424B1: Prospectus filed pursuant to Rule 424(b)(1)
Published on June 14, 1999
Filed pursuant to Rule 424(B)(1)
Registration No. 333-71791
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PROSPECTUS
JUNE 11, 1999
(EMCORE LOGO) EMCORE CORPORATION
3,897,441 SHARES OF COMMON STOCK
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EMCORE CORPORATION:
- EMCORE Corporation
394 Elizabeth Avenue
Somerset, New Jersey 08873
(732) 271-9090
- NASDAQ SYMBOL: EMKR
THE OFFERING:
- - EMCORE is offering 3,000,000 of the shares and existing shareholders are
offering 897,441 of the shares.
- - The underwriters have an option to purchase an additional 584,616 shares
from EMCORE to cover over-allotments.
- - There is an existing trading market for these shares. The reported last
sale price on June 10, 1999 was $19.56
per share.
- - We plan to use the proceeds from this offering to repay debt and for
general corporate purposes. We will not receive any proceeds from the
shares sold by the selling shareholders.
- - Closing: June 15, 1999.
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THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 8.
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Neither the SEC nor any state securities commission has determined whether this
prospectus is truthful or complete. Nor have they made, nor will they make, any
determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
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DONALDSON, LUFKIN & JENRETTE
PRUDENTIAL SECURITIES
NEEDHAM & COMPANY, INC.
SOUNDVIEW TECHNOLOGY GROUP
THE UNDERSIGNED IS FACILITATING INTERNET DISTRIBUTION.
DLJDIRECT INC.
[Artwork depicts a cellular relay station antenna, fiber optics, an automobile
line drawing showing engine components, a cellular phone handset, a bar code, a
satellite, light-emitting diodes, Cds, and, the lights of Times Square at night.
Text of artwork states "Leading manufacturers throughout the world use EMCORE's
production systems and process technology, wafers and devices for a variety of
advanced electronic applications. Below the artwork text states "Illustrated
above are examples of current and future end-use product applications that
incorporate the compound semiconductor process, technology or equipment
developed and sold by EMCORE Corporation. This illustration contains products
of companies other then EMCORE Corporation. (EMCORE logo).]
[Fold out artwork depicts a diagram of flow and heat patterns inside a
TurboDisc reactor under heading Technology with text stating EMCORE has
developed its compound semiconductor processes and higher performance production
systems through substantial investments in research and development. EMCORE
works closely with its customers to identify specific performance criteria in
its production systems, wafers and devices.
Surrounding the EMCORE logo and "Integrated Compound Semiconductor Solutions"
TECHNOLOGY
EMCORE has developed its compound semiconductor processes and higher performance
production systems through substantial investments in research and development.
EMCORE works closely with its customers to identity specific performance
criteria in its production systems, wafers, and devices.
WAFERS AND DEVICES
EMCORE provides its customers with materials science expertise, process
technology and metal-organic chemical vapor deposition (MOCVD) systems that
enable the manufacture of commercial volumes of high-performance compound
semiconductor wafers and devices. (Pictures of MR Sensors, VCSELs, Solar
Cells, 3 LEDs and RF Materials.)
The Company is working with its customers and JV partners to design, engineer
and manufacture commercial quantities of compound semiconductor devices and
materials. The devices are fabricated from materials grown in our production
equipment; and then tested according to specifications worked out in
partnership with customers or JV partners.
SYSTEMS
EMCORE provides production-scale metal organic chemical vapor deposition,
MOCVD, equipment using its proprietary TURBODISC technology. By combining
material science expertise and proven process technology, EMCORE offers key
enabling technology for the low cost, high-volume production of a variety of
compound semiconductor wafers and devices. (Picture of TurboDisc System)]
TABLE OF CONTENTS
3
PROSPECTUS SUMMARY
This summary is qualified by more detailed information appearing in other
sections of this prospectus. The other information is important, so please read
this entire prospectus carefully. Unless otherwise indicated, all information in
this prospectus: (a) gives effect to a 3.4-for-1 reverse stock split that was
completed on February 3, 1997 and (b) assumes that the underwriters do not
exercise their over-allotment option. References to EMCORE's fiscal years refer
to fiscal years ended on September 30.
EMCORE CORPORATION
EMCORE designs, develops and manufactures compound semiconductor wafers and
devices and is a leading developer and manufacturer of the tools and
manufacturing processes used to fabricate compound semiconductor wafers and
devices. Our products and technology enable our customers, both in the United
States and internationally, to manufacture commercial volumes of
high-performance electronic devices using compound semiconductors. Our products
are used in 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.
Compound semiconductors are the key components of electronic systems and
electronic circuits and are now used in today's most advanced information
systems. 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, phosphorus or nitrogen. These elements are combined in our
proprietary manufacturing process to create a round disk, or wafer, that has
multiple layers of thin films of semiconductors on it. The wafers are further
processed to create devices that are ready to be packaged by our customers for
use in their products, such as solar cells, lasers and transistors. Many
compound semiconductor materials have unique physical properties that allow
electrons to move at least four times faster than through semiconductors based
on silicon. Advantages of compound semiconductor devices over silicon devices
include:
- operation at higher speeds;
- lower power consumption;
- less noise and distortion; and
- the ability to emit and detect light, known as optoelectronic properties.
Although compound semiconductors are more expensive to manufacture than the
more traditional silicon-based semiconductors that are used in most computers,
electronics manufacturers are increasingly integrating compound semiconductors
into their products in order to achieve higher performance.
4
We manufacture and sell, either alone or with our joint venture partners,
the following products:
Our objective is to capitalize on our position as a leading developer and
manufacturer of compound semiconductor tools and manufacturing processes to
become the leading supplier of compound semiconductor wafers and devices. The
key elements of our strategy are to:
- apply our core scientific and manufacturing technology across multiple
product applications;
- target high growth opportunities;
- partner with key industry participants; and
- continue our investment to maintain technology leadership.
We have recently established a number of strategic relationships through
joint ventures and long-term supply agreements including:
- a joint venture with General Electric Lighting to develop and market
white light and colored HB LED lighting products.
- a long-term purchase agreement for solar cells with Space Systems/Loral,
a wholly-owned subsidiary of Loral Space & Communications.
- a cooperative development agreement and a three-year purchase agreement
with Sumitomo Electric to provide certain RF materials for use in
cellular handsets.
We were incorporated in the State of New Jersey in September 1986. Our
World Wide Web site is www.emcore.com. Our web site is not part of this
prospectus. EMCORE and TurboDisc are registered trademarks of EMCORE and
Gigalase, Gigarray and the EMCORE logo are trademarks of EMCORE. Each trademark,
trade name or service mark of any other company appearing in this prospectus
belongs to its holder.
5
THE OFFERING
The number of shares of common stock to be outstanding after this offering
is based on the 9,513,299 shares outstanding as of May 1, 1999, as further
described under "Capitalization."
6
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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(*) As restated -- See Note 20 to the consolidated financial statements
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(1) Basic and diluted earnings per share have been restated for all periods
presented to give effect to the Commission's Staff Accounting Bulletin No.
98, which eliminated certain computational requirements of the Commission's
Staff Accounting Bulletin No. 64.
(2) Reflects the sale by EMCORE of 3,000,000 shares of common stock offered by
this prospectus, repayment of all long-term debt, the conversion of 520,000
shares of convertible preferred stock into 520,000 shares of common stock
and the exercise of 19,898 warrants at $4.08 per share and 186,030 warrants
at $10.20 per share for 205,928 shares of common stock.
7
RISK FACTORS
You should carefully consider the following risks, together with the other
information contained in this prospectus, before you decide whether to purchase
shares of our common stock. If any of the following risks actually occur, our
business, financial condition or results of operations would likely suffer. In
such case, the trading price of our common stock could decline, and you may lose
all or part of the money you paid to buy our common stock.
This prospectus contains forward-looking statements based on our current
expectations, assumptions, estimates and projections about EMCORE and our
industry. These forward-looking statements involve numerous risks and
uncertainties. Our actual results could differ materially from those anticipated
in such forward-looking statements as a result of certain factors, as more fully
described in this section and elsewhere in this prospectus. We undertake no
obligation to update publicly any forward-looking statements for any reason,
even if new information becomes available or other events occur in the future.
WE EXPECT TO CONTINUE TO INCUR OPERATING LOSSES.
We started operations in 1984 and as of March 31, 1999 had an accumulated
deficit of $71.2 million. We incurred net losses of $3.2 million in fiscal 1996,
$5.6 million in fiscal 1997, $36.4 million in fiscal 1998 and $10.9 million in
the first six months of fiscal 1999. We expect to continue to incur losses. To
support our growth, we have increased our expense levels and our investments in
inventory and capital equipment. As a result, we will need to significantly
increase revenues and profit margins to become and stay profitable. If our sales
and profit margins do not increase to support the higher levels of operating
expenses and if our new product offerings are not successful, our business,
financial condition and results of operations will be materially and adversely
affected. Please see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Financial Statements and the Notes
thereto for detailed information on our history of losses.
OUR RAPID GROWTH PLACES A STRAIN ON OUR RESOURCES.
We are experiencing rapid growth, having added a significant number of new
employees, acquired MicroOptical Devices, Inc., or MODE, and entered into joint
ventures with General Electric Lighting, Uniroyal Technology Corporation, Optek
Technology, Inc. and Union Miniere Inc. We have expanded our facilities to
include two manufacturing facilities in Albuquerque, New Mexico in addition to
our original facility in Somerset, New Jersey. Our joint venture with Uniroyal
Technology Corporation has leased a manufacturing facility in Tampa, Florida.
This growth has placed and will continue to place a significant strain on our
management, financial, sales and other employees and on our internal systems and
controls. If we are unable to effectively manage multiple facilities and
multiple joint ventures in geographically distant locations, our business,
financial condition and results of operations will be materially and adversely
affected. We are also in the process of installing new manufacturing software
for all of our facilities and are evaluating replacing our accounting and
purchasing systems. Most of the new manufacturing software is
8
customized to our particular business and manufacturing processes. It will take
time and require evaluation to eliminate all of the bugs in the software and to
train personnel to use the new software. In this transition we may experience
delays in production, cost overruns and disruptions in our operations.
Please see "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for more information.
SINCE THE TECHNOLOGY IN THE COMPOUND SEMICONDUCTOR INDUSTRY RAPIDLY CHANGES, WE
MUST CONTINUALLY IMPROVE EXISTING PRODUCTS, DESIGN AND SELL NEW PRODUCTS AND
MANAGE THE COSTS OF RESEARCH AND DEVELOPMENT IN ORDER TO EFFECTIVELY COMPETE.
We compete in markets characterized by rapid technological change, evolving
industry standards and continuous improvements in products. Due to constant
changes in these markets, our future success depends on our ability to improve
our manufacturing processes and tools and our products. For example, our
TurboDisc production systems must remain competitive on the basis of cost of
ownership and process performance. To remain competitive we must continually
introduce manufacturing tools with higher capacity and better production yields.
We have recently introduced a number of new products and, in connection
with recent joint ventures and internal development, we will be introducing
additional new products in the near future. The commercialization of new
products involves substantial expenditures in research and development,
production and marketing. We may be unable to successfully design or manufacture
these new products and may have difficulty penetrating new markets. In addition,
many of our new products are being incorporated into our customers' new products
for new applications, such as high speed computer networks.
Because it is generally not possible to predict the amount of time required
and the costs involved in achieving certain research, development and
engineering objectives, actual development costs may exceed budgeted amounts and
estimated product development schedules may be extended. Our business, financial
condition and results of operations may be materially and adversely affected if:
- we are unable to improve our existing products on a timely basis;
- our new products are not introduced on a timely basis;
- we incur budget overruns or delays in our research and development
efforts; or
- our new products experience reliability or quality problems.
FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS MAY NEGATIVELY IMPACT OUR STOCK
PRICE.
Our revenues and operating results may vary significantly from quarter to
quarter due to a number of factors particular to EMCORE and the compound
semiconductor industry. Not all of these factors are in our control. These
factors include:
- the volume and timing of orders for our products, particularly TurboDisc
systems, which have an average selling price in excess of $1 million;
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- the timing of our announcement and introduction of new products and of
similar announcements by our competitors;
- downturns in the market for our customers' products;
- regional economic conditions, particularly in Asia where we derive a
significant portion of our revenues; and
- price volatility in the compound semiconductor industry.
These factors may cause our operating results for future periods to be
below the expectations of analysts and investors. This may cause a decline in
the price of our common stock. Please see "Management's Discussion and Analysis
of Financial Condition and Results of Operations" for detailed information on
our annual and quarterly operating results.
OUR JOINT VENTURE PARTNERS, WHO HAVE CONTROL OF THESE VENTURES, MAY MAKE
DECISIONS THAT WE DO NOT AGREE WITH AND THAT ADVERSELY AFFECT OUR NET INCOME.
Since December 1997, we have established four joint ventures (with Optek
Technology, Inc., Union Miniere, Inc., Uniroyal Technology Corporation and
General Electric Lighting). Each of our joint ventures involves the creation of
a separate company, and we do not have a majority interest in any of these
entities. Each of these joint ventures is governed by a board of managers with
representatives from both the strategic partner and us. Many fundamental
decisions must be approved by both parties to the joint venture, which means we
will be unable to direct the operation and direction of these joint ventures
without the agreement of our joint venture partners. If we are unable to agree
on important issues with a joint venture partner, the business of that joint
venture may be delayed or interrupted, which may, in turn, materially and
adversely affect our business, financial condition and results of operations.
We have devoted and we will be required to continue to devote significant
funds and technologies to our joint ventures to develop and enhance their
products. In addition, our joint ventures will require that some of our
employees devote much of their time to joint venture projects. This will place a
strain on our management, scientific, financial and sales employees. If our
joint ventures are unsuccessful in developing and marketing their products, our
business, financial condition and results of operations will be materially and
adversely affected.
General Electric Lighting and we have agreed that our joint venture will be
the sole vehicle for each party's participation in the solid state lighting
market. We and General Electric Lighting have also agreed to several limitations
during the life of the venture and thereafter relating to use that each of us
can make of the joint venture's technology. One consequence of these limitations
is that in certain circumstances, such as a material default by us, we would not
be permitted to use the joint venture's technology to compete against General
Electric Lighting in the solid state lighting market.
10
SINCE A LARGE PERCENTAGE OF OUR REVENUES ARE FROM FOREIGN SALES, CERTAIN EXPORT
RISKS MAY DISPROPORTIONATELY AFFECT OUR REVENUES.
Sales to customers located outside the United States accounted for
approximately 42.5% of our revenues in fiscal 1996, 42.0% of our revenues in
fiscal 1997, 39.1% of our revenues in fiscal 1998 and 44.5% of our revenues in
the first six months of fiscal 1999. Sales to customers in Asia represent the
majority of our international sales. We believe that international sales will
continue to account for a significant percentage of our revenues. Because of
this, the following export risks may disproportionately affect our revenues:
- political and economic instability may inhibit export of our systems and
devices and limit potential customers' access to dollars;
- shipping and installation costs of our systems may increase;
- we have experienced and may continue to experience difficulties in the
timeliness of collection of foreign accounts receivable and have been
forced to write off receivables from a foreign customer;
- a strong dollar may make our systems less attractive to foreign
purchasers who may decide to postpone making the capital expenditure;
- tariffs and other barriers may make our systems and devices less cost
competitive;
- we may have difficulty in staffing and managing our international
operations;
- the laws of certain foreign countries may not adequately protect our
trade secrets and intellectual property; and
- potentially adverse tax consequences to our customers may make our
systems and devices not cost competitive.
WE WILL LOSE SALES IF WE ARE UNABLE TO OBTAIN GOVERNMENT AUTHORIZATION TO EXPORT
OUR PRODUCTS.
Exports of our products to certain destinations, such as the People's
Republic of China, Malaysia and Taiwan, may require pre-shipment authorization
from U.S. export control authorities, including the U.S. Departments of Commerce
and State. Authorization may be conditioned on end-use restrictions. On certain
occasions, we have been denied authorization, particularly with respect to the
People's Republic of China. Failure to receive these authorizations may
materially and adversely affect our revenues and in turn our business, financial
condition and results of operations from international sales. Beginning April
1999, exports of all satellites and associated components require a license from
the Department of State. This may cause delays in shipping solar cells abroad.
Delays in receiving export licenses for solar cells may materially and adversely
affect our revenues and in turn our business, financial condition and results of
operations.
THE LOSS OF SALES TO GENERAL MOTORS OR OUR OTHER LARGE CUSTOMERS WOULD BE
DIFFICULT TO REPLACE.
We derive a substantial portion of our revenues from a limited number of
customers. Sales to Hughes-Spectrolab, primarily of TurboDisc systems and solar
cells,
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accounted for approximately 23.6% of our revenues in fiscal 1996, 10.2% of our
revenues in fiscal 1997, 17.3% of our revenues in fiscal 1998, but only 3.8% of
our revenues for the first six months of fiscal 1999. We believe that, at least
in the short-term, Hughes-Spectrolab will produce most of its material
requirements in-house using TurboDisc systems purchased from us. Consequently,
we do not expect sales to Hughes-Spectrolab to continue to be significant in the
short term. General Motors, our main customer for MR sensors, accounted for
approximately 15.1% of our revenues in fiscal 1997, 12.8% of our revenues in
fiscal 1998 and 10.8% of our revenues for the first six months of fiscal 1999.
General Motors' three month strike in 1998 adversely affected our operating
performance because during that time shipments of sensors to General Motors were
halted. In addition to the lost revenues, we incurred the expense of paying
salaries to the part of our workforce dedicated to producing sensors. If General
Motors, or any of our other significant customers, stops ordering our products,
significantly reduces the volume of these orders, or cancels, delays or
reschedules any orders, and we are unable to replace these orders, our business,
financial condition and results of operations could be materially and adversely
affected. Please see "Business -- Customers" for more information on our
significant customers.
OUR PRODUCTS ARE DIFFICULT TO MANUFACTURE AND SMALL MANUFACTURING DEFECTS CAN
ADVERSELY AFFECT OUR PRODUCTION YIELDS AND OUR OPERATING RESULTS.
The manufacture of our TurboDisc systems is a highly complex and precise
process. We increasingly outsource the fabrication of certain components and
sub-assemblies of our systems, often to sole source suppliers or a limited
number of suppliers. We have experienced occasional delays in obtaining
components and subassemblies because the manufacturing process for these items
is very complex and requires long lead times. The revenues derived from sales of
our TurboDisc systems will be materially and adversely affected if we are unable
to obtain a high quality, reliable and timely supply of these components and
subassemblies. In addition, any reduction in the precision of these components
will result in sub-standard end products and will cause delays and interruptions
in our production cycle.
We manufacture all of our wafers and devices in our manufacturing
facilities and our joint venture with Uniroyal Technology Corporation plans to
manufacture HB LED wafers and package-ready devices at its facility. Minute
impurities, difficulties in the production process, defects in the layering of
the devices' constituent compounds, wafer breakage or other factors can cause a
substantial percentage of wafers and devices to be rejected or numerous devices
on each wafer to be non-functional. These factors can result in lower than
expected production yields, which would delay product shipments and may
materially and adversely affect our operating results. Because the majority of
our costs of manufacture are relatively fixed, the number of shippable devices
per wafer for a given product is critical to our financial results.
Additionally, because we manufacture all of our products at our facilities in
Somerset, New Jersey and Albuquerque, New Mexico, and our joint venture with
Uniroyal Technology Corporation will manufacture HB LED wafers and package-ready
devices at its sole facility in Tampa, Florida, any interruption in
manufacturing resulting from fire, natural disaster, equipment failures or
otherwise would materially and adversely affect our business, financial
condition and results of operations. Please see "Business -- Manufacturing" for
a more detailed description of our manufacturing processes.
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WE FACE LENGTHY SALES AND QUALIFICATIONS CYCLES FOR OUR PRODUCTS AND, IN MANY
CASES, MUST INVEST A SUBSTANTIAL AMOUNT OF TIME AND FUNDS BEFORE WE RECEIVE
ORDERS.
Sales of our TurboDisc systems primarily depend upon the decision of a
prospective customer to increase its manufacturing capacity, which typically
involves a significant capital commitment by the customer. Customers usually
place orders with us on average two to nine months after our initial contact
with them. We often experience delays in obtaining system sales orders while
customers evaluate and receive internal approvals for the purchase of these
systems. These delays may include the time necessary to plan, design or complete
a new or expanded compound semiconductor fabrication facility. Due to these
factors, we expend substantial funds and sales, marketing and management efforts
to sell our compound semiconductor production systems. These expenditures and
efforts may not result in sales.
In order to expand our materials production capabilities, we have dedicated
a number of our TurboDisc systems to the manufacture of wafers and devices.
Several of our products are currently being tested to determine whether they
meet customer or industry specifications. During this qualification period, we
invest significant resources and dedicate substantial production capacity to the
manufacture of these new products, prior to any commitment to purchase by the
prospective customer and without generating significant revenues from the
qualification process. If we are unable to meet these specifications or do not
receive sufficient orders to profitably use the dedicated production capacity,
our business, financial condition and results of operations would be materially
and adversely affected. Please see "Business -- Products," "Business --
Marketing and Sales" and "Business -- Competition" for more information on our
products and our marketing and sales efforts.
INDUSTRY DEMAND FOR SKILLED EMPLOYEES, PARTICULARLY SCIENTIFIC AND TECHNICAL
PERSONNEL WITH COMPOUND SEMICONDUCTOR EXPERIENCE, EXCEEDS THE NUMBER OF SKILLED
PERSONNEL AVAILABLE.
Our future success depends, in part, on our ability to attract and retain
certain key personnel, including scientific, operational and management
personnel. We anticipate that we will need to hire additional skilled personnel
to continue to expand all areas of our business. The competition for attracting
and retaining these employees, especially scientists, is intense. Because of
this intense competition for these skilled employees, we may be unable to retain
our existing personnel or attract additional qualified employees in the future.
If we are unable to retain our skilled employees and attract additional
qualified employees to keep up with our expansion, our business, financial
condition and results of operations will be materially and adversely affected.
PROTECTING OUR TRADE SECRETS IS CRITICAL TO OUR ABILITY TO EFFECTIVELY COMPETE
FOR BUSINESS.
Our success and competitive position depend on protecting our trade secrets
and other intellectual property. Our strategy is to rely more on trade secrets
than patents to protect our manufacturing and sales processes and products, but
reliance on trade secrets is only an effective business practice insofar as
trade secrets remain undisclosed and a proprietary product or process is not
reverse engineered or independently developed. We take certain measures to
protect our trade secrets, including executing non-disclosure agreements with
our employees, joint venture partners, customers and suppliers. If parties
breach these agreements or the measures we take are not properly
13
implemented, we may not have an adequate remedy. Disclosure of our trade secrets
or reverse engineering of our proprietary products, processes or devices would
materially and adversely affect our business, financial condition and results of
operations.
Although we currently hold 11 U.S. patents, these patents do not protect
any material aspects of the current or planned commercial versions of our
systems, wafers or devices. We are actively pursuing patents on some of our
recent inventions, but these patents may not be issued. Even if these patents
are issued, they may be challenged, invalidated or circumvented. In addition,
the laws of certain other countries may not protect our intellectual property to
the same extent as U.S. laws. Please see "Business -- Intellectual Property and
Licensing" for more information regarding our trade secrets, patents and other
intellectual property.
WE MAY REQUIRE LICENSES TO CONTINUE TO MANUFACTURE AND SELL CERTAIN OF OUR
COMPOUND SEMICONDUCTOR WAFERS AND DEVICES, THE EXPENSE OF WHICH MAY ADVERSELY
AFFECT OUR RESULTS OF OPERATIONS.
We may require licenses from Rockwell International Corporation to continue
to sell our compound semiconductor wafers and devices to current customers who
do not hold licenses from Rockwell International Corporation. In addition, we
may be required to pay royalties for certain of our past sales of wafers and
devices to these customers. If we are required to pay significant royalties in
connection with these sales, our business, financial condition and results of
operations may be materially and adversely affected. The failure to obtain or
maintain these licenses on commercially reasonable terms may materially and
adversely affect our business, financial condition and results of operations.
Please see "Business -- Intellectual Property and Licensing" for more details
regarding our patents and licenses.
INTERRUPTIONS IN OUR BUSINESS AND A SIGNIFICANT LOSS OF SALES TO ASIA MAY RESULT
IF OUR PRIMARY ASIAN DISTRIBUTOR FAILS TO EFFECTIVELY MARKET AND SERVICE OUR
PRODUCTS.
We rely on a single marketing, distribution and service provider, Hakuto
Co. Ltd. to market and service many of our products in Japan, China and
Singapore. Hakuto is one of our shareholders and Hakuto's president is a member
of our Board of Directors. We have distributorship agreements with Hakuto which
expire in March 2008 and give Hakuto exclusive distribution rights for certain
of our products in Japan. Hakuto's failure to effectively market and service our
products or termination of our relationship with Hakuto would result in
significant delays or interruption in our marketing and service programs in
Asia. This would materially and adversely affect our business, financial
condition and results of operations.
YEAR 2000 PROBLEMS MAY DISRUPT OUR BUSINESS AND THE COSTS TO CORRECT THESE
PROBLEMS MAY BE MATERIAL.
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.
14
We have made a preliminary assessment of our Year 2000 readiness. We plan
to perform a Year 2000 simulation on our software during the second and third
calendar quarter of 1999. We are also in the process of contacting certain
third-party vendors, licensors and providers of software, hardware and services
regarding their Year 2000 readiness. Following this testing and after contacting
these vendors and licensors, we will be better able to make a complete
evaluation of Year 2000 readiness, to determine what costs will be necessary to
be Year 2000 compliant and to determine whether contingency plans need to be
developed. We may discover Year 2000 compliance problems in our TurboDisc
systems that will require substantial modifications. In addition, we may
discover that third-party software or hardware incorporated into EMCORE's
TurboDisc systems will need to be revised or replaced, all of which could be
time-consuming and expensive.
Any failure on our part to fix or replace our internally developed
proprietary software or third-party software or hardware or services on a timely
basis could result in lost revenues, increased operating costs, the loss of
customers and other business interruptions. Moreover, we could be subject to
lawsuits which could be costly and time-consuming to defend. The failure of
governmental agencies, utility companies, third party service providers and
others outside of our control to be Year 2000 compliant could result in systemic
failure such as telecommunications or electrical failure, which could have a
material adverse effect on our business, results of operations and financial
condition. Please see "Management's Discussion and Analysis of Financial
Condition" for detailed information on our state of readiness, potential risks
and contingency plans regarding the Year 2000 issue.
OUR MANAGEMENT'S STOCK OWNERSHIP GIVES THEM THE POWER TO CONTROL BUSINESS
AFFAIRS AND PREVENT A TAKEOVER THAT COULD BE BENEFICIAL TO UNAFFILIATED
SHAREHOLDERS.
Certain members of our management, specifically Thomas J. Russell, Chairman
of our Board, Reuben F. Richards, President, Chief Executive Officer and a
director, and Robert Louis-Dreyfus, a director, are former members of Jesup &
Lamont Merchant Partners, L.L.C. They collectively beneficially own
approximately 45.9% of our common stock immediately prior to this offering and
will own approximately 34.1% of our common stock after the offering.
Accordingly, such persons will continue to hold sufficient voting power to
control our business and affairs for the foreseeable future. This concentration
of ownership may also have the effect of delaying, deferring or preventing a
change in control of our company, which could have a material adverse effect on
our stock price.
UNSUCCESSFUL CONTROL OF THE HAZARDOUS RAW MATERIALS USED IN OUR MANUFACTURING
PROCESS COULD RESULT IN COSTLY REMEDIATION FEES, PENALTIES OR DAMAGES UNDER
ENVIRONMENTAL AND SAFETY REGULATIONS.
The production of wafers and devices involves the use of certain hazardous
raw materials, including, but not limited to, ammonia, phosphine and arsene. If
our control systems are unsuccessful in preventing a release of these materials
into the environment or other adverse environmental conditions occur, we could
experience interruptions in our operations and incur substantial remediation and
other costs. Failure to comply with environmental and health and safety laws and
regulations may materially and adversely affect our business, financial
condition and results of operations.
15
OUR BUSINESS OR OUR STOCK PRICE COULD BE ADVERSELY AFFECTED BY REDEMPTION OF
OUTSTANDING CONVERTIBLE PREFERRED STOCK OR ISSUANCE OF ADDITIONAL PREFERRED
STOCK.
We have 1,550,000 shares of convertible preferred stock issued and
outstanding, all of which are subject to mandatory redemption by us on November
17, 2003. If we do not have the funds available to redeem the convertible
preferred stock at that time, we will need to raise additional funds to finance
this redemption or we will be in default under the terms of the convertible
preferred stock. We may be unable to obtain adequate financing on acceptable
terms, which may adversely affect our business and financial condition.
Our board of directors is authorized to issue up to an additional 4,332,353
shares of preferred stock with such dividend rates, liquidation preferences,
voting rights, redemption and conversion terms and privileges as our board of
directors, in its sole discretion, may determine. The issuance of additional
shares of preferred stock may result in a decrease in the value or market price
of our common stock, or our board of directors could use the preferred stock to
delay or discourage hostile bids for control of us in which shareholders may
receive premiums for their common stock or to make the possible sale of the
company or the removal of our management more difficult. The issuance of
additional shares of preferred stock could adversely affect the voting and other
rights of the holders of common stock.
CERTAIN PROVISIONS OF NEW JERSEY LAW AND OUR CHARTER MAY MAKE A TAKEOVER OF OUR
COMPANY DIFFICULT EVEN IF SUCH TAKEOVER COULD BE BENEFICIAL TO SOME OF OUR
SHAREHOLDERS.
New Jersey law contains and our certificate of incorporation, as amended,
contains certain provisions that could delay or prevent a takeover attempt that
our shareholders may consider in their best interests. Our board of directors is
divided into three classes. Directors are elected to serve staggered three-year
terms and are not subject to removal except for cause by the vote of the holders
of at least 80% of our capital stock. In addition, if these amendments are
adopted, approval by the holders of 80% of our voting stock is required for
certain business combinations unless these transactions meet certain fair price
criteria and procedural requirements or are approved by two-thirds of our
continuing directors. We may in the future adopt other measures that may have
the effect of delaying or discouraging an unsolicited takeover, even if the
takeover were at a premium price or favored by a majority of unaffiliated
shareholders. Certain of these measures may be adopted without any further vote
or action by our shareholders.
FUTURE SALES BY EXISTING SHAREHOLDERS COULD DEPRESS THE MARKET PRICE OF OUR
COMMON STOCK AND MAKE IT MORE DIFFICULT FOR US TO SELL STOCK IN THE FUTURE.
If our shareholders sell substantial amounts of our common stock in the
public market following this offering, the market price of our common stock
could fall. These sales also might make it more difficult for us to sell equity
or equity-related securities in the future at a time and price that we deem
appropriate. Upon completion of this offering, we will have 13,239,227 shares of
common stock outstanding (based on the number of shares outstanding as of May 1,
1999 and assuming no exercise of outstanding options or warrants). Of these
shares, 5,600,226 shares are freely tradeable. This leaves 5,887,883 shares
eligible for sale in the public market at various times after the date of this
prospectus pursuant to Rule 144.
In addition, as of May 1, 1999, stock options to purchase 1,225,511 shares
of our common stock, warrants to purchase 1,878,265 shares of our common stock
and 1,550,000 shares of our convertible preferred stock, which are convertible
into shares of common stock on a one-for-one basis, were outstanding. In
connection with our joint
16
venture with General Electric Lighting, we have issued General Electric common
stock purchase warrants at an exercise price of $22.875 to acquire 282,010
shares of common stock, and a $7.8 million subordinated convertible debenture
with an interest rate of 4.75% per annum due in seven years. The debenture is
convertible into 340,984 shares of common stock at a conversion price equal to
$22 7/8.
Certain shareholders, representing approximately 6,863,579 shares of our
common stock (including shares of common stock issuable upon conversion of our
convertible preferred stock, convertible debenture and warrants) have the right
to require us to register their shares. We agreed to file a shelf registration,
for the benefit of the holders of our convertible preferred stock and those
holders of up to 5,210,585 shares of common stock who choose to participate, 90
days after completion of this offering. This shelf registration will remain
effective until November 17, 2003 or such earlier time as all of the shares of
our convertible preferred stock and the common stock issued upon conversion
thereof are no longer restricted under Rule 144.
17
USE OF PROCEEDS
The net proceeds to EMCORE from the sale of the 3,000,000 shares of common
stock being offered by EMCORE are estimated to be $52.8 million ($63.2 million
if the underwriters' over-allotment option is exercised in full), assuming a
public offering price of $19.00 per share and after deducting the underwriting
discounts and commissions and estimated offering expenses. EMCORE will not
receive any proceeds from the sale of shares of common stock by the selling
shareholders. EMCORE intends to use $27.5 million to repay outstanding bank
indebtedness to First Union National Bank under two credit facilities,
approximately $8.8 million to repay subordinated notes to an affiliate and other
investors, and the balance for general corporate purposes, including working
capital.
The two credit facilities have the following principal amounts, interest
rates, maturity dates and use of proceeds:
When the debt is extinguished, there will be an extraordinary charge in
1999 of approximately $1.3 million related to the early extinguishment of debt.
The subordinated notes were issued in May and September of 1996, bear
interest at 6.0% and mature on May 1, 2001. Thomas Russell holds approximately
$8.4 million of the subordinated notes that are being repaid. The balance of the
subordinated notes being repaid are held by approximately ten other
non-affiliated investors.
We may also use a portion of the net proceeds to fund acquisitions of
complementary businesses, products or technologies in the semiconductor sector.
Although we periodically review potential acquisition opportunities, we have not
reached any agreements, commitments or understanding for any future
acquisitions. Pending such uses, the net proceeds of this offering will be
invested in short-term, investment-grade, income producing investments.
We believe that the remaining net proceeds from this offering will be
sufficient to fund our anticipated capital expenditures and to provide adequate
working capital at least through July 2000. However, future events may require
EMCORE to seek additional capital which may not be available on terms acceptable
to us.
18
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
EMCORE's common stock has traded on the Nasdaq National Market under the
symbol "EMKR" since March 6, 1997, the date of EMCORE's initial public offering.
The following table sets forth, for the periods indicated, the high and low sale
prices per share of common stock, as reported on the Nasdaq National Market:
The reported last sale price of the common stock on the Nasdaq National
Market on June 10, 1999 was $19 9/16 per share. As of May 1, 1999, EMCORE had
approximately 1,742 shareholders of record.
EMCORE has not declared or paid dividends on its common stock since its
formation. EMCORE currently does not intend to pay dividends on its common stock
in the foreseeable future so that it may reinvest its earnings in its business.
The shares of EMCORE's convertible preferred stock are entitled to receive
cumulative quarterly dividends at the annual rate of 2% of their liquidation
preference ($0.28 per annum per share). The payment of dividends, if any, on the
common stock in the future will be at the discretion of EMCORE's board of
directors.
19
CAPITALIZATION
The following table sets forth the capitalization of EMCORE as of March 31,
1999, and as adjusted to reflect the sale by EMCORE of 3,000,000 shares of
common stock being offered hereby (at an offering price of $19.00 per share),
the conversion of 520,000 shares of convertible preferred stock into 520,000
shares of common stock and the exercise of 19,898 warrants at $4.08 per share
and 186,030 warrants at $10.20 per share into 205,928 shares of common stock and
the application of the estimated net proceeds therefrom. The as adjusted March
31, 1999 amounts also reflect actual share issuances between March 31, 1999 and
May 1, 1999 and the extraordinary loss that would have been recorded at March
31, 1999 upon repayment of long-term debt with the offering proceeds.
- ------------------------------
The 13,239,227 shares of common stock as adjusted for this offering exclude
the following options and warrants that were outstanding at May 1, 1999:
(1) 1,372,059 shares of common stock reserved for issuance under EMCORE's
stock option plan, of which 1,077,839 shares are subject to outstanding options
at exercise prices varying from $3.03 per share to $24.75 per share;
(2) warrants to purchase 301,075 shares of common stock at an exercise
price of $4.08 per share, exercisable until May 1, 2001;
(3) warrants to purchase 1,039,460 shares of common stock at an exercise
price of $10.20 per share, exercisable until September 1, 2001;
(4) options to purchase 147,672 shares of common stock issued in connection
with EMCORE's acquisition of MODE at exercise prices ranging from $0.43 to
$0.60;
(5) warrants to purchase 47,118 shares of common stock at exercise prices
ranging from $4.32 to $5.92 per share, exercisable until September 2000;
(6) shares reserved for issuance pursuant to warrants to purchase 284,684
shares of common stock at an exercise price of $11.375 per share, exercisable
until May 1, 2001; and
(7) 282,010 common stock purchase warrants with an exercise price of
$22 7/8 and a subordinated convertible debenture that will be convertible into
340,984 shares of stock at a price of $22 7/8.
Please see Notes 11, 12, 17 and 18 of the Notes to Financial Statements
included elsewhere in this prospectus for more information.
20
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for the six months ended
March 31, 1998 and 1999 and 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 Income 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 prospectus. The Statement of Income 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. The financial
data as of March 31, 1999 and for the six months ended March 31, 1998 and 1999
are derived from unaudited consolidated financial statements that, in the
opinion of EMCORE's management, reflect all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of the financial
position and results of operations for these periods. Operating results for the
six months ended March 31, 1999 are not necessarily indicative of the results
that may be expected for the entire fiscal year ending September 30, 1999.
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.
21
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Subsequent to the issuance of EMCORE's Annual Report on Form 10-K for the
year ended September 30, 1998, EMCORE'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 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, EMCORE'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 information included in "Selected Financial Data," and in the
discussion following reflect the effects of this restatement. Refer to Note 20
to the consolidated financial statements for further discussion.
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.
23
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 the last week of May 1999, EMCORE and General Electric Lighting formed
GELcore, a joint venture to develop and market white light and colored HB
LED lighting products. GELcore's long-term goal is to develop HB LED
products to replace traditional lighting. We invested $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 May 1999, Sumitomo Electric and EMCORE entered into a long-term
agreement to jointly develop and produce certain RF materials for use in
digital wireless and cellular applications. EMCORE will manufacture these
RF materials at our Somerset, New Jersey manufacturing facility. Sumitomo
Electric will market them in Japan. Sumitomo Electric is one of the
world's leading electronics manufacturers. Shipments of these RF
materials are expected to begin in June 1999.
- 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
24
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.
- 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, 1998 and the
first six months of fiscal 1999, international sales constituted 42.5%, 42.0%,
39.1% and 44.5%,
25
respectively, of revenues. In fiscal 1998, the majority 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 March 31, 1999, EMCORE had an order backlog of $38.3 million
scheduled to be shipped through March 31, 2000. This represented an increase of
69% 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.
26
RESULTS OF OPERATIONS
The following table sets forth the statement of operations data of EMCORE
expressed as a percentage of total revenues for the fiscal years ended September
30, 1996, 1997 and 1998 and the six months ended March 31, 1998 and 1999.
(*) as restated, see Note 20 to the financial statements.
COMPARISON OF SIX MONTHS ENDED MARCH 31, 1998 AND 1999
RESULTS OF OPERATIONS:
Revenues. For both the six-month periods ended March 31, 1998 and 1999,
revenues were $26.2 million. Revenues from systems-related sales and
materials-related sales were $14.4 million and $11.7 million, respectively, for
the six months ended March 31, 1998 and $20.6 million and $5.6 million,
respectively, for the six months ended March 31, 1999. As a percentage of
revenues, production systems and wafers and devices accounted for 55.2% and
44.8%, respectively, for the six months ended March 31, 1998 and 78.8% and
21.2%, respectively, for the six months ended March 31, 1999. EMCORE expects
these percentages to approach 50% in each category as its new products such as
solar cells, VCSELs and HBT's are introduced and production ramps. International
sales accounted for 43.5% of revenues for the six months ended March 31, 1998
and 44.5% of revenues for the six months ended March 31, 1999.
27
Cost Of Sales/Gross Profit. Cost of sales includes direct material and
labor costs, allocated manufacturing and service overhead, and installation and
warranty costs. EMCORE's gross profit decreased 10.4% from $12.3 million for the
six months ended March 31, 1998, to $11.0 million for the six months ended March
31, 1999. The decrease was due principally to EMCORE's sale of three compound
semiconductor production systems for approximately $5.3 million to a joint
venture in which it has a 49% minority interest. EMCORE eliminated $1.2 million
of gross profit on these sales, which 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 10.7% from $5.8 million for the six months ended March 31,
1998 to $6.4 million in the six months ended March 31, 1999. As a percentage of
revenue, selling, general and administrative expenses increased from 22.0% for
the six months ended March 31, 1998 to 24.3% for the six months ended March 31,
1999. A significant portion of the increase was due to increases in sales
personnel headcount to support both domestic and foreign markets and general
headcount additions to sustain internal administrative support.
Goodwill Amortization. EMCORE recognized approximately $2.2 million of
goodwill amortization for the six months ended March 31, 1999 in connection with
the acquisition of MODE on December 5, 1997. As of March 31, 1999, EMCORE had
approximately $7.3 million of goodwill remaining, which will be fully amortized
by December 2000.
Research and Development. Research and development expenses increased
74.8% from $5.9 million in the six months ended March 31, 1998 to $10.3 million
in the six months ended March 31, 1999. As a percentage of revenue, recurring
research and development expenses increased from 22.5% for the six months ended
March 31, 1998 to 39.2% for the six months ended March 31, 1999. The increase
was primarily attributable to EMCORE's acquisition of MODE, the startup of our
new Albuquerque, New Mexico facility and increased staffing and equipment costs
necessary to enhance current products and develop new product offerings.
Products introduced or under development include HB LEDs, high efficiency solar
cells, new generation TurboDisc production systems, VCSELs, RF materials and
other optoelectronic devices. During the six months ended March 31, 1998, EMCORE
recognized a $19.5 million one-time charge for acquired in-process research and
development relating to the purchase of MODE. To maintain growth and to continue
to pursue market leadership in materials science technology, EMCORE expects to
continue to invest a significant amount of its resources in research and
development.
Operating Loss. EMCORE reported an operating loss of $7.9 million for the
six months ended March 31, 1999, as compared to an operating loss of $20.3
million for the six months ended March 31, 1998. The change in operating loss
was principally due to the $19.5 million one-time charge for acquired in-process
research and development in 1998, offset by the elimination of $1.2 million of
gross profit in 1999 on the three compound semiconductor production systems sold
to a joint venture in which it has a 49% minority interest. In addition,
EMCORE's 1999 operating loss was impacted by increased research and development
spending, the loss generated from the
28
operations of MODE and the startup expenses associated with the opening of
EMCORE's new Albuquerque, New Mexico facility.
Other Expense. During fiscal 1996, EMCORE issued detachable warrants along
with subordinated notes to certain of its existing shareholders. EMCORE
subsequently assigned a value to these detachable warrants issued using the
Black-Scholes option pricing model. EMCORE recorded the subordinated notes at a
carrying value that is subject to periodic accretions, using the interest
method. In June 1998, EMCORE issued 284,684 warrants to its Chairman and its
Chief Executive Officer for providing a guarantee in connection with an 18-month
credit facility with First Union National Bank. EMCORE also assigned a value to
these warrants using the Black-Scholes option pricing model. The consequent
expense of these warrant accretion amounts is charged to "Imputed warrant
interest, non-cash" and equals approximately $192,000 and $633,000 for the six
months ended March 31, 1998 and March 31, 1999, respectively.
For the six months ended, March 31, 1999, stated interest expense, net
increased by $577,000 to $693,000 due to additional borrowing.
Because EMCORE does not have a controlling economic and voting interest in
the Uniroyal, Union Miniere, and General Electric Lighting joint ventures,
EMCORE accounts for these joint ventures under the equity method of accounting.
For the six months ended March 31, 1999, EMCORE incurred a net loss of $1.0
million related to the Uniroyal joint venture, a $497,000 net loss related to
the GELCore joint venture and a $141,000 net loss related to the UMCore joint
venture.
Net Loss. For the six months period March 31, 1999, EMCORE reported net
loss of $10.9 million, a decrease of 47.5% from a $20.7 million net loss for the
six months ended March 31, 1998. 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
offset in part by an increase in research and development expenses and the net
loss from unconsolidated affiliates.
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30, 1997 AND 1998
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
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
29
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.
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
30
applications. As of 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):
* one "man year" is defined as approximately 2,000 hours of effort (including
training, holiday, etc.) by one individual, which is an approximation of a
year of effort.
** development efforts curtailed as a result of EMCORE's redirection of its
resources.
*** commercialization and production efforts curtailed as a result of EMCORE's
redirection of its resources to other products due to market demand forces.
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%
31
was utilized. EMCORE has capitalized approximately $0.5 million for MODE's
workforce, which is included in goodwill and is offset against the values
assigned in the table above.
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, 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,
2.6% 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
32
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 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 expenses of $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 for the fiscal year ended September 30, 1996 to $47.8 million. 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 $13.7 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 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.
33
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. 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.
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 credit 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.
34
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 $4.0 million
of non-cash imputed warrant interest associated with certain financing
transactions.
QUARTERLY RESULTS OF OPERATIONS
The following tables present EMCORE's unaudited results of operations
expressed in dollars and as a percentage of revenues for the ten most recently
ended fiscal quarters. EMCORE believes that all necessary adjustments,
consisting only of normal recurring adjustments, have been included in the
amounts below to present fairly the selected quarterly information when read in
conjunction with the consolidated financial statements and notes included
elsewhere in this prospectus. EMCORE's results from operations may vary
substantially from quarter to quarter. Accordingly, the operating results for a
quarter are not necessarily indicative of results for any subsequent quarter or
for the full year.
35
* As restated -- see Notes 15 and 20 to consolidated financial statements.
From inception through December 31, 1996, EMCORE derived the majority of
its revenues from the sale of TurboDisc production systems. Beginning in January
1997, EMCORE expanded its product line to offer wafers and devices. Throughout
fiscal 1997 and the first half of fiscal 1998, EMCORE benefited from the
expanded product offerings. Early in fiscal 1998, the capital equipment market
experienced a downturn and bookings of TurboDisc systems decreased
substantially. The result was lower revenues for the last two quarters of fiscal
1998 and the first quarter of fiscal 1999.
Cost of sales was also affected by revenue shifts. Gross profit improved
consistently from the introduction of the new product lines through the second
quarter of fiscal 1998. Thereafter, gross profit was affected primarily by
reduced revenues and the resulting under-absorbed overhead.
Operating expenses have generally increased both in absolute dollars and as
a percentage of revenues, due to increased staffing in research and development,
sales and marketing, and general and administrative functions. The increase in
research expenditures was related to the development of systems for the
processing of gallium nitride materials used in the production of blue HB LEDs,
enhancement of production systems, and the introduction of wafers and devices,
in particular, MR sensors,
36
VCSELs and solar cells. Selling, general and administrative expenses increased
as a result of increased marketing and sales related activities, including the
hiring of additional personnel, commissions, customer samples, expansion of
facilities, and the opening of field offices in Taiwan and California.
EMCORE has experienced and expects to continue to experience significant
fluctuations in quarterly results. Factors which have had an influence on and
may continue to influence EMCORE's operating results in a particular quarter
include, but are not limited to the timing of receipt of orders, cancellation,
rescheduling or delay in product shipment or supply deliveries, product mix,
competitive pricing pressures, EMCORE's ability to design, manufacture and ship
products on a cost effective and timely basis, including the ability of EMCORE
to achieve and maintain acceptable production yields for wafers and devices,
regional economic conditions and the announcement and introduction of new
products by EMCORE and by its competitors. The timing of sales of EMCORE's
TurboDisc production systems may cause substantial fluctuations in quarterly
operating results due to the substantially higher per unit price of these
products relative to EMCORE's other products. If the compound semiconductor
industry experiences downturns or slowdowns, EMCORE's business, financial
condition and results of operations may be materially and adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $2.8 million from $4.5 million at
September 30, 1998 to $1.6 million at March 31, 1999. For the six months ended
March 31, 1999, net cash used for operations amounted to $5.9 million, primarily
due to EMCORE's net losses and an increase in accounts receivable which was
partially offset by EMCORE's non-cash depreciation and amortization charges and
an increase in advance billings.
For the six months ended March 31, 1999, net cash used for investment
activities amounted to $16.2 million, primarily due to the purchase and
manufacture of new equipment for the facilitation of EMCORE's wafer and device
product lines, and clean room modifications and enhancements of approximately
$10.4 million, as well as investments in unconsolidated affiliates of
approximately $5.8 million.
Net cash provided by financing activities for the six months ended March
31, 1999 amounted to approximately $19.2 million, primarily due to the $21.2
million of net proceeds from the private placement of preferred stock in
November 1998 and short-term related party borrowings of $5.1 million. This was
offset by debt repayments of $7.0 million on short-term related party debt.
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 of $40.0 million.
On January 27, 1999 EMCORE borrowed $3.0 million from its Chairman, Thomas
J. Russell. This loan bears interest at 8% per annum. On February 1, 1999,
EMCORE repaid this loan from borrowings under a new loan from First Union
National Bank. On February 1, 1999, EMCORE entered into a $5.0 million short-
term note with First Union that matures in May 1999. This note bears interest at
a rate equal to one-month LIBOR plus three quarters of one percent per annum.
37
On April 29, 1999, EMCORE borrowed $2.5 million from its Chairman. The loan
bears interest at prime rate plus 2% per annum. On May 7, 1999, the loan was
repaid from borrowings under EMCORE's $19.0 million short-term note, as
discussed below.
On April 29, 1999, EMCORE entered into a $19.0 million short-term loan
agreement with First Union. This loan agreement represented a consolidation of
the $8.0 million loan agreement dated June 22, 1998 and $5.0 million short-term
loan agreements dated February 1, 1999, and an additional note of $6.0 million.
This new loan agreement is due and payable on 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 14, 1999). On May 7, 1999, EMCORE used borrowings under this new
loan agreement to repay the $2.5 million short-term note from EMCORE's Chairman.
As of May 14, 1999, EMCORE had borrowed approximately $17.5 million under this
new loan agreement. This new loan agreement is guaranteed by EMCORE's Chairman
and Chief Executive Officer.
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 our joint ventures. Capital spending in
1999 also is expected to include upgrading manufacturing facilities, continued
investment in analytical and diagnostic research and development equipment,
upgrading and purchasing computer equipment, and the manufacture of TurboDisc
systems for in-house use.
EMCORE believes that its current liquidity, together with available credit,
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 will be severely limited. Such a
limitation could have a material adverse effect on EMCORE's business, financial
condition or operations.
In connection with the GELcore joint venture, EMCORE issued to General
Electric common stock purchase warrants to purchase 282,010 shares of EMCORE's
common stock at an exercise price of $22.875, which will expire in 2006. The
number of common stock purchase warrants was determined based on the market
price of EMCORE's common stock on March 31, 1999. General Electric purchased a
$7.8 million subordinated convertible debenture bearing interest at 4.75% per
annum and maturing in 2006. The debenture's interest rate is subject to
adjustment in the event EMCORE does not complete a public offering by June 30,
1999. The debenture is convertible into 340,984 shares of common stock at a
conversion price equal to $22.875. Proceeds from the debenture were used to fund
EMCORE's investment in GELcore.
In January 1999, Rockwell settled litigation which challenged the validity
of certain patents which EMCORE licensed from Rockwell prior to the commencement
of the litigation. As a result of this settlement, EMCORE will be required to
pay Rockwell a royalty including interest under our license agreement relating
to
38
TurboDisc tools. EMCORE believes it has adequately accrued for these royalties.
In addition, prior to the commencement of the litigation, EMCORE had initiated
discussions with Rockwell to receive additional licenses to permit EMCORE to use
the technology to manufacture and sell wafers and devices. EMCORE may be
required to pay royalties to Rockwell for certain past sales of wafers and
devices to customers who do not hold licenses directly from Rockwell. Management
has reviewed and reassessed the royalty agreements and concluded that it has the
appropriate amounts reserved for at both September 30, 1998 and March 31, 1999.
The Rockwell patent expires in January 2000 and we may require additional
licenses from Rockwell in order to continue to manufacture and sell wafers and
devices. The failure to obtain licenses to manufacture these wafers and devices
on commercially reasonable terms may materially and adversely affect our
business, financial condition and results of operations through January 2000.
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.
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
39
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.
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
40
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 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.
In June 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 EMCORE.
41
BUSINESS
EMCORE CORPORATION
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.
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
communica-
42
tions, 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
- the anticipated conversion to HB LEDs from incandescent, halogen and
compact fluorescent lighting.
43
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
44
phosphide. The performance characteristics of compound semiconductors are
dependent on the composition of these compounds. Many of the unique properties
of compound semiconductor devices are achieved by the layering of different
compound semiconductor materials in the same device. This layered structure
creates an optimal configuration to permit the 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
45
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.
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
46
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 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,
47
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.
(Turbodisc Diagram)
Wafers are loaded on a multiple wafer platter into the growth chamber,
where they are subjected to high-temperature vacuum conditions and spun at high
speeds. Gases are then introduced into the vacuum growth chamber, and
semiconductor materials become deposited onto the substrate in a highly uniform
manner.
EMCORE offers the following family of TurboDisc systems:
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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.
49
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.
50
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. EMCORE anticipates completing this qualification in June
1999. 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 May 1999, EMCORE and General Electric Lighting formed GELcore, a joint
venture to develop and market HB LED lighting products. General Electric
Lighting and EMCORE have agreed that this joint venture will be the exclusive
vehicle for each party's participation in solid state lighting. GELcore seeks to
combine EMCORE's materials science expertise, process technology and compound
semiconductor production systems with General Electric Lighting's brand name
recognition
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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.
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 March 31, 1999 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.
In May 1999, Sumitomo Electric and EMCORE announced a long-term agreement
to jointly develop and produce certain RF materials for use in digital
52
wireless and cellular applications. EMCORE will manufacture these RF materials
at our Somerset, New Jersey manufacturing facility and Sumitomo Electric will
market them in Japan. Sumitomo Electric is one of the world's leading
electronics manufacturers. Shipments of sample volumes of materials commenced in
June 1999.
CUSTOMERS
EMCORE's customers include many of the largest semiconductor,
telecommunications, consumer goods and computer manufacturing companies in the
world. Sales to Hughes-Spectrolab accounted for 17.3% of EMCORE's revenues in
fiscal 1998 and 3.8% of EMCORE's revenues in the first six months of 1999. Sales
to General Motors accounted for 12.8% of EMCORE's revenues in fiscal 1998 and
10.8% of EMCORE's revenues in the first six months of 1999. 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
The Boeing Company
General Motors
Hewlett Packard
Honeywell
Hughes-Spectrolab
Hyundai Electronics
IBM
LG Semiconductor
L.M. Ericsson AB
Lucent Technologies
Motorola
Northrop Grumman
Philips AG
Polaroid
Rockwell International
Samsung
Sharp U.S.A.
Siemens AG
Texas Instruments
Thomson CSF
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. As of
March 31, 1999, EMCORE employed 27 field service engineers who install EMCORE
systems and provide on-site support.
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. As of
March 31, 1999, EMCORE employed 26 persons in sales and marketing.
53
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.
54
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 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 $10.3 million in the first six months of fiscal
1999, $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. As of March 31, 1999, EMCORE
employed 50 persons in research and development, 14 of whom held Ph.D.s in
materials science or related fields.
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 March 31, 1999, government and other
external research contracts have provided approximately $13.3 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.
55
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
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. Management has reviewed and reassessed the
royalty agreements and concluded that it has the appropriate amounts reserved
for at both September 30, 1998 and March 31, 1999. Additionally, 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
56
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 March 31, 1999, EMCORE had an order backlog of $38.3 million,
scheduled to be shipped through March 31, 2000. This represented an increase of
69% since September 30, 1998. This increase primarily relates to increased
production 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. 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. As of March 31, 1998, EMCORE had 158
employees involved in manufacturing. 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 as
possible. However, operating results could be materially and adversely affected
by a stoppage or delay of supply, receipt of defective
57
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 March 31, 1999, EMCORE had 326 full-time employees. None of EMCORE's
employees is covered by a collective bargaining agreement. EMCORE considers its
relationship with its employees to be good.
58
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.
- -------------------------
(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.
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.
59
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
EMCORE's executive officers and directors and their ages and positions are
as follows:
- ------------------------------
(1) Member of Compensation Committee
(2) Member of Nominating Committee
(3) Member of Audit Committee
Thomas J. Russell, Ph.D. has been a director of EMCORE since May 1995 and
was elected Chairman of the Board in December 1996. Dr. Russell founded
Bio/Dynamics, Inc. in 1961 and managed the company until its acquisition by IMS
International in 1973, following which he served as President of that company's
Life Sciences Division. From 1984 until 1988, he served as Director, then as
Chairman of IMS International until its acquisition by Dun & Bradstreet in 1988.
From 1988 to 1992, he served as Chairman of Applied Biosciences, Inc. Since
1992, he has been an investor and director of several companies. Dr. Russell
currently serves as a director of Cordiant plc and Adidas AG. Dr. Russell is one
of three trustees of the AER 1997 Trust, and he was Chairman and a member of
Jesup & Lamont Merchant Partners, L.L.C. (JLMP).
60
Reuben F. Richards, Jr. joined EMCORE in October 1995 as its President and
Chief Operating Officer and became Chief Executive Officer in December 1996. Mr.
Richards has been a director of EMCORE since May 1995. From September 1994 to
December 1996, Mr. Richards was a Senior Managing Director of Jesup & Lamont
Capital Markets Inc. (JLCM), an affiliate of a registered broker-dealer. From
December 1994 to 1997, he was a member of and President of JLMP. From 1992 until
1994, Mr. Richards was a principal with Hauser, Richards & Co., a firm engaged
in corporate restructuring and management turnarounds. From 1986 until 1992, Mr.
Richards was a Director at Prudential-Bache Capital Funding in its Investment
Banking Division. Mr. Richards is on the management boards of Emtech, Uniroyal
Optoelectronics and GELcore.
Thomas G. Werthan joined EMCORE in 1992 as its Chief Financial Officer,
Vice President--Finance, Secretary and a director. Mr. Werthan is a Certified
Public Accountant and has over sixteen years experience in assisting high
technology, venture capital financed growth companies. Prior to joining EMCORE
in 1992, he was associated with The Russell Group, a venture capital
partnership, as Chief Financial Officer for several portfolio companies. The
Russell Group is affiliated with Thomas J. Russell, who was a member of and
Chairman of JLMP and is Chairman of the board of directors of EMCORE. From 1985
to 1989, Mr. Werthan served as Chief Operating Officer and Chief Financial
Officer for Audio Visual Labs, Inc., a manufacturer of multimedia and computer
graphics equipment.
Richard A. Stall, Ph.D became a director of EMCORE in December 1996. Dr.
Stall helped found EMCORE in 1984 and has been Vice President--Technology at
EMCORE since October 1984, except for a sabbatical year in 1993 during which Dr.
Stall acted as a consultant to EMCORE and his position was left unfilled. Prior
to 1984, Dr. Stall was a member of the technical staff of AT&T Bell Laboratories
and was responsible for the development of molecular beam expitaxy technologies.
He has co-authored more than 75 papers and holds four patents on MBE and MOCVD
technology and the characterization of compound semiconductor materials.
William J. Kroll joined EMCORE in 1994 as Vice President--Business
Development and in 1998 became Executive Vice President -- Strategic Planning.
Prior to 1994, Mr. Kroll served for seven years as Senior Vice President of
Sales and Marketing for Matheson Gas Products, Inc., a manufacturer and
distributor of specialty gases and gas control and handling equipment. In that
position, Mr. Kroll was responsible for $100 million in sales and 700 employees
worldwide. Prior to working at Matheson Gas Products, Mr. Kroll was Vice
President of Marketing for Machine Technology, Inc., a manufacturer of
semiconductor equipment for photoresistor applications, plasma strip, and
related equipment.
Paul Rotella joined EMCORE in 1996 as Director of Manufacturing and has
served as Vice President of TurboDisc Manufacturing since October 1997. Prior to
1996, Mr. Rotella served for three years as worldwide Manufacturing Operations
Manager for Datacolor International, a manufacturer of color measurement and
control instrumentation. Prior to working at Datacolor International, Mr.
Rotella spent 18 years with AlliedSignal Inc., where he held various positions
including Manufacturing Engineer, Manufacturing Engineering Manager and Program
Manager of Quality Improvement Systems.
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Louis A. Koszi joined EMCORE in 1995 as Vice President--Device
Manufacturing and is presently on a 2 year assignment as Chief Operating Officer
of Uniroyal Optoelectronics, LLC the Company's joint venture with Uniroyal
Technology, Inc. Prior to 1995, Mr. Koszi was a member of AT&T Bell Laboratories
for 25 years. Mr. Koszi has experience in all phases of semiconductor device
design and manufacturing processes and associated quality programs. Mr. Koszi
holds 17 U.S. patents, five foreign patents, and is a co-author of 35
publications. He was named a Distinguished Member of Technical Staff in 1989. In
1992, he was presented with the Excellence in Engineering from the Optical
Society of America.
Thomas M. Brennan joined EMCORE as a result of EMCORE's acquisition of MODE
in December 1997 and now serves as a Vice President of EMCORE. Prior to
co-founding MODE, Mr. Brennan was a senior member of the technical staff at
Sandia National Laboratories from 1986 to 1996. At Sandia, he focused his
efforts on the material growth of III-V compound semiconductors, reactor design,
in-situ reactor diagnostics, and material characterization. His responsibilities
and activities included growth of some of the first VCSEL material at Sandia and
in the U.S., and development of new and unique manufacturing techniques for
VCSEL material growth. Prior to joining Sandia, Mr. Brennan was a member of the
technical staff at AT&T Bell Laboratories from 1980 to 1984. At both facilities,
he focused his efforts on expitaxial materials growth and characterization and
expitaxial reactor design.
Robert P. Bryan joined EMCORE as a Vice President as a result of EMCORE's
acquisition of MODE in December 1997. Prior to co-founding MODE in 1995, he was
a co-founder of Vixel Corporation in 1992, a company that develops and
manufactures VCSEL devices for data links. At Vixel, he was the executive in
charge of optoelectronic product development, including all engineering
management. From 1990 to 1992, he was a senior member of the technical staff at
Sandia National Laboratories where his research focused on the areas of VCSEL
design, fabrication and characterization.
Craig W. Farley joined EMCORE in June 1998 as Vice President--Wafer
Manufacturing and is presently Vice President of Electronic Materials which
includes responsibility for antimonide sensors, RF materials, optoelectronic
devices, and EMCORE's Research and Applications laboratory. Dr. Farley has
experience in all phases of compound semiconductor device design and
manufacturing. Prior to joining EMCORE, he spent 11 years at Rockwell
International Corporation where he served as a member of the technical staff at
Rockwell's Science Center from 1987 to 1994 and as Manager of Advanced Device
Technology for Rockwell's Gallium Arsenide Manufacturing facility from 1994 to
1998.
David D. Hess joined EMCORE in 1989 as General Accounting Manager. He was
named Corporate Controller in 1990. Mr. Hess is a Certified Public Accountant
and has more than fifteen years experience in monitoring and controlling all
phases of product and process cost and general accounting systems. Prior to his
employment at EMCORE, he held several positions as cost accounting manager,
divisional accountant and inventory control supervisor in manufacturing firms
such as Emerson Quiet Kool (air conditioner manufacturers), Huls North America
(paint/solvent processors), and Brintec Corporation (screw machine part
manufacturers).
62
Robert Louis-Dreyfus has been a director of EMCORE since March 1997. Mr.
Louis-Dreyfus has been the Chairman of the Board and Chief Executive Officer of
Adidas AG since April 1993. Prior to that time, he had been from 1990 until 1993
the Chief Executive Officer of Saatchi & Saatchi plc (now Cordiant plc) and a
Director of Saatchi & Saatchi plc from January 1990 until December 1994. Since
1992, he has been an investor and a Director of several other companies. From
1982 until 1988, he served as Chief Operating Officer (1982 to 1983) and then as
Chief Executive Officer (from 1984 to 1988) of IMS International until its
acquisition by Dun & Bradstreet in 1988. Mr. Louis-Dreyfus controls Gallium
Enterprises Inc., and he was a member of JLMP.
Hugh H. Fenwick served as a director of EMCORE from 1990 until 1995, and
was again elected to serve on EMCORE's board of directors in June 1997. Since
1992, Mr. Fenwick has been a private investor and he currently holds the office
of Mayor of Bernardsville, New Jersey, to which he was elected in 1994. From
1990 until 1992, Mr. Fenwick was the Executive Director of the Alliance for
Technology Management at the Stevens Institute in Hoboken, New Jersey. Prior to
that time, Mr. Fenwick worked as a marketing executive with Lockheed Electronics
and with Alenia (formerly Selenia), an Italian subsidiary of Raytheon.
Shigeo Takayama became a director of EMCORE in July 1997. Mr. Takayama is
the Chairman, President and founder of Hakuto, EMCORE's distributor of EMCORE's
products in Japan, China and Singapore. Mr. Takayama is a Director Emeritus of
Semiconductor Equipment & Material International (SEMI), Chairman of the Japan
Electronics Products Importers Association (JEPIA), and Director of the Japan
Machinery Importers' Association (JMIA). Mr. Takayama is also a director of
Temptronic Corp., a semiconductor test equipment manufacturer in Newton,
Massachusetts, and of Anatel Corp., a TOC high-purity water monitor manufacturer
in Boulder, Colorado.
Charles T. Scott became a director of EMCORE in February 1998. Mr. Scott is
presently Chairman of Cordiant Communications Group plc, the successor
corporation of the Saatchi & Saatchi Advertising Group. He joined Saatchi &
Saatchi Company in 1990 and served as Chief Financial Officer until 1992 when he
was appointed Chief Operating Officer. In 1993, he became Chief Executive
Officer and held that position until 1996 when he assumed the title of Chairman.
John J. Hogan, Jr. became a director of EMCORE in February 1999. Mr. Hogan
has been President of a private investment management company since October
1997. Prior to that time, he had been with the law firm of Dewey Ballentine
since 1969. He also serves as a director of several other corporations and is a
former executive officer and/or director of various subsidiaries of S.A. Louis
Dreyfus en Cie.
63
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In the last week of May 1999, EMCORE and General Electric Lighting formed a
joint venture to develop and market HB LED lighting products. In connection with
consummation of this joint venture, EMCORE issued to General Electric warrants
to purchase 282,010 shares of EMCORE common stock, which will expire in 2006 and
have an exercise price of $22.875. In addition, General Electric purchased a
$7.8 million subordinated convertible debenture bearing interest at 4.75% per
annum and maturing in 2006. The debenture is convertible into 340,984 shares of
common stock at General Electric's option.
On April 29, 1999, EMCORE borrowed $2.5 million from its Chairman at an
interest rate of prime plus two percent. On May 7, 1999, EMCORE repaid the loan
from borrowings from First Union.
In January 1999, EMCORE's Chairman advanced $3.0 million to EMCORE. These
funds were repaid with borrowings under a new $5.0 million credit facility with
First Union National Bank. The Chairman has also committed to provide up to
$30.0 million of long-term financing to EMCORE through July 1, 2000. This
commitment terminates upon completion of this offering, subject to a minimum
offering size requirement of $40.0 million.
On November 30, 1998, EMCORE completed a private placement of an aggregate
of 1,550,000 shares of Series I Preferred Stock to Hakuto, Union Miniere Inc.
and Uniroyal Technology Corporation. The net proceeds to EMCORE from the private
placement were approximately $21.2 million which has been used (1) to repay $8.5
million of debt, plus interest, to EMCORE's Chairman of the Board, Dr. Thomas
Russell, (2) to fund EMCORE's $5.0 million portion of a joint venture between
EMCORE and Uniroyal Technology Corporation to develop and manufacture HB LEDs
and (3) to fund EMCORE's $600,000 portion of its joint venture with Union
Miniere Inc. The remaining net proceeds from the private placement of
convertible preferred stock were used to acquire capital equipment for EMCORE's
new Albuquerque, New Mexico manufacturing facility and for working capital
purposes.
In September and October 1998, EMCORE borrowed an aggregate of $8.5 million
from its Chairman, Thomas J. Russell. The loan bears interest at 9.75% per
annum. The entire $8.5 million borrowed from Mr. Russell was repaid from the
proceeds of the private placement of preferred stock.
On June 22, 1998, EMCORE entered into the 1998 Agreement with First Union
National Bank. The 1998 Agreement was guaranteed by the Chairman and the Chief
Executive Officer of EMCORE. In return for guaranteeing the facility, EMCORE
granted the Chairman and the Chief Executive Officer an aggregate of 284,684
common stock purchase warrants at an exercise price of $11.375 per share which
expire May 1, 2001. These warrants are callable at EMCORE's option at $0.85 per
warrant if EMCORE's common stock has traded at or above 150% of the exercise
price for a period of 30 days. The warrant exercise price was equal to the
market price of the Company's common stock on the date of grant. An accounting
value of $1.3 million was assigned to these warrants based upon the EMCORE's
application of the Black-Scholes option pricing model.
64
The President of Hakuto Co., Ltd., EMCORE's Asian distributor, is a member
of EMCORE's board of directors and Hakuto Co., Ltd. is a minority shareholder of
EMCORE. During the year ended September 30, 1998, sales made through Hakuto Co.,
Ltd. approximated $9.2 million.
In February 1998, EMCORE and Uniroyal Technology Corporation formed
Uniroyal Optoelectronics, a joint venture to produce and market compound
semiconductor products. EMCORE has a non-controlling minority interest in the
joint venture. During the first six months of fiscal 1999, EMCORE sold three
TurboDisc systems to the joint venture for a total of $5.3 million. As of March
31, 1999, EMCORE's investment in this venture amounted to $4.3 million.
In fiscal 1997, EMCORE signed a non-exclusive and non-refundable technology
licensing and royalty agreement with Uniroyal Technology Corporation for the
process technology to develop and manufacture HB LEDs. During fiscal 1998 and
1997, revenue associated with the Uniroyal Technology Corporation licensing
agreement amounted to $2.5 million and $2.5 million, respectively. At the time
the transaction was originally entered into, Uniroyal Technology Corporation's
Chairman and Chief Executive Officer was a member of EMCORE's board of directors
and EMCORE's Chairman was on the Board of Directors of Uniroyal Technology
Corporation.
All related party transactions were approved by a majority of the
disinterested members of EMCORE's board of directors.
65
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information known to EMCORE with
respect to beneficial ownership of its common stock as of May 1, 1999 and as
adjusted to reflect the sale of the shares offered pursuant to this prospectus
by: (1) each person who is known by EMCORE to be the beneficial owner of five
percent or more of the its common stock; (2) each of EMCORE's directors; (3)
each of EMCORE's executive officers; (4) all officers and directors of EMCORE as
a group (16 persons); and (5) each other selling shareholder. Except as
otherwise indicated, EMCORE believes, based on information furnished by such
persons, that each person listed below has the sole voting and investment power
over the shares of common stock shown as beneficially owned, subject to common
property laws, where applicable. Unless otherwise noted, the address for the
individuals listed below is c/o EMCORE Corporation, 394 Elizabeth Avenue,
Somerset, NJ 08873.
- ------------------------------
* Less than 1.0%
66
(1) With 141,504 held by the AER 1997 Trust -- see note 4.
(2) Held by Gallium Enterprises Inc. -- see note 5.
(3) Includes 442,368 shares of Common Stock and 264,286 shares of convertible
preferred stock owned by Hakuto Co., Ltd., which is controlled by Shigeo
Takayama.
(4) Dr. Thomas J. Russell, one of the three trustees for The AER 1997 Trust, is
the Chairman of EMCORE. After January 13, 2002, Avery E. Russell, the
daughter of Thomas J. Russell will be the primary beneficiary of the trust.
The address of The AER 1997 Trust is 117 Leabrook Lane, Princeton, NJ 10854.
(5) Gallium Enterprises Inc. is controlled by Robert Louis-Dreyfus, a member of
the board of directors of EMCORE. The address of Gallium Enterprises, Inc.
is c/o Harborstone Capital Management., 152 West 57th Street, 21st Floor,
New York, New York 10019.
(6) Includes 642,857 shares of convertible preferred stock. The address of Union
Miniere Inc. is 13847 West Virginia Drive, Lakewood, Colorado 80228.
(7) Includes 642,857 shares of convertible preferred stock. The address of
Uniroyal Technology Corporation is Two North Tamiami Trail, Suite 900,
Sarasota, Florida 34236.
(8) In connection with the consummation of the GELcore joint venture, EMCORE
issued to General Electric common stock purchase warrants for 282,010 shares
of EMCORE common stock. Those warrants have an exercise price of $22.875 and
will expire in 2006. General Electric also purchased a $7.8 million
subordinated convertible debenture that is convertible into 340,984 shares
of common stock at General Electric's option.
67
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement,
the underwriters named below, who are represented by Donaldson, Lufkin &
Jenrette Securities Corporation, Prudential Securities Incorporated, Needham &
Company, Inc., SoundView Technology Group, Inc., Jesup & Lamont Securities
Corporation, Chatsworth Securities, LLC and Pacific Growth Equities, Inc. have
severally agreed to purchase from EMCORE and the selling shareholders the
respective number of shares of common stock set forth opposite their names
below.
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares of common stock
offered hereby are subject to approval by their counsel of certain legal matters
and certain other conditions. The underwriters are obligated to purchase and
accept delivery of all the shares of common stock offered hereby (other than
those shares covered by the over-allotment option described below) if any are
purchased.
The underwriters initially propose to offer the shares of common stock in
part directly to the public at the public offering price set forth on the cover
page of this prospectus and in part to certain dealers (including the
underwriters) at such price less a concession not in excess of $0.68 per share.
The underwriters may allow, and such dealers may re-allow, to certain other
dealers a concession not in excess of $0.10 per share. After the initial
offering of the common stock, the public offering price and other selling terms
may be changed by the representatives at any time without notice.
DLJdirect Inc., an affiliate of Donaldson, Lufkin & Jenrette Securities
Corporation and a member of the selling group, is facilitating the distribution
of the shares sold in the offering over the Internet. The underwriters have
agreed to allocate a limited number of shares to DLJdirect Inc. for sale to its
brokerage account holders.
EMCORE has granted to the underwriters an option, exercisable within 30
days after the date of this prospectus, to purchase, from time to time, in whole
or in part, up to an aggregate of 584,616 additional shares of common stock at
the public offering price less underwriting discounts and commissions. The
underwriters may exercise such option solely to cover over-allotments, if any,
made in connection with this offering. To the extent that the underwriters
exercise such option, each underwriter will become obligated, subject to certain
conditions, to purchase its pro rata portion of such additional shares based on
such underwriter's percentage underwriting commitment as indicated in the
preceding table.
EMCORE and the selling shareholders have agreed to indemnify the
underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, or to contribute to payments that the underwriters may
be required to make in respect thereof.
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Each of EMCORE, its executive officers and directors and certain
shareholders of EMCORE (including the selling shareholders) has agreed, subject
to certain exceptions, not to (i) offer, pledge, sell, contract to sell, sell
any option or contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase or otherwise transfer or dispose
of, directly or indirectly, any shares of common stock or (ii) enter into any
swap or other arrangement that transfers all or a portion of the economic
consequences associated with the ownership of any common stock (regardless of
whether any of the transactions described in clause (i) or (ii) is to be settled
by the delivery of common stock, or such other securities, in cash or otherwise)
for a period of 90 days after the date of the prospectus without the prior
written consent of Donaldson, Lufkin & Jenrette. In addition, during such
period, EMCORE has also agreed not to file any registration statement with
respect to, and each of its executive officers, directors and certain
shareholders of EMCORE (including the selling shareholders) has agreed not to
make any demand for, or exercise any right with respect to, the registration of
any shares of common stock or any securities convertible into or exercisable or
exchangeable for common stock without the prior written consent of Donaldson,
Lufkin & Jenrette.
Other than in the United States, no action has been taken by EMCORE, the
selling shareholders or the underwriters that would permit a public offering of
the shares of common stock offered hereby in any jurisdiction where action for
that purpose is required. The shares of common stock offered hereby may not be
offered or sold, directly or indirectly, nor may this prospectus or any other
offering material or advertisements in connection with the offer and sale of any
such shares of common stock be distributed or published in any jurisdiction,
except under circumstances that will result in compliance with the applicable
rules and regulations of such jurisdiction. Persons into whose possession this
prospectus comes are advised to inform themselves about and to observe any
restrictions relating to this offering of the common stock and the distribution
of this prospectus. This prospectus does not constitute an offer to sell or
solicitation of an offer to buy any shares of common stock offered hereby in any
jurisdiction in which such an offer or a solicitation is unlawful.
The underwriters and dealers may engage in passive market making
transactions in the common stock in accordance with Rule 103 of Regulation M
promulgated by the Commission. In general, a passive market maker may not bid
for or purchase shares of common stock at a price that exceeds the highest
independent bid. In addition, the net daily purchases made by any passive market
maker generally may not exceed 30% of its average daily trading volume in the
common stock during a specified two-month period, or 200 shares, whichever is
greater. A passive maker must identify passive market making bids as such on the
Nasdaq electronic inter-dealer reporting system. Passive market making may
stabilize or maintain the market price of the common stock above independent
market levels. Underwriters and dealers are not required to engage in passive
market making and may end passive market making activities at any time.
In connection with the offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
common stock. Specifically, the underwriters may overallot this offering,
creating a syndicate short position. In addition, the underwriters may bid for
and purchase shares of common stock in the open market to cover syndicate short
positions or to stabilize the price of the common stock. Finally, the
underwriting syndicate may reclaim selling concessions from
69
syndicate members in the offering, if the syndicate repurchases previously
distributed common stock in syndicate covering transactions, in stabilization
transactions or otherwise. Any of these activities may stabilize or maintain the
market price of the common stock above independent market levels. The
underwriters are not required to engage in these activities, and may end any of
these activities at any time.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
EMCORE by White & Case LLP, Miami, Florida, who may rely upon Dillon, Bitar &
Luther, New Jersey counsel for EMCORE as to matters of New Jersey law. Certain
legal matters in connection with this offering will be passed upon for the
underwriters by Brobeck, Phleger & Harrison LLP, New York, New York.
EXPERTS
The consolidated financial statements of EMCORE as of September 30, 1998
and for the year then ended included and incorporated by reference in this
prospectus, have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report (which expresses an unqualified opinion and includes an
explanatory paragraph relating to a restatement described in Note 20), which is
included and incorporated by reference herein, and has been so included and
incorporated in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
The balance sheet of EMCORE as of September 30, 1997, and the statements of
operations, shareholders' equity and cash flow for the two year period ended
September 30, 1997, included and incorporated by reference in this prospectus,
have been included herein and incorporated by reference in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of that firm as experts in accounting and auditing.
The financial statements of MicroOptical Devices, Inc. included in this
prospectus and elsewhere in the registration statement, to the extent and for
the periods indicated in their reports, have been audited by Arthur Andersen
LLP, independent public accountants, and are included herein in reliance upon
the authority of said firm as experts in giving said reports. EMCORE has agreed
to indemnify and hold harmless Arthur Andersen LLP and its personnel for any
costs and expenses including attorneys' fees incurred by Arthur Andersen in
successful defense of a legal action or proceeding that arises as a result of
Arthur Andersen's consent to the inclusion of its audit reports on MODE's past
financial statements in a registration statement filed by EMCORE with the SEC. A
successful defense in this context would be one in which Arthur Andersen is
neither decreed to have been culpable nor pays any part of MODE's or EMCORE's
damages as a result of judgment or settlement.
The statements in this Prospectus set forth under the captions "Risk
Factors -- Our ability to protect our trade secrets is crucial to our business."
"-- We may require licenses to continue to manufacture and sell certain of our
compound semiconductor wafers and devices." and discussions of trade secrets and
the Rockwell Patent litigation in "Business -- Intellectual Property and
Licensing" have been reviewed and approved by Lerner David Littenberg Krumholz &
Mentlik, Westfield, New Jersey, patent counsel for EMCORE, as experts on such
matters, and are included herein in reliance upon such review and approval.
70
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
On December 5, 1997, EMCORE acquired all of the outstanding capital stock
of MODE in exchange for 1,461,866 shares of EMCORE's common stock, 200,966
common stock purchase options and 47,118 common stock purchase warrants. The
purchase price was approximately $32.8 million, including direct acquisition
costs of approximately $500,000. MODE was a development stage company
(incorporated in August 1995) and had 18 employees at the date of acquisition.
MODE's activities were substantially directed towards the research and
development of optical laser devices. The following unaudited pro forma
consolidated statement of operations is based on the historical financial
statements of EMCORE and MODE, adjusted to give the effect to the acquisition of
MODE by EMCORE. The unaudited pro forma consolidated statements of operations
assume that the acquisition of MODE by EMCORE occurred as of October 1, 1997.
The pro forma financial information reflects the purchase method of accounting
for the acquisition of MODE. The accompanying unaudited pro forma information
does not give effect to any cost savings that may be realized as a result of the
integration of EMCORE and MODE, or to any changes in the revenues of the
combined entity, resulting from such integration. The accompanying unaudited pro
forma financial information should be read in conjunction with EMCORE's
historical financial statements and the notes thereto and the MODE historical
financial statements and the notes thereto included herein. Such unaudited pro
forma financial information does not purport to be indicative of the results of
operations of EMCORE in the future or what its financial position and results of
operations would have been had the acquisition occurred at the dates indicated
above.
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. EMCORE's
over-riding investment consideration was that if MODE's research and development
efforts, with continued research and development funding contemplated and
required after acquisition, yielded commercial products for targeted
applications, EMCORE would possess a broader array of enabling advanced
technologies and would be better positioned for entry into certain existing
large and/or high growth technology-dependent markets. The primary value
enhancing asset acquired in the MODE acquisition was the technology under
development by MODE as part of its planned micro-laser and optical subassembly
products. EMCORE plans to use MODE's micro-optical laser technology in new
products for data communications and telecommunications applications. As of the
date of acquisition, MODE had six primary micro-optical laser research and
development projects in process. EMCORE expects MODE's microlasers and optical
subassemblies to provide design, performance and significant cost advantages
over their technical predecessors such as edge-emitting solid state lasers.
Through the integration of vertical cavity surface emitting lasers (VCSELs) with
leading original equipment manufacturer systems design, VCSELs are expected to
provide enhanced performance benefits to market applications such as Internet
access, onboard photonics, Gigabit Ethernet, local area networks, microarea
network, digital video discs (DVDs) and fiberoptic switching. In developing
EMCORE's financial projections for future revenues and costs, new micro-optical
laser product introductions were expected to commence in fiscal 1998 and
reflected the
71
impact of entering new markets such as the data communications and
telecommunications industries. Should EMCORE be unable to complete the
development of any of the six projects, EMCORE may not realize the product,
market and financial benefits expected from this acquisition. In February 1998,
MODE announced the introduction of its first commercial product, a Gigalase
VCSEL. Subsequent to such announcement, MODE's Gigalase product efforts were
primarily directed toward engineering, testing and quality control activities to
facilitate commercial production which commenced in May 1998. On December 14,
1998, MODE announced its second commercial product, a Gigarray VCSEL.
As part of the acquisition, EMCORE incurred a one-time in-process research
and development write-off of $19.5 million which is reflected in the
accompanying financial statements. 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.
- ------------------------------
Notes to Pro Forma Statement of Operations
(1) EMCORE acquired MODE on December 5, 1997 in exchange for (i) the issuance of
1,461,866 shares of common stock, and (ii) the assumption of (x) up to
200,966 common stock purchase options at exercise prices ranging from $0.43
to $0.59 and (y) 47,118 common stock purchase warrants at exercise prices
ranging from $4.32 to $5.92. The transaction purchase price amounted to
approximately $32,800,000, including approximately $500,000 of direct
acquisition costs. EMCORE's
72
common stock was valued based upon the average closing price of EMCORE's
common stock for the five days before and after the announcement of the
acquisition. The purchase price was allocated to the assets acquired
(approximately $2,801,000) and liabilities assumed (approximately
$2,645,000), based upon the fair value at the date of acquisition. In
addition, EMCORE recorded a one-time write-off of approximately $19,516,000
(as restated) relating to purchased in-process research and development.
Goodwill of approximately $13,157,000 (as restated) was recorded as a result
of the acquisition.
(2) To reflect the amortization of goodwill over a period of three years.
(3) To reverse the non-recurring, one-time write-off of $19,516,000 (as
restated) relating to purchased in-process research and development.
(4) The operating results of MODE are from the period of October 1, 1997 through
the date of acquisition. Subsequent to the date of acquisition, MODE's
operations are included with those of EMCORE.
The pro forma statement of operations for the year ended September 30, 1998,
does not reflect the non-recurring write-off of the acquired in-process research
and development.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents have been filed by EMCORE with the Commission under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and are
incorporated herein by reference:
1. EMCORE's Annual Report on Form 10-K and 10-K/A for the fiscal year
ended September 30, 1998;
2. EMCORE's Quarterly Reports on Form 10-Q and 10-Q/A for the period
ended December 31, 1998 and on Form 10-Q for the period ended March 31,
1999;
3. EMCORE's Current Report on Form 8-K dated May 13, 1999; and
4. The description of the common stock, contained in EMCORE's
Registration Statement on Form 8-A filed pursuant to Section 12 of the
Exchange Act and all amendments thereto and reports filed for the purpose
of updating such description.
All documents filed by us pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Exchange Act: (1) subsequent to the initial filing of this prospectus and
prior to the date it is declared effective; and (2) subsequent to the date of
this prospectus and prior to the termination of this offering are incorporated
by reference and become a part of this prospectus and to be a part hereof from
their date of filing. Any statement contained in this prospectus to the extent
that a statement contained in any such document modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this prospectus.
On request, we will provide anyone who receives a copy of this prospectus
with a copy of any or all of the documents incorporated in this prospectus by
reference. We will provide this information at no cost to you. Written or
telephone requests for such copies should be directed to our principal office:
EMCORE Corporation, 394 Elizabeth Avenue, Somerset, New Jersey 08872, Attn:
Thomas G. Werthan, Secretary, Telephone (732) 271-9090.
73
AVAILABLE INFORMATION
We file reports, proxy statement and other information with the Commission.
Those reports, proxy statements and other information may be obtained:
- At the Public Reference Room of the Commission, Room 1024 -- Judiciary
Plaza, 450 Fifth Street, N.W., Washington, DC 20549 (for information,
please call 1-800-SEC-0330);
- At the public reference facilities at the Commission's regional offices
located at Seven World Trade Center, 13th Floor, New York, New York 10048
or Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661;
- By writing to the Commission, Public Reference Section, Judiciary Plaza,
450 Fifth Street, N.W., Washington, DC 20549;
- At the offices of the National Association of Securities Dealers, Inc.,
Reports Section, 1735 K Street, N.W., Washington, DC 20006; or
- From the Internet site maintained by the Commission at
http://www.sec.gov. which contains reports, proxy and information
statements and other information regarding issuers that file
electronically with the Commission.
Some locations may charge prescribed or modest fees for copies.
EMCORE has filed with the Commission a Registration Statement on Form S-3
(together with any amendments or supplements thereto, the "Registration
Statement") under the Securities Act covering the shares of common stock offered
hereby. As permitted by the Commission, this prospectus, which constitutes a
part of the Registration Statement, does not contain all the information
included in the Registration Statement. Such additional information may be
obtained from the locations described above. Statements contained in this
prospectus as to the contents of any contract or other document are not
necessarily complete. You should refer to the contract or other document for all
the details.
74
EMCORE CORPORATION
INDEX OF FINANCIAL STATEMENTS
F-1
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. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements 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.
As discussed in Note 20 the accompanying 1998 consolidated financial
statements have been restated.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
May 14, 1999
F-2
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. These financial statements schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements 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.
Coopers & Lybrand L.L.P.
Parsippany, New Jersey
November 3, 1997, except for
note 15, as to which the date
is December 5, 1997
F-3
EMCORE CORPORATION
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
EMCORE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
EMCORE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997, 1998
AND THE SIX-MONTH PERIOD ENDED MARCH 31, 1999
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
EMCORE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
F-7
EMCORE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
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.
F-8
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. For the year ended September 30,
1998, the Company 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
F-9
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information. The financial information as of March 31,
1999 and for the six-month periods ended March 31, 1998 and 1999 is unaudited,
but includes all adjustments (consisting only of normal recurring accruals) that
the Company considers necessary for a fair presentation of the financial
position at such date and the operating results and cash flows for those
periods. Operating results for the six months ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the entire year.
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
F-10
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 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
F-11
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
F-12
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 and the
number of shares to be issued upon the conversion of the Company's Series I
Preferred Stock 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.
F-13
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 is 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.
F-14
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.
F-15
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
F-16
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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:
F-17
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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, 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:
F-18
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 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
F-19
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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
F-20
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-21
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:
F-22
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
F-23
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
F-24
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 $0.49.
F-25
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the activity of options assumed in the MODE
acquisition.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock Based Compensation" ("SFAS 123"). SFAS 123
establishes financial and reporting standards for stock based compensation
plans. The Company has adopted the disclosure only provisions of this standard
and has elected to continue to apply the provision of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees". Had the
Company elected to recognize compensation expense for stock options based on the
fair value at the grant dates of awards, net loss and net loss per share would
have been as follows:
The weighted average fair value of the Company's stock options was
calculated using Black Scholes with the following weighted-average assumptions
used for grants in fiscal 1997: 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
F-26
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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
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
F-27
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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. During the six months ended March 31, 1999, the Company sold three
compound semiconductor production systems to the UTC Venture totaling $5.3
million in revenues. The Company eliminated gross profit of approximately $1.3
million on such sales to the extent of its minority interest. Such deferred
gross profit will be recognized ratably over the assigned life of the UTC
Venture's production systems. For the six months and the year ended March 31,
1999 and September 30, 1998, respectively, the Company recognized a loss of $1.0
million and $198,000 related to this venture, which has been recorded as a
component of other income and expense. As of March 31, 1999, the Company's
investment in this venture amounted to $4.3 million.
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. During the six months ended
March 31, 1999, sales made through Hakuto amounted to approximately $5.1
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).
F-28
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 $19.5 million 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.
F-29
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 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 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.
F-30
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the GELcore venture, General Electric will fund the
Company's initial capital contribution of $7.8 million into GELcore. The funding
will be in the form of a subordinated debenture (the "Debenture") with an
interest rate of 4.75% that 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.
In addition, General Electric will also receive 282,010 warrants to
purchase common stock at $22.875 per share. The warrants are exercisable at any
time and will expire in 2006. For the three months ended March 31, 1999, the
Company recognized a loss of $497,000 related to this venture which has been
recorded as a component of other income and expense. On a fully diluted basis,
General Electric will own approximately 5% of the common stock of the Company.
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. The Amended Note is guaranteed by the Company's Chairman and
Chief Executive Officer.
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.
F-31
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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:
F-32
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
MicroOptical Devices, Inc.:
We have audited the accompanying balance sheets of MICROOPTICAL DEVICES,
INC. (a Delaware corporation in the development stage) (the "Company") as of
December 31, 1996 and 1995, and the related statements of operations,
stockholders' equity and cash flows for the year ended December 31, 1996 and for
the period from inception (August 3, 1995) through December 31, 1995 and 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with 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 MicroOptical Devices, Inc.
as of December 31, 1996 and 1995, and the results of its operations and its cash
flows for the year ended December 31, 1996 and for the period from inception
(August 3, 1995) through December 31, 1995 and 1996, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Albuquerque, New Mexico
March 21, 1997
F-33
MICROOPTICAL DEVICES, INC.
(A DEVELOPMENT STAGE CORPORATION)
BALANCE SHEETS
AS OF SEPTEMBER 30, 1997 (UNAUDITED), DECEMBER 31, 1996 AND 1995
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-34
MICROOPTICAL DEVICES, INC.
(A DEVELOPMENT STAGE CORPORATION)
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (AUGUST 3, 1995)
THROUGH DECEMBER 31, 1996,
THE YEAR ENDED DECEMBER 31, 1996,
THE PERIOD FROM INCEPTION THROUGH DECEMBER 31, 1995
AND FOR THE NINE MONTH PERIOD
ENDED SEPTEMBER 30, 1997 (UNAUDITED)
The accompanying notes to financial statements are an integral part of these
statements.
F-35
MICROOPTICAL DEVICES, INC.
(A DEVELOPMENT STAGE CORPORATION)
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (AUGUST 3, 1995)
THROUGH SEPTEMBER 30, 1997 (UNAUDITED)
The accompanying notes to financial statements are an integral part of these
statements.
F-36
MICROOPTICAL DEVICES, INC.
(A DEVELOPMENT STAGE CORPORATION)
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (AUGUST 3, 1995)
THROUGH DECEMBER 31, 1996
AND FOR THE YEAR ENDED DECEMBER 31, 1996
AND FOR THE PERIOD FROM INCEPTION THROUGH DECEMBER 31, 1995
AND FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997 (UNAUDITED)
The accompanying notes to financial statements are an integral part of these
statements.
F-37
MICROOPTICAL DEVICES, INC.
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM INCEPTION (AUGUST 3, 1995)
THROUGH DECEMBER 31, 1996
AND FOR THE YEAR ENDED DECEMBER 31, 1996
AND FOR THE PERIOD FROM INCEPTION THROUGH DECEMBER 31, 1995
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT RISK FACTORS
MicroOptical Devices, Inc. (the "Company" or "MODE"), was incorporated
under the laws of the State of Delaware on August 3, 1995 for the purpose of
developing technology and manufacturing of advanced optoelectronic components
and systems for specific use in commercial identification and communications
markets.
The Company funded its marketing, development and operational activities to
date from the proceeds of two equity offerings. Since inception, the Company has
devoted substantially all of its efforts and resources to marketing and
development of its technology and remains in the development stage. Ultimately,
the Company's ability to achieve profitable operations is dependent, in large
part, upon making the transition to a manufacturing company.
On July 16, 1996, an amendment to the Certificate of Incorporation of MODE
(the "Amendment") was filed, which (a) increased the total number of its common
shares, which the Company is authorized to issue from two million to four
million, and (b) increased the total number of authorized shares of its
Convertible Preferred Stock, from four thousand to two million (222,222 shares
of Series A Convertible Preferred Stock and 1,777,778 shares of Series B
Convertible Preferred Stock).
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Basis. The financial books and records of the Company are
maintained on the accrual basis of accounting. As a development stage company,
cumulative results of operations from inception are presented.
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 and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Cash Equivalents. For the purposes of presenting cash flows, cash and cash
equivalents represent cash balances and highly liquid investments with original
maturities of less than 90 days.
Inventory. Inventories are stated at the lower of standard cost (which
approximates actual cost using the first-in, first-out method) or market and
consist of raw materials.
Property and Equipment. Equipment is stated at cost, net of accumulated
depreciation. Depreciation is computed on the straight-line method based on
estimated useful lives ranging from three to five years. Leasehold improvements
are amortized
F-38
MICROOPTICAL DEVICES, INC.
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
using the straight-line method over the shorter of the estimated useful life of
the asset or the remaining term of the lease.
Organization Costs. Costs to organize the Company are capitalized and
amortized on a straight-line basis over five years.
Research and Development. The costs of research and development activities
are charged to expense as incurred.
Fair Value of Financial Instruments. The carrying value of all financial
instruments approximates fair market value at December 31, 1996 and 1995.
Stock-Based Compensation. The Company accounts for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25 ("APB Opinion No. 25"), "Accounting for Stock
Issued to Employees," and related Interpretations. Accordingly, compensation
cost for stock options is measured as the excess, if any, of the quoted market
price of the Company's stock at the date of the grant over the amount an
employee must pay to acquire the stock. Financial Accounting Standards Board
Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), was
issued in 1995 and the Company has adopted the disclosure requirements of SFAS
123 (see Note 6).
Income Taxes. MODE accounts for income taxes using the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under Financial Accounting Standards Board Statement No.
109, "Accounting for Income Taxes" ("SFAS No. 109"), the effect on deferred tax
assets and liabilities of a change in tax rates is recognized in operations in
the period that includes the enactment date.
Net Loss Per Share. Net loss per share for each period was calculated
based upon the weighted average number of Common Stock outstanding during each
period, using post split shares resulting from the three- for-one stock split
effective August 1996. Common Stock equivalents were excluded in the calculation
of weighted average shares outstanding since their inclusion would have had an
anti-dilutive effect.
Accounting Pronouncement Not Yet Adopted. The Financial Accounting
Standards Board issued SFAS No. 128, "Earnings Per Share," which is effective
for calendar years beginning after December 15, 1997 at which time it will
require restatement of prior years earnings per share calculations. Management
has not yet determined the effect, if any, of SFAS No. 128 on the financial
statements.
F-39
MICROOPTICAL DEVICES, INC.
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment at December 31 by major classification are as
follows:
NOTE 4. CAPITAL LEASES
In 1996, the Company financed certain manufacturing equipment, leasehold
improvements, and furniture and fixtures under a Master Equipment Lease
Agreement ("the Lease") expiring June 30, 1997, which provides for financing of
up to $2,000,000. The Company had only nominal borrowings under the Lease at
December 31, 1996. The capital leases have terms of 42 months and are
collateralized by manufacturing equipment. The transactions under the Lease are
accounted for as a financing, whereby the property remains on the books and
continues to be depreciated and amortized. Obligations under capital leases
representing the proceeds was recorded, and is reduced based on payments under
capital lease obligations. All items are sold and leasedback at original
purchase price, therefore no gain or loss was recorded on such transactions
during 1996.
At December 31, 1996, approximately $146,000 of manufacturing equipment was
under capital lease. The future minimum lease payments for assets under capital
lease and the present value of the net minimum lease payments at December 31,
1996, are as follows:
In connection with the Lease, the Company issued a warrant to purchase
208,695 shares of MODE's Series B convertible preferred stock, on a post stock
split basis (see Note 5), exercisable at any time for a period of up to ten
years ending on August 21,
F-40
MICROOPTICAL DEVICES, INC.
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2006 at a price of $.77 per share. The warrant may terminate sooner in
connection with certain significant corporate events.
NOTE 5. STOCKHOLDERS' EQUITY
Effective August, 1996, the Company declared a stock split on all existing
preferred and common shares at a ratio of three to one. The accompanying
financial statements for the year ended December 31, 1996, have been adjusted to
reflect the stock split.
On July 17, 1996, the Company issued 4,076,088 shares, on a post stock
split basis, of its Series B Convertible Preferred Stock ("Series B"). Each
share of Series B, which has a liquidation preference of $.77, is convertible to
one share of the Company's Common Stock and earns dividends at the rate declared
for each share of Common Stock. No such dividends have been declared as of
December 31, 1996. Terms of the agreements with Preferred Shareholders require
the Company to comply with terms similar to those specified in the Series A
issuance.
As specified in the Series A Convertible Preferred Stock ("Series A")
issuance, the Series A Preferred Stockholder purchased $150,000 of Convertible
Promissory Notes (the "Notes"), during 1996. The Notes, which bore interest at
the prime rate compounded monthly, were convertible at a price equal to the per
share purchase price of the Series B stock issuance. On July 17, 1996, the Notes
and the related interest of $1,169 were converted to Series B convertible
preferred stock in conjunction with the Series B stock issuance.
On August 29, 1995, the Company issued 666,666 shares, on a post stock
split basis, of its Series A. Each share of Series A, which has a liquidation
preference of $.3, is convertible to one share of the Company's Common Stock and
earns dividends at the rate declared for each share of Common Stock. No such
dividends have been declared as of December 31, 1996. An agreement with the
Series A Preferred Stockholder requires the Company to, among other items,
maintain keyman life insurance on certain key employees, and obtain the
Preferred Stockholders' approval to make key changes in the operations of the
Company.
On August 3, 1995, the Company issued 3,000,000 shares, on a post stock
split basis, of its Common Stock at a par value of $.001 per share.
NOTE 6. DEFERRED COMPENSATION PLAN
In July 1996, the Company adopted the 1996 Stock Option Plan (the "Plan"),
where options granted to an employee are qualified "incentive stock options"
under the Internal Revenue Code and options granted to a non-employee are
"non-statutory stock options", for which 1,800,000 shares were reserved, on a
post stock split basis. The Company accounts for options granted to employee's
under this Plan in accordance with APB Opinion No. 25, under which no
compensation cost has been recognized. The compensation costs for the Plan
determined consistent with SFAS 123
F-41
MICROOPTICAL DEVICES, INC.
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
is immaterial. Options granted to non-employee's under this Plan are accounted
for in accordance with the provisions of SFAS 123.
The Company has granted options on 645,500 shares through December 31,
1996. Under the Plan, the option exercise price equals the common stocks market
price on date of grant. All options are immediately exercisable and expire ten
years from date of grant. The options granted to MODE's founders are subject to
repurchase by the Company, at the original exercise price, upon the cessation of
service prior to vesting in such shares. Such shares vest in a series of 72
successive equal monthly installments over a six year period, however, such
vesting shall accelerate to 48 successive equal monthly installments upon the
Company meeting performance milestones as provided for by the Board. At December
31, 1996, the Company has achieved two out of five of its performance measures.
All other shares vest at the rate of 25 percent of the shares upon the
optionee's continued service to the Company through the initial vesting date,
with the remaining shares vesting in a series of 36 successive equal monthly
installments. The vesting period accelerates in connection with certain
significant corporate events.
A summary of the status of the Company's option Plan at December 31, 1996,
and changes during the year then ended is presented in the table and narrative
below:
The options outstanding at December 31, 1996, have a weighted average
remaining contractual life of 9.5 years.
The fair value of each option grant is estimated on the date of grant using
Black-Scholes option pricing model with the following average assumptions used:
risk-free interest rate of 6.65%; expected lives of ten years; a divided yield
of 0%; and expected volatility of .01%.
F-42
MICROOPTICAL DEVICES, INC.
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7. INCOME TAXES
MODE had no income tax expense and there were no income taxes currently
payable for the year ended December 31, 1996 and period ended December 31, 1995.
Deferred income taxes at December 31, 1996 and 1995, are offset by a valuation
allowance as follows:
The Company has established a valuation allowance for the entire deferred
tax asset due to the uncertainty of future earnings (see Note 1). A net
operating loss carry forward of $46,214 is available to offset future taxable
income for the next fifteen years.
NOTE 8. COMMITMENTS AND CONTINGENCIES
Technology Assistance and Royalty Agreement. On February 22, 1996, the
Company entered into a technical assistance and royalty agreement (as
subsequently amended) in which the Company agreed to further develop laser
technology in return for eight years of co-exclusive rights to five existing
patents covering this technology. The Company is required to pay $7,500 in 1997,
plus royalty payments beginning in 1998 of 1.5% to 2.5%, subject to minimum
annual payments ranging from up to $50,000 over the life of the patents provided
that the technology is developed and the related products are manufactured in
Albuquerque, New Mexico. In the event that the Company fails to develop or
abandons development of this technology, all rights to the technology become
nonexclusive. The Company paid $7,500 under this Agreement in 1996.
In October, 1996, the Company signed an agreement for research and
development, which expires March 31, 1998. Under the Agreement, the Buyer paid
the Company $95,000 for non-recurring engineering expense, plus all applicable
fees and taxes, which payment is non-refundable. Buyer will pay MODE the balance
of the payment upon demonstration of feasibility.
F-43
MICROOPTICAL DEVICES, INC.
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Keyman Life Insurance. The Company is beneficiary to $500,000 of term life
insurance for each of its two founders.
Licensing Agreement. On March 21, 1996, the Company signed a license
agreement (the "Agreement") with a major manufacturer in the identification
market (the "Manufacturer"). Under the Agreement, the Manufacturer paid the
Company a $500,000 license fee (the "Payment") plus all applicable gross
receipts tax that the Company is required to pay thereon.
The Manufacturer retains exclusive rights to use and sell any products or
components which the Company develops for the Manufacturer's portion of the
identification market (the "Product") for a limited period of time. After the
exclusive rights period expires, the Company is required to first offer these
Products, if achieved to the Manufacturer under similar sales terms as the
Products are offered to any other party for a limited period of time.
Within approximately one year of the receipt of the Payment, the Company
and the Manufacturer will negotiate in good faith to enter into a supply
agreement for the Product, if achieved. If no agreement is reached, then the
Company can elect to sell the Product, if achieved to the Manufacturer for an
additional license fee and, for each Product sold, the cost of the Product plus
a specified factor for overhead and profit.
Should the Company fail to pursue development or sell the Product to the
Manufacturer, the Manufacturer will be granted certain nonexclusive
sub-licensing rights.
At December 31, 1996, $325,000 has been earned under the terms of this
agreement.
Leased Property. The Company leases its facility under an operating lease
with a term of three years. Rental expense under operating leases was $18,214
for the year end December 31, 1996. There was no rental expense incurred for the
period from inception through December 31, 1995. The minimum future lease
commitments for all operating leases are $34,332 for each of the years ending
December 31, 1997 and 1998 and $17,166 for year end December 31, 1999.
NOTE 9. SUBSEQUENT EVENT
Purchase and Supply Agreement. On February 14, 1997, the Company signed a
purchase and supply contract (the "Contract"). Under the Contract, MODE
established the terms and conditions controlling potential sales of
vertical-cavity surface-emitting laser ("VCSEL") chips, devices and arrays in
the event they occur. The initial term of the Contract is five years, and can be
canceled by either party upon written notice 360 days prior to the end of the
initial term or any subsequent term. The Contract also may terminate prior to
the five year period under certain circumstances. Products sold under the
agreement are subject to a warranty period not to exceed the earlier of 18
months from the date the product is delivered to customer,
F-44
MICROOPTICAL DEVICES, INC.
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
or one year from the date of delivery by customer to its end-users, or one year
from the date the products are placed in service.
Sale/Leaseback of Assets. Subsequent to year end, the Company financed an
additional $1,850,000 of its property via a sale-leaseback transaction with a
leasing company under the terms of the Master Equipment Lease Agreement (see
Note 4).
F-45
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JUNE 11, 1999
(EMCORE LOGO) EMCORE CORPORATION
3,897,441 SHARES OF COMMON STOCK
------------------------
PROSPECTUS
------------------------
DONALDSON, LUFKIN & JENRETTE
PRUDENTIAL SECURITIES
NEEDHAM & COMPANY, INC.
SOUNDVIEW TECHNOLOGY GROUP
------------------------
DLJDIRECT INC.
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We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor any
sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of the company
have not changed since the date hereof.
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