials basis. Customers may purchase annual service contracts under
which EMCORE is required to maintain an inventory of replacement parts and to
service the equipment upon the request of the customer. EMCORE also sells
replacement parts from inventory for customer needs. EMCORE pursues a program of
system upgrades for customers to increase the performance of older systems.
EMCORE generally does not offer extended payment terms to its customers and
generally adheres to a warranty policy of one year. Consistent with industry
practice, EMCORE maintains an inventory of components for servicing systems in
the field and it believes that its inventory is sufficient to satisfy
foreseeable short-term customer requirements. EMCORE recently opened a warehouse
depot in Taiwan to provide improved service to its Asian customers.
RESEARCH AND DEVELOPMENT
To maintain and improve its competitive position, EMCORE's research and
development efforts are focused on designing new proprietary processes and
products, improving the performance of existing systems, wafers and devices and
reducing costs in the product manufacturing process. EMCORE has dedicated 16
TurboDisc systems for both research and production which are capable of
processing virtually all compound
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semiconductor materials. The research and development staff utilizes x-ray,
optical and electrical characterization equipment which provide instant data
allowing for shortened development cycles and rapid customer response. EMCORE's
recurring research and development expenses were approximately, $16.5 million in
fiscal 1998, $9.0 million in fiscal 1997 and $5.4 million in fiscal 1996. EMCORE
also incurred a one-time, non-cash research and development expense in fiscal
1998 in the amount of $19.5 million in connection with the acquisition of MODE.
EMCORE expects that it will continue to expend substantial resources on research
and development.
EMCORE also competes for research and development funds. In view of the
high cost of development, EMCORE solicits research contracts that provide
opportunities to enhance its core technology base or promote the
commercialization of targeted products. EMCORE presently has three contracts
under the Small Business Innovative Research programs or similar government
sponsored programs. From inception until September 30, 1998, government and
other external research contracts have provided approximately $13.2 million to
support EMCORE's research and development efforts. EMCORE is also positioned to
market technology and process development expertise directly to customers who
require it for their own product development efforts.
INTELLECTUAL PROPERTY AND LICENSING
EMCORE's success and competitive position both for production systems and
wafers and devices depend significantly on its ability to maintain trade secrets
and other intellectual property protections. Our strategy is to rely more on
trade secrets than patents. A "trade secret" is information that has value to
the extent it is not generally known, not readily ascertainable by others
through legitimate means, and protected in a way that maintains its secrecy.
Reliance on trade secrets is only an effective business practice insofar as
trade secrets remain undisclosed and a proprietary product or process is not
reverse engineered or independently developed. In order to protect its trade
secrets, EMCORE takes certain measures to ensure their secrecy, such as
executing non-disclosure agreements with its employees, joint venture partners,
customers and suppliers.
To date, EMCORE has been issued 11 U.S. patents and others are either
pending or under review. These U.S. patents will expire between 2005 and 2013.
None of these U.S. patents claim any material aspect of the current or planned
commercial versions of EMCORE's systems, wafers or devices. EMCORE relies on
trade secrets rather than patents to protect its intellectual property because
it believes publishing patents would make it easier for others to reverse
engineer EMCORE's proprietary processes.
EMCORE is a licensee of certain VCSEL technology and associated patent
rights owned by Sandia Corporation. The Sandia license grants EMCORE:
- exclusive rights (subject to certain rights granted to Department of
Energy and AT&T Corporation) to develop, manufacture and sell products
containing Sandia VCSEL technologies for barcode scanning and plastic
optical fiber communications applications under five U.S. patents that
expire between 2007 and 2015;
- nonexclusive rights with respect to all other applications of these
patents; and
- nonexclusive rights to employ a proprietary oxidation fabrication method
in the manufacture of VCSEL products under a sixth U.S. patent that
expires in 2014. Our exclusivity with respect to the barcode scanning and
plastic optical fiber communications applications expires in 2003 or such
earlier time as we fail to meet certain development and marketing
criteria. EMCORE's success and competitive position as a producer of
VCSEL products depends on the continuation of its rights under the Sandia
license, the scope and duration of those rights and the ability of Sandia
to protect its proprietary interests in the underlying technology and
patents.
In 1992, we received a royalty-bearing, non-exclusive license under a
patent held by Rockwell International Corporation which relates to an aspect of
the manufacturing process used by our TurboDisc systems. In October 1996, we
initiated discussions with Rockwell to receive additional licenses to permit us
to use this technology to manufacture and sell compound semiconductor wafers and
devices. In November 1996, we suspended these negotiations because of litigation
surrounding the validity of the Rockwell patent. We also ceased making royalty
payments to Rockwell under the license during the pendency of the litigation. In
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January 1999, the case was settled and a judgment was entered in favor of
Rockwell. As a result, we may be required to pay royalties to Rockwell for
certain of our past sales of wafers and devices to our customers who did not
hold licenses directly from Rockwell. If we are required to pay significant
royalties in connection with these sales our business, financial condition and
results of operations may be materially and adversely affected. In addition,
until the patent expires in January 2000, we may require additional licenses
from Rockwell under the Rockwell patent in order to continue to manufacture and
sell wafers and devices. The failure to obtain or maintain licenses to
manufacture these wafers and devices on commercially reasonable terms may
materially and adversely affect our business, financial condition and results of
operations.
ENVIRONMENTAL REGULATIONS
EMCORE is subject to federal, state and local laws and regulations
concerning the use, storage, handling, generation, treatment, emission, release,
discharge and disposal of certain materials used in its research and development
and production operations, as well as laws and regulations concerning
environmental remediation and employee health and safety. The production of
wafers and devices involves the use of certain hazardous raw materials,
including, but not limited to, ammonia, phosphine and arsene. If EMCORE's
control systems are unsuccessful in preventing release of these or other
hazardous materials, EMCORE could experience a substantial interruption of
operations. EMCORE has retained an environmental consultant to advise it in
complying with applicable environmental and health and safety laws and
regulations, and believes that it is currently, and in the past has been, in
substantial compliance with all such laws and regulations.
BACKLOG
As of September 30 1998, EMCORE had an order backlog of $22.6 million
compared to backlog of $24.4 million as of September 30, 1997. EMCORE includes
in backlog only customer purchase orders that have been accepted by EMCORE and
for which shipment dates have been assigned within the 12 months to follow and
research contracts that are in process or awarded. Wafer and device agreements
extending longer than one year in duration are included in backlog only for the
ensuing 12 months. EMCORE receives partial advance payments or irrevocable
letters of credit on most production system orders. EMCORE recognizes revenue
from the sale of its systems and materials upon shipment. For research contracts
with the U.S. government and commercial enterprises with durations greater than
six months, EMCORE recognizes revenue to the extent of costs incurred plus a
portion of estimated gross profit, as stipulated in such contracts, based on
contract performance.
MANUFACTURING
EMCORE's manufacturing operations are located at EMCORE's headquarters in
Somerset, New Jersey and in Albuquerque, New Mexico and include systems
engineering and production, wafer fabrication, and design and production of
devices. Many of EMCORE's manufacturing operations are computer monitored or
controlled to enhance reliability and yield. EMCORE manufactures its own systems
and outsources some components and sub-assemblies, but performs all final system
integration, assembly and testing. EMCORE fabricates wafers and devices at its
facilities in Somerset, New Jersey and Albuquerque, New Mexico and has a
combined clean room area totaling approximately 12,000 square feet. EMCORE's
joint venture with Uniroyal Technology Corporation expects to begin
manufacturing HB LED wafers and package-ready devices at its Tampa, Florida
manufacturing facility by summer of 1999. In May 1998, EMCORE received ISO 9001
and QS 9002 quality certification for its Somerset, New Jersey facility. EMCORE
is pursuing ISO 9001 quality certification for its Albuquerque, New Mexico
facilities.
Outside contractors and suppliers are used to supply raw materials and
standard components and to assemble portions of end systems from EMCORE
specifications. EMCORE depends on sole, or a limited number of, suppliers of
components and raw materials. EMCORE generally purchases these single or limited
source products through standard purchase orders. EMCORE also seeks to maintain
ongoing communications with its suppliers to guard against interruptions in
supply and has, to date, generally been able to obtain sufficient supplies in a
timely manner and maintains inventories it believes are sufficient to meet its
near term needs. EMCORE implemented a vendor program through which it inspects
quality and reviews suppliers and prices in order to standardize purchasing
efficiencies and design requirements to maintain as low a cost of sales
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as possible. However, operating results could be materially and adversely
affected by a stoppage or delay of supply, receipt of defective parts or
contaminated materials, and increase in the pricing of such parts or EMCORE's
inability to obtain reduced pricing from its suppliers in response to
competitive pressures.
COMPETITION
The markets in which EMCORE competes are highly competitive. EMCORE
competes with several companies for sales of MOCVD systems including Aixtron
GmbH, Nippon-Sanso K.K. and Thomas Swann Ltd. The primary competitors for
EMCORE's wafer foundry include Epitaxial Products Inc., Kopin Corporation and
Quantum Epitaxial Designs, Inc. EMCORE's principal competitors for sales of
VCSEL-related products include Honeywell, Inc. and Mitel Corporation. The
principal competitors for MR sensors are Honeywell, Inc., Matshushita Electric
Industrial Co. Ltd., Siemens AG and Asahi. The principal competitors for HB LEDs
and EMCORE's joint venture with Uniroyal Technology Corporation and the pending
joint venture with General Electric Lighting include the Phillips Electronics
and Hewlett Packard Company joint venture, Siemens AG's Osram GmbH subsidiary,
Nichia Chemical Industries and Toshiba Corporation. EMCORE also faces
competition from manufacturers that implement in-house systems for their own
use. In addition, EMCORE competes with many research institutions and
universities for research contract funding. EMCORE also sells its products to
current competitors and companies with the capability of becoming competitors.
As the markets for EMCORE's products grow, new competitors are likely to emerge,
and present competitors may increase their market share.
EMCORE believes that the primary competitive factors in the markets in
which EMCORE's products compete are yield, throughput, performance, breadth of
product line, customer satisfaction, customer commitment to competing
technologies and, in the case of production systems, capital and directs costs
and size of installed base. Competitors may develop enhancements to or future
generations of competitive products that offer superior price and performance
factors. EMCORE believes that in order to remain competitive, it must invest
significant financial resources in developing new product features and
enhancements and in maintaining customer satisfaction worldwide.
EMPLOYEES
At September 30, 1998, EMCORE had 308 full-time employees. None of EMCORE's
employees are covered by a collective bargaining agreement. EMCORE considers its
relationship with its employees to be good.
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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 Hsinchu, Taiwan and Santa Clara, California. In addition to EMCORE's
facilities, Uniroyal Optoelectronics, a joint venture between EMCORE and
Uniroyal Technology Corporation, leases a 75,000 square foot office and
manufacturing facility in Tampa, Florida.
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(1) These leases all have options to renew by EMCORE, subject to cost of living
adjustments.
(2) EMCORE plans a three-phase construction project to expand the facility from
an initial 50,000 square feet in October 1998 to 70,000 square feet by 2002.
ITEM 3. LEGAL PROCEEDINGS
EMCORE is not aware of any pending or threatened litigation against it that
could have a material adverse effect on its business, financial condition and
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II.
ITEM 5.
MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
The Company's Common Stock is quoted on the NASDAQ National Market
under the symbol "EMKR". The following table sets forth the quarterly high and
low sales prices for the Company's Common Stock since its initial public
offering in March 6, 1997.
FISCAL 1997
Second Quarter................................... $12 3/4 $ 9 1/4
Third Quarter.................................... $19 1/2 $11
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Fourth Quarter................................... $25 1/4 $16
FISCAL 1998
First Quarter.................................... $23 3/8 $15 1/2
Second Quarter................................... $19 5/8 $11
Third Quarter ................................... $16 3/4 $ 9
Fourth Quarter .................................. $13 1/2 $ 6
FISCAL 1999
First Quarter (through December 23, 1998)........ $18 1/4 $ 7 1/4
As of December 23, 1998 date there were 1,595 shareholders of record.
The Company has never declared or paid dividends on its Common Stock
since its formation. The Company currently does not intend to pay dividends on
its Common Stock in the foreseeable future so that it may reinvest its earnings
in the development of its business. The payment of dividends, if any, in the
future will be at the discretion of the Board of Directors.
RECENT SALES OF UNREGISTERED SECURITIES
On November 30, 1998, the Company sold an aggregate of 1,550,000 shares
of Series I Preferred Stock (the "Private Placement") to Hakuto, UMI and UTC for
an aggregate consideration of $21.7 million before deducting costs and expenses
of the offering of approximately $500,000. 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
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. In addition, the
Series I Preferred Stock is subject to mandatory redemption by the Company on
November 17, 2003. The Company believes the sale of the shares of Series I
Preferred Stock is exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act").
On June 22, 1998 the Company issued 227,747 warrants to purchase common
stock of the Company to Thomas Russell, Chairman of the Board of Directors of
the Company and 56,937 warrants to purchase common stock of the Company to
Reuben Richards, President, Chief Executive Officer and a director of the
Company. The warrants are exercisable at a price of $11.375 and expire on May
1, 2001. These warrants are callable at the Company's option at $.85 per
warrant at such time as the Company's Common Stock has traded at or above 150%
of the exercise price for a period of 30 days. These warrants were granted in
exchange for the guarantee by these executives of the 1998 Agreement entered
into by the Company on June 22, 1998 with the Bank. The credit facility is
being used to finance general corporate purposes, including, but not limited
to, the construction of a facility in Albuquerque, New Mexico. The term of the
credit facility is 18 months and the interest rate is at LIBOR plus 0.75%. The
Company received a fairness opinion from its investment bank, Hempstead &
Company, that this transaction was fair from a financial point of view to the
Company's non-participating shareholders. The Company believes the issuance of
the warrants is exempt from registration pursuant to Section 4(2) of the
Securities Act.
On December 5, 1997, the Company issued 1,461,866 shares of Common
Stock, 200,966 common stock purchase options and 47,118 common stock purchase
warrants in exchange for all of the outstanding capital stock of MODE. The
purchase price was approximately $32.8 million and was recorded under the
purchase method of accounting. The Company believes the issuance of Common
Stock, options and warrants in connection with the acquisition of MODE is
exempt from registration pursuant to Section 4(2) of the Securities Act.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data for the five fiscal
years ended September 30, 1998 of EMCORE is qualified by reference to and should
be read in conjunction with the Financial Statements and the Notes thereto, and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this prospectus. The Statement of Operations
Data set forth below with respect to fiscal 1996, 1997 and 1998 and the Balance
Sheet Data as of September 30, 1997 and 1998 are derived from EMCORE's audited
financial statements included elsewhere in this Form 10-K/A. The Statement of
Operations Data for fiscal 1994 and 1995 and the Balance Sheet Data as of
September 30, 1994, 1995 and 1996 are derived from audited financial statements
not included herein.
On December 5, 1997, the Company acquired MODE in a stock transaction
accounted for under the purchase method of accounting for a purchase price of
$32.8 million. In connection with this transaction, the Company recorded a
non-recurring, non-cash charge of $19.5 million for acquired in-process research
and development, which affects the comparability of the Company's operating
results and financial condition.
(*) as restated - See Note 20
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
Subsequent to the issuance of the Company's Annual Report on Form 10-K for
the year ended September 30, 1998, the Company's management revised the amount
of the purchase price which was allocated to in-process research and development
in accounting for the acquisition of MicroOptical Devices, Inc. ("MODE") in
December 1997. The revised allocation is based upon methods prescribed in a
letter from the Securities and Exchange Commission ("SEC") sent to the American
Institute of Certified Public Accountants. The letter sets forth the SEC's views
regarding the valuation methodology to be used in allocating a portion of the
purchase price to acquired in-process research and development ("IPR&D") at the
date of acquisition.
The revised valuation is based on management's estimates of the net cash
flows associated with expected operations of MODE and gives explicit
consideration to the SEC's views on acquired IPR&D as set forth in its letter to
the American Institute of Certified Public Accountants.
As a result of the revised allocation, the Company's financial statements
for the year ended September 30, 1998 have been restated from amounts
previously reported to reduce the amount of the acquired in-process research and
development expensed by $9.8 million and to increase goodwill by $9.8 million.
The amount allocated to goodwill includes approximately $0.5 million related to
the value of MODE's workforce. The change had no impact on net cash flows used
by operations.
The Securities and Exchange Commission ("SEC") issued new guidance on its
views regarding the methodologies used to determine the allocation of purchase
price in a purchase business combination, involving amounts allocated to
in-process research and development ("IPRD"). Generally accepted accounting
principles require that amounts allocated to IPRD be expensed upon consummation
of an acquisition accounted for as a purchase. As a result of this new guidance
the Company has modified the methods used to value IPRD acquired related to
MODE. The revised valuation is based on management's best estimates at the date
of acquisition of the net cash flows associated with expected operations of MODE
and gives explicit consideration to the SEC's views on acquired IPRD as set
forth in its letter to the American Institute of Certified Public Accountants.
The information included in Item 6, "Selected Financial Data," and in the
discussion following reflect the effects of this restatement.
OVERVIEW
EMCORE designs, develops and manufactures compound semiconductor materials
and is a leading developer and manufacturer of the tools and manufacturing
processes used to fabricate compound semiconductor wafers and devices. Prior to
fiscal 1997, EMCORE's revenues consisted primarily of the sales of compound
semiconductor production systems. In fiscal 1997, EMCORE expanded its product
offerings to include the design and high-volume production of compound
semiconductor wafers and package-ready devices. EMCORE's vertically-integrated
product offering allows it to provide a complete compound semiconductor solution
to its customers. EMCORE assists its customers with device design, process
development and optimal configuration of TurboDisc production systems.
Systems-related revenues include sales of EMCORE's TurboDisc production
systems as well as spare parts and services. The book-to-ship time period on
systems is approximately four to six months, and the average selling price is in
excess of $1.0 million. Materials revenues include wafers, devices and process
development technology. The materials sales cycle is generally shorter than for
systems and average selling prices vary significantly based on the products and
services provided. Generally, EMCORE achieves a higher gross profit on its
materials related products.
EMCORE recognizes revenue upon shipment. For systems, EMCORE incurs certain
installation and warranty costs subsequent to shipment which are estimated and
accrued at the time the sale is recognized. EMCORE reserves for estimated
returns and allowances at the time of shipment. For research contracts with the
U.S. government and commercial enterprises with durations greater than six
months, EMCORE recognizes revenue to the extent of costs incurred plus a pro
rata portion of estimated gross profit as stipulated in these contracts, based
on contract performance. EMCORE's research contracts require the development or
evaluation of new materials applications and have a duration of six to 36
months. Contracts with a duration of six months or less are accounted for on the
completed contract method. A contract is considered complete when all costs have
been incurred and the research reporting requirements to the customer have been
met.
EMCORE has recently established a number of strategic relationships through
joint ventures, long-term supply agreements and an acquisition as summarized
below.
- In January 1999, EMCORE signed an agreement with General Electric
Lighting to form GELcore, a joint venture to develop and market white
light and colored HB LEDs lighting products. GELcore's long-term goal is
to develop HB LED products to replace traditional lighting. We anticipate
investing approximately $7.8 million in GELcore upon formation of the
joint venture and will second various personnel to the joint venture to
assist in the development and marketing of its products. These personnel
and the related costs will be charged to the joint venture. In addition,
GELcore will hire its own administrative and management personnel. As
such, the impact on EMCORE's operations will be limited to the seconded
employees who will continue to be managed by EMCORE personnel.
- In November 1998, EMCORE signed a long term purchase agreement with Space
Systems/Loral, a wholly owned subsidiary of Loral Space & Communications.
Under this agreement, which is contingent upon EMCORE's compliance with
Loral's product specification requirements, EMCORE will supply compound
semiconductor high-efficiency gallium arsenide solar cells for Loral's
satellites. EMCORE anticipates completing this qualification in June
1999. Subject to the product qualification, EMCORE received an initial
purchase order for $5.25 million of solar cells. EMCORE expects to
service this agreement through our newly completed facility in
Albuquerque, New Mexico. This facility presently employs approximately 40
people, including sales, marketing, administrative and manufacturing
personnel.
- In November 1998, EMCORE formed UMCore, a joint venture with Union
Miniere Inc., a mining and materials company, to explore and develop
alternate uses for germanium using EMCORE's materials science and
production platform expertise and Union Miniere's access to and
experience with germanium. EMCORE has invested $600,000 in UMCore which,
together with an equal amount funded by Union Miniere, is expected to
fund the operations of UMCore through fiscal 1999.
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EMCORE will second various personnel to the joint venture to assist in
the development of products. Thereafter, any additional funding will be
contributed equally.
- In October 1998, EMCORE formed Emtech, a joint venture with Optek
Technology, Inc., a packager and distributor of optoelectronic devices,
to market an expanded line of magneto resistive sensors to the automotive
and related industries. This joint venture combines EMCORE's expertise in
the manufacture of magneto resistive die and Optek's expertise in
packaging these die. This combination will allow us to offer customers
off-the-shelf products. No additional personnel are anticipated to meet
the obligations to the joint venture.
- In September 1998, EMCORE entered into an agreement with Lockheed Martin
to provide technical management and support for the commercialization of
a new high-efficiency solar cell. It is anticipated that we will provide
high efficiency solar cells to Lockheed Martin upon completion of the
research and development agreement. EMCORE's new facility in Albuquerque,
New Mexico, will provide the support necessary to meet our obligations
under this agreement.
- EMCORE also signed a four-year purchase agreement with AMP Incorporated
to provide high speed VCSELs, for use in transceivers for high speed
networks that link computers. The contract requires AMP to purchase a
minimum of 80% of their VCSEL needs from EMCORE. EMCORE's MODE facility
in Albuquerque, New Mexico, will produce the devices under this contract.
- In February 1998, EMCORE and Uniroyal Technology Corporation formed
Uniroyal Optoelectronics, a joint venture to manufacture, sell and
distribute HB LED wafers and package-ready devices. This joint venture
commenced operations in July 1998. EMCORE has invested $5.5 million in
Uniroyal Optoelectronics. Uniroyal Optoelectronics is hiring its own
administrative and management personnel. The impact on EMCORE's
operations will be limited to a few seconded employees who will continue
to be managed by EMCORE personnel.
- To expand its technology base into the data communications and
telecommunications markets, on December 5, 1997, EMCORE acquired MODE in
a stock transaction accounted for under the purchase method of accounting
for a purchase price of $32.8 million. These operations are located in
Albuquerque, New Mexico and currently employ approximately 40 people
including sales, marketing, administrative and manufacturing personnel.
Because we do not have a controlling economic and voting interest in the
Uniroyal, Union Miniere, Optek and General Electric Lighting joint ventures,
EMCORE will account for these joint ventures under the equity method of
accounting and, as such, our share of profits and losses will be included below
the operating income line in our statement of operations.
EMCORE sells its products and has generated a significant portion of its
sales to customers outside the United States. In fiscal 1996, 1997 and 1998,
international sales constituted 42.5%, 42.0% and 39.1%, respectively, of
revenues. In fiscal 1998, a majority of EMCORE's international sales were made
to customers in Asia, particularly in Japan. EMCORE's sales revenues from Europe
have fluctuated because most of our sales of TurboDisc systems are to a limited
number of customers, who do not purchase these systems regularly. EMCORE
anticipates that international sales will continue to account for a significant
portion of revenues. Historically, we have received all payments for products
and services in U.S. dollars. We do not anticipate that Europe's Euro-currency
conversion will have a material effect on our financial condition or results of
operations.
The information below summarizes EMCORE's export sales by geographic area.
EMCORE's export sales to the Far East and Europe are as follows:
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RESULTS OF OPERATIONS:
The following table sets forth the Statement of Income Data of the
Company expressed as a percentage of total revenues for the fiscal years ended
September 30, 1996, 1997 and 1998.
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(*) as restated, see Note 20 to the consolidated financial statements.
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30, 1997 AND 1998
REVENUES
Revenues. EMCORE's revenues decreased 8.4% from $47.8 million for the
fiscal year ended September 30, 1997 to $43.8 million for the fiscal year ended
September 30, 1998. The revenue decrease represented a shift in product mix
during the year. Equipment related revenues decreased approximately 22.3% while
materials related revenues increased approximately 26.5%. The decrease in
equipment revenues was primarily attributable to the financial issues in the
Asian economies as well as a general slowdown in the semiconductor equipment
market overall. While materials related revenues did experience a 26.5%
increase, the General Motors three month strike adversely affected revenue, as
shipments to General Motors were halted during the strike. Revenues relating to
-20-
TurboDisc systems were $34.1 million for the fiscal year ended September 30,
1997 and $26.5 million for the fiscal year ended September 30, 1998. Revenues
relating to wafers and devices were $13.7 million for the fiscal year ended
September 30, 1997 and $17.3 million for the fiscal year ended September 30,
1998. As a percentage of revenues, TurboDisc systems accounted for 71.4% for the
fiscal year ended September 30, 1997 and 60.5% for the fiscal year ended
September 30, 1998. As a percentage of revenues, wafers and devices accounted
for 28.6% for the fiscal year ended September 30, 1997 and 39.5% for the fiscal
year ended September 30, 1998. International sales accounted for approximately
42.0% and 39.1% of revenues for the fiscal years ended September 30, 1997 and
1998, respectively.
Cost Of Sales/Gross Profit. Cost of sales includes direct material and
labor costs, allocated manufacturing and service overhead, and installation and
warranty costs. Gross profit increased from 37.0% of revenue to 43.6% of revenue
for the fiscal years ended September 30, 1997 and 1998, respectively. The gross
profit percentage increase was attributable to a shift in product mix towards
higher gross margin materials related revenues.
Selling, General and Administrative. Selling, general and administrative
expenses increased by 50.7% from $9.3 million for the year ended September 30,
1997, to $14.1 million for the year ended September 30, 1998. The increase was
largely due to sales personnel headcount increases to support both domestic and
foreign markets and general headcount additions to sustain the internal
administrative support necessary for EMCORE's expanded product lines and new
locations. During fiscal 1998, EMCORE wrote-off a $1.0 million receivable due
from an Asian customer which was deemed to be uncollectible. As a percentage of
revenue, selling, general and administrative expenses increased from 19.6% of
revenue during fiscal 1997 to 32.2% of revenue for fiscal 1998. EMCORE believes
that selling, general and administrative expenses will decrease as a percentage
of revenues in fiscal 1999 as revenues increase.
Goodwill Amortization. In connection with the purchase of MODE, EMCORE
recorded goodwill of $13.2 million which is being amortized over 36 months.
Goodwill amortization expense amounted to $3.6 million for the year ended
September 30, 1998. Net goodwill at September 30, 1998 was $9.5 million.
Research and Development. Recurring research and development expenses
increased by 83.3% from $9.0 million for the year ended September 30, 1997, to
$16.5 million for the year ended September 30, 1998. The increase was primarily
attributable to EMCORE's acquisition of MODE and increased staffing and
equipment costs necessary to enhance current products and develop new product
offerings. Products introduced or under development include HB LEDs, high
efficiency solar cells, new generation TurboDisc production systems, VCSELs and
other optoelectronic devices. For the year ended September 30, 1998, EMCORE
incurred $1.1 million of research and development costs associated with MODE's
in-process (at the date of acquisition) research and development projects. As a
percentage of revenue, research and development expenses increased from 18.8% of
revenue during fiscal 1997 to 37.7% of revenue for fiscal 1998. To maintain
growth and market leadership in epitaxial technology, EMCORE expects to continue
to invest a significant amount of its resources in research and development.
In connection with the MODE acquisition, EMCORE incurred a one-time charge
for the write-off of acquired in-process research and development amounting to
$19.5 million.
The acquisition of MODE, a development stage company, constituted a
significant and strategic investment for EMCORE. The principal investment
consideration was to acquire and gain access to MODE's micro-optical technology,
which was under development at the time. EMCORE plans to use MODE's micro-
optical laser technology in new products for data communications and
telecommunications applications. As of
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the date of acquisition, MODE was engaged in the following six significant VCSEL
research and development projects:
- Gigalase -- a high speed (modulation), near-infrared single optical
laser component for serial selica fiber optic applications.
- Visilase -- a visible, red light, single optical laser component to be
used for fiber optic links and optical storage and identification.
- Gigarray -- an array of optical lasers to be used in transmission in
parallel optical interconnects.
- Microscan -- an integrated near-infrared optical laser, visible laser
and focusing element.
- Optical Laser Source Module (OLSM) -- incorporates optical lasers and
fast detector specialized circuitry and electronics.
- Optical Laser Array Source Module (OLASM) -- incorporates optical
lasers, array detection and specialized circuitry and electronics.
The value assigned to each project and the estimated time and cost to reach
technological feasibility was as follows (in $000's):
The fair value assumptions relating to pricing, product margins and expense
levels were based upon management's experience with its own operations and the
compound semiconductor industry as a whole. In developing EMCORE's future
estimated revenues and costs, new product introductions were expected to
commence in calendar 1998 and net cash flows were expected to commence in
calendar 1999 and 2000. In determining fair value of the acquired projects, a
risk-adjusted discount rate of 20% was utilized. The Company has capitalized
approximately $0.5 million for MODE's workforce, which is included in Goodwill.
If all of MODE's in-process projects are not successfully completed and if
management's estimated product pricing and growth rates are not achieved, EMCORE
may not realize the product, market and financial benefits expected from the
MODE acquisition.
Operating Loss. During fiscal 1998, operating loss increased from a loss
of $0.7 million for the fiscal year ended September 30, 1997, to a loss of $34.6
million for the year ended September 30, 1998. The change in operating loss was
primarily due to the $19.5 million one-time charge for in-process research and
development written off in connection with the purchase of MODE. Additionally,
recurring research and development expense increased by $7.5 million from the
prior year, as a result of increased research and development activities at MODE
and in our core business. In addition, the General Motors three month strike
adversely affected operating performance as shipments to General Motors were
halted during the strike. General Motors is among EMCORE's largest customers.
EMCORE was unable to furlough or reduce their workforce during the strike and
thereby incurred charges without the benefit of related revenues.
Other Expense. Other expenses decreased, particularly due to the reduced
imputed warrant interest expense associated with EMCORE's subordinated debt and
debt issuance guarantee cost. During fiscal 1996, EMCORE issued detachable
warrants along with subordinated notes to certain of its existing shareholders.
In fiscal year 1997, EMCORE also issued detachable warrants in return for a
$10.0 million demand note facility guarantee by the Chairman of the Board of
EMCORE, who provided collateral for the facility. EMCORE subsequently assigned a
value to these detachable warrants issued using the Black-Scholes option pricing
model. EMCORE recorded the subordinated notes at a carrying value that is
subject to periodic accretions,
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using the interest method, and reflected the facility's detachable warrant value
as debt issuance cost which was written off in its entirety in fiscal 1997. The
consequent expense of these subordinated note accretion amounts and the now
terminated facility's debt issuance cost is charged to "imputed warrant
interest, non-cash," and amounted to approximately $4.0 million and $370,000 for
the fiscal years ended September 30, 1997 and 1998, respectively. In June 1998,
EMCORE issued 284,684 warrants to its Chairman and its Chief Executive Officer
for providing a guarantee in connection with the 1998 Agreement, an $8.0 million
18 month credit facility with First Union National Bank. EMCORE assigned a value
to these warrants using the Black-Scholes option pricing model. As a result,
EMCORE will record imputed warrant interest, non-cash of approximately $1.3
million over the life of the credit facility.
Income Taxes. EMCORE's effective income tax rate was 0.0% in fiscal 1998,
2.5% in fiscal 1997 and 0.0% in fiscal 1996. The lower effective rate in fiscal
1998 and 1996, relative to fiscal 1997, was attributable to a federal income tax
benefit offset by net operating loss and expenses not utilized or deductible for
tax purposes.
As of September 30, 1998, EMCORE has net operating loss carryforwards for
regular tax purposes of approximately $22.0 million which expire in the years
2003 through 2013. EMCORE believes that the consummation of certain equity
transactions and a significant change in the ownership during fiscal year 1995
has constituted a change in control under Section 382 of the Internal Revenue
Code. Due to the change in control, EMCORE's ability to use its federal net
operating loss carryovers and federal research credit carryovers to offset
future income and income taxes, respectively, are subject to annual limitations
under Internal Revenue Code Section 382 and 383.
EMCORE believes that the acquisition of MODE and the consummation of
certain other equity transactions has constituted a change in control in fiscal
1998 under Section 382 of the Internal Revenue Code. As such, federal net
operating loss carryovers and research credit carryovers incurred subsequent to
EMCORE's fiscal 1995 change in control (as described above) will also be subject
to annual limitations under Internal Revenue Code Sections 382 and 383.
Extraordinary Item. In the fiscal year ended September 30, 1997, EMCORE
repaid $2.0 million of its outstanding subordinated notes due May 1, 2001. In
connection with this discharge of EMCORE's subordinated notes, an extraordinary
loss of $286,000 was recognized in fiscal 1997 relating to such early
extinguishment of debt.
Net Loss. Net loss increased from $5.6 million for the fiscal year ended
September 30, 1997, to $36.4 million for the fiscal year ended September 30,
1998. This increase was primarily attributable to the aforementioned acquisition
of MODE and subsequent write-off of in-process research and development of $19.5
million as well as an increase in recurring research and development expense of
approximately $7.5 million. In addition, the General Motors three month
prolonged strike adversely affected operating performance.
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30, 1996 AND 1997
Revenues. EMCORE's revenues for fiscal 1997 increased 71.9% from $27.8
million to $47.8 million for the fiscal year ended September 30, 1997. The
revenue increase was primarily attributable to increased demand for compound
semiconductor production systems and package-ready devices, as well as the
introduction of compound semiconductor wafer products. Revenues relating to
TurboDisc systems were $23.8 million for the fiscal year ended September 30,
1996 and $34.1 million for the fiscal year ended September 30, 1997. Revenues
relating to wafers and devices were $4.0 million for the fiscal year ended
September 30, 1996 and $14.7 million for the fiscal year ended September 30,
1997. As a percentage of revenues, TurboDisc systems accounted for 85.6% for the
fiscal year ended September 30, 1996 and 71.4% for the fiscal year ended
September 30, 1997. As a percentage of revenues, wafers and devices accounted
for 14.4% for the fiscal year ended September 30, 1996 and 28.6% for the fiscal
year ended September 30, 1997. International sales accounted for approximately
42.5% and 42.0% of revenues for the fiscal years ended September 30, 1996 and
1997, respectively.
Cost Of Sales/Gross Profit. Cost of sales includes direct material and
labor costs, allocated manufacturing and service overhead, and installation and
warranty costs. Gross profit increased from 33.0% of revenue to
-23-
37.0% of revenue for the fiscal years ended September 30, 1996 and 1997,
respectively. The gross profit percentage increase was attributable to higher
margins on wafer, device and licensing revenues.
Selling, General And Administrative. Selling, general and administrative
expenses increased by 43.3% from $6.5 million for the year ended September 30,
1996, to $9.3 million for the year ended September 30, 1997. The increase was
largely due to increases in sales personnel headcount to support both domestic
and foreign markets and general headcount additions to sustain the internal
administrative support necessary for EMCORE's increased business as well as
higher expenses attributable to increased revenues. As a percentage of revenue,
selling, general and administrative expenses decreased from 23.5% of revenue
during fiscal 1996 to 19.6% of revenue for fiscal 1997.
Research And Development. Research and development expenses increased by
66.6% from $5.4 million for the year ended September 30, 1996, to $9.0 million
for the year ended September 30, 1997. The increase was primarily attributable
to increased staffing and equipment costs necessary to enhance current products
and research and development activities related to wafers and package-ready
devices. As a percentage of revenue, research and development expenses decreased
from 19.4% of revenue during fiscal 1996 to 18.8% of revenue for fiscal 1997. To
maintain growth and market leadership in epitaxial technology, EMCORE expects to
continue to invest a significant amount of its resources in research and
development.
Operating Loss. During fiscal 1997, operating loss decreased $2.1 million
from a loss of $2.8 million for the fiscal year ended September 30, 1996, to a
loss of $0.7 million for the year ended September 30, 1997. The change in
operating loss was primarily due to higher revenues generating greater overall
gross profit.
Other Expense. During fiscal 1996, EMCORE issued detachable warrants along
with subordinated notes to certain of its existing shareholders. In the first
quarter of fiscal year 1997, EMCORE also issued detachable warrants in return
for the $10.0 million facility guarantee by the Chairman of the Board of EMCORE,
who provided collateral for the Facility. EMCORE subsequently assigned a value
to these detachable warrants issued using the Black-Scholes option pricing
model. EMCORE recorded the subordinated notes at a carrying value that is
subject to periodic accretions, using the interest method, and reflected the
facility's detachable warrant value as debt issuance cost. The consequent
expense of these subordinated note accretion amounts and the now terminated
facility's debt issuance cost is charged to "Imputed warrant interest,
non-cash," related to the warrant issuances in connection with the $10.0 million
facility, and amounted to approximately $126,000 and $4.0 million for the fiscal
years ended September 30, 1996 and 1997, respectively.
Borrowings totaling $8.0 million under the facility were utilized to fund
capital expenditures in connection with the build-out of EMCORE's manufacturing
facility during the six months ended March 31, 1997. The resultant interest
expense was the primary reason for the increase in "Stated interest expense" for
the year ended September 30, 1997. The outstanding $8.0 million under this
demand note facility was repaid in March 1997.
Extraordinary Item. EMCORE repaid $10.0 million of its outstanding debt
with proceeds from its initial public offering. The entire $8.0 million
outstanding of its Facility was repaid and $2.0 million was used to repay a
portion of EMCORE's outstanding subordinated notes due May l, 2001. In
connection with this discharge of EMCORE's subordinated notes, an extraordinary
loss of $286,000 was recognized in fiscal 1997 relating to such early
extinguishment of debt.
Net Loss. Net loss increased $2.4 million from $3.2 million for the fiscal
year ended September 30, 1996, to $5.6 million for the fiscal year ended
September 30, 1997. This increase was primarily attributable to the
aforementioned $4.0 million of non-cash imputed warrant interest associated with
certain financing transactions.
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OTHER SELECTED SEPTEMBER 30, 1998 INFORMATION
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by approximately $800,000 from $3.7
million at September 30, 1997, to $4.5 million at September 30, 1998. For the
year ended September 30, 1998, net cash used by operations amounted to $1.6
million, primarily due to the Company's net losses excluding the acquired
in-process research and development non-cash charge and increase in inventories
which was partially offset by the Company's non-cash depreciation and
amortization charges, its increase in accounts payable and advanced billings,
and its decrease in accounts receivable.
For the year ended September 30, 1998, net cash used in investment
activities amounted to $22.2 million primarily due to the purchase and
manufacture of new equipment for the Company's wafer and package ready device
product lines and clean room modifications and enhancements, as well as its
purchase of land and construction of a facility in Albuquerque, New Mexico to
be used for the manufacture of wafers and package ready devices.
On March 31, 1997, the Company entered into the 1997 Agreement, a $10.0
million revolving loan which bears interest at the rate of prime plus 50 basis
points (8.75% at September 30, 1998). As a result of the net loss for the
quarters ended June 30, 1998 and September 30, 1998, the Company was not in
compliance with the 1997 Agreement fixed charge coverage ratio covenant. The
Company received a waiver from the bank regarding this non-compliance. The
Company and the Bank amended the 1997 Agreement as of November 30, 1998 to,
among other things, extend the expiration until October 1, 1999 and modify
certain financial covenants. In addition, pursuant to the amendment of the 1997
Agreement, Thomas Russell, the Chairman of the Board of the Company became the
guarantor of this debt as the Company did not meet certain financial covenants
by May 15, 1999. On June 22, 1998, the Company entered into the 1998 Agreement,
an $8.0 million loan agreement with the Bank, which expires December 31, 1999.
The 1998 Agreement bears interest at a rate equal to one-month LIBOR plus
three-quarters of one percent per annum (6.4% at September 30, 1998). As of
September 30, 1998, the Company had borrowed approximately $10.0 million under
the 1997 Agreement and $8.0 million under the 1998 Agreement.
On September 17, 1998, the Company borrowed $7.0 million from its
Chairman, Thomas J. Russell. The loan bears interest at the prime rate plus
200 basis points (10.25% as of September 30, 1998) per annum. In addition, on
October 23, 1998 the Company borrowed an additional $1.5 million from its
Chairman on identical terms. The entire $8.5 million, borrowed from Thomas J.
Russell was repaid from the proceeds of the Private Placement. The Company
received a waiver from the Bank regarding the repayment of this debt.
Net cash provided by financing activities for the year ended September
30, 1998 amounted to approximately $24.6 million, primarily due to the
Company's proceeds of approximately $18.0 million from borrowings under the
1997 and 1998 Agreements and the $7.0 million note to the Company's Chairman.
The Company's operations are subject to a number of risks, including but
not limited to a history of net losses from operations, future capital needs,
dependence on key personnel, competition and risk of technological obsolescence,
governmental regulations and approvals, research and development results,
continued development of its compound semiconductor manufacturing and marketing
capabilities and a concentration of international sales in Asia. The Company's
operations for the year ended September 30, 1998, were primarily funded through
borrowings under existing credit facilities and short-term advances from the
Company's Chairman - aggregating $7.0 million as of September 30, 1998. The
Company's Chairman has from time to time provided credit enhancements in the
form of debt guarantees and has loaned the Company funds to support its
expansion and capital equipment requirements. The Company's Chief Executive
Officer has also provided credit enhancements in the form of debt guarantees for
the Company. Subsequent to September 30, 1998, the Company completed the Private
Placement, resulting in proceeds of $21.2 million. The Company repaid its
Chairman $8.5 million (including $1.5 million advanced to the Company subsequent
to September 30, 1998), invested approximately $5.6 million in two
unconsolidated ventures, reduced bank debt by $2 million and the balance of
approximately $5.0 million will be used for general working capital purposes. In
addition, the Company's $10.0 million credit facility was extended to October 1,
1999.
-25-
On February 1, 1999, EMCORE entered into a $5.0 million short-term note
with First Union. The note is due and payable in May 1999. The note bears
interest at a rate equal to one-month LIBOR plus three-quarters of one percent
per annum. On January 27, 1999, EMCORE borrowed $3.0 million from its Chairman,
Thomas J. Russell. The loan bears interest at 8% per annum. The loan was repaid
from borrowings under the First Union $5.0 million note. EMCORE's Chairman has
committed to provide up to $30.0 million of long-term financing to EMCORE
through July 1, 2000. This financing commitment terminates if the Company
completes a secondary offering of approximately $40 million.
On April 29, 1999, EMCORE borrowed $2.5 million from its Chairman of an
interest rate of prime plus two percent per annum. On May 7, EMCORE repaid this
loan from borrowings under the $19.0 million short-term note, described below.
On April 29, 1999, EMCORE entered into a $19.0 million short-term loan
agreement with First Union. This agreement represented a consolidation of the
$8.0 million loan agreement dated June 22, 1998 and the $5.0 million loan
agreement dated February 1, 1999 plus an additional $6.0 million of
availability. This agreement is due and payable October 1, 1999 and bears
interest at a rate equal to one-month LIBOR plus three quarters of one percent
per annum (5.75% at May 13, 1999). On May 7, 1999, EMCORE used borrowings under
the agreement to repay the $2.5 million borrowed from EMCORE's chairman.
EMCORE's planned capital expenditures are expected to total approximately
$26 million during fiscal 1999, including approximately $13.4 million in
expenditures related to investments in joint ventures. Capital spending in 1999
also is expected to include upgrading manufacturing facilities, continued
investment in analytical and diagnostic of research and development equipment,
upgrading and purchasing computer equipment and the manufacture of TurboDisc
systems for in-house use. As of September 30, 1998, we had approximately $2
million of commitments for capital expenditures. These commitments were received
and paid for during the quarter ended December 31, 1998.
The Company's operating plans include, among other things attempting to
improve (i) operating cash flow through increased sales of compound
semiconductor systems, wafers and package-ready devices and (ii) managing its
cost structure in relation to its anticipated level of revenues. The Company
believes that its current liquidity, together with available credit facilities,
the proceeds from the Private Placement and the Chairman's commitment, should be
sufficient to meet its cash needs for working capital through fiscal 1999.
However, if the proceeds from the Private Placement, cash generated from
operations, the Chairman's commitment and cash on hand are not sufficient to
satisfy the Company's liquidity requirements, the Company will seek to obtain
additional equity or debt financing. Additional funding may not be available
when needed or on terms acceptable to the Company. If the Company is required to
raise additional financing and if adequate funds are not available or are not
available on acceptable terms, the ability to continue to fund expansion,
develop and enhance products and services, or otherwise respond to competitive
pressures would be severely limited. Such a limitation could have a material
adverse effect on the Company's business, financial condition or operations.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept or recognize only two digit entries in the date code field. These
systems and software products will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and/or software used by many companies and governmental agencies may
need to be upgraded to comply with such Year 2000 requirements or risk system
failure or miscalculations causing disruptions of normal business activities.
-26-
State Of Readiness. EMCORE has made a preliminary assessment of the Year
2000 readiness of its operating financial and administrative systems, including
the hardware and software that support such systems. EMCORE's assessment plan
consists of
(1) quality assurance testing of its internally developed proprietary
software;
(2) contacting third-party vendors and licensors of material hardware,
software and services that are both directly and indirectly
related to EMCORE's business;
(3) contacting vendors of third-party systems;
(4) assessing repair or replacement requirements;
(5) implementing repair or replacement; and
(6) creating contingency plans in the event of Year 2000 failures.
Our compound semiconductor wafers and devices are date insensitive and,
therefore, do not have any Year 2000 issues associated with them. Our TurboDisc
production systems have several components that could give rise to Year 2000
compliance concerns. We have preliminarily assessed the Year 2000 issues
associated with these components and have found that they have either been
certified by the vendor to be compliant or are date insensitive.
Our principal concern has been the status of our operating, financial and
administrative systems. These systems include accounting and production control
software at our New Jersey, MODE and EmcoreWest facilities. All software has
been certified as Year 2000 compliant by the vendors, except our New Jersey
office's accounting software. However, the software's manufacturer has a new
version of the software that is Year 2000 compliant. We are planning this
upgrade. The upgrade will be installed and tested by June 1999.There are other
information technology systems and non-information technology systems that could
give rise to Year 2000 concerns. These include scientific and engineering
applications, desktop applications (such as Microsoft Word and Excel) and
facilities controls such as HVAC and security. A review of these systems leads
us to believe that the systems are Year 2000 compliant, are not critical to
business operations, are used on a limited basis or are date insensitive.
We are continuing the evaluation of the Year 2000 compliance of all our
systems and have developed an enterprise-wide database that we will use to
document these Year 2000 issues. EMCORE plans to complete its evaluation by
September 30, 1999 including Year 2000 simulation on its systems during the
second and third quarter of calendar 1999 to test systems readiness.
Costs. To date, EMCORE has not incurred any material expenditures in
connection with identifying, evaluating or addressing Year 2000 compliance
issues. Most of EMCORE expenses have related to, and are expected to continue to
relate to, the operating costs associated with time spent by employees in the
evaluation process and Year 2000 compliance matters generally.
The exact costs related to Year 2000 compliance are difficult to determine.
Several known costs relating to our information technology systems are:
- Updating New Jersey's accounting system, 2 man-weeks or $4,000, and
- Reviewing software and completing Year 2000 database, 1 man-month or
$8,000.
-27-
We will be able to make a reasonable determination of the remediation costs
for Year 2000 compliance after we have completed our Year 2000 evaluation. At
present EMCORE believes that the costs for bringing our in-house information
technology systems into compliance should not exceed $200,000.
EMCORE does not anticipate that remediation expenses will be material. If the
remediation expenses are higher than anticipated EMCORE's business, financial
condition and results of operations could be materially and adversely affected.
Risks. EMCORE is not currently aware of any Year 2000 compliance problems
relating to its systems that would have a material adverse effect on EMCORE's
business, results of operations and financial condition. There can be no
assurance that, upon completion of its evaluation, EMCORE will not discover Year
2000 compliance problems in its systems that will require substantial revision.
In addition, there can be no assurance that third-party software, hardware or
services incorporated into EMCORE's material systems will not need to be revised
or replaced, all of which could be time-consuming and expensive. The failure of
EMCORE to fix or replace its internally developed proprietary software or
third-party software, hardware or services on a timely basis could result in
lost revenues, increased operating costs, the loss of customers and other
business interruptions, any of which could have a material adverse effect on
EMCORE's business, result of operations and financial condition. Moreover, the
failure to adequately address Year 2000 compliance issues in its internally
developed proprietary software could result in claims of mismanagement,
misrepresentation or breach of contract and related litigation, which could be
costly and time-consuming to defend. In addition, the failure of governmental
agencies, utility companies, third-party service providers and others outside of
EMCORE's control to be Year 2000 compliant could result in systemic failure
beyond EMCORE's control such as a telecommunications or electrical failure,
which could have a material adverse effect on EMCORE's business, results of
operations and financial condition.
Contingency Plan. As discussed above, EMCORE is engaged in an ongoing Year
2000 assessment and has not yet developed any contingency plans. The results of
EMCORE's Year 2000 simulation testing and the responses received from
third-party vendors and service providers will be taken into account in
determining the nature and extent of any contingency plans.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS No. 131"), which
establishes standards for reporting information about operating segments in
annual financial statements. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS No. 131 is effective for fiscal years beginning after December 15, 1997.
EMCORE will be required to adopt this standard in its fiscal year ending
September 30, 1999. The adoption of SFAS No. 131 is not expected to have an
impact on EMCORE's results of operations, financial position or cash flows.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-l, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
is effective for financial statements for years beginning after December 14,
1998. SOP 98-l provides guidance over accounting for computer software developed
or obtained for internal use including the requirement to capitalize specified
costs and amortization of such costs. EMCORE does not expect the adoption of
this standard to have a material effect on results of operations, financial
position or cash flows.
In June of 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and requires recognition of all
derivatives as assets or liabilities in the statement of financial position and
measurement of these instruments at fair value. The statement is effective for
fiscal years beginning after June 15, 1999. Management believes that adopting
this statement will not have a material impact on the financial position,
results of operations, or cash flows of the Company.
-28-
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on
the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5, which is effective for
fiscal years beginning after December 15, 1998, provides guidance on the
financial reporting of start-up costs and organization costs. It requires costs
of start-up activities and organization costs to be expensed as incurred. As
EMCORE has expensed these costs historically, the adoption of this standard is
not expected to have a significant impact on EMCORE's results of operations,
financial position or cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During fiscal 1998, the Company was not a party to any derivative
contracts, hedging or other market risk transactions.
-29-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
EMCORE CORPORATION
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial
statements.
-30-
EMCORE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these consolidated financial
statements.
-31-
EMCORE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997, 1998
The accompanying notes are an integral part of these consolidated financial
statements.
-32-
EMCORE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
-33-
Reference is made to Note 8 -- Debt Facilities -- for disclosure relating to
certain non-cash warrant issuance.
The accompanying notes are an integral part of these consolidated financial
statements.
-34-
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS
EMCORE is a designer and developer of compound semiconductor materials and
process technology and a manufacturer of production systems used to fabricate
compound semiconductor wafers. Compound semiconductors are used in a broad range
of applications in wireless communications, telecommunications, computers, and
consumer and automotive electronics. The Company has recently capitalized on its
technology base by expanding into the design and production of compound
semiconductor wafers and package-ready devices and under specific arrangements
has licensed certain process technologies. During fiscal 1998, the Company
completed the acquisition of a development stage company focused on the research
and development of optical laser technologies (see Note 3). The Company offers
its customers a complete, vertically-integrated solution for the design,
development and production of compound semiconductor wafers and devices.
Basis of Presentation and Liquidity. The accompanying financial statements
have been prepared on a going concern basis. The Company for the year ended
September 30, 1998, experienced an 8% decline in revenue of approximately $4.0
million and a substantial operating loss amounting to approximately $34.6
million (approximately $15.1 million excluding the effect of acquired in-process
research and development) and had a working capital deficiency of $2.0 million.
The Company's operations are subject to a number of risks, including but
not limited to a history of net losses from operations, future capital needs,
dependence on key personnel, competition and risk of technological obsolescence,
governmental regulations and approvals, technology research and development
results, continued development of its compound semiconductor manufacturing and
marketing capabilities and a concentration of international sales in Asia. The
Company's operations for the year ended September 30, 1998 were primarily funded
through borrowings under existing credit facilities and short-term advances from
the Company's Chairman -- aggregating $7.0 million as of September 30, 1998. The
Company's Chairman has from time to time provided credit enhancements in the
form of debt guarantees and has loaned the Company funds to support its
expansion and capital equipment requirements. The Company's Chief Executive
Officer has also provided credit enhancement in the form of debt guarantees for
the Company. On November 30, 1998, the Company completed a preferred stock
private placement (the "Private Placement" see Note 17), resulting in net
proceeds of $21.2 million. The Company repaid its Chairman $8.5 million
(including $1.5 million advanced to the Company subsequent to September 30,
1998), invested approximately $5.6 million in two unconsolidated ventures, used
$2 million to repay debt and the balance is being used for general working
capital purposes. In addition, the Company's $10.0 million credit facility was
extended to October 1, 1999. The Company's Chairman has committed to provide the
Company with $30 million of long-term financing through July 1, 2000. The
Chairman's financing commitment terminates if the Company completes a secondary
offering of approximately $40.0 million. The Company's operating plans include,
among other things attempting to improve (i) operating cash flow through
increased sales of compound semiconductor systems, wafers and package-ready
devices and (ii) managing its cost structure in relation to its anticipated
level of revenues. The Company believes that its current liquidity, together
with available credit facilities and the proceeds from the Private Placement,
should be sufficient to meet its cash needs for working capital through fiscal
1999. If the working capital generated from the Private Placement and cash
generated from operations is not sufficient to satisfy the Company's liquidity
requirements, the Company will seek to obtain additional equity or debt
financing. Additional funding may not be available when needed or on terms
acceptable to the Company. If the Company is required to raise additional
financing and if adequate funds are not available or are not available on
acceptable terms, the ability to continue to fund expansion, develop and enhance
products and services, or otherwise respond to competitive pressures would be
severely limited. Such a limitation could have a material adverse effect on the
Company's business, financial condition or operations and the financial
statements do not include any adjustment that could result therefrom.
-35-
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiary. The equity method
of accounting is used for unconsolidated affiliates in which the Company's
equity is at least 20% and not more than 50%. All significant intercompany
transactions are eliminated upon consolidation.
Cash and Cash Equivalents. The Company considers all highly liquid
short-term investments purchased with an original maturity of three months or
less to be cash equivalents. The Company had approximately $2.3 million and $3.0
million in cash equivalents at September 30, 1997 and 1998, respectively. As of
September 30, 1998, the Company had restricted cash in the amount of $62,500 due
to a contractual obligation.
Inventories. Inventories are stated at the lower of FIFO (first-in,
first-out) cost or market. Reserves are established for slow moving or obsolete
inventory based upon historical and anticipated usage.
Property and Equipment. Property and equipment are stated at cost.
Significant renewals and betterments are capitalized. Maintenance and repairs
which do not extend the useful lives of the respective assets are expensed.
Depreciation is recorded using the straight-line method over the estimated
useful lives of the applicable assets, which range from three to five years.
Leasehold improvements are amortized using the straight-line method over the
term of the related leases or the estimated useful lives of the improvements,
whichever is less. Depreciation expense includes the amortization of capital
lease assets. When assets are retired or otherwise disposed of, the assets and
related accumulated depreciation accounts are adjusted accordingly, and any
resulting gain or loss is recorded in current operations.
Long-Lived Assets. The carrying amount of assets is reviewed on a regular
basis for the existence of facts or circumstances, both internally and
externally, that suggest impairment. To date no such impairment has been
indicated. The Company determines if the carrying amount of a long-lived asset
is impaired based on anticipated undiscounted cash flows before interest. In the
event of an impairment, a loss is recognized based on the amount by which the
carrying amount exceeds fair value of the asset. Fair value is determined
primarily using the anticipated cash flows before interest, discounted at a rate
commensurate with the risk involved.
Deferred Costs. Included in other assets are deferred costs related to
obtaining product patents and debt issuance costs and an investment in an
unconsolidated affiliate. Total amortization expense amounted to approximately
$128,000, $40,000 and $79,000 for the years ended September 30, 1996, 1997 and
1998, respectively. During the year ended September 30, 1998, the Company issued
284,684 common stock purchase warrants in exchange for the guaranteeing of a
credit facility by the Company's Chairman and Chief Executive Officer. The
warrants were assigned a value of $1,310,000 which is being amortized over the
eighteen month term of the facility. The warrants were valued by the Company
based upon its application of the Black Scholes Option Pricing Model ("Black
Scholes"). Amortization expense related to such warrant issuance amounted to
approximately $219,000 for fiscal 1998.
Goodwill. Goodwill is amortized using the straight-line method over three
years. The Company, as applicable, evaluates whether there has been a permanent
impairment in the value of goodwill. Any impairment would be recognized when the
sum of expected undiscounted cash flows derived from the acquired business is
less than its carrying value.
Income Taxes. The Company recognizes deferred taxes by the asset and
liability method of accounting for income taxes. Under the asset and liability
method, deferred income taxes are recognized for differences between the
financial statement and tax bases of assets and liabilities at enacted statutory
tax rates in effect for the years in which the differences are expected to
reverse. The effect on deferred taxes of a change in tax rates is recognized in
income in the period that includes the enactment date. In addition, valuation
allowances are
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EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
established when necessary to reduce deferred tax assets to the amounts expected
to be realized. The primary sources of temporary differences are depreciation
and amortization of intangible assets.
Revenue and Cost Recognition -- Systems, Components and Service
Revenues. Revenue from systems sales is recognized upon shipment, when title
passes to the customer. Subsequent to product shipment, the Company incurs
certain installation costs at the customer's facility and warranty costs which
are estimated and accrued at the time the sale is recognized. Component sales
and service revenues are recognized when goods are shipped or services are
rendered to the customer. Service revenue under contracts with specified service
terms is recognized as earned over the service period in accordance with the
terms of the applicable contract. Costs in connection with the procurement of
the contracts are charged to expense as incurred.
Revenue and Cost Recognition -- Contract Revenue. The Company's research
contracts require the development or evaluation of new materials applications
and have a duration of six to thirty-six months. For research contracts with the
U.S. Government and commercial enterprises with durations greater than six
months, the Company recognizes revenue to the extent of costs incurred plus the
estimated gross profit as stipulated in such contracts, based upon contract
performance. Contracts with a duration of six months or less are accounted for
on the completed contract method. A contract is considered complete when all
costs, except insignificant items, have been incurred, and the research
reporting requirements to the customer have been met. Contract costs include all
direct material and labor costs and those indirect costs related to contract
performance, such as indirect labor, supplies, tools, repairs and depreciation
costs, as well as coverage of certain general and administrative costs.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined. Revenues from contracts amounted to
approximately $3,295,000, $614,000 and $438,000 for the years ended September
30, 1996, 1997 and 1998, respectively.
Research and Development. Research and development costs related to the
development of both present and future products and Company-sponsored materials
application research are charged to expense as incurred. In connection with the
acquisition of MicroOptical Devices, Inc. ("MODE"), the Company recorded a
charge of $19,516,000 for acquired in-process research and development.
Fair Value of Financial Instruments. The Company estimates the fair value
of its financial instruments based upon discounted cash flow analyses using the
Company's incremental borrowing rate on similar instruments as the discount
rate. As of September 30, 1998, the fair value of the Company's subordinated
notes exceeded the carrying value of such instruments by approximately $830,000.
As of September 30, 1998, the carrying values of the Company's cash and cash
equivalents, receivables, accounts payable and variable rate based debt as
reflected on the Company's accompanying balance sheet approximates fair value.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements. Estimates also affect the reported amounts of revenues
and expenses during the reporting period. Actual results may differ from those
estimates. The Company's most significant estimates relate to acquired
in-process research and development, accounts receivable and inventory valuation
reserves, warranty and installation accruals, estimates of cost and related
gross profits on certain research contracts and the valuation of long-lived
assets.
Net Loss Per Share. The Company accounts for earnings per share under the
provisions of Statement of Financial Accounting Standards No. 128 "Earnings per
Share" ("SFAS No. 128"). Basic and diluted earnings per share calculated
pursuant to SFAS No. 128 have been restated for all periods presented to give
effect to the Securities and Exchange Commission's Staff Accounting Bulletin No.
98 which eliminated certain computational requirements of Staff Accounting
Bulletin No. 64.
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EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Basic earnings per common share was calculated by dividing net loss by the
weighted average number of common stock shares outstanding during the period.
Diluted earnings per share was calculated by dividing net loss by the sum of the
weighted average number of common shares outstanding plus all additional common
shares that would have been outstanding if potentially dilutive common shares
had been issued. The following table reconciles the number of shares utilized in
the Company's earnings per share calculations.
- -------------------------
The effect of outstanding common stock purchase options and warrants have been
excluded from the Company's earnings per share calculation since the effect of
such securities is anti-dilutive.
Reclassifications. Prior period balances have been reclassified to conform
with the current period financial statement presentation.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131 "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS No. 131"), which
establishes standards for reporting information about operating segments in
annual financial statements. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The Company will be required to adopt this standard in its fiscal year ended
September 30, 1999. The adoption of SFAS No. 131 will not have an impact on the
Company's results of operations, financial position or cash flows.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
is effective for financial statements for years beginning after December 15,
1998. SOP 98-1 provides guidance over accounting for computer software developed
or obtained for internal use, including the requirement to capitalize specified
costs and amortization of such costs. The Company does not expect the adoption
of this standard to have a material effect on its results of operations,
financial position or cash flows.
In April 1998, AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities" ("SOP 98-5"). SOP 98-5, which is effective for fiscal years
beginning after December 15, 1998, provides guidance on the financial reporting
of start-up costs and organization costs. It requires costs of start up
activities and organization costs to be expenses as incurred. The adoption of
this standard is not expected to have a significant impact on its results of
operations, financial position or cash flows.
In June of 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and requires recognition of all
derivatives as assets or liabilities in the statement of financial position and
measurement of these instruments at fair value. The statement is effective for
fiscal years beginning after June 15, 1999. Management believes that adopting
this statement will not have a material impact on the financial position,
results of operations, or cash flows of the Company.
-38-
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. ACQUISITION
On December 5, 1997, the Company acquired all of the outstanding capital
stock of MODE in exchange for 1,461,866 shares of EMCORE common stock, 200,966
common stock purchase options (exercise prices ranging from $0.43 to $0.59), and
47,118 common stock purchase warrants (exercise prices ranging from $4.32 to
$5.92). The purchase price was approximately $32,829,000 including direct
acquisition costs of approximately $500,000. The acquisition of MODE was
recorded using the purchase method of accounting. Accordingly, the results of
operations of the acquired business and the fair values of the acquired tangible
and intangible assets and assumed liabilities have been included in the
Company's financial statements as of December 5, 1997. The allocation of the
fair value of the net assets acquired is as follows:
The common stock issued in connection with the MODE acquisition was valued
based upon the average closing price of the Company's common stock for the five
days before and after the announcement date of the acquisition. The assumed MODE
options and warrants were valued using Black-Scholes and such values amounted to
approximately $3,761,000 and $793,000, respectively.
The MODE options have a term of 10 years from the date of grant, with such
options expiring at various dates through July 2007. The options vest, with
continued service, over a four-year period; 25% in year one and 75% equally over
the remaining 36 months. The warrants have a term of 10 years from the date of
grant, were exercisable upon grant, and expire at various dates through May
2007.
MODE was a development stage company (incorporated in August 1995) and had
18 employees at the date of acquisition. MODE's activities were substantially
dedicated towards the research and development of optical laser devices at the
date of acquisition.
Management is responsible for estimating the fair value of the acquired
in-process research and development. As of the date of acquisition, MODE had six
primary micro-optical laser research and development projects in-process, which
had not reached technological feasibility. MODE's in-process research and
development related to new technologies, the fair value assumptions relating to
pricing, product margins and expense levels were based upon management's
experience with its own operations and the compound semiconductor industry as a
whole.
The Company allocated $475,000 of the purchase price to the acquired
workforce of MODE which is included in the approximately $13.2 million of
goodwill discussed above. The amount allocated to goodwill is being amortized
over a period of three years.
-39-
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following unaudited pro forma basis financial information reflects the
combined results of operations of the Company and MODE, as if MODE had been
acquired as of October 1, 1996 and October 1, 1997, respectively, but does not
reflect the non-recurring write-off of the acquired in-process research and
development. The summary includes the impact of certain adjustments, such as
goodwill amortization and the number of shares outstanding.
The unaudited pro forma results of operations are not necessarily
indicative of what actually would have occurred if the acquisition had occurred
on October 1, 1996. In addition, the unaudited pro forma results of operations
are not intended to be a projection of future results that might be achieved
from the combined entity. The foregoing pro forma results of operations does not
reflect the non-recurring write-off of acquired in-process research and
development.
NOTE 4. CONCENTRATION OF CREDIT RISK
The Company sells its compound semiconductor products domestically and
internationally. The Company's international sales are generally made under
letter of credit arrangements.
For the years ended September 30, 1996, 1997 and 1998, the Company sold
42.5%, 42.0% and 39.1% of its products to foreign customers, respectively.
The Company's world-wide sales to major customers were as follows:
The Company performs material application research under contract with the
U.S. Government or as a subcontractor of U.S. Government funded projects.
The Company performs ongoing credit evaluations of its customers' financial
condition and collateral is not requested. The Company maintains reserves for
potential credit losses based upon the credit risk of specified customers,
historical trends and other information. To reduce credit risk and to fund
manufacturing costs, the Company requires periodic prepayments or irrevocable
letters of credit on most production system orders. During the quarter ended
June 30, 1998, the Company wrote off outstanding receivables of approximately
$1.0 million which was due from an Asian customer. Prior to this event, the
Company's credit losses generally had not exceeded its expectations.
-40-
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company has maintained cash balances with certain financial
institutions in excess of the $100,000 insured limit of the Federal Deposit
Insurance Corporation.
NOTE 5. INVENTORIES
The components of inventories consisted of the following:
NOTE 6. PROPERTY, PLANT AND EQUIPMENT
Major classes of property and equipment are summarized below:
At September 30, 1998, minimum future lease payments due under the capital
leases are as follows:
The provisions for depreciation and amortization expense on owned property
and equipment amounted to approximately $1,743,000, $3,148,000 and $4,683,000
for the years ended September 30, 1996, 1997 and 1998,
-41-
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
respectively. Accumulated amortization on assets accounted for as capital lease
amounted to approximately $366,000 as of September 30, 1998.
Included in equipment above are ten systems and twenty systems with a
combined net book value of approximately $5.1 million and $9.8 million at
September 30, 1997 and 1998, respectively. Such systems are utilized for the
production of compound semiconductor wafers and package-ready devices for sale
to third parties, systems demonstration purposes, system sales support, in-house
materials applications, internal research and contract research funded by third
parties.
NOTE 7. ACCRUED EXPENSES
Accrued expenses consisted of the following:
NOTE 8. DEBT FACILITIES
1998 Agreement:
On June 22, 1998, the Company entered into an $8.0 million loan agreement
with First Union National Bank (the "1998 Agreement"), which expires December
31, 1999. The 1998 Agreement bears interest at a rate equal to one-month LIBOR
plus three-quarters of one percent per annum (or 6.4%) at September 30, 1998. As
of September 30, 1998, $8.0 million was outstanding under the 1998 Agreement and
is due and payable on December 31, 1999. The 1998 Agreement is guaranteed by
both the Company's Chairman and Chief Executive Officer. In exchange for
guaranteeing the facility, the Chairman and the Chief Executive Officer were
granted an aggregate of 284,684 common stock purchase warrants exercisable at
$11.375 per share until May 1, 2001. These warrants are callable at the
Company's option at $0.85 per warrant at such time as the Company's Common Stock
has traded at or above 150% of the exercise price for a period of thirty days.
The Company assigned a value of $1,310,000 to the warrants issued to the
guarantors. This valuation was based upon the Company's application of Black
Scholes. This value is accounted for as debt issuance cost and will be amortized
over the eighteen month life of the 1998 Agreement.
1997 Agreement:
On March 31, 1997, the Company entered into a $10.0 million loan agreement
(the "1997 Agreement"). The Agreement bears interest at the rate of Prime plus
50 basis points (8.75% and 9.0% at September 30, 1998 and 1997, respectively).
As of September 30, 1998 the Company had $9,950,000 outstanding under this
facility. As of September 30, 1997, there were no amounts outstanding under this
facility.
As a result of the net loss for the quarters ended June 30, 1998 and
September 30, 1998, the Company was not in compliance with the 1997 Agreement
fixed charged coverage ratio covenant. The Company received a waiver from the
bank regarding this non-compliance. The Company's 1997 Agreement was
subsequently further extended through October 1, 1999. The 1997 Agreement's
financial covenants were modified under the second amendment, and management
believes that the Company will be able to comply
-42-
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
with such requirements throughout fiscal 1999. In addition, the Company's
Chairman has guaranteed such debt in the event the Company does not meet certain
financial covenants.
Subordinated Notes:
On May 1, 1996, the Company issued subordinated notes (the "Subordinated
Notes") in the amount of $9,500,000 to its existing shareholders, $1,000,000 of
which were exchanged for notes receivable from officers and certain employees
with identical payment and interest provisions. The Subordinated Notes are
scheduled to mature on May 1, 2001, and have a stated interest rate of 6.0%
which is payable semi-annually on May 1 and November 1. In addition, the
noteholders were issued 2,328,432 common stock purchase warrants with an
exercise price of $4.08 per share which expire on May 1, 2001. The warrants are
exercisable after November 1, 1996, and are callable at the Company's option,
after May 1, 1997, at $0.85 per warrant. The Company has the legal right of
offset with respect to the notes receivable from officers and certain key
employees, and it is their full intention to offset the corresponding notes
receivable and payable upon maturity. As such, the Company reflected $848,000 of
the officers' and employees' notes receivable as a contra liability, reducing
the Company's Subordinated Notes balance. The remaining $152,000 note receivable
has been reflected as a contra equity note receivable balance, representing the
portion of the employee note receivable associated with common stock purchase
warrants issued to such employees. The Company received cash proceeds of
$8,500,000 in connection with this Subordinated Notes issuance.
On September 1, 1996, the Company issued a subordinated note in the amount
of $2,500,000 to the Company's then majority shareholder with terms identical to
the Subordinated Notes issued on May 1, 1996. In addition, under the terms of
this issuance, 245,098 common stock purchase warrants were issued to purchase
common stock at $10.20 per share and which expire September 1, 2001. These
warrants are exercisable after March 1, 1997, and are callable at the Company's
option after September 1, 1997, at $0.85 per warrant.
The Company assigned a value of $1,440,000 to the May 1, 1996 detachable
warrants and $900,000 to the September 1, 1996 detachable warrants. These
valuations were based upon the Company's application of Black Scholes and the
Company's assessment of the underlying valuation factors, as well as an
assessment of the terms of the Subordinated Notes. The carrying value of the
Subordinated Notes will be subject to periodic accretions, using the interest
method, in order for the carrying amount to equal the Company's obligation upon
maturity. As a result, the May 1, 1996 and September 1, 1996 Subordinated Notes
have an effective interest rate of approximately 9.3% and 15.0%, respectively.
For the years ended September 30, 1998, 1997 and 1996, imputed warrant interest
related to the Subordinated Notes amounted to $370,000, $388,000 and $126,000,
respectively.
Demand Note Facilities:
On September 17, 1998, the Company borrowed $7.0 million from its Chairman.
The loan bears interest at the rate of Prime plus 200 basis points (10.25% as of
September 30, 1998), per annum. In addition, on October 23, 1998 the Company
borrowed an additional $1.5 million from its Chairman on identical terms. The
entire sum of $8.5 million borrowed plus interest was repaid from the proceeds
of the Private Placement (see Note 17).
On October 25, 1996, the Company entered into a $10.0 million demand note
facility (the "Facility"). The Facility bore interest at the rate of LIBOR plus
75 basis points, had a term of one year and was due and payable on demand. The
Facility was guaranteed by the Chairman of the Company's Board of Directors who
provided collateral for the Facility. In December 1996, in return for
guaranteeing the facility, the Company granted the Chairman 980,392 common stock
purchase warrants at $10.20 per share which expire September 1, 2001. These
warrants are exercisable after July 1, 1997, and are callable at the Company's
option after December 1, 1997 at $0.85 per warrant. The Facility was terminated
in conjunction with the Company's initial public offering.
-43-
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company assigned a value of $3,600,000 to the warrants issued to the
guarantor. This valuation was based upon the Company's application of Black
Scholes. This value was accounted for as debt issuance cost and was amortized
over the expected period that the facility was to be in place (four months).
The Company utilized a portion of the proceeds from its initial public
offering to pay down or discharge certain of its debts. The Company repaid the
entire $8.0 million outstanding under its October 1996 Facility and $2.0 million
was used to repay a portion of the Company's outstanding subordinated notes, due
May 1, 2001. In connection with the discharge of the Company's subordinated
notes, an extraordinary loss of $286,000 was recognized.
NOTE 9. COMMITMENTS AND CONTINGENCIES
On November 16, 1992, the Company entered into a three-year lease agreement
with a bank for 34,000 square feet of space in the building the Company
presently occupies. On March 31, 1995, the agreement was renewed for 5 years for
49,000 square feet. In November 1996, the Company signed an agreement to occupy
the remaining 26,000 square feet that it previously had not occupied.
The Company leases certain equipment under non-cancelable operating leases.
Facility and equipment rent expense under such leases amounted to
approximately $350,000, $548,000 and $637,000 for the years ended September 30,
1996, 1997 and 1998, respectively.
Future minimum rental payments under the Company's non-cancelable operating
leases with an initial or remaining term of one year or more as of September 30,
1998 are as follows:
The Company is from time to time involved in litigation incidental to the
conduct of its business. Management and its counsel believe that such pending
litigation will not have a material adverse effect on the Company's results of
operations, cash flows or financial condition.
-44-
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10. INCOME TAXES
Income tax expense consists of the following:
The principal differences between the U.S. statutory and effective income
tax rates were as follows:
-45-
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The components of the Company's net deferred taxes were as follows:
The Company has established a valuation reserve as it has not determined
that it is more likely than not that the net deferred tax asset is realizable,
based upon the Company's past earnings history.
As of September 30, 1998, the Company has net operating loss carryforwards
for regular tax purposes of approximately $22.0 million which expire in the
years 2003 through 2013. The Company believes that the consummation of certain
equity transactions and a significant change in the ownership during fiscal
years 1995 and 1998 have constituted a change in control under Section 382 of
the Internal Revenue Code ("IRC"). Due to the change in control, the Company's
ability to use its federal net operating loss carryovers and federal research
credit carryovers to offset future income and income taxes, respectively, are
subject to annual limitations under IRC Section 382 and 383.
The Company believes that the acquisition of MODE and the consummation of
certain other equity transactions has constituted a change in control in fiscal
1998 under Section 382 of the IRC. As such, Federal net operating loss
carryovers and research credit carryovers incurred subsequent to the Company's
fiscal 1995 change in control (as described above) will also be subject to
annual limitations under IRC Section 382 and 383.
NOTE 11. STOCKHOLDERS' EQUITY
Reverse Stock Split. On February 3, 1997, the Board of Directors approved
a 3.4:1 reverse stock split of its common stock and approved a decrease in the
number of shares of common stock authorized. All references in the accompanying
financial statements to the number of common stock and per-share amounts have
been restated to reflect the reverse split.
Common Stock Offering. In March 1997, the Company completed an initial
public offering of 2,500,000 shares of common stock at a price of $9.00 per
share (the "Offering"), and upon the exercise of the Underwriter's overallotment
option, 375,000 additional shares of common stock were also sold at $9.00 per
share. The proceeds, net of commissions and certain expenses, to the Company
from the offering were
-46-
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
approximately $22.8 million. Prior to the Offering, there was no public market
for the Company's common stock.
Warrant Exercise. On December 3, 1997, the holders of 1.8 million common
stock purchase warrants (with an exercise price of $4.08) exercised such
warrants with the Company taking full recourse notes amounting to approximately
$7.5 million in exchange for the issued common stock. The notes receivable
mature and are payable in full on May 1, 2001 and bear interest at a rate of 6%,
compounding semi-annually. In addition, the holders are required to provide
collateral at a 2:1 coverage ratio. This collateral is presently held by the
Company.
Preferred Stock. The Company's certificate of incorporation authorizes the
Board of Directors to issue up to 5,882,353 shares of preferred stock of the
Company upon such terms and conditions having such rights, privileges and
preferences as the Board of Directors may determine.
NOTE 12. STOCK OPTIONS AND WARRANTS
Stock Option Plan. In November 1994, the Company's Incentive Stock Option
Plan, initiated in 1987, was eliminated. On June 5, 1995, the Company adopted
the 1995 Incentive and Non-Statutory Stock Option Plan (the "Option Plan").
Under the terms of the Option Plan, options to acquire 323,529 shares of common
stock may be granted to eligible employees, as defined, at no less than 100
percent of the fair market value on the date of grant. In March 1996, options to
acquire an additional 323,530 shares of common stock were approved. In February
1997, options to acquire an additional 725,000 shares of common stock were
approved. As of September 30, 1998, 1,372,059 stock options were available for
issuance under the Company's Option Plan.
Certain options under the Option Plan are intended to qualify as incentive
stock options pursuant to Section 422A of the Internal Revenue Code.
During fiscal 1998, options with respect to 816,284 shares were granted
pursuant to the Company's option plan or issued in connection with the MODE
acquisition at exercise prices ranging from $0.44 to $20.00 per share.
Stock options granted generally vest over three to five years and are
exercisable over a ten year period. As of September 30, 1996, 1997 and 1998,
options with respect to 162,764, 199,368 and 481,863 shares were exercisable,
respectively.
-47-
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the activity under the plan:
As of September 30, 1998, stock options outstanding, excluding those
assumed in connection with the acquisition of MODE, were as follows:
In connection with the Company's acquisition of MODE, it assumed 200,966
common stock purchase options with exercise prices ranging from $0.43 to $0.59.
The MODE options have a term of 10 years from the date of grant, with such
options expiring at various dates through July 31, 2007. The options vest, with
continued service, over a four-year period; 25% in year one and 75% equally over
the remaining 36 months. As of September 30, 1998, there are 177,312 options
outstanding at a weighted average exercise price of $0.50.
The following table summarizes the activity of options assumed in the MODE
acquisition.
-48-
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock Based Compensation" ("SFAS 123"). SFAS 123
establishes financial and reporting standards for stock based compensation
plans. The Company has adopted the disclosure only provisions of this standard
and has elected to continue to apply the provision of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees". Had the
Company elected to recognize compensation expense for stock options based on the
fair value at the grant dates of awards, net loss and net loss per share would
have been as follows:
The weighted average fair value of the Company's stock options was
calculated using Black Scholes with the following weighted-average assumptions
used for grants in fiscal 1997 and 1998: no dividend yield; expected volatility
of 0% prior to the Company's initial public offering and 60% thereafter; a
risk-free interest rate of 6.04% and 5.57% for fiscal years 1997 and 1998,
respectively; and expected lives of 5 years. The weighted average fair value of
options granted during the years ended September 30, 1997 and 1998 is $3.82 and
$7.50 per share, respectively. Stock options granted by the Company prior to its
initial public offering were valued using the minimum value method under FASB
No. 123.
Warrants. Set forth below is a summary of the Company's outstanding
warrants at September 30, 1998:
- -------------------------
(1) Issued in connection with the Company's May 1996 subordinated note issuance.
(2) Issued in connection with the MODE acquisition.
(3) Issued in connection with the Company's September 1996 subordinated debt
issuance and October 1996 debt guarantee.
(4) Issued in connection with the 1998 Agreement guarantee.
NOTE 13. RELATED PARTIES
In May 1995, 52% of the Company's outstanding shares of Common Stock were
purchased by Jesup & Lamont Merchant Partners, L.L.C. ("JLMP"). Prior to May 12,
1997, a majority of the Company's then six directors were members of JLMP. On
May 12, 1997, JLMP distributed all of its shares of the Company to the
-49-
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
individual members of JLMP. In May 1995, the Company entered into a consulting
agreement (the "Agreement") with Jesup & Lamont Capital Markets, Inc. ("Jesup &
Lamont") pursuant to which Jesup & Lamont agreed to provide financial advisory
and employee services for the Company for one year. Total fees paid to Jesup &
Lamont amounted to approximately $241,697 for the fiscal year ended September
30, 1996. No fees were paid to Jesup & Lamont during the fiscal years ended
September 30, 1998 and 1997.
In December 1996, the Company's chairman and chief executive officer
retired. The Company entered into a consulting agreement with him for a term of
two years and will provide compensation of $250,000 per annum. In addition, the
Company has also forgiven $115,300 of his indebtedness to the Company and had
agreed to extend the period for the exercise of his vested stock options through
March 1997 and accordingly he exercised all 26,471 vested shares.
In fiscal 1997, the Company entered into a non-exclusive and non-refundable
technology licensing and royalty agreement with Uniroyal Technology Corporation
("UTC") for the process technology to develop and manufacture high brightness
light emitting diodes ("LEDs"). During fiscal 1998 and 1997, revenue associated
with the UTC licensing agreement amounted to $2.5 million and $2.5 million,
respectively. At the time the transaction was originally entered into, UTC's
Chairman and CEO was a member of EMCORE's Board of Directors and EMCORE's
Chairman was on the Board of Directors of UTC. All related party accounts
receivable for fiscal 1997 have been paid in full. As of September 30, 1998, the
Company had an outstanding related party receivable of $500,000.
In July 1998, the Company and a wholly-owned subsidiary of UTC formed
Uniroyal Optoelectronics, a venture (the "UTC Venture") to produce and market
compound semiconductor products. The Company has a 49% non-controlling minority
interest. The Company's rights under the venture agreement are protective and as
such, the Company accounts for its interest in the venture under the equity
method of accounting. In July 1998, the Company invested $490,000 in the UTC
Venture which was classified as a component of other long-term assets. For the
year ended September 30, 1998, the Company recognized a loss of $198,000 related
to the UTC Venture, which has been recorded as a component of other income and
expense. In November 1998, the Company invested an additional $5.0 million into
the UTC Venture.
The President of Hakuto Co. Ltd. ("Hakuto"), the Company's Asian
distributor, is a member of the Company's Board of Directors and Hakuto is a
minority shareholder of the Company. During the year ended September 30, 1998,
sales made through Hakuto approximated $9.2 million.
On June 22, 1998, the Company entered into the 1998 Agreement. The 1998
Agreement was guaranteed by the Chairman and the Chief Executive Officer of the
Company (see Note 8). In return for guaranteeing the facility, the Company
granted the Chairman and the Chief Executive Officer an aggregate of 284,684
common stock purchase warrants at $11.375 per share which expire May 1, 2001.
These warrants are callable at the Company's option at $0.85 per warrant at such
time as the Company's common stock has traded at or above 150% of the exercise
price for a period of 30 days.
On September 17, 1998, the Company borrowed $7.0 million from its Chairman,
Thomas J. Russell. The loan bears interest at 9.75% per annum. In addition, on
October 23, 1998 the Company borrowed an additional $1.5 million from its
Chairman on identical terms. The entire $8.5 million, borrowed from Mr. Russell
was repaid from the proceeds of a private placement (See Note 8).
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EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14. EXPORT SALES
The information below summarizes the Company's export sales by geographic
area. The Company's export sales to the Far East and Europe are as follows:
NOTE 15. QUARTERLY FINANCIAL DATA (UNAUDITED)
- -------------------------
See Note 20, "Restatement".
* includes a one-time charge to acquired in-process research and
development, non-cash.
NOTE 16. EMPLOYEE SAVINGS PLAN
The Company has a savings plan (the "Savings Plan") that qualifies as a
deferred salary arrangement under Section 401(k) of the Internal Revenue Code.
Under the Savings Plan, participating employees may defer a portion of their
pretax earnings, up to the Internal Revenue Service annual contribution limit.
Effective August 1, 1997, the Company began contributing to the Savings Plan.
All employer contributions are made in the Company's common stock. For the year
ended September 30, 1998, the Company contributed approximately $252,000 to the
Savings Plan.
NOTE 17. SUBSEQUENT EVENT -- REDEEMABLE PREFERRED STOCK PRIVATE PLACEMENT
On November 30, 1998, the Company sold an aggregate of 1,550,000 shares of
Series I Redeemable Convertible Preferred Stock (the "Series I Preferred Stock")
to related parties (Hakuto Company, Ltd., Uniroyal Technology Corporation, and
Union Miniere, Inc.) for aggregate consideration of $21.7 million before
deducting costs and expenses which amounted to approximately $500,000. The
Series I Preferred Stock was recorded net of issuance costs. The excess of the
preference amount over the carrying value of the Series I Preferred Stock will
be accreted by periodic charges to accumulated deficit in the absence of
additional paid in
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EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
capital. The shares of Series I Preferred Stock are convertible, at any time, at
the option of the holders thereof, unless previously redeemed, into shares of
common stock at an initial conversion price of $14.00 per share of common stock,
subject to adjustment in certain cases. The market price of the Company's common
stock was $12.875 on the date the Series I Preferred Stock was issued. The
Series I Preferred Stock is redeemable, in whole or in part, at the option of
the Company at any time the Company's stock has traded at or above $28.00 per
share for 30 consecutive trading days, at a price of $14.00 per share, plus
accrued and unpaid dividends, if any, to the redemption date. The Series I
Preferred stock carries a dividend of 2% per annum. Dividends are being charged
to accumulated deficit in the absence of additional paid in capital. In
addition, the Series I Preferred Stock is subject to mandatory redemption by the
Company at $14.00 per share plus accrued and unpaid dividends, if any, on
November 17, 2003.
NOTE 18. SUBSEQUENT EVENTS -- JOINT VENTURES
In November 1998, the Company entered into a joint venture with Union
Miniere Inc. to undertake research and development aimed at new material
application of germanium substrates. The Company has a 50% non-controlling
interest in the venture. The Company will account for its interest in the
venture under the equity method of accounting. In November 1998, the Company
invested $600,000 in the venture. The Company is obligated to fund the venture's
capital requirements in proportion to its equity interest.
In November 1998, the Company also formed a venture with Optek Technology,
Inc. to produce, market and distribute packaged electronic semiconductor
components. The Company has a 50% non-controlling interest in the venture. The
Company will account for its interest in the venture under the equity method of
accounting. The Company is obligated to fund the venture's capital requirements
in proportion to its equity interest.
On January 21, 1999, GE Lighting and the Company agreed, subject to certain
conditions, to form a new joint venture to develop and market "white light"
light-emitting diodes. The new company, GELcore, LLC (the "GELcore Venture"),
will develop and market LEDs as replacements for miniature automotive, compact
fluorescent, halogen and traditional incandescent lighting. Under terms of the
joint venture agreement, the Company will have a 49% non-controlling interest in
the GELcore Venture.
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 GE Lighting and may be called by the Company after three years, if the
price of the Company's common stock has traded at or above $34 for at least
thirty days. The Debenture's interest rate will be subject to adjustment in the
event the Company does not complete a public offering by June 30, 1999.
General Electric will also receive between 282,010 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.
On April 27, 1999, the Company contributed an additional $500,000 as a
capital investment in their joint venture with Uniroyal Technologies
Corporation.
NOTE 19. SUBSEQUENT EVENTS -- OTHER
Short Term Borrowings
On February 1, 1999, the Company entered into a $5 million short-term note
(the "Note") with First Union. The Note is due and payable in May 1999. The Note
bears interest at a rate equal to one-month LIBOR plus three-quarters of one
percent per annum.
On April 29, 1999, the Company entered into a $19.0 million short-term note
(the "Amended Note") with First Union. The Amended Note consolidated the $8.0
million loan agreement dated June 22, 1998 and the $5 million Note plus an
additional $6.0 million. The Amended Note is due and payable October 1, 1999 and
bears interest at a rate equal to one-month LIBOR plus three-quarters of one
percent per annum.
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EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1997 Agreement. In January 1999, the Company borrowed the remaining
balance of $2,050,000 available under the 1997 Agreement.
Related Party Transactions
On January 27, 1999, the Company borrowed $3.0 million from its Chairman.
The loan bears interest at 8% per annum. This loan was repaid from borrowings
under the Note.
On January 29, 1999, the Company's Chairman committed to provide $30
million of long-term financing of the Company through July 1, 2000. The
Chairman's financing commitment terminates if the Company completes a secondary
offering of approximately $40.0 million.
On April 29, 1999, the Company borrowed $2.5 million from its Chairman at
an interest rate of prime plus two percent. On May 7, 1999, this loan was repaid
from borrowing under the Amended Note with First Union.
20. RESTATEMENT
Subsequent to the issuance of the Company's Annual Report on Form 10-K for
the year ended September 30, 1998, the Company's management revised the amount
of the purchase price which was allocated to in-process research and development
in accounting for the acquisition of MicroOptical Devices, Inc. ("MODE") in
December 1997. The revised allocation is based upon methods prescribed in a
letter from the Securities and Exchange Commission ("SEC") sent to the American
Institute of Certified Public Accountants. The letter sets forth the SEC's views
regarding the valuation methodology to be used in allocating a portion of the
purchase price to acquired in-process research and development ("IPR&D") at the
date of acquisition.
The revised valuation is based on management's estimates of the net cash
flows associated with expected operations of MODE and gives explicit
consideration to the SEC's views on acquired IPR&D as set forth in its letter to
the American Institute of Certified Public Accountants.
As a result of the revised allocation, the Company's financial statements
for the year ended September 30, 1998 have been restated from amounts
previously reported to reduce the amount of the acquired in-process research and
development expensed by $9.8 million and to increase goodwill by $9.8 million.
The amount allocated to goodwill includes approximately $0.5 million related to
the value of MODE's workforce. The change had no impact on net cash flows used
by operations.
A summary of the significant effects of the restatement is as follows:
-53-
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Shareholders of EMCORE Corporation
Somerset, New Jersey
We have audited the accompanying consolidated balance sheet of EMCORE
Corporation, (the "Company") as of September 30, 1998, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the year then ended. Our audit also included the financial statement schedule
listed in the Index at Item 14(a)(2) for the year ended September 30, 1998.
These financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedule based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1998 consolidated financial statements present fairly,
in all material respects, the financial position of the Company as of September
30, 1998, and the results of their operations and their cash flows for the year
then ended in conformity with generally accepted accounting principles. Also, in
our opinion, such financial statement schedule for the year ended September 30,
1998, 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 20 the accompanying 1998 consolidated financial
statements have been restated.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
May 14, 1999
-54-
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of EMCORE Corporation
We have audited the accompanying balance sheet of EMCORE Corporation (the
"Company") as of September 30, 1997, the related statements of operations,
shareholders' (deficit) equity and cash flows for each of the two years in the
period ended September 30, 1997. We have also audited the financial statement
schedule listed in Item 14(a)(2) for each of the two years in the period ended
September 30, 1997. These financial statements and the financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and the financial
statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of EMCORE Corporation as of
September 30, 1997, and the results of its operations and its cash flows for
each of the two years in the period ended September 30, 1997, in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
Coopers & Lybrand L.L.P.
Parsippany, New Jersey
November 3, 1997, except for
note 15, as to which the date
is December 5, 1997
-55-
STATEMENT OF MANAGEMENT RESPONSIBILITY FOR FINANCIAL STATEMENTS
To the Shareholders of
EMCORE Corporation:
Management has prepared and is responsible for the consolidated
financial statements and related information in the Annual Report. The financial
statements, which include amounts based on judgment, have been prepared in
conformity with generally accepted accounting principles consistently applied.
Management has developed, and in 1998 continued to strengthen, a system
of internal accounting and other controls for the Company. Management believes
these controls provide reasonable assurance that assets are safeguarded from
loss or unauthorized use and that the Company's financial records are a reliable
basis for preparing the financial statements. Underlying the concept of
reasonable assurance is the premise that the cost of control should not exceed
the benefit derived.
The Board of Directors, through its audit committee, is responsible for
reviewing and monitoring the Company's financial reporting and accounting
practices. The audit committee meets regularly with management and independent
accountants - both separately and together. The independent accountants have
free access to the audit committee to review the results of their audits, the
adequacy of internal accounting controls and the quality of financial reporting.
-56-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
PricewaterhouseCoopers LLP ("PwC") and one of its predecessors, Coopers
& Lybrand L.L.P., have served as the Company's independent public accountants
since 1986. On May 13, 1999 the staff of the Securities and Exchange Commission
(the "SEC") advised EMCORE that, in its view, because several current and
former Price Waterhouse LLP partners owned shares of the Company's common stock,
PwC had violated the independence standards promulgated by the SEC. The SEC
staff is requiring the Company to change auditors and to have a new accounting
firm reaudit its fiscal 1998 financial statements as a result of such
violations by PwC.
In connection with the foregoing, on May 13, 1999, the Company engaged
Deloitte & Touche LLP as its independent public accountants to reaudit the
Company's financial statements for fiscal year 1998 and dismissed PwC as the
Company's independent public accountant for fiscal year 1998. Both of these
decisions were approved by the audit committee of the Company's Board of
Directors.
PwC's report on the Company's financial statements for the two most
recent fiscal years (1997 and 1996) did not contain an adverse opinion or a
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope, or accounting principles. In addition, during the Company's two
most recent fiscal years and through May 13, 1999, there were no disagreements
with PwC on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements, if
not resolved to the satisfaction of PwC, would have caused PwC to make reference
to the subject matter of the disagreement in connection with its report,
During the Company's two most recent fiscal years and through May 13,
1999, there have been no reportable events, as defined in Regulation S-K Item
304(a)(1)(v).
Prior to formally being appointed as auditors on May 13, 1999, Deloitte
& Touche LLP performed certain audit-related work at the request of the Company
as a precaution in the event the SEC staff required the Company to change
accountants.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated herein by
reference to the Company's 1999 Proxy Statement which will be filed on or before
January 28, 1999.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by
reference to the Company's 1999 Proxy Statement which will be filed on or before
January 28, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by
reference to the Company's 1999 Proxy Statement which will be filed on or before
January 28, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this term is incorporated herein by
reference to the Company's 1999 Proxy Statement which will be filed on or before
January 28, 1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
14(A)(1) FINANCIAL STATEMENTS:
-57-
14(A)(3) EXHIBITS
EXHIBIT NO. DESCRIPTION
- ---------- ------------
3.1 Restated Certificate of Incorporation, amended February 3, 1997
(incorporated by reference to Exhibit 3.1 to Amendment No. 1 to
the Registration Statement on Form S-1 (File No. 333-18565) filed
with the Commission on February 6, 1997 (the "1997 S-1")).*
3.2 Amended By-Laws, as amended January 11, 1989 (incorporated by
reference to Exhibit 3.2 to Amendment No. 1 to the 1997 S-1).*
3.3 Certificate of Amendment to the Certificate of Incorporation,
dated November 19, 1998.*
4.1 Specimen certificate for shares of Common Stock (incorporated by
reference to Exhibit 4.1 to Amendment No. 3 to the 1997 S-1).*
4.2 Form of $11.375 Warrant.*
10.1 1995 Incentive and Non-Statutory Stock Option Plan (incorporated
by reference to Exhibit 10.1 to Amendment No. 1 to the 1997
S-1).*
10.2 1996 Amendment to Option Plan (incorporated by reference to
Exhibit 10.2 to Amendment No. 1 to the 1997 S-1).*
10.3 Specimen Incentive Stock Option Agreement (incorporated by
reference to Exhibit 10.3 to Amendment No. 1 to the 1997 S-1).*
10.4 Second Amended and Restated Distributorship Agreement dated as of
March 31, 1998 between the Company and Hakuto. Confidential
treatment has been requested by the Company for portions of this
document. Such portions are indicated by "[*]".
10.5 Amendment to Lease for premises at 394 Elizabeth Avenue,
Somerset, New Jersey 08873 (incorporated by reference to Exhibit
10.5 to Amendment No. 1 to the 1997 S-1).*
10.6 Registration Rights Agreement relating to September 1996 warrant
issuance (incorporated by reference to Exhibit 10.6 to Amendment
No. 1 to the 1997 S-1).*
10.7 Registration Rights Agreement relating to December 1996 warrant
issuance (incorporated by reference to Exhibit 10.7 to Amendment
No. 1 to the 1997 S-1).*
10.8 Form of 6% Subordinated Note Due May 1, 2001 (incorporated by
reference to Exhibit 10.8 to Amendment No. 1 to the 1997 S-1).*
10.9 Form of 6% Subordinated Note Due September 1, 2001 (incorporated
by reference to Exhibit 10.9 to Amendment No. 1 to the 1997
S-1).*
10.10 Form of $4.08 Warrant (incorporated by reference to Exhibit 10.10
to Amendment No. 1 to the 1997 S-1).*
-58-
EXHIBIT INDEX - (CONTINUED)
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.11 Form of $10.20 Warrant (incorporated by reference to Exhibit
10.12 to Amendment No. 1 to the 1997 S-1).*
10.12 Consulting Agreement dated December 6, 1996 between the Company
and Norman E. Schumaker (incorporated by reference to Exhibit
10.14 to Amendment No. 1 to the 1997 S-1).*
10.13 Purchase Order issued to the Company by General Motors
Corporation on November 17, 1996. (incorporated by reference to
Exhibit 10.15 to Amendment No. 1 to the 1997 S-1).* Confidential
treatment has been requested by the Company with respect to
portions of this document. Such portions are indicated by "[*]".
10.14 Acquisition Agreement, dated as of December 5, 1997, between the
Company and MicroOptical Devices, Inc. (incorporated by
reference to Exhibit 2 to the Company's filing on Form 8-K,
dated December 22, 1997).*
10.15 Purchase Agreement, dated November 30, 1998, by and between the
Company, Hakuto UMI and UTC.*
10.16 Registration Rights Agreement, dated November 30, 1998 by and
between the Company, Hakuto, UMI and UTC.*
10.17 Long Term Purchase Agreement dated November 24, 1998 by and
between the Company and Space Systems/Loral, Inc. Confidential
treatment has been requested by the Company with respect to
portions of this document. Such portions are indicated by "[*]."
10.18 Promissory Note, dated June 22, 1998 by the Company in favor of
First Union National Bank.*
10.19 Second Amendment to Revolving Loan and Security Agreement, dated
as of November 30, 1998 between the Company and First Union
National Bank.*
21 Subsidiaries of the registrant.*
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule.
- ----------
* Filed previously with or incorporated by reference in Form 10-K filed on
December 29, 1998.
14(B) Reports on Form 8-K:
The Company filed a current report on Form 8-K dated August 6,
1998 which set forth information under Item 5.
-59-
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Township of Somerset, State of
New Jersey, on May 17, 1999.
EMCORE CORPORATION
By /s/ REUBEN F. RICHARDS, JR.
--------------------------------------------
Name: Reuben F. Richards, Jr.
TITLE: PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report on Form 10-K has been signed below by the following persons on
behalf of EMCORE Corporation in the capacities indicated, on May 17, 1999.
SIGNATURE TITLE
--------- -----
/s/ THOMAS J. RUSSELL Chairman of the Board and Director
- --------------------------------------
Thomas J. Russell
/s/ REUBEN F. RICHARDS, JR. President, Chief Executive Officer and
- -------------------------------------- Director (Principal Executive Officer)
Reuben F. Richards, Jr.
/s/ THOMAS G. WERTHAN Vice President, Chief Financial Officer,
- -------------------------------------- Secretary and Director (Principal
Thomas G. Werthan Accounting and Financial Officer)
/s/ RICHARD A. STALL Director
- --------------------------------------
Richard A. Stall
/s/ ROBERT LOUIS-DREYFUS Director
- --------------------------------------
Robert Louis-Dreyfus
/s/ HUGH H. FENWICK Director
- --------------------------------------
Hugh H. Fenwick
/s/ SHIGEO TAKAYAMA Director
- --------------------------------------
Shigeo Takayama
/s/ CHARLES T. SCOTT Director
- ---------------------------------------
Charles T. Scott
/s/ JOHN HOGAN Director
- ---------------------------------------
John Hogan
-60-
Schedule II
EMCORE CORPORATION
Valuation and Qualifying Accounts and Reserves
For the years ended September 30, 1996, 1997 and 1998
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