10-Q/A: Quarterly report pursuant to Section 13 or 15(d)
Published on May 17, 1999
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark one):
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to
Commission File Number: 0-22175
EMCORE Corporation
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(Exact name of Registrant as specified in its charter)
NEW JERSEY
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(State or other jurisdiction of incorporation or organization)
22-2746503
(IRS Employer Identification No.)
394 Elizabeth Avenue
Somerset, NJ 08873
(Address of principal executive offices) (zip code)
(732) 271-9090
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes:[X] No:[ ]
As of February 1, 1999 there were 9,426,030 shares of the registrant's
no par value common stock outstanding.
Part I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
EMCORE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
(Unaudited)
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
EMCORE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, except share data)
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
EMCORE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
EMCORE CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
for the years ended September 30, 1997 and 1998 and the three
months ended December 31, 1998 (unaudited)
(In Thousands)
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
EMCORE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Interim Financial Information
The accompanying unaudited condensed consolidated financial statements of
EMCORE Corporation (the "Company") reflect all adjustments considered necessary
by management to present fairly the Company's consolidated financial position as
of December 31, 1998 and December 31, 1997, and the consolidated results of
operations and the consolidated cash flows for the three month periods ended
December 31, 1998. All adjustments reflected in the accompanying unaudited
condensed consolidated financial statements are of a normal recurring nature
unless otherwise noted. Prior period balances have been reclassified to conform
with the current period financial statement presentation. The results of
operations for the three months ended December 31, 1998 are not necessarily
indicative of the results for the fiscal year ending September 30, 1999 or any
future interim period.
NOTE 2. Preferred Stock Private Placement
On November 30, 1998, the Company sold an aggregate of 1,550,000 shares of
Series I Redeemable Convertible Preferred Stock ("the Series I Preferred Stock")
for aggregate consideration of $21.7 million before deducting costs and
expenses, which amounted to approximately $500,000. The Series I Preferred Stock
was recorded net of issuance costs. The excess of the preference amount over the
carrying value is being accreted by periodic charges to accumulated deficit in
the absence of additional paid in capital. The shares of Series I Preferred
Stock are convertible, at any time, at the option of the holders thereof, unless
previously redeemed, into shares of common stock at an initial conversion price
of $14.00 per share of common stock, subject to adjustment in certain cases. The
market price of the Company's common stock was $12.875 on the date the Series I
Preferred Stock was issued. The Series I Preferred Stock is redeemable, in whole
or in part, at the option of the Company at any time the Company's stock has
traded at or above $28.00 per share for 30 consecutive trading days, at a price
of $14.00 per share, plus accrued and unpaid dividends, if any, to the
redemption date. The Series I Preferred stock carries a dividend of 2% per
annum. Dividends are being charged to accumulated deficit in the absence of
additional paid in capital. In addition, the Series I Preferred Stock is subject
to mandatory redemption by the Company at $14.00 per share plus accumulated and
unpaid dividends, if any, on November 17, 2003.
NOTE 3. Related Party Transactions
In February 1998, the Company and a subsidiary of Uniroyal Technology
Corporation formed Uniroyal Optoelectronics LLC, a joint venture, to
manufacture, sell and distribute HB LED wafers and package-ready devices. The
joint venture commenced operations in July 1998. The Company has a 49%
non-controlling minority interest. The Company's rights under the venture
agreement are protective and as such, the Company accounts for its interest in
the venture under the equity method of accounting. The Company's initial
investment in this venture amounted to $490,000. In November 1998, the Company
invested an additional $5.0 million into this venture. During the quarter ended
December 31, 1998, the Company sold two compound semiconductor production
systems to the venture totaling $3.0 million in revenues. The Company eliminated
gross profit of approximately $711,000 on such sales to the extent of its
minority interest. Such deferred gross profit will be recognized ratably over
the assigned life of the production systems purchased by the joint venture. For
the three months and the year ended December 31, 1998 and September 30, 1998,
respectively, the Company recognized a loss of $276,000 and $198,000 related to
this venture, which has been recorded as a component of other income and
expense. As of December 31, 1998, the Company's investment in this venture
amounted to $5,015,000.
6
The President of Hakuto Co. Ltd. ("Hakuto"), the Company's Asian
distributor, is a member of the Company's Board of Directors and Hakuto is a
minority shareholder of the Company. During the quarter ended December 31, 1998,
sales made through Hakuto amounted to approximately $3.1 million.
On January 27, 1999, the Company borrowed $3.0 million from its Chairman.
The loan bears interest at 8% per annum. The loan will be repaid from borrowings
under the Company's $5.0 million short-term note.
On January 29, 1999, the Company's Chairman has committed to provide $30
million of long-term financing of the Company through July 1, 2000. The
Chairman's financing commitment terminates if the Company completes a secondary
offering of a specified amount.
7
EMCORE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. Joint Ventures
In November 1998, the Company entered into a venture with Union Miniere
Inc. to undertake research and development aimed at new material application of
germanium substrates. The Company has a 50% non-controlling interest in the
venture. The Company will account for its interest in the venture under the
equity method of accounting. In November 1998, the Company invested $600,000 in
the venture. The Company is obligated to fund the venture's capital requirements
in proportion to its equity interest. As of December 31, 1998, no expenses have
been incurred by the joint venture and it is expected to commence in the second
quarter of fiscal 1999.
In November 1998, the Company also formed a venture with Optek Technology,
Inc. to produce, market and distribute packaged electronic semiconductor
components. The Company has a 50% non-controlling interest in the venture. The
Company will account for its interest in the venture under the equity method of
accounting. The Company is obligated to fund the venture's capital requirements
in proportion to its equity interest. As of December 31, 1998, neither party has
contributed capital to this venture, which is expected to commence in the second
quarter of fiscal 1999.
NOTE 5. Inventories
The components of inventories consisted of the following (in thousands):
As of As of
December 31, 1998 September 30, 1998
----------------- ------------------
Raw materials................ $10,694 $11,346
Work-in-process.............. 1,768 1,092
Finished goods............... 21 7
----------------- ------------------
Total........................ $12,483 $12,445
================= ==================
8
EMCORE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. Earnings Per Share
The Company accounts for earnings per share under the provision of
Statement of Financial Accounting Standards No. 128 "Earnings per share" ("SFAS
No. 128"). For the quarter ended December 31, 1998, basic and diluted earnings
per share calculated pursuant to SFAS No. 128 has been restated to give effect
to the Securities and Exchange Commission's Staff Accounting Bulletin No. 98
which eliminated certain computational requirements of Staff Accounting Bulletin
No. 64.
Basic earnings per common share was calculated by dividing net loss by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share was calculated by dividing net loss by the sum of the
weighted average number of common shares outstanding plus all additional common
shares that would have been outstanding if potentially dilutive common shares
had been issued. The following table reconciles the number of shares utilized in
the earnings per share calculations for the three-month periods ending December
31, 1998 and 1997, respectively.
Three Months
Ended December 31,
------------------
1998 1997
---- ----
As Restated,
see Note 8
Net loss........................................ $(6,879) $(19,883)
Preferred stock dividends.................... (36) --
------- --------
Periodic accretion of preferred stock
to redemption value.......................... (6) --
------- --------
Net loss available to common shareholders....... $(6,921) $(19,883)
======= ========
Earnings per common share - basic............... $ (0.74) $ (2.81)
======= ========
Earnings per common share - diluted............. $ (0.74) $ (2.81)
======= ========
Common shares - basic .......................... 9,390 7,075
Effect of dilutive securities:
Stock options and warrants..................... -- --
Preferred stocks............................... -- --
------- --------
Common shares - diluted......................... 9,390 7,075
======= ========
The effect of outstanding common stock purchase options and warrants and
the number of shares available to be issued upon the conversion of the Company's
Series I Preferred Stock have been excluded from its earnings per share
calculation since the effect of such securities is anti-dilutive.
9
EMCORE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. Subsequent Events
Joint Venture:
On January 21, 1999, GE Lighting and the Company agreed, subject to certain
conditions, to form a new joint venture to develop and market "white light"
light-emitting diodes. The new company, GELcore, LLC (the "GELcore venture"),
will develop and market LEDs as replacements for miniature automotive, compact
fluorescent, halogen and traditional incandescent lighting. Under terms of the
joint venture agreement, the Company will have a 49% non-controlling interest in
the GELcore venture.
In connection with the GELcore venture, General Electric will loan the
Company $7.8 million at 4.75% per annum. The proceeds will be used to fund part
of the Company's initial capital contribution in GELcore. This subordinated
debenture (the "Debenture") will mature seven years from the date of issuance
and is convertible into common stock of the Company at a conversion price of
$22.875 or 340,984 shares. The Debenture is convertible at any time at the
option of General Electric and may be called by the Company after three years,
if the price of the Company's common stock has traded at or above $34 for at
least thirty days. The Debenture's interest rate will be subject to adjustment
in the event the Company does not complete a public offering by June 30, 1999.
General Electric will also receive 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. The number of common stock
purchase warrants to be issued is subject to the market price of the Company's
common stock upon the completion of a secondary offering or March 31, 1999,
whichever occurs first.
Debt Facilities:
On March 31, 1997, the Company entered into a $10.0 million loan agreement
(the "1997 Agreement"). The Agreement bears interest at the rate of Prime plus
50 basis points (8.25% at December 31, 1998). As of September 30, 1998 the
Company had $9,950,000 outstanding under this facility. In December 1998, the
Company repaid $2.0 million of its obligation, resulting in an outstanding
balance at December 31, 1998 of approximately $8.0 million. In January 1999, the
Company borrowed the remaining balance of $2,050,000 available under the 1997
Agreement.
On January 27, 1999, the Company borrowed $3.0 million from its Chairman.
The loan bears interest at 8% per annum. The loan will be repaid from borrowings
under the Company's $5.0 million short-term note.
On January 29, 1999, the Company's Chairman has committed to provide $30
million of long-term financing of the Company through July 1, 2000. The
Chairman's financing commitment terminates if the Company completes a secondary
offering of a specified amount.
On February 1, 1999, the Company entered into a $5.0 million short-term
note (the "Note") with First Union National Bank. The Note is due and payable in
May 1999. The Note bears interest at a rate equal to one-month LIBOR plus
three-quarters of one percent per annum.
NOTE 8. Restatement
Subsequent to the issuance of the Company's Quarterly Report on Form 10-Q
for the three months ended December 31, 1998, the Company 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") on
December 5, 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 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 in-process research and
development as set forth in its September 1998 letter to the American Institute
of Certified Public Accountants.
As a result of the revised allocation, the amount of the purchase price
allocated to acquired in-process research and development at the date of
acquisition decreased from $29.3 million to $19.5 million, and the amount
ascribed to goodwill increased by $9.8 million which includes approximately $0.5
million related to the value of MODE's workforce. The Company's financial
statements for the three months ended December 31, 1998 and 1997, have been
restated from amounts previously reported to increase the amount of goodwill by
$6.2 million and $9.5 million, respectively, and goodwill amortization by
$815,000 and $272,000, respectively. This change had no impact on net cash flows
used for operations.
A summary of the significant effect of the restatement is as follows:
10
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Cautionary Statement Identifying Important Factors That Could Cause the
Company's Actual Results to Differ From Those Projected in Forward
Looking Statements:
In connection with the safe harbor provisions of the Private Securities
Litigation Perform Act of 1995, readers of this document are advised that it
contains both statements of historical facts and forward looking statements.
Management's Discussion and Analysis of Financial Condition and Results of
Operations includes forward-looking statements that reflect current expectations
or beliefs of EMCORE Corporation concerning future results and events. The words
"expects," "intends," "believes," "anticipates," "likely," "will," and similar
expressions identify forward-looking statements. These forward-looking
statements are subject to certain risks and uncertainties that could cause
actual results and events to differ materially from those anticipated in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, statements about future financial performance of the
Company and the effect of the acquisition of MicroOptical 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
optical VCSEL technologies; the Company's ability to achieve and implement the
planned enhancements of products and services on a timely and cost effective
basis and customer acceptance of those product introductions; product
obsolescence due to advances in technology and shifts in market demand;
competition and resulting price pressures; business conditions; economic and
stock market conditions, particularly in the U.S., Europe and Japan, and their
impact on sales of the Company's products and services; risks associated with
foreign operations, including currency and political risks; and such other risk
factors as may have been or may be included from time to time in the Company's
reports filed with the Securities and Exchange Commission.
Restatement
The Company has restated its previously filed condensed consolidated
financial statements as of and for the three months ended December 31, 1998 to
adjust the allocation of the purchase price related to the acquisition of
MicroOptical Devices, Inc. ("MODE") in December 1997 and the resulting
amortization of goodwill.
The Securities and Exchange Commission ("SEC") issued new guidance on its
views regarding the valuation methodologies used to determine the allocation of
purchase price to acquire in-process research and development ("IPR&D") and
intangible assets in a purchase business combination. Generally accepted
accounting principles require that amounts allocated to IPR&D be expensed upon
consummation of an acquisition. Following discussions between the Company and
the staff of the SEC regarding the application of this guidance, the Company has
modified the methods used to value IPR&D and other intangible assets acquired in
connection with the acquisition of MODE. The revised valuation is based on
management's best estimates at the date of acquisition of the net cash flows
expected to be generated by MODE on a going-forward basis and gives explicit
consideration to the SEC's views on IPR&D as set forth in its letter to the
American Institute of Certified Public Accountants. As a result of this revised
valuation, the amount of the purchase price allocated to IPR&D at the date of
acquisition decreased from $29.3 to $19.5 million. Therefore, the amount
ascribed to goodwill increased by $9.8 million which includes approximately $0.5
million related to the value of MODE's workforce.
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
11
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.
0 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.
0 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.
0 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. EMCORE will second
various personnel to the joint venture to assist in the development of
products. Thereafter, any additional funding will be contributed equally.
0 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.
0 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.
O 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.
O 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.
12
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.
To expand its technology base into the data communications and
telecommunications markets, on December 5, 1997, EMCORE acquired MicroOptical
Devices, Inc. ("MODE") in a stock transaction accounted for under the purchase
method of accounting for a purchase price of $32.8 million. EMCORE's acquisition
of MODE, a development stage company, constituted a significant and strategic
investment for EMCORE to acquire and gain access to MODE's in-process research
and development of micro-optical technology. As part of this acquisition, EMCORE
incurred a one-time in-process research and development write-off of $19.5
million. EMCORE also recorded goodwill of approximately $13.2 million. This is
being charged against operations over a three-year period, and will therefore
impact financial results through December 2000.
EMCORE sells its products and has generated a significant portion of its
sales to customers outside the United States. In fiscal 1996, 1997, 1998 and the
first fiscal quarter of fiscal 1999, international sales constituted 42.5%,
42.0%, 39.1% and 35.1%, respectively, of revenues. In fiscal 1998, approximately
two-thirds of EMCORE's international sales were made to customers in Asia,
particularly in Japan. EMCORE's sales revenues from Europe have f luctuated
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:
As of December 31, 1998, EMCORE had an order backlog of $41.8 scheduled to
be shipped through September 30, 1999. This represented an increase of 81.4%
since September 30, 1998 which primarily relates to increased systems bookings
in Asia and an initial order for solar cells from Loral, which is subject to
product qualification. EMCORE includes in backlog only customer purchase orders
that have been accepted by EMCORE and for which shipment dates have been
assigned within the 12 months to follow and research contracts that are in
process or awarded. Wafer and device agreements extending longer than one year
in duration are included in backlog only for the ensuing 12 months. EMCORE
receives partial advance payments or irrevocable letters of credit on most
production system orders.
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RESULTS OF OPERATIONS:
REVENUES. The Company's revenues decreased 18.1% from $12.4 million for the
three months ended December 31, 1997, to $10.1 million for the three months
ended December 31, 1998. The revenue decrease in the three-month period was
attributable to decreased revenues in the materials-related product lines, which
were impacted primarily by a decrease in process development fees and a decrease
due to the discontinuation of a wafer sales contract in October 1998. This
three-year contract is on hold pending evaluation by the customer. Revenues
relating to systems- and materials-related products accounted for 54.4% and
45.6%, respectively, for the three months ended December 31, 1997 and 72.0% and
28.0%, respectively, for the three months ended December 31, 1998. International
sales accounted for 44.2% of revenues for the three months ended December 31,
1997 and 35.1% of revenues for the three months ended December 31, 1998.
COST OF SALES/GROSS PROFIT. Cost of sales includes direct material and
labor costs, allocated manufacturing and service overhead, and installation and
warranty costs. Gross profit decreased from 48.4% of revenue for the quarter
ended December 31, 1997, to 40.6% of revenue for the three months ended December
31, 1998. The gross profit percentage was negatively affected by a product mix
in favor of lower gross profit system products as well as under-absorbed
overhead due to lower overall revenues. During the three months ended December
31, 1998, the Company sold for approximately $3.0 million two compound
semiconductor production systems to a joint venture in which it has a 49%
minority interest. The Company eliminated $711,000 of gross profit on such
sales. Such deferred gross profit will be recognized ratably over the assigned
life of the production systems purchased by the joint venture.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by 4.7% from $3.0 million for the three months ended December
31, 1997, to $3.1 million in the three months ended December 31, 1998. A
significant portion of the increase was largely due to increases in sales
personnel headcount to support both domestic and foreign markets and general
headcount additions to sustain the internal administrative support. As a
percentage of revenue, selling, general and administrative expenses increased
from 24.3% for the three months ended December 31, 1997 to 31.0% for the three
months ended December 31, 1998. This increase is a direct result of the decrease
in overall revenues.
GOODWILL AMORTIZATION. The Company recognized approximately $1.1 million
(as restated) of goodwill amortization for the three months ended December 31,
1998 in connection with the acquisition of MODE on December 5, 1997. As of
December 31, 1998, the Company has approximately $8.4 million (as restated) of
goodwill remaining which will be fully amortized by December 2000.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
108.9% from $2.8 million in the three months ended December 31, 1997, to $5.9
million in the three months ended December 31, 1998. As a percentage of revenue,
recurring research and development expenses increased from 23.0% for the first
quarter of the prior year to 58.5% for the first quarter of the current year.
The increase was primarily attributable to EMCORE's acquisition of MODE, startup
of its new Albuquerque, New Mexico facility and increased staffing and equipment
costs necessary to enhance current products and develop new product offerings.
Products introduced or under development include HB LEDs, high-efficiency solar
cells, new generation TurboDisc production systems, VCSELs and other
optoelectronic devices. During the three months ended December 31, 1997, the
Company recognized a $19.5 million one-time non-cash charge for acquired
in-process research and development relating to the Company's December 5, 1997
purchase of MODE. For the three-months ended December 31, 1997 and 1998, the
Company incurred approximately $321,000 and $844,000, respectively, of research
and development costs associated with MODE's in-process (at the date of
acquisition) research and development projects. To maintain growth and to
continue to pursue market leadership in materials science technology, the
Company expects to continue to invest a significant amount of its resources in
research and development.
14
OPERATING LOSS. The Company reported an operating loss of $6.1 million (as
restated) for the three months ended December 31, 1998, as compared to a $19.7
million loss for the three months ended December 31, 1997. The change in
operating loss is due to the loss of gross profit on decreased revenues and a
product mix geared towards lower gross margin system related sales coupled with
a higher fixed cost infrastructure to support those revenues. In addition, the
Company's operating loss was impacted by increased research and development
spending; the loss generated from the operations of MODE, a company acquired in
December 1997, and the startup expenses associated with the opening of the
Company's new Albuquerque, New Mexico facility. During the three months ended
December 31, 1997, the Company recognized a $19.5 million one-time non-cash
charge for acquiring in-process research and development relating to the
Company's December 5, 1997 purchase of MODE.
OTHER EXPENSE. During fiscal 1996, the Company issued detachable warrants
along with subordinated notes to certain of its existing shareholders. In fiscal
1997, the Company also issued detachable warrants in return for a $10.0 million
demand note facility (the "Facility") guarantee by the Chairman of the Board of
the Company, who provided collateral for the Facility. The Company subsequently
assigned a value to these detachable warrants issued using the Black-Scholes
Option Pricing Model. The Company recorded the subordinated notes at a carrying
value that is subject to periodic accretions, using the interest method, and
reflected the Facility's detachable warrant value as a debt issuance cost. The
consequent expense of these warrant accretion amounts is charged to "Imputed
warrant interest, non-cash" and amount to approximately $96,000 and $316,000 for
the three months ended December 31, 1997 and December 31, 1998, respectively. In
June 1998, the Company issued 284,684 warrants to its Chairman and its Chief
Executive Officer for providing a guarantee in connection with the 1998
Agreement, an 18 month credit facility with First Union National Bank. The
Company subsequently assigned a value to these detachable warrants using the
Black-Scholes Option Pricing Model. As a result, the Company will record imputed
warrant interest, non-cash of approximately $1.3 million over the life of the
credit facility.
For the three months ended, December 31, 1998, stated interest expense, net
increased by $160,000 to $230,000 due to additional borrowing and lower interest
income. In the prior year, the Company was earning interest income on its
initial public offering proceeds.
NET LOSS. The Company reported net loss of $6.9 million (as restated) for
the quarter ended December 31, 1998, as compared to a $19.9 million loss for the
quarter ended December 31, 1997. For the quarter ended December 31, 1997, the
decrease in the year-to-date loss was attributable to the $19.5 million
write-off of acquired in-process research and development in connection with the
acquisition of MODE on December 5, 1997.
LIQUIDITY AND CAPITAL RESOURCES:
Cash and cash equivalents decreased by $2.7 million from $4.5 million at
September 30, 1998, to $1.8 million at December 31, 1998. For the three months
ended December 31, 1998, net cash used for operations amounted to $3.3 million,
primarily due to the Company's net losses, and decrease in accounts payable;
which was partially offset by the Company's non-cash depreciation and
amortization charges, and an increase in advance billings.
For the three months ended December 31, 1998, net cash used in investment
activities amounted to $11.5 million, primarily due to the purchase and
manufacture of new equipment for the facilitation of the Company's wafer and
device product lines, and clean room modifications and enhancements of
approximately $6.0 million, as well as investments in unconsolidated affiliates
of approximately $5.6 million.
Net cash provided by financing activities for the three months ended
December 31, 1998 amounted to approximately $12.1 million, primarily due to the
$21.2 million of net proceeds from the private placement of preferred stock and
short-term related party borrowings of $1.5 million. This was offset by debt
repayments of $10.5 million ($8.5 million on short-term related party debt and
$2.0 million on the $10.0 million bank loan).
15
On March 31, 1997, the Company entered into a $10.0 million loan agreement
with First Union National Bank (the "1997 Agreement"). The 1997 Agreement bears
interest at the rate of prime plus 50 basis points (7.75% at December 31, 1998).
As of September 30, 1998 the Company had $9,950,000 outstanding under this
facility. In December 1998, the Company repaid $2.0 million of its obligations,
resulting in an outstanding balance at December 31, 1998 of approximately $8.0
million. In January 1999, the Company borrowed the remaining balance of
$2,050,000 available under the Company's 1997 Agreement.
EMCORE's Chairman has committed to provide up to $30.0 million of long term
financing to EMCORE through July 1, 2000. This commitment terminates upon
completion of any public offering of EMCORE's common stock, subject to a minimum
offering size requirement. On January 27, 1999 EMCORE borrowed $3.0 million from
its Chairman, Thomas J. Russell. The loan bears interest at 8% per annum. On
February 1, 1999 EMCORE entered into a $5.0 million short term note (the "Note")
with First Union National Bank. The loan from Thomas J. Russell was repaid from
borrowings under the Note. The Note is due and payable in May 1999. The Note
bears interest at the rate equal to one-month LIBOR plus three-quarters of one
percent per annum.
EMCORE believes that its current liquidity, together with available credit
facilities (including the Chairman's commitment), should be sufficient to meet
its cash needs for working capital through July 2000. However, if the
available credit facilities, cash generated from operations and cash on hand are
not sufficient to satisfy EMCORE's liquidity requirements, EMCORE will seek to
obtain additional equity or debt financing. Additional funding may not be
available when needed or on terms acceptable to EMCORE. If EMCORE is required to
raise additional financing and if adequate funds are not available or not
available on acceptable terms, the ability to continue to fund expansion,
develop and enhance products and services, or otherwise respond to competitive
pressures would be severely limited. Such a limitation could have a material
adverse effect on EMCORE's business, financial condition or operations.
At December 31, 1998, the Company employed 310 full-time employees. None of
the Company's employees are covered by a collective bargaining agreement. The
Company considers its relationship with its employees to be good.
YEAR 2000:
Many currently installed computer systems and software products are coded
to accept or recognize only two digit entries in the date code field. These
systems and software products will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and/or software used by many companies and governmental agencies may
need to be upgraded to comply with such Year 2000 requirements or risk system
failure or miscalculations causing disruptions of normal business activities.
STATE OF READINESS. EMCORE has made a preliminary assessment of the Year
2000 readiness of its operating financial and administrative systems, including
the hardware and software that support such systems. EMCORE's assessment plan
consists of (1) quality assurance testing of its internally developed
proprietary software; (2) contacting third-party vendors and licensors of
material hardware, software and services that are both directly and indirectly
related to EMCORE's business; (3) contacting vendors of third-party systems; (4)
assessing repair or replacement requirements; (5) implementing repair or
replacement; and (6) creating contingency plans in the event of Year 2000
failures. EMCORE plans to perform a Year 2000 simulation on its systems during
the second and third quarters of l999 to test system readiness. Many vendors of
material hardware and software components of its systems have indicated that the
products used by EMCORE are currently Year 2000 compliant. EMCORE will require
vendors of its other material hardware and software components of its systems to
provide assurances of their Year 2000 compliance. EMCORE plans to complete this
process by September 30, 1999. Until such testing is completed and such vendors
and providers are contacted, EMCORE will not be able to completely evaluate
whether its systems will need to be revised or replaced.
COSTS. To date, EMCORE has not incurred any material expenditures in
connection with identifying, evaluating or addressing Year 2000 compliance
issues. Most of EMCORE expenses have related to, and are expected to continue to
relate to, the operating costs associated with time spent by employees in the
16
evaluation process and Year 2000 compliance matters generally. At this time,
EMCORE does not possess the information necessary to estimate the potential
costs of revisions to its systems should such revisions be required or the
replacement of third-party software, hardware or services that are determined
not to be Year 2000 compliant. Although EMCORE does not anticipate that such
expenses will be material, such expenses if higher than anticipated could have a
material adverse effect on EMCORE's business, financial condition and results of
operations.
RISKS. EMCORE is not currently aware of any Year 2000 compliance problems
relating to its systems that would have a material adverse effect on EMCORE
business, results of operations and financial condition, without taking into
account EMCORE efforts to avoid or fix such problems. There can be no assurance
that EMCORE will not discover Year 2000 compliance problems in its systems that
will require substantial revision. In addition, there can be no assurance that
third-party software, hardware or services incorporated into EMCORE material
systems will not need to be revised or replaced, all of which could be
time-consuming and expensive. The failure of EMCORE to fix or replace its
internally developed proprietary software or third-party software, hardware or
services on a timely basis could result in lost revenues, increased operating
costs, the loss of customers and other business interruptions, any of which
could have a material adverse effect on EMCORE business, result of operations
and financial condition. Moreover, the failure to adequately address Year 2000
compliance issues in its internally developed proprietary software could result
in claims of mismanagement, misrepresentation or breach of contract and related
litigation, which could be costly and time-consuming to defend. In addition, the
failure of governmental agencies, utility companies, third-party service
providers and others outside of EMCORE's control to be Year 2000 compliant could
result in systemic failure beyond EMCORE's control, such as a telecommunications
or electrical failure, which could have a material adverse effect on EMCORE's
business, results of operations and financial condition.
CONTINGENCY PLAN. As discussed above, EMCORE is engaged in an ongoing Year
2000 assessment and has not yet developed any contingency plans. The results of
EMCORE's Year 2000 simulation testing and the responses received from
third-party vendors and service providers will be taken into account in
determining the nature and extent of any contingency plans.
17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits:
10.1 - Transaction Agreement, dated January 26, 1999, by and
between the Company and General Electric Company.
Confidential Treatment has been requested by the Company
with respect to portions of this document. Such portions are
indicated by "***."
27 - Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended
December 31, 1998.
18
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EMCORE CORPORATION
Date: May 17, 1999 By: /s/ Reuben F. Richards, Jr.
---------------------------------------------
Reuben F. Richards, Jr.
President and Chief Executive Officer
Date: May 17, 1999 By: /s/ Thomas G. Werthan
---------------------------------------------
Thomas G. Werthan
Vice President, Finance and Administration
19
EXHIBIT INDEX
Exhibit Description
------ -----------
10.1 - Transaction Agreement, dated
January 26, 1999, by and between the
Company and General Electric
Company. Confidential Treatmen
has been requested by the Company
with respect to portions of this
document. Such portions are
indicated by "***."
27 - Financial Data Schedule