UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one):
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number: 0-22175
EMCORE CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
NEW JERSEY 22-2746503
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
394 ELIZABETH AVENUE, SOMERSET, NJ 08873
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (732) 271-9090
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, NO PAR VALUE
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of common stock held by non-affiliates of the
registrant as of December 22, 1997 was approximately $89,429,417 (based on the
closing sale price of $16 1/2 per share).
The number of shares outstanding of the registrant's no par value common stock
as of December 22, 1997 was 9,317,740.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the 1998 Annual
Meeting of Shareholders (to be filed with the Securities and Exchange Commission
on or before January 28, 1998) are incorporated by reference in Part III of this
Form 10-K.
<PAGE>
PART I
ITEM 1. BUSINESS
Company Overview
EMCORE Corporation ("EMCORE" or the "Company"), founded in 1984, designs
and develops compound semiconductor materials and process technology and is a
leading manufacturer of production systems used to fabricate compound
semiconductor wafers. The Company provides its customers, both in the U.S. and
internationally, with materials science expertise, process technology and
compound semiconductor production systems that enable the manufacture of
commercial volumes of high-performance electronic and optoelectronic devices.
Recently, in response to the growing need of its customers to cost effectively
get to market faster with high volumes of new and improved high-performance
products, the Company expanded its product offerings to include the design,
development and production of compound semiconductor wafers and package-ready
devices. In March 1997, the Company completed an initial public offering of
2,875,000 shares of common stock (including the exercise of the Underwriter's
overallotment option). Prior to the Offering, there was no public market for the
Company's common stock.
Industry Overview
Recent advances in information technologies have created a growing need for
power 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 which are generally not achievable using silicon-based
components. To address these market demands, electronic system manufacturers are
increasingly incorporating new electronic and optoelectronic devices into their
products in order to improve performance or enable new applications.
Compound semiconductors have emerged as an enabling technology to meet the
complex requirements of today's advanced information systems. Compound
semiconductor devices can be used to perform individual functions as discrete
devices, such as high-brightness laser-emitting diodes ("HBLEDs"), laser and
solar cells, or can be combined into integrated circuits, such as transmitters,
receivers and alpha-numeric displays. Many compound semiconductor materials have
unique physical properties that allow electrons to move at least four times
faster than through silicon-based devices. This higher electron mobility enables
a compound semiconductor device to operate at much higher speeds than silicon
devices with lower power consumption and less noise and distortion. In addition,
unlike silicon-based devices, compound semiconductor devices have optoelectronic
capabilities that enable them to emit and detect light. As a result, electronics
manufacturers are increasingly integrating compound semiconductor devices into
their products in order to achieve higher performance in a wide variety of
applications, including wireless communications, telecommunications, computers,
and consumer and automotive electronics.
Recent advances in a type of semiconductor laser called a Vertical
Cavity Surface Emitting Laser ("VCSEL") are expected to enable higher modulation
frequencies, better coupling into optical fibers, easier fabrication of laser
arrays, and lower cost solutions. With these advantages, VCSELs will be used in
large volume applications for telecommunication, data communication, data
storage, scanning, printing, and for micro-area networks such as chip-to-chip
and board-to-board communications.
Wireless Communications. Compound semiconductor devices have multiple
applications in wireless communication products, including cellular telephones,
pagers, PCS handsets, DBS systems and global positioning systems. Compound
semiconductor devices are used in high frequency transmitters, receivers and
power amplifiers to increase capacity, improve signal to noise performance and
lower power consumption, which in turn reduces network congestion, increases
roaming range and extends battery life. In addition, HB LEDs are used in
electronic displays on these products in order to reduce size, weight and power
consumption and to improve display visibility. In satellite communications,
compound semiconductor devices are used in ultra-high frequency satellite
up-converters and down-converters to cost-effectively deliver information to
fixed and mobile users over wide geographic areas. In addition, compound
semiconductor solar cells are used to power these satellites because they are
more tolerant to radiation levels in space and have higher power-to-weight
ratios than silicon-based solar cells, thereby increasing satellite life and
payload capacity.
Telecommunications. To accommodate the exponential growth in voice, data
and video traffic and the increased demand for higher transmission rates,
telecommunications companies and Internet service providers are relying on fiber
optic networks utilizing high speed switching technologies. Compound
semiconductor components such as lasers and LEDs, coupled with optical
detectors, are used within these networks to enable high speed data
transmission, increase overall network capacity and reduce equipment costs.
Computers. Computer manufacturers are increasingly seeking to achieve
higher clock speeds than the architecture prevalent in today's advanced
multimedia computer systems. Higher processing speeds necessitate the use of
larger cache memory to enable higher transmission rates. Computer manufacturers
are increasingly utilizing compound semiconductor devices to achieve these
results. In addition, today's advanced multimedia applications require increased
data storage capacity, which is commonly addressed by the use of CD-ROMs. To
achieve these higher storage capabilities, computer manufacturers are
increasingly utilizing compound semiconductor lasers and optical detectors. As a
result of the migration of multimedia applications into consumer products,
computer manufacturers are also incorporating compound semiconductor infrared
emitters into their products to replace bulky wires and cables.
Consumer Electronics. Consumer electronics manufacturers are using compound
semiconductor devices to improve the performance of many existing products and
to develop new applications. For example, next generation compact disc players
are utilizing shorter wavelength compound semiconductor lasers to read and
record information on high density DVDs which store at least four times more
information than a conventional compact disc. In addition, compound
semiconductor devices are increasingly being used in advanced display
technologies. Ultra-thin LED flat panel displays are being used in a variety of
applications, including point-of-purchase displays and outdoor advertising with
live-action billboards, and are being developed for use in laptop computers and
flat panel television screens.
Automotive Electronics. Compound semiconductor devices are increasingly
being used by automotive manufacturers to improve vehicle performance while
reducing weight and costs through lower power consumption. These devices are
utilized in a wide variety of applications, including dashboard displays,
indicator lights, engine sensors, anti-lock braking systems and other electronic
systems. In addition, the Company believes that the use of electronic components
within automobiles is likely to increase as manufacturers design vehicles to
comply with state and federal environmental and safety regulations. Automotive
production cycles generally last three to five years, providing a relatively
predictable source of demand for compound semiconductor devices once an
electronic component is designed into a specific vehicle model.
The high-performance characteristics of compound semiconductors, combined
with the requirements of advanced information systems, have led to the
widespread deployment of compound semiconductor devices within a broad range of
electronic systems. The Company believes that the following factors have
resulted in an increased demand for compound semiconductor production systems,
wafers and devices which enable electronic systems manufacturers to reach the
market faster with high volumes of high-performance products and applications:
o Launch of new wireless services such as PCS and wireless high speed
data systems;
o Rapid build-out of satellite communications systems;
o Widespread deployment of fiber optic networks and the increasing use
of optical systems;
o Increasing use of infrared emitters and optical detectors in computer
systems;
o Emergence of advanced consumer electronics applications, such as DVDs
and flat panel displays; and,
o Increasing use of high-performance electronic devices in automobiles.
The EMCORE Solution
EMCORE provides its customers with materials science expertise, process
technology and MOCVD (metal organic chemical vapor deposition) production
systems that enable the manufacture of commercial volumes of high-performance
compound semiconductor wafers and devices. EMCORE believes that its proprietary
TurboDiscTM deposition technology makes possible one of the most cost-effective
production systems for the commercial volume manufacture of high-performance
compound semiconductor wafers and devices. EMCORE is capitalizing on its
technology base to address the critical need of electronics manufacturers to
cost-effectively get to market faster with high volumes of new and improved
high-performance products. EMCORE offers its customers a broad range of products
and services and a vertically integrated product line which includes device
design, materials and process development, MOCVD production systems, epitaxial
wafers and package-ready devices. The Company believes that its knowledge base
and materials science expertise uniquely position the Company to become a
valuable source for a broad array of solutions for the compound semiconductor
industry.
Recent Developments
On December 5, 1997, the Company purchased the privately-held MicroOptical
Devices, Inc. ("MODE"). MODE is one of the market leaders in the design and
development of high-quality optical components and subsystems based on VCSEL
technology, which offers superior performance at lower cost over conventional
semiconductor laser technologies. MODE's microlasers and optical subsystems
provide design, performance and significant cost advantages over their technical
predecessors such as edge-emitting solid state lasers. Through the integration
of VCSELs with leading OEM 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 networks,
DVD and fiberoptic switching. MODE's Gigalase(TM) and Gigarray(TM) technology
developments to date are currently being evaluated by a variety of domestic and
international OEM customers in the areas of data communications,
telecommunications, optical storage and sensing.
Under the terms of the agreement, the Company issued 1,461,866 shares of
common stock, 200,966 common stock purchase options and 47,118 common stock
purchase warrants in exchange for 100% of the outstanding capital stock of MODE.
The acquisition purchase price amounted to approximately $32.8 million. The
acquisition will be recorded under the purchase method of accounting and a
significant portion of the purchase price will be taken as a one-time charge by
EMCORE related to the write-off of in-process research and development costs.
MODE will operate as a separate wholly-owned subsidiary of EMCORE.
Strategy
The Company believes that its close collaborations with its customers over
the past twelve years have contributed to its position in the MOCVD process
technology and production systems market. The Company's objective is to
capitalize on this position to become a leading supplier of compound
semiconductor wafers and package-ready devices. The key elements of the
Company's strategy include:
Provide Complete Compound Semiconductor Solutions. The Company's
vertically-integrated product offerings allow it to provide complete compound
semiconductor solutions to a broad range of electronics manufacturers in order
to meet their diverse technology requirements. The Company plans to capitalize
on the growing need of electronics manufacturers to reach the market faster and
more cost-efficiently with high volumes of end products. The Company assists its
customers with device design, process development and optimal configuration of
production systems. Moreover, the Company can also serve its customers as a
reliable source for high-volume production of wafers or package-ready devices.
Through its materials science expertise, process technology and commercial
production systems, the Company intends to become an integral part of its
customers' compound semiconductor product life cycle.
Form Strategic Relationships with Customers. By developing enabling
technologies, the Company seeks to form strategic alliances with its customers
in order to obtain long-term development and high volume production contracts.
For example, the Company currently has a strategic relationship with General
Motors under which it has developed and enhanced the device structure and
production process for, and is manufacturing and shipping magneto-resistive
("MR") sensor products for use in General Motors' automotive applications. In
addition, the Company has been integrally involved with a large
telecommunication concern in connection with the development of solar cell
technologies for satellites and is currently shipping commercial volumes of
products based on these technologies. Throughout its association with this
customer, the Company has successfully customized its production systems to meet
the customer's special high-performance device requirements. The Company intends
to actively seek similar strategic relationships with other key customers in
order to further expand its technological and production base.
Expand Technology Leadership. The Company has developed and optimized its
compound semiconductor processes and has developed higher performance production
systems through substantial investments in research and development. The Company
works closely with its customers to identify specific performance criteria in
its production systems, wafers and package-ready devices. The Company intends to
continue to expend substantial resources in research and development in order 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 package-ready devices for its customers.
Products
Production Systems and Materials Processes. The Company is a leading
supplier of MOCVD compound semiconductor production systems, and, in 1996, had a
23% share of this market according to VLSI Research Inc. which regularly
publishes research on this market. The Company has shipped more than 190 systems
to date and believes that its TurboDiscTM systems offer significant cost of
ownership advantages over competing systems. The Company believes that its MOCVD
production systems produce materials with superior uniformity of thickness,
electrical properties and material composition. EMCORE has a variety of models
that are optimized for the application and throughput of the customer.
The Company believes that the high throughput capabilities of its
TurboDiscTM systems make possible the lowest cost of ownership for the
manufacture of compound semiconductor materials as well as superior
reproducibility of thickness, composition, electrical profiles and layer
accuracy required for electronic and optoelectronic devices. The Company's
production systems also achieve a high degree of reliability with an average
time available for production, based on customer data, of approximately 95%.
Wafer and Device Fabrication. Since its inception, the Company has worked
closely with its customers in designing and developing materials processes to be
used in production systems for its customers' end-use applications. Recently,
the Company has begun to leverage its process and materials science knowledge
base to manufacture wafers and package-ready devices in its own facility. The
Company's expansion into wafer and package-ready device production has been
spurred almost entirely by requests from customers whose epitaxial wafer needs
exceed their available in-house production capabilities. The Company fabricates
wafers and package-ready devices at its facility in Somerset, New Jersey and has
a combined clean room area totaling 7,500 square feet.
The Company is working with its customers to design, engineer and
manufacture commercial quantities of wafers and/or package-ready compound
semiconductor devices such as MR sensors, HBTs, HEMTs, FETs, HB LEDs, VCSELs,
solar cells and other electronic and optoelectronic devices. In 1996, General
Motors and the Company entered into an agreement under which General Motors paid
the Company approximately $1.6 million to develop and enhance certain MR
position sensors for commercial production. In June 1996, the Company achieved
positive test results in its development of MR sensors and successfully
completed the General Motors Pre-Production Approval Process in September 1996.
In November 1996, the Company received a purchase order from General Motors
pursuant to which it began production of these package-ready position sensors.
In January 1997, the Company began shipping these devices and had shipped over
2,000,000 devices as of September 30, 1997.
In addition, the Company is working closely with several large
telecommunications concerns to assist these customers in developing solar cell
and other process technology for use on their communications satellites. As a
result of this collaboration, the Company's technology has produced gallium
arsenide solar cells that are not only approximately 50% more efficient in
light-to-power conversion than silicon-based solar cells but also are more
radiation-resistant. The resulting advance allows a satellite manufacturer to
increase the useful life and payload capacity of its satellites. Over the last
two years, the Company's customers have purchased several MOCVD production
systems for this purpose. In the summer of 1996, a customer requested that the
Company begin producing epitaxial wafers for use in the manufacture of solar
cells for satellites. In May 1997, the Company qualified its production systems
for the manufacture of such wafers and in June 1997 began production and
shipment of commercial volumes of such wafers to this customer. Additionally,
the Company has completed an initial process development phase with a large
telecommunications concern. This collaboration has resulted in prototype wafers
for solar cells that may lead to more efficient wafers than those currently
being used.
Customers
The Company's customers include several of the largest semiconductor,
telecommunications and computer manufacturing companies in the world. In fiscal
year 1995, two customers accounted for more than 10% of the Company's revenues;
sales to these customers accounted for 28.9% and 11.5% of the Company's revenues
during fiscal 1995. In fiscal year 1996, only one customer accounted for more
than 10% of the Company's revenues; sales to this customer accounted for 23.6%
of the Company's revenues in fiscal 1996. For the fiscal year 1997, two
customers accounted for more than 10% of the Company's revenues; sales to these
customers accounted for 15.0% and 10.2% of the Company's revenues during fiscal
year 1997.
In fiscal 1996, the Company adopted a comprehensive Total Quality
Management Program with special emphasis on total customer satisfaction. In its
continuing effort to maintain and enhance its relationships with its customers,
the Company is seeking ISO and QS 9000 quality certification.
Sales and Marketing
The Company markets and sells its products through its direct sales force
in Europe, North America and through representatives and distributors in Asia.
In July 1995, the Company signed a seven year exclusive distributorship
agreement with Hakuto & Co., Ltd. ("Hakuto") , its Asian distributor for
TurboDisc(TM) system products, whose territory encompasses seven Asian
countries. Hakuto has marketed and serviced the Company's products since 1988,
is a minority shareholder in the Company, and Hakuto's Chairman of the Board and
CEO is a member of the Company's Board of Directors.
International sales as a percentage of total sales in fiscal 1995, 1996 and
1997 were 36.0%, 42.5% and 42.0%, respectively. Sales to customers in the U.S.
in fiscal 1995, 1996 and 1997 were approximately, $11.6 million, $16.0 million
and $27.7 million, respectively, while the Company's sales in Asia for the same
time periods were $4.0 million, $8.2 million and $14.6 million, respectively,
and sales in Europe were $2.5 million, $3.6 million and $5.5 million,
respectively. The Company receives all payments for all products and services in
U.S. dollars.
Service and Support
The Company maintains an international 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 the Company is required to maintain an inventory of
replacement parts and to service the equipment upon the request of the customer.
The Company also sells replacement parts from inventory for customer needs. The
Company pursues a program of system upgrades for customers to increase the
performance of older systems. The Company generally does not offer extended
payment terms to its customers and generally adheres to a warranty policy of up
to one year. Consistent with industry practice, the Company 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.
Research and Development
To maintain and improve its competitive position, the Company's research
and development efforts are focused on designing new proprietary products,
improving the performance of existing systems, wafers and package-ready devices
and reducing costs in the product manufacturing process. The Company has
dedicated 14 in-house EMCORE TurboDiscTM systems for both research and
production which are capable of processing virtually all compound semiconductor
materials. The research and development staff utilizes state-of-the-art x-ray,
optical and electrical characterization equipment which provide instant data
allowing for shortened development cycles and rapid customer response. The
Company's research and development expenses in fiscal 1995, 1996 and 1997 were
approximately $1.9 million, $5.4 million and $9.0 million, respectively. The
Company expects that it will continue to expend substantial resources on
research and development.
Intellectual Property and Licensing
The Company's success and competitive position both for production systems,
wafers and package-ready devices depend materially on its ability to maintain
trade secrets, patents and other intellectual property protections. Trade
secrets are routinely employed in the Company's manufacturing processes. A
"trade secret" is information that has value to the extent it is not generally
known, not readily ascertainable by others through legitimate means, and
protected in a way that maintains its secrecy. In order to protect its trade
secrets, the Company takes certain measures to ensure their secrecy, such as
executing non-disclosure agreements with its employees, customers and suppliers.
To date, the Company has been issued six U.S. patents. Provided that all
requisite maintenance fees are paid, 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 the Company's systems, wafers or devices.
Environmental Regulations
The Company 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 Company has
retained an environmental consultant to advise it in complying with applicable
environmental and health and safety laws and regulations, and believes that it
is currently, and in the past has been, in substantial compliance with all such
laws and regulations.
Backlog
As of September 30, 1997, the Company had an order backlog of approximately
$24.4 million compared to backlog of $23.6 million as of September 30, 1996. The
Company includes in backlog only customer purchase orders which have been
accepted by the Company and for which shipment dates have been assigned within
the twelve 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. Some of these agreements
currently extend over five years. The Company receives partial advance payments
or irrevocable letters of credit on most production system orders.
Manufacturing
The Company's manufacturing operations are located at the Company's
headquarters in Somerset, New Jersey and include systems engineering and
production, wafer fabrication, and design and production of package-ready
devices. Many of the Company's manufacturing operations are computer monitored
or controlled, enhancing reliability and yield. The Company manufactures its own
systems and outsources some components and sub-assemblies, but performs all
final system integration, assembly and testing.
Competition
The markets in which the Company competes are highly competitive. The
Company competes with several companies for sales of MOCVD systems including
Aixtron, Nippon-Sanso and Thomas Swann. The primary competitors for the
Company's wafer foundry include Epitaxial Products Inc., Kopin Corporation and
Q.E.D. The Company also faces competition from manufacturers that implement
in-house systems for their own use. In addition, the Company competes with many
research institutions and universities for research contract funding.
The Company believes that the primary competitive factors in the markets in
which the Company's products compete are yield, throughput, capital and direct
costs, system performance, size of installed base, breadth of product line and
customer satisfaction, as well as customer commitment to competing technologies.
The Company 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.
Risk Factors
Ownership of the Company's Common Stock is subject to a number of risks,
including, without limitation: a history of operating losses, fluctuations in
operating results, dependence on key personnel, increased competition, reliance
on trade secrets, risk of technological obsolescence, reliance on international
sales, governmental regulations and approvals, environmental regulations,
manufacturing and marketing capabilities, uncertainty of additional funding and
certain anti-takeover provisions.
ITEM 2. PROPERTIES
The Company's executive office and manufacturing facility are located in
Somerset, New Jersey, where the Company leases a 75,000 square foot facility.
This facility lease expires on February 29, 2000. The Company has two five-year
renewal options. The Company believes that its current facilities are adequate,
well maintained and in good condition.
ITEM 3. LEGAL PROCEEDINGS
The Company is aware of no pending or threatened litigation against it
which would have a material adverse effect on its business, financial condition
and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The Company's Common Stock is quoted on the NASDAQ National Market under
the symbol "EMKR". The following table sets forth the quarterly high and low
sales prices for the Company's Common Stock since its initial public offering in
March 1997.
MARKET PRICE
- ---------------------------------------------------
Quarters ended High Low
- ---------------------------------------------------
March 31, 1997 12 1/4 10 1/3
June 30, 1997 19 1/2 11
September 30, 1997 25 16 1/4
- ---------------------------------------------------
The Company has never declared or paid dividends on its Common Stock since
its formation. The Company currently does not intend to pay dividends in the
foreseeable future so that it may reinvest its earnings in the development of
its business. The payment of dividends, if any, in the future will be at the
discretion of the Board of Directors.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and notes thereto included
elsewhere in this report. The following table shows selected financial data for
the most recent five years:
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) YEARS ENDED SEPTEMBER 30,
------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenue $ 8,180 $ 9,038 $ 18,137 $ 27,779 $ 47,753
Cost of sales 4,772 5,213 9,927 18,607 30,094
------------------------------------------------------------
Gross profit 3,408 3,825 8,210 9,172 17,659
Operating expenses:
Selling, general and administrative 2,849 2,645 4,452 6,524 9,347
Research and development 1,024 1,064 1,852 5,401 9,001
------------------------------------------------------------
Total operating expenses 3,873 3,709 6,304 11,925 18,348
------------------------------------------------------------
Operating (loss) income (465) 116 1,906 (2,753) (689)
242 286 255 297 519
Imputed warrant interest, non-cash - - - 126 3,988
Other (income) expense (100) - 10 - -
------------------------------------------------------------
(Loss) income before income taxes and
extraordinary item (607) (170) 1,641 (3,176) (5,196)
Provision for income taxes - - 125 - 137
Extraordinary loss - - - - 286
------------------------------------------------------------
Net (loss) income $ (607) $ (170) $ 1,516 $ (3,176) $ (5,619)
============================================================
Net (loss) income per share $ (0.40) $ (0.11) $ 0.48 $ (0.72) $ (1.12)
============================================================
Shares used in computing net (loss)
income per share 1,502 1,502 3,145 4,438 5,030
------------------------------------------------------------
(IN THOUSANDS) AS OF SEPTEMBER 30,
------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Working capital $ 840 $ 1,041 $ 2,208 $ 1,151 $ 12,156
Total assets 3,171 5,415 10,143 20,434 39,463
Long-term obligations 2,000 3,000 3,000 8,947 7,577
Redeemable preferred stock 14,825 16,274 - - -
Shareholders' equity (deficit) 12 (96) 1,509 522 21,831
------------------------------------------------------------
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
EMCORE, founded in 1984, designs and develops compound semiconductor
materials and process technology and is a leading 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 provides its customers, both in the US and internationally, with
materials science expertise, process technology and compound semiconductor
production systems that enable the manufacture of commercial volumes of
high-performance electronic and optoelectronic devices. Recently, in response to
the growing need of its customers to cost effectively get to market faster with
higher volumes of new and improved high performance products, the Company
expanded its product offerings to include the design, development and production
of compound semiconductor wafers and package-ready devices.
RESULTS OF OPERATIONS:
The following table sets forth the Statement of Income Data of the Company
expressed as a percentage of total revenues for the fiscal years ended September
30, 1995, 1996 and 1997.
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
----------------------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Cost of Sales 54.8 67.0 63.0
--------------- --------------- -------------
Gross profit 45.2 33.0 37.0
Operating expenses:
Selling, general and administrative 24.5 23.5 19.6
Research and development 10.2 19.4 18.8
--------------- --------------- -------------
Operating income (loss) 10.5 (9.9) (1.4)
Stated interest expense, net 1.4 1.1 1.1
Imputed warrant interest, non-cash - 0.4 8.4
Other expense (income) 0.1 - -
--------------- --------------- -----------
Income (loss) before income taxes and extraordinary item 9.0 (11.4) (10.9)
Provision for income taxes 0.6 - 0.3
--------------- --------------- -------------
Net income (loss) before extraordinary item 8.4 (11.4) (11.2)
Extraordinary item - - (0.6)
--------------- --------------- --------------
Net income (loss) before extraordinary item 8.4% (11.4)% (11.8)%
============== =============== ===============
</TABLE>
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30, 1996 AND 1997
Revenues
The Company's revenues for fiscal 1997 increased 71.9% from $27.8 million
to $47.8 million for the fiscal year ended September 30, 1996. The revenue
increase was primarily attributable to increased demand of MOCVD systems and
package-ready devices, as well as the introduction of compound semiconductor
wafer products. International sales accounted for approximately 42.5% and 42.0%
of revenues for the fiscal years ended September 30, 1996 and 1997,
respectively.
The Company believes that in the future its revenues and consequential
results of operations in a given quarterly period could be impacted by the
timing of customer development projects and related purchase orders for the
Company's varied products, new merchandise announcements and releases by the
Company, and conditions in the economy, generally and in the compound
semiconductor industry environment, specifically.
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.
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 sales personnel
headcount increases to support both domestic and foreign markets and general
headcount additions to sustain the internal administrative support necessary for
the Company'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 for the emulation of the Company's two new product lines
(epitaxial 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, the Company expects to continue to invest a
significant amount of its resources in research and development.
Operating Income (Loss)
During fiscal 1997, operating loss decreased $2.1 million from a loss of
$2.8 million for the fiscal year ended September 30, 1996, to a loss of $0.7
million for the year ended September 30, 1997. The change in operating loss was
primarily due to higher revenues generating greater overall gross profit.
Other Expense
During fiscal 1996, the Company issued detachable warrants along with
subordinated notes to certain of its existing shareholders. In the first quarter
of fiscal year 1997, the Company also issued detachable warrants in return for a
$10.0 million demand note facility (the "Facility") guarantee by the Chairman of
the Board of the Company, who provided collateral for the Facility. The Company
subsequently assigned a value to these detachable warrants issued using the
Black-Scholes Option Pricing Model. The Company recorded the subordinated notes
at a carrying value that is subject to periodic accretions, using the interest
method, and reflected the Facility's detachable warrant value as 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," and amounted to approximately $126,000 and $4.0 million for
the fiscal years ended September 30, 1996 and 1997, respectively.
Borrowings totaling $8.0 million under the Facility were utilized to fund
capital expenditures in connection with the build-out of the Company'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
The Company repaid $10.0 million of its outstanding debt with proceeds from
its IPO. The entire $8.0 million outstanding of its Facility was repaid and $2.0
million was used to repay a portion of the Company's outstanding subordinated
notes due May 1, 2001. In connection with this discharge of the Company's
subordinated notes, an extraordinary loss of $286,000 was recognized.
Income Taxes
The Company's effective income tax rate was 2.6% in fiscal 1997 up from
0.0% in fiscal 1996. The effective rate was 7.6% in fiscal 1995 which was a
direct result of AMT and state taxes. The lower effective rate in fiscal 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.
Net Income (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 year-to-date increase was primarily attributable to the
aforementioned $4.0 million of non-cash imputed warrant interest associated with
certain financing transactions.
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30, 1995 AND 1996
Revenues. Revenues increased 53.6% from $18.1 million in fiscal 1995 to
$27.8 million in fiscal 1996. Revenues derived from international sales
increased 81.5% from $6.5 million in fiscal 1995 to $11.8 million in fiscal
1996. These increases were primarily due to greater sales of the Company's
compound semiconductor production systems resulting from broader acceptance of
these products, coupled with an increased market demand for compound
semiconductor devices, and to a lesser extent, increased service revenues, which
include parts and service contracts, resulting from the Company's growing
installed base. In addition, in fiscal 1996, the Company's research contract
revenues increased as a result of an arrangement with General Motors whereby
General Motors paid the Company $1.6 million to develop and enhance certain MR
package-ready devices for commercial production.
Cost of Sales/Gross Profit. Cost of sales increased 87.9% from $9.9 million
in fiscal 1995 to $18.6 million in fiscal 1996. Gross profit decreased from
45.2% of revenues in fiscal 1995 to 33.0% of revenues in fiscal 1996. This
decrease was principally attributable to: (i) the sale of three systems at a
loss for strategic reasons; (ii) competitive pricing conditions prevailing
generally in the market and a resulting decrease in the average selling price of
the Company's production systems; (iii) increased production costs associated
with system enhancements; and (iv) an increase in the Company's cost of
obtaining certain components. The sales for strategic reasons were made to
several leading universities in key geographic areas in order to increase the
Company's visibility and to enhance its reputation in the technology and
research community. The Company believes that the three sales made for strategic
reasons resulted in an approximately 4% decline in gross profit in fiscal 1996.
Selling, General and Administrative. Selling, general and administrative
expenses increased 44.4% from $4.5 million in fiscal 1995 to $6.5 million in
fiscal 1996. This increase was primarily due to increased marketing expenses
associated with the Company's higher level of production systems sales and the
hiring of additional personnel to support the Company's expanded activities. As
a percentage of revenues, selling, general and administrative expenses decreased
from 24.5% in fiscal 1995 to 23.5% in fiscal 1996.
Research and Development. Research and development expenses increased
184.2% from $1.9 million in fiscal 1995 to $5.4 million in fiscal 1996. This
increase was primarily due to the Company's increased research and development
activities relating to the initiation of its wafer and package-ready device
product lines. As a percentage of revenues, research and development expenses
increased from 10.2% in fiscal 1995 to 19.4% in fiscal 1996.
Backlog
The Company's order backlog increased 3.4% from $23.6 million for the
fiscal year ended September 30, 1996, to $24.4 million for the fiscal year ended
September 30, 1997. The Company includes in backlog only customer purchase
orders which have been accepted by the Company and for which shipment dates have
been assigned within the twelve months to follow and research contracts that are
in process or awarded. Wafer and device contract agreements extending longer
than one year in duration are included in backlog only for the ensuing 12 months
and 3 months, respectively. Some of these agreements currently extend over five
years. The Company receives partial advance payments or irrevocable letters of
credit on most production system orders and has never experienced an order
cancellation. Although the Company has increased its capacity to meet continued
increased production needs, there can be no assurance that the Company will be
consistently able to increase its capacity to meet its scheduled needs.
Liquidity And Capital Resources
Cash and cash equivalents increased by $2.3 million from $1.4 million at
September 30, 1996, to $3.7 million at September 30, 1997. For fiscal 1997, net
cash used by operations amounted to $6.9 million, primarily due to the Company's
increase in accounts receivable, decrease in accounts payable and advanced
billings, offset by an increase in accrued expenses and certain non-cash items,
including depreciation, amortization, and detachable warrant accretion and debt
issuance cost. Net cash used in investment activities during fiscal 1997
amounted to $11.9 million due to the purchase and manufacture of new equipment
for the facilitation of the Company's wafer and package ready device product
lines and to new facility clean room modifications and enhancements. For the
fiscal year ended September 30, 1997, net cash from financing activities
amounted to $21.1 million, primarily the $22.8 million net proceeds from the
Company's initial public offering, accounted for the majority of the resulting
net cash increase.
On March 31, 1997, the Company entered into a $10.0 million revolving loan
and security agreement (the "Agreement") with First Union National Bank. The
Agreement bears interest at the rate of First Union's prime rate plus 50 basis
points and expires on September 30, 1998. There are presently no borrowings
under the Agreement.
The Company believes that its current liquidity, together with the
Agreement, will be sufficient to meet its cash needs for working capital through
fiscal 1998. Thereafter, if cash generated from operations is insufficient to
satisfy the Company's liquidity requirements, the Company may be required to
raise funds through equity or debt offerings or obtain additional credit
facilities. Additional funding may not be available when needed or on terms
acceptable to the Company, which could have a material adverse effect on the
Company's financial conditions and operations.
Staffing
At September 30, 1997, the Company employeed 271 full-time employees, up
46.5% from 185 as of September 30, 1996 and up 243.0% from the 79 employees at
fiscal 1995. The increase in the number of employees since the end of 1995 is a
direct result of the Company's increased manufacturing operation needs to meet
the demand for its compound semiconductor production systems, wafers and
package-ready devices. None of the Company's employees are covered by a
collective bargaining agreement. The Company considers its relationship with its
employees to be good.
Outlook
On December 5, 1997, in line with the Company's strategic growth plan, the
Company purchased the privately-held MicroOptical Devices, Inc. ("MODE"). MODE
is one of the market leaders in the design and development of high-quality
components and subsystems based on VCSEL technology, which is expected to offer
superior performance and higher efficiency over conventional compound
semiconductor technologies.
MODE's microlasers and optical subsystems provide design, performance and
significant cost advantages over their technical predecessors such as
edge-emitting solid state lasers. Through the integration of VCSELs with leading
OEM 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 networks such as chip-to-chip and
board-to-board applications, DVD and fiberoptic switching. MODE's Gigalase(TM)
and Gigarray(TM) technology developments to date are currently being evaluated
by a variety of domestic and international OEM customers in the areas of data
communications, telecommunications, optical storage and sensing.
The Company believes that VCSEL technology may address a number of
technical bandwidth challenges applicable to the high-speed computing and
communications markets, allowing optoelectronic applications to perform their
functions at higher speeds with lower costs than traditional optoelectronic
systems. It believes that with the acquisition of MODE, the Company will be well
positioned to actively participate in the development of the next-generation
optoelectronic laser market which is estimated to grow to one billion dollars by
the year 2000.
Under the terms of the agreement, the Company issued 1,461,866 shares of
Common Stock, 200,966 common stock purchase options and 47,118 common stock
purchase warrants in exchange of 100% of the outstanding capital stock of MODE.
The acquisition purchase price amounted to approximately $32.8 million. The
acquisition will be recorded under the purchase method of accounting and a
significant portion of the purchase price will be taken as a one time charge of
approximately $29.3 million by the Company related to the write-off of
in-process research and development. The proposed transaction is expected to be
accretive within the first twelve months. Upon the completion of the
transaction, MODE is expected to operate as a separate wholly-owned subsidiary
of EMCORE.
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 manufacture high brightness light emitting
diodes ("LEDs"). During fiscal 1997, revenue associated with the UTC licensing
agreement amounted to $2.5 million. UTC's Chairman and CEO is a member of
EMCORE's Board of Directors and EMCORE's Chairman is on the Board of Directors
of UTC. Over the next 12 to 36 months, the Company may realize up to $5.5
million in license fees and related royalties in connection with these
agreements. Additionally, the Company and a wholly-owned subsidiary of UTC have
agreed in principle to form a new venture in which the Company will have a
minority interest, for the production and marketing of products related to this
licensed technology. Subsequent to September 30, 1997, the Company's outstanding
related party accounts receivable was paid in full and the payments under the
terms of the licensing agreement are not refundable.
Historically the Company has generated significant revenues from its
TurboDisc(TM) product line from Asian customers. Continued economic and
currency-related uncertainty in the region could impact the Company's future
TurboDisc(TM) sales in this market. However, the Company believes that a
potential drop in such sales could allow the Company to begin selling epitaxial
wafers and package-ready devices to this market despite the recent financial
volatility in the area.
The Company believes it possesses the technological "know how" to
capitalize on all of these market opportunities. However, there can be no
assurance that the Company will maintain sufficient growth in sales levels to
support the associated labor, equipment and facility costs.
Information Relating to Forward Looking Statements
Management's Discussions and Analysis and the business description in Item
1 of this Report include forward-looking statements that reflect the Company's
current expectations or beliefs concerning future results and events. The words
"expects", "intends", "believes", "anticipates", "likely", "will", and similar
expressions identify forward-looking statements. These forward-looking
statements are subject to certain risks and uncertainties which could cause
actual results and events to differ materially from those anticipated in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, statements about future financial performance of the
Company and MODE and the effect of the acquisition on the Company's business;
continued acceptance of the Company's MOCVD technologies, as well as the market
success of VCSEL technologies; the Company's ability to achieve and implement
the planned enhancements of products and services on a timely and cost-effective
basis and customer acceptance of those product introductions; product
obsolescence due to advances in technology and shifts in market demand;
competition and resulting price pressures; business conditions; economic and
stock market conditions, particularly in the U.S., Europe and Japan, and their
impact on sales of the Company's products and services; risks associated with
foreign operations, including currency and political risks; and such other risk
factors as may have been or may be included from time to time in the Company's
reports filed with the Securities and Exchange Commission.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
EMCORE CORPORATION
BALANCE SHEET
AS OF SEPTEMBER 30, 1996 AND 1997
<CAPTION>
------------------ -------------
1996 1997
------------------ -------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $1,367,386 $ 3,653,145
Restricted cash -
312,500
Accounts receivable, net of allowance for doubtful accounts of approximately
$310,000 and $697,000 at September 30, 1996 and 1997, respectively 3,025,171 8,439,704
Accounts receivable - related party - 2,500,000
Inventories, net
7,645,040 7,185,626
Costs in excess of billings on uncompleted contracts 19,322 -
Prepaid expenses and other current assets 59,935 120,393
------------------ -------------
Total current assets
12,116,854 22,211,368
Property and equipment, net
7,796,832 16,797,833
Other assets, net
520,735 453,608
------------------ -------------
Total assets $20,434,421 $39,462,809
================== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $5,660,438 $4,050,216
Accrued expenses
1,986,646 3,867,589
Advanced billings
3,306,462 1,998,183
Unearned service revenue
12,315 124,279
Capitalized lease obligation - current - 15,030
------------------ -------------
Total current liabilities
10,965,861 10,055,297
Long-term debt:
Subordinated notes, net
8,946,971 7,499,070
Capitalized lease obligation - 77,870
------------------ -------------
Total liabilities 19,912,832 17,632,237
------------------ -------------
Commitments and contingencies
Shareholders' equity:
Common stock, no par value, 23,529,411 shares authorized, 2,994,461 shares
issued and outstanding in 1996 and 6,000,391 shares issued and outstanding in
1997 18,977,566 45,816,774
Accumulated deficit (18,158,291) (23,777,658)
------------------ -------------
819,275 22,039,116
Notes receivable from warrant issuances and stock sales (297,686) (208,544)
------------------ -------------
Total shareholders' equity 521,589 21,830,572
------------------ -------------
Total liabilities and shareholders' equity $20,434,421 $39,462,809
================== =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
<TABLE>
EMCORE CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
------------------ ----------------- -----------------
1995 1996 1997
------------------ ----------------- -----------------
<S> <C> <C> <C>
Revenues:
Systems and materials $16,616,236 $24,066,506 $45,591,287
Services 1,520,431 3,712,379 2,161,285
------------------ ----------------- -----------------
Total revenues 18,136,667 27,778,885 47,752,572
Cost of sales:
Systems and materials 8,782,674 16,132,335 29,308,788
Services 1,144,297 2,474,085 785,227
------------------ ----------------- -----------------
Total cost of sales 9,926,971 18,606,420 30,094,015
------------------ ----------------- -----------------
Gross profit 8,209,696 9,172,465 17,658,557
------------------ ----------------- -----------------
Operating expenses:
Selling, general and administrative 4,451,534 6,524,482 9,346,329
Research and development 1,851,798 5,401,413 9,001,188
------------------ ----------------- -----------------
Operating income (loss) 1,906,364 (2,753,430) (688,960)
------------------ ----------------- -----------------
Other expenses:
Stated interest, net of interest income of $84,101,
$71,460 and $236,945 for the years ended
September 30, 1995, 1996 and 1997, respectively 255,384 297,093 519,422
Imputed warrant interest, non-cash - 125,791 3,988,390
Other 10,000 - -
------------------ ----------------- -----------------
Income (loss) before income taxes and
extraordinary item 1,640,980 (3,176,314) (5,196,772)
Provision for income taxes 125,000 - 137,000
------------------ ----------------- -----------------
Net income (loss) before extraordinary item 1,515,980 (3,176,314) (5,333,772)
Extraordinary item - loss on early extinguishment of
debt - - 285,595
------------------ ----------------- -----------------
Net income (loss) $1,515,980 $(3,176,314) $(5,619,367)
================== ================= =================
Per share data:
Shares used in computation of net income (loss) 3,145,292 4,438,403 5,029,806
Net income (loss) per share before extraordinary item $0.48 $(0.72) $(1.06)
================== ================= =================
Net income (loss) per share $0.48 $(0.72) $(1.12)
================== ================= =================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
<TABLE>
EMCORE CORPORATION
STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY
AS OF SEPTEMBER 30, 1995, 1996 AND 1997
<CAPTION>
Common Stock Class I Preferred Stock Accumulated
----------------------------------------------------------------------------
Shares Amount Shares Amount Discount Deficit
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT
SEPTEMBER 30, 1994 58,364 $ 301,924 693,900 $ 1,235,142 $ 934,454) $ (16,497,957)
Warrants exercised and
conversions 30,586 92,554 528,450
Repurchase of Class I
Preferred Stock
November 1994 preferred
stock conversions
into common stock
and retirement of
preferred treasury
shares 149,572 15,350,689 (1,222,350) (1,235,142) 934,454
August 1995 conversion
of Class A preferred
stock into common
stock 2,755,939 892,399
Net income 1,515,980
--------------------------------------------------------------------------------------------
BALANCE AT
SEPTEMBER 30, 1995 2,994,461 16,637,566 - - - (14,981,977)
Issuance of common
stock purchase
warrants 2,340,000
Notes receivable due
from shareholders in
connection with
issuance of detachable
warrants
Net loss (3,176,314)
--------------------------------------------------------------------------------------------
BALANCE AT
SEPTEMBER 30, 1996 2,994,461 18,977,566 - - - (18,158,291)
Issuance of common
stock purchase
warrants 3,601,455
Issuance of common
stock in initial public
offering, net of
issuance cost of
$3,110,345 2,875,000 22,764,655
Issuance of common
stock on exercise
of warrants 94,124 384,027
Issuance of common
stock on exercise
of stock options 34,965 53,640
Redemptions of notes
receivable from
shareholders
Forgiveness of notes
receivable from
shareholder
401(k) matching
contribution 1,841 35,431
Net loss (5,619,367)
--------------------------------------------------------------------------------------------
BALANCE AT
SEPTEMBER 30, 1997 $ 6,000,391 $ 45,816,774 - - - $(23,777,658)
============================================================================================
<PAGE>
STATEMENTS OF SHAREHOLDERS (DEFICIT) EQUITY (CONTINUED)
- --------------------------------------------------------
<CAPTION>
Shareholders' Total
Treasury Notes Shareholders'
Stock Receivable Equity/(Deficit)
-----------------------------------------
<S> <C> <C> <C>
BALANCE AT
SEPTEMBER 30, 1994 $ (28,104) $(146,107) (16,069,556)
Warrants exercised and
conversions 92,554
Repurchase of Class I
Preferred Stock (12,645) (12,645)
November 1994 preferred
stock conversions
into common stock
and retirement of
preferred treasury
shares 40,749 15,090,750
August 1995 conversion
of Class A preferred
stock into common
stock 892,399
Net income 1,515,980
-------------------------------------------
BALANCE AT
SEPTEMBER 30, 1995 - (146,107) 1,509,482
Issuance of common
stock purchase
warrants 2,340,000
Notes receivable due
from shareholders in
connection with
issuance of detachable
warrants (151,579) (151,579)
Net loss (3,176,314)
-------------------------------------------
BALANCE AT
SEPTEMBER 30, 1996 - (297,686) 521,589
Issuance of common
stock purchase
warrants 3,601,455
Issuance of common
stock in initial public
offering, net of
issuance cost of
$3,110,345 22,764,655
Issuance of common
stock on exercise
of warrants 384,027
Issuance of common
stock on exercise
of stock options 53,640
Redemptions of notes
receivable from
shareholders 31,842 31,842
Forgiveness of notes
receivable from
shareholder 57,300 57,300
401(k) matching
contribution 35,431
Net loss (5,619,367)
-------------------------------------------
BALANCE AT
SEPTEMBER 30, 1997 - $ (208,544) $21,830,572
===========================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
<PAGE>
<TABLE>
EMCORE CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
<CAPTION>
1995 1996 1997
------------------ ------------------- --------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,515,980 $ (3,176,314) $ (5,619,367)
Adjustments to reconcile net income (loss) to
net cash provided by (used for) operating
activities:
Depreciation and amortization 887,132 1,871,016 3,187,755
Provision for doubtful accounts 95,430 146,418 515,000
Provision for inventory valuation 15,379 105,000 120,000
Detachable warrant accretion and debt
issuance cost - 125,792 3,988,390
Extraordinary loss on early extinguishment - -
of debt - - 285,595
401(k) matching contribution - - 35,431
Write-off note receivable due from
shareholder - - 57,300
Change in assets and liabilities:
Accounts receivable - trade (353,895) (1,041,956) (5,929,533)
Accounts receivable - related party - - (2,500,000)
Inventories (2,209,540) (4,410,566) 339,414
Costs in excess of billings on uncompleted
contracts 17,282 (2,882) 19,322
Prepaid expenses and other current assets (18,858) (26,784) (60,458)
Other assets (8,988) (468,565) 27,568
Accounts payable
1,100,338 3,398,078 (2,029,154)
Accrued expenses 538,719 777,899 1,880,943
Advanced billings 1,176,831 1,122,667 (1,308,279)
Billings in excess of costs on uncompleted
contracts 306,359 (306,359) -
Unearned service revenue - 12,315 111,964
------------------ ------------------- --------------------
Total adjustments 1,546,189 1,302,073 (1,258,742)
------------------ ------------------- --------------------
Net cash and cash equivalents
provided by (used for) operating activities 3,062,169 (1,874,241) (6,878,109)
------------------ ------------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant, and equipment (1,316,968) (7,090,869) (11,631,642)
Funding of Restricted Cash - - (312,500)
------------------ ------------------- --------------------
Net cash and cash equivalents used for
investing activities (1,316,968) (7,090,869) (11,944,142)
------------------ ------------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering, net of
issuance cost of $3,110,345 - - 22,764,655
Proceeds from demand note facility - - 8,000,000
Proceeds from subordinated note issuance - 11,009,600 -
Payments on demand note facility and
subordinated debt - - (10,000,000)
Proceeds from exercise of stock purchase
warrants 102,554 - 85,121
Proceeds from exercise of stock options - - 53,640
Repurchase of Class I preferred stock (12,645) - -
Payments on capital lease obligations - (3,000,000) (5,723)
Reduction in notes receivable from shareholders - - 210,317
------------------ ------------------- --------------------
Net cash and cash equivalents provided by
financing activities 89,909 8,009,600 21,108,010
------------------ ------------------- --------------------
Net increase (decrease) in cash and cash equivalents 1,835,110 (955,510) 2,285,759
Cash and cash equivalents at beginning of year 487,786 2,322,896 1,367,386
------------------ ------------------- --------------------
Cash and cash equivalents at end of year $2,322,896 $1,367,386 $3,653,145
================== =================== ====================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $285,413 $276,012 $599,925
Cash paid for income taxes - 55,000 -
Non-cash expenditures for purchases of property and
equipment included in accounts payable - 328,000 418,932
Reference is made to Note 7 - Long-Term Debt - for disclosure relating to
certain non-cash warrant issuance.
Reference is made to Note 10 - Stockholders' Equity - for disclosure relating to
certain non-cash equity transactions.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
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. The Company offers its customers a
complete, vertically-integrated solution for the design, development and
production of compound semiconductor wafers and devices.
The Company's operations are subject to a number of risks, including but
not limited to a history of losses, future capital needs, dependence on key
personnel, competition and risk of technological obsolescence, governmental
regulations and approvals, developing compound semiconductor manufacturing and
marketing capabilities and a concentration of international sales in Asia. The
Company's operations for the year ended September 30, 1997, were primarily
funded through the initial public offering completed in March 1997, resulting in
$22.8 million of net proceeds. A portion of the proceeds was used to extinguish
$8.0 million of debt under a line of credit agreement and to paydown $2.0
million of debt under the subordinated notes (see Note 7). The Company's
operating and financing plans include, among other things (i) attempting to
improve operating cash flow through increased sales of compound semiconductor
systems, wafers and package-ready devices, (ii) managing its cost structure to
its anticipated level of revenues and (iii) seeking equity and debt financing
sufficient to meet its obligations on a long-term basis in order to fund its
expansion plans. On March 31, 1997, the Company entered into a $10.0 million
revolving loan agreement to finance its operating and capital requirements.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 $106,000 and
$2,254,000 in cash equivalents at September 30, 1996 and 1997, respectively. As
of September 30, 1997, the Company had restricted cash in the amount of $312,500
due to contractual obligations.
Inventories. Inventories are stated at the lower of FIFO (first-in,
first-out) cost or market. Reserves are established for slow moving or obsolete
inventory based upon historical and anticipated usage.
Property and Equipment. Property and equipment are stated at cost.
Significant renewals and betterments are capitalized. Maintenance and repairs
which do not extend the useful lives of the respective assets are expensed.
Depreciation is recorded using the straight-line method over the estimated
useful lives of the applicable assets, which range from three to five years.
Leasehold improvements are amortized using the straight-line method over the
term of the related leases or the estimated useful lives of the improvements,
whichever is less. Depreciation expense includes the amortization of capital
lease assets. When assets are retired or otherwise disposed of, the assets and
related accumulated depreciation accounts are adjusted accordingly, and any
resulting gain or loss is recorded in current operations.
Long-Lived Assets. Statement of financial Accounting Standards No. 121,
"Accounting for the Improvement of Long-Lived Assets and Long-Lived Assets to be
Disposed of ("SFAS121") requires that long-lived assets be reviewed for
impairment whenever events of changes in circumstances indicate that their
carrying amounts may not be recoverable. In the event that facts and
circumstance indicate that the value of assets may be impaired an evaluation of
recoverability is performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the asset would be compared to the
assets carrying amount to determine if an adjustment to the carrying amount is
required. SFAS 121 was adopted in fiscal 1997 and did not have a material effect
on the Company's results of operations, cash flows or financial position.
Deferred Costs. Included in other assets are deferred costs related to
obtaining product patents and long-term debt refinancing. Such costs are being
amortized over a three to five year period, respectively. Amortization expense
amounted to approximately $58,000, $128,000 and $40,000 for the years ended
September 30, 1995, 1996 and 1997, respectively.
Income Taxes. The Company accounts for income taxes under the provision of
Statement of Financial Accounting Standards ("SFAS") No. 109. "Accounting for
Income Taxes." SFAS No. 109 requires utilization of the asset and liability
method of accounting for income taxes. Under the asset and liability method,
deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities. Under SFAS No. 109, the effect on
deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date.
Revenue and Cost Recognition--Systems, Components and Service Revenues.
Revenue from systems sales is recognized upon shipment, when title passes to the
customer. Subsequent to product shipment, the Company incurs certain
installation costs at the customer's facility and warranty costs which are
estimated and accrued at the time the sale is recognized. Component sales and
service revenues are recognized when goods are shipped or services are rendered
to the customer. Service revenue under contracts with specified service terms is
recognized as earned over the service period in accordance with the terms of the
applicable contract. Costs in connection with the procurement of the contracts
are charged to expense as incurred.
Revenue and Cost Recognition--Contract Revenue. The Company's research
contracts require the development or evaluation of new materials applications
and have a duration of six to 36 months. For research contracts with the U.S.
Government and commercial enterprises with duration's 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 $1,321,000, $3,295,000 and $614,000 for the years ended September
30, 1995, 1996 and 1997, 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.
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, 1997, the fair value of the Company's subordinated
notes exceeded the carrying value of such instruments by approximately $1.7
million. As of September 30, 1997, the carrying values of the Company's cash and
cash equivalents, receivables and accounts payable 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 accounts
receivable and inventory valuation reserves, warranty and installation accruals,
estimates of cost and related gross profits on certain research contracts and
the valuation of long-lived assets.
Net (Loss) Income Per Share. Net income (loss) per share data included in
accompanying statement of operations was calculated pursuant to the Securities
and Exchange Commission Staff Accounting Bulletin No. 64 ("SAB No. 64"). Under
the provisions of SAB No. 64, common stock and common equivalent shares issued
by the Company at prices below the initial public offering price within one year
or in contemplation of the Company's offering are treated as if they were
outstanding for all periods presented (using the treasury stock method).
Accordingly, the weighted average number of shares outstanding has been
increased by 1,443,936 equivalent shares, reflecting the common stock purchase
warrants and stock options issued during the twelve months preceding the filing
date of the Company's registration statement related to its initial public
offering. The historic per share data in the following table, has been computed
based on the income or loss for the period divided by the weighted average
number of shares of common stock outstanding and common stock equivalents, if
diluted. The weighted average number of shares outstanding excludes the number
of common shares issuable upon the exercise of outstanding stock options and
warrants and preferred stock in periods in which they were anti-dilutive.
<TABLE>
<CAPTION>
Years ended September 30,
--------------------------------------------------------
1995 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
Weighted average number of common shares outstanding ............. 1,701,355 2,994,461 4,668,822
============ ============ =============
Net income (loss) per share ...................................... $0.89 $(1.06) $(1.20)
============ ============ =============
</TABLE>
New Accounting Standards. In February 1997, the Financial Accounting
Standards Board issued SFAS No. 128, "Earnings per Share" ("SFAS No. 128"). SFAS
No. 128 establishes standards for computing and presenting earnings per share
("EPS") for periods ending after December 15, 1997. SFAS No. 128 is designed to
improve EPS information provided in financial statements by simplifying the
existing computational guidelines, revising disclosure requirements, and
increasing the comparability of EPS on an international basis. Basic and diluted
earnings per share, calculated pursuant to SFAS No. 128, are not expected to be
materially different from net income per common share as reflected in the
accompanying statements of operations.
Reclassifications. Prior period balances have been reclassified to conform
with the current period financial statement presentation.
NOTE 3. 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, 1995, 1996 and 1997, the Company sold
36%, 43% and 42% of its products to foreign customers, respectively.
The Company's world-wide sales to major customers were as follows:
As of September 30,
------------------------------------------------------
1995 1996 1997
--------------- ----------------- -----------------
Customer A $5,238,620 $6,558,930 $4,872,540
Customer B 887,390 2,075,722 -
Customer C 1,036,000 1,530,000 3,085,000
Customer D 2,092,986 - 2,990,476
Customer E - - 7,158,619
--------------- ----------------- -----------------
Total $9,254,996 $10,164,652 $18,106,635
=============== ================= =================
The Company performs material application research under contract with the
U.S. Government or as a subcontractor of U.S. Government funded projects.
The Company performs ongoing credit evaluations of its customers' financial
condition and collateral is not requested. The Company maintains reserves for
potential credit losses based upon the credit risk of specified customers,
historical trends and other information. To reduce credit risk and to fund
manufacturing costs, the Company requires periodic prepayments or irrevocable
letters of credit on most production system orders. Credit losses have generally
not exceeded the Company's 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 4. INVENTORIES
The components of inventories consisted of the following:
As of September 30,
-------------------------------------
1996 1997
------------------ -----------------
Raw materials $4,964,917 $6,513,379
Work-in-process 2,680,123 672,247
------------------ -----------------
Total $7,645,040 $7,185,626
================== =================
NOTE 5. PROPERTY AND EQUIPMENT
Major classes of property and equipment are summarized below:
As of September 30,
-------------------------------------
1996 1997
------------------ ------------------
Equipment $11,748,577 $19,190,770
Equipment under capital lease - 98,623
Furniture and fixtures 1,650,488 2,300,146
Leasehold improvements 2,147,034 6,085,256
------------------ ------------------
15,546,099 27,674,795
Less: accumulated depreciation and
amortization (7,749,267) (10,876,962)
------------------ ------------------
Total $7,796,832 $16,797,833
================== ==================
At September 30, 1997, minimum future lease payments due under the capital
leases are as follows:
Period ending September 30,
1998 $27,480
1999 27,480
2000 27,480
2001 27,480
2002 and thereafter 18,320
------------------
Total minimum lease payments 128,240
Less: amount representing interest
(imputed interest rate of 14.4%) (35,340)
------------------
Net minimum lease payments 92,900
Less: current portion (15,030)
------------------
Long-term portion $ 77,870
==================
The provisions for depreciation and amortization amounted to approximately
$829,000, $1,743,000 and $3,148,000 for the years ended September 30, 1995, 1996
and 1997, respectively. Accumulated amortization on assets accounted for as
capital lease amounted to approximately $5,000 as of September 30, 1997.
Included in equipment above are ten systems and fourteen systems with a
combined net book value of approximately $2,124,000 and $5,057,000 at September
30, 1996 and 1997, 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 6. ACCRUED EXPENSES
Accrued expenses consisted of the following:
As of September 30,
--------------------------------
1996 1997
---------------- --------------
Accrued payroll, vacation and other
employee expenses $990,538 $1,659,428
Installation and warranty costs 562,231 1,411,120
Interest 269,315 272,445
Other 164,562 524,596
---------------- --------------
Total $1,986,646 $3,867,589
================ ==============
NOTE 7. LONG-TERM DEBT
On March 31, 1997, the Company entered into a $10.0 million revolving loan
agreement (the "Agreement"). The Agreement bears interest at the rate of Prime
plus 50 basis points (9.0% at September 30, 1997) and has a revolving loan
maturity date and expires on September 30, 1998. As of September 30, 1997, there
were no amounts outstanding under this facility.
On October 25, 1996, the Company entered into a $10.0 million demand note
facility (the "Facility"). The Facility bore interest at the rate of LIBOR plus
75 basis points, had a term of one year and was due and payable on demand. The
Facility was guaranteed by the Chairman of the Company's Board of Directors who
provided collateral for the Facility. In December 1996, in return for
guaranteeing the facility, the Company granted the Chairman 980,392 common stock
purchase warrants at $10.20 per share which expire September 1, 2001. These
warrants are exercisable after July 1, 1997, and are callable at the Company's
option after December 1, 1997 at $0.85 per warrant. The Facility was terminated
in conjunction with the Company's initial public offering.
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 the
Black-Scholes Option Pricing Model ("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.
On May 1, 1996, the Company issued subordinated notes (the "Subordinated
Notes") in the amount of $9,500,000 to its existing shareholders, $1,000,000 of
which were exchanged for notes receivable from officers and certain employees
with identical payment and interest provisions. The Subordinated Notes are
scheduled to mature on May 1, 2001, and have a stated interest rate of 6.0%
which is payable semi-annually on May 1 and November 1. In addition, the
noteholders were issued 2,328,432 common stock purchase warrants with an
exercise price of $4.08 per share which expire on May 1, 2001. The warrants are
exercisable after November 1, 1996, and are callable at the Company's option,
after May 1, 1997, at $0.85 per warrant. The Company has the legal right of
offset with respect to the notes receivable from officers and certain key
employees, and it is their full intention to offset the corresponding notes
receivable and payable upon maturity. As such, the Company reflected $848,000 of
the officers' and employees' notes receivable as a contra liability, reducing
the Company's Subordinated Notes balance. The remaining $152,000 note receivable
has been reflected as a contra equity note receivable balance, representing the
portion of the employee note receivable associated with common stock purchase
warrants issued to such employees. The Company received cash proceeds of
$8,500,000 in connection with this Subordinated Notes issuance.
On September 1, 1996, the Company issued a subordinated note in the amount
of $2,500,000 to the Company's then majority shareholder with terms identical to
the Subordinated Notes issued on May 1, 1996. In addition, under the terms of
this issuance, 245,098 common stock purchase warrants were issued to purchase
common stock at $10.20 per share and which expire September 1, 2001. These
warrants are exercisable after March 1, 1997, and are callable at the Company's
option after September 1, 1997, at $0.85 per warrant.
The Company assigned a value of $1,440,000 to the May 1, 1996 detachable
warrants and $900,000 to the September 1, 1996 detachable warrants. These
valuations were based upon the Company's application of Black Scholes and the
Company's assessment of the underlying valuation factors, as well as an
assessment of the terms of the Subordinated Notes. The carrying value of the
Subordinated Notes will be subject to periodic accretions, using the interest
method, in order for the carrying amount to equal the Company's obligation upon
maturity. As a result, the May 1, 1996 and September 1, 1996 Subordinated Notes
have an effective interest rate of approximately 9.3% and 15.0%, respectively.
For the years ended September 30, 1997 and 1996, imputed warrant interest
related to the subordinated notes amounted to $388,390 and $125,791,
respectively.
NOTE 8. 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 amounted to approximately $292,000,
$350,000 and $548,000 for the years ended September 30, 1995, 1996 and 1997,
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,
1997 are as follows:
Period ending September 30, Operating
---------------
1998 $553,607
1999 549,281
2000 231,454
---------------
Total minimum lease payments $1,334,342
===============
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.
<PAGE>
NOTE 9. INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<CAPTION>
Years ended September 30,
--------------------------------------------------------------
1995 1996 1997
------------------- ------------------- -------------------
<S> <C> <C> <C>
Current:
Federal $70,000 $ - $ 113,000
State 55,000 - 24,000
--------------------------------------------------------------
125,000 - 137,000
Deferred:
Federal - - -
State - - -
----------------------------------------- -------------------
Total $ 125,000 $ - $ 137,000
=================== =================== ===================
</TABLE>
The principal differences between the U.S. statutory and effective income
tax rates were as follows:
<TABLE>
<CAPTION>
Years ended September 30,
---------------------------------------------------------
1995 1996 1997
------------------ ----------------- -----------------
<S> <C> <C> <C>
US statutory income tax (benefit)
expense rate 34.0% (34.0)% (34.0)%
Net operating loss carryforward (45.4) - -
Net operating loss not utilized - 27.7 1.7
Expenses not yet deductible for
tax purposes 11.4 6.3 32.0
AMT and state taxes 7.6 - 2.9
------------------ ----------------- -----------------
Effective tax rate 7.6% 0.0% 2.6%
================== ================= =================
</TABLE>
The components of the Company's net deferred taxes were as follows:
<TABLE>
<CAPTION>
Years ended September 30,
-------------------------------------------
1996 1997
----------------------- -------------------
<S> <C> <C>
Deferred tax assets:
Federal net operating loss carryforwards $ 3,283,003 $ 3,502,348
Research credit carryforwards (state and federal) 264,966 718,644
Inventory reserves 142,593 207,732
Accounts receivable reserves 105,383 243,996
Interest 84,022 1,461,389
Accrued installation reserve 109,684 362,379
Accrued warranty reserve 81,475 158,202
State net operating loss carryforwards 801,555 461,821
Other 68,858 144,586
Valuation reserve - federal (4,048,583) (5,583,217)
Valuation reserve - state (801,555) (1,334,975)
----------------------- -------------------
Total deferred tax assets 91,401 342,905
Deferred tax liabilities:
Fixed assets and intangibles (91,401) (342,905)
----------------------- -------------------
Total deferred tax liabilities (91,401) (342,905)
Net deferred taxes $ - $ -
======================= ===================
</TABLE>
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, 1997, the Company has net operating loss carryforwards
for regular tax purposes of approximately $7.6 million which expire in the years
2003 through 2012. The Company believes that the consummation of certain equity
transactions and a significant change in the ownership during fiscal year 1995
has constituted a change in control under Section 382 of the Internal Revenue
Code ("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.
NOTE 10. STOCKHOLDERS' EQUITY
Reverse Stock Split
On February 3, 1997, the Board of Directors approved a 3.4:1 reverse stock
split of its Common Stock and approved a decrease in the number of shares of
Common Stock authorized. All references in the accompanying financial statements
to the number of Common Stock and per-share amounts have been restated to
reflect the reverse split.
Common Stock Offering
In March 1997, the Company completed an initial public offering of
2,500,000 shares of common stock at a price of $9.00 per share (the "Offering"),
and upon the exercise of the Underwriter's overallotment option, 375,000
additional shares of common stock were also sold at $9.00 per share. The
proceeds, net of commissions and certain expenses, to the Company from the
offering were approximately $22.8 million. Prior to the Offering, there was no
public market for the Company's common stock.
Preferred Stock
In October 1994, the Company initiated a series of activities to reduce and
convert its outstanding Class I, Class III and Class IV preferred stock into
common stock. The Company offered the holders of 1,399,333 Class III preferred
stock purchase warrants the right to convert such warrants into 528,450 shares
(representing a reduced ratio of 1 to .38) of the Company's Class I preferred
stock. All the warrant holders exercised such rights. This transaction increased
the outstanding number of Class I preferred stock to 1,222,350 shares.
In November 1994, in an effort to simplify its capital structure, the
Company's Board of Directors and shareholders approved a capital restructuring
plan (the "Plan"). Pursuant to this Plan, a newly formed and wholly-owned
subsidiary of the Company was formed and merged with and into the Company. Under
the Plan, shares of the Company's Class IV preferred stock were exchanged for
shares of Class A senior convertible preferred stock at an exchange rate of 1.5
to 1.0. The shares of all other classes of preferred stock were exchanged into
common stock at the following ratios; Class I preferred stock at 100 to 1.18 and
Class III preferred stock at 100 to 2.94. In addition, the Company effected a
reverse stock split of .29 for one hundred and retired its preferred treasury
stock. Prior to this exchange, the Class I preferred stockholders were given the
right to have their stock repurchased for $.09 per share. The holders of
approximately 140,000 shares exercised this right, resulting in a stock
repurchase amounting to $12,645.
In August 1995, the outstanding shares of Class A senior convertible
preferred stock were exchanged for shares of common stock on the basis of seven
shares of common stock for each Class A security. This transaction reduced the
classes of stock outstanding to common stock.
As part of the August 1995 restructuring activities, holders of warrants to
purchase common stock were allowed to exercise its warrants at $3.03 per share,
resulting in the exercise of 30,588 warrants for aggregate cash consideration of
$92,554.
In January 1995, the holder of 15,000 warrants to purchase Class A senior
convertible preferred stock exercised their rights by paying $0.67 per share, or
$10,000. In August 1995, these 15,000 shares of Class A preferred stock were
converted into 30,882 shares of common stock.
The basis of all exchanges were approved by the Company's Board of
Directors and its shareholders and reflected the priorities of the Class A
securities upon liquidation and other factors.
The following table summarizes the Company's preferred stock activities
from October 1, 1994 through September 30, 1995:
<TABLE>
<CAPTION>
(in thousands)
Class I Class III Class IV Class A
---------------------------------------------------------------------------------------------
Preferred Stock Preferred Stock Preferred Stock Preferred Stock
---------------------------------------------------------------------------------------------
Shares Amount Discount Shares Amount Shares Amount Shares Amount
------------------------------- ----------------------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
September 30, 1994 694 $ 1,235 $ (934) 6,617 $ 15,091 882 $ 882
Warrants exercised and
conversions 528 15 $ 15
November 1994 preferred
stock conversions
into common stock
and Class A
preferred stock (1,222) (1,235) 934 (6,617) (15,091) (882) (882) 1,324 882
August 1995 conversion
of Class A preferred
stock into common
stock (1,339) (897)
---------- ---------- --------- ---------- ------------ -------- -------- --------- --------
Balance at
September 30, 1995 - $ - $ - - $ - - $ - - $ -
========== ========== ========= ========== ============ ======== ======== ========= ========
</TABLE>
NOTE 11. 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.
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 1997, options with respect to 182,700 shares were granted at
exercise prices ranging from $10.20 to $24.75 per share.
Stock options granted generally vest over three to five years and are
exercisable over a ten year period. As of September 30, 1995, 1996 and 1997,
options with respect to 100,382, 162,764 and 199,368 shares were exercisable,
respectively.
The following table summarized the activity under the plan:
<TABLE>
<CAPTION>
Weighted
Average
Shares Exercise Price
------ --------------
<S> <C> <C>
Outstanding as of September 30, 1994 32,794 $3.03
Granted 281,470 3.03
Exercised - -
Canceled (32,794) 3.03
--------------- ---------------
Outstanding as of September 30, 1995 281,470 $3.03
Granted 57,942 6.04
Exercised - -
Canceled - -
--------------- ------------
Outstanding as of September 30, 1996 339,412 $3.54
Granted 182,700 11.06
Exercised (42,165) 3.17
Canceled (4,475) 3.08
--------------- ------------
Outstanding as of September 30, 1997 475,472 $6.47
=============== ============
</TABLE>
At September 30, 1997, stock options outstanding were as follows:
<TABLE>
<CAPTION>
Exercise Options Weighted Average Remaining Exercisable
Prices Outstanding Contractual Life (Years) Options
------ ----------- ------------------------ -------
<S> <C> <C> <C>
$3.03 243,775 7.96 175,598
4.08 29,703 8.51 16,002
10.20 177,994 9.17 7,768
16.25 22,500 9.65 -
24.75 1,500 9.84 -
</TABLE>
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:
<PAGE>
<TABLE>
<CAPTION>
Years ended September 30,
----------------------------------------------
1996 1997
----------------------- --------------------
Loss before extraordinary item
<S> <C> <C>
As reported $3,176,314 $5,333,772
Pro forma $3,169,741 $5,226,270
Loss before extraordinary item per share
As reported $0.72 $ 1.06
Pro forma $0.71 $1.04
Net loss
As reported $3,176,314 $5,619,367
Pro forma $3,169,741 $5,511,865
Net loss per share
As reported
$0.72 $ 1.12
Pro forma $0.71 $1.09
</TABLE>
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%, expected lives of 5 years. The weighted average fair
value of options granted during the years ended September 30, 1996 and 1997 is
$1.02 and $3.82 per share, respectively. Stock options granted by the Company
prior to its initial public offering were valued using the minimum value method
under FASB No. 123.
Warrants
Set forth below is a summary of the Company's outstanding warrants at
September 30, 1997:
Exercise Expiration
Security Price Warrants Date
-------- ----- -------- ----
Common Stock $4.08 2,236,661 May 1, 2001
Common Stock $10.20 1,225,490 September 1, 2001
NOTE 12. 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. As of September 30, 1997, the former members of JLMP
had an ownership interest in the Company of approximately 28% based on common
stock outstanding (not on a fully diluted basis). 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 and
$288,385 for the fiscal years ended September 30, 1995 and 1996, respectively.
No fees were paid to Jesup & Lamont during the fiscal year ended September 30,
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 1997, revenue associated with the
UTC licensing agreement amounted to $2.5 million. UTC's Chairman and CEO is a
member of EMCORE's Board of Directors and EMCORE's Chairman is on the Board of
Directors of UTC. Over the next 12 to 36 months, the Company may realize up to
$5.5 million in addtional license fees and related royalties in connection with
these agreements. Additionally, the Company and a wholly-owned subsidiary of UTC
have agreed in principle to form a venture in which the Company will have a
minority interest, for the production and marketing of products related to this
licensed technology. Subsequent to September 30, 1997, the Company's outstanding
related party accounts receivable was paid in full and the payments under the
terms of the licensing agreement are not refundable.
The Chairman and CEO 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, 1997,
sales made through Hakuto approximated $9.1 million.
<PAGE>
NOTE 13. 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:
<TABLE>
<CAPTION>
Far East Europe Total
-------- ------ -----
<S> <C> <C> <C>
Year ended September 30, 1995 $3,978,118 $2,546,301 $6,524,419
Year ended September 30, 1996 8,209,309 3,588,066 11,797,375
Year ended September 30, 1997 14,583,981 5,478,186 20,062,167
</TABLE>
NOTE 14. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Operating Net (Loss)
(Loss) Net (Loss) Income Per
Revenues Income Income Share
-------- ------ ------ -----
Fiscal Year 1996:
<S> <C> <C> <C> <C>
December 31, 1995 $ 4,255 $ (831) $ (885) $ (0.20)
March 31, 1996 6,014 (768) (823) (0.19)
June 30, 1996 7,727 (1,376) (1,480) (0.33)
September 30, 1996 9,783 221 12 0.00
Fiscal Year 1997:
December 31, 1996 $ 8,591 $(2,585) $ (3,798) $ (0.86)
March 31, 1997 12,929 147 (3,150) (0.82)
June 30, 1997 14,106 907 830 0.10
September 30, 1997 12,126 841 498 0.06
</TABLE>
NOTE 15. SUBSEQUENT EVENTS
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. In addition, the holders are required to
provide collateral at a 2:1 coverage ratio. This collateral is presently held by
the Company.
Acquisition:
On December 5, 1997, the Company acquired all of the outstanding capital
stock of MicroOptical Devices, Inc. ("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 will be 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 will be included in the Company financial statements as of the
effective date. The preliminary allocation of the fair value of the net assets
acquired is as follows:
Net tangible assets $707,000
Goodwill 2,828,000
Purchased in process research and development 29,294,000
-----------------
Total purchase price $32,829,000
=================
The amount allocated to purchased in-process research and development was
determined through an independent valuation. Amounts allocated to purchased
in-process research and development will be immediately written-off in the
period the acquisition is recorded. Goodwill will be amortized over a period of
three years.
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. The summary includes the impact of certain
adjustments, such as goodwill amortization and the number of shares outstanding.
(Unaudited)
Year ended September 30, 1997
---------------------------------------------------------
Revenue $48,313,000
Net loss before extraordinary item 8,769,000
Net loss 9,055,000
Net loss, per share $1.35
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, 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 purchased in-process research and
development.
<PAGE>
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 and 1996, the related statements of
operations, shareholders' (deficit) equity and cash flows for each of the three
years in the period ended September 30, 1997. We have also audited the financial
statement Schedule listed in Item 14(a). These financial statements and the
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of EMCORE Corporation as of
September 30, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1997, in
conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedule referred to above, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information required to be included therein.
Coopers & Lybrand L.L.P.
Parsippany, New Jersey
November 3, 1997,
except for note 15, as to
which the date is
December 5, 1997
<PAGE>
STATEMENT OF MANAGEMENT RESPONSIBILITY FOR FINANCIAL STATEMENTS
To the Shareholders of
EMCORE Corporation:
Management has prepared and is responsible for the consolidated financial
statements and related information in the Annual Report. The financial
statements, which include amounts based on judgment, have been prepared in
conformity with generally accepted accounting principles consistently applied.
Management has developed, and in 1997 continued to strengthen, a system of
internal accounting and other controls for the Company. Management believes
these controls provide reasonable assurance that assets are safeguarded from
loss or unauthorized use and that the company's financial records are a reliable
basis for preparing the financial statements. Underlying the concept of
reasonable assurance is the premise that the cost of control should not exceed
the benefit derived.
The Board of Directors, through its audit committee, is responsible for
reviewing and monitoring the Company's financial reporting and accounting
practices. The audit committee meets regularly with management and independent
accountants - both separately and together. The independent accountants have
free access to the audit committee to review the results of their audits, the
adequacy of internal accounting controls and the quality of financial reporting.
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated herein by reference
to the Company's 1998 Proxy Statement which will be filed on or before January
28, 1998.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference
to the Company's 1998 Proxy Statement which will be filed on or before January
28, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference
to the Company's 1998 Proxy Statement which will be filed on or before January
28, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this term is incorporated herein by reference
to the Company's 1998 Proxy Statement which will be filed on or before January
28, 1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
14(a)(1) FINANCIAL STATEMENTS:
<TABLE>
<CAPTION>
Page
Reference
<S> <C>
Included in Part II, Item 8 of this report:
Balance sheets as of September 30, 1996 and 1997
Statements of income for the years ended September 30, 1995, 1996 and 1997
Statements of shareholders' equity for the years ended September 30, 1995, 1996 and 1997
Statements of cash flows for the years ended September 30, 1995, 1996 and 1997
Notes to financial statements
Report of independent accountants
14(a)(2) Financial Statement Schedule:
Included in Part IV of this report:
Schedule II - Valuation and qualifying accounts and reserves
Other schedules have been omitted since they are either not required or not applicable.
</TABLE>
14(a)(3) EXHIBITS
EXHIBIT NO. DESCRIPTION
3.1 Restated Certificate of Incorporation, amended February 3, 1997
(incorporated by reference to Exhibit 3.1 to Amendment No. 1 to the
Registration Statement on Form S-1 (File No. 333-18565) filed with the
Commission on February 6, 1997).
3.2 Amended By-Laws, as amended January 11, 1989 (incorporated by reference to
Exhibit 3.2 to Amendment No. 1 to the Registration Statement on Form S-1
(File No. 333-18565) filed with the Commission on February 6, 1997).
4.1 Specimen certificate for shares of Common Stock (incorporated by reference
to Exhibit 4.1 to Amendment No. 3 to the Registration Statement on Form S-1
(File No. 333-18565) filed with the Commission on February 24, 1997).
10.1 1995 Incentive and Non-Statutory Stock Option Plan (incorporated by
reference to Exhibit 10.1 to Amendment No. 1 to the Registration Statement
on Form S-1 (File No. 333-18565) filed with the Commission on February 6,
1997).
10.2 1996 Amendment to Option Plan (incorporated by reference to Exhibit 10.2 to
Amendment No. 1 to the Registration Statement on Form S-1 (File No.
333-18565) filed with the Commission on February 6, 1997).
10.3 Specimen Incentive Stock Option Agreement (incorporated by reference to
Exhibit 10.3 to Amendment No. 1 to the Registration Statement on Form S-1
(File No. 333-18565) filed with the Commission on February 6, 1997).
10.4 Hakuto Distributorship Agreement (incorporated by reference to Exhibit 10.4
to Amendment No. 1 to the Registration Statement on Form S-1 (File No.
333-18565) filed with the Commission on February 6, 1997).
10.5 Amendment to Lease for premises at 394 Elizabeth Avenue, Somerset, New
Jersey 08873 (incorporated by reference to Exhibit 10.5 to Amendment No. 1
to the Registration Statement on Form S-1 (File No. 333-18565) filed with
the Commission on February 6, 1997).
10.6 Registration Rights Agreement relating to September 1996 warrant issuance
(incorporated by reference to Exhibit 10.6 to Amendment No. 1 to the
Registration Statement on Form S-1 (File No. 333-18565) filed with the
Commission on February 6, 1997).
10.7 Registration Rights Agreement relating to December 1996 warrant issuance
(incorporated by reference to Exhibit 10.7 to Amendment No. 1 to the
Registration Statement on Form S-1 (File No. 333-18565) filed with the
Commission on February 6, 1997).
10.8 Form of 6% Subordinated Note Due May 1, 2001 (incorporated by reference to
Exhibit 10.8 to Amendment No. 1 to the Registration Statement on Form S-1
(File No. 333-18565) filed with the Commission on February 6, 1997).
10.9 Form of 6% Subordinated Note Due September 1, 2001 (incorporated by
reference to Exhibit 10.9 to Amendment No. 1 to the Registration Statement
on Form S-1 (File No. 333-18565) filed with the Commission on February 6,
1997).
10.10 Form of $4.08 Warrant (incorporated by reference to Exhibit 10.10 to
Amendment No. 1 to the Registration Statement on Form S-1 (File No.
333-18565) filed with the Commission on February 6, 1997).
10.11 Form of $10.20 Warrant (incorporated by reference to Exhibit 10.12 to
Amendment No. 1 to the Registration Statement on Form S-1 (File No.
333-18565)filed with the Commission on February 6, 1997).
10.12 Consulting Agreement dated December 6, 1996 between the Company and Norman
E. Schumaker (incorporated by reference to Exhibit 10.14 to Amendment No.1
to the Registration Statement on Form S-1 (File No. 333-18565) filed with
the Commission on February 6, 1997).
10.13 Purchase Order issued to the Company by General Motors Corporation on
November 17, 1996 (incorporated by reference to Exhibit 10.15 to
Amendment No. 1 to the Registration Statement on Form S-1(File No.
333-18565) filed with the Commission on February 6, 1997). Confidential
treatment has been requested by the Company with respect to portions of
this document. Such portions are indicated by "[*] ".
10.14 Acquisition Agreement, dated as of December 5, 1997, between the Company
and MicroOptical Devices, Inc. (incorporated by reference to Exhibit 2 to
the Company's filing on Form 8-K, dated December 22, 1997).
11.1 Statement of Computation of Per Share Amounts.
23.1 Consent of Coopers & Lybrand L.L.P.
14(b) Reports on Form 8-K: Form 8-K dated December 22, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Township of Somerset, State of
New Jersey, on December 24, 1997.
EMCORE CORPORATION
BY /S/ REUBEN F. RICHARDS, JR.
Name: Reuben F. Richards, Jr.
TITLE: President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report on Form 10-K has been signed below by the following persons on behalf of
EMCORE Corporation in the capacities indicated, on December 24, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ THOMAS J. RUSSELL Chairman of the Board and Director
Thomas J. Russell
/s/ REUBEN F. RICHARDS, JR. President, Chief Executive Officer and Director
Reuben F. Richards, Jr. (Principal Executive Officer)
/s/ THOMAS G. WERTHAN Vice President, Chief Financial Officer, Secretary
Thomas G. Werthan and Director (Principal Accounting and
Financial Officer)
/s/ RICHARD A. STALL Director
Richard A. Stall
/s/ HOWARD R. CURD Director
Howard R. Curd
/s/ HOWARD F. CURD Director
Howard F. Curd
/s/ ROBERT LOUIS-DREYFUS Director
Robert Louis-Dreyfus
/s/ HUGH H. FENWICK Director
Hugh H. Fenwick
/s/ THOMAS E. CONSTANCE Director
Thomas E. Constance
/s/ SHIEGO TAKAYAMA Director
Shiego Takayama
</TABLE>
<PAGE>
Schedule II
EMCORE CORPORATION
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
Additions
Balance at Charged to Balance
Beginning of Costs and Recoveries at End of
Period Expenses (Deductions) Period
-------------- ------------- --------------- -----------
ALLOWANCE FOR DOUBTFUL ACCOUNTS
- ---------------------------------------------------
<S> <C> <C> <C> <C>
Year Ended September 30, 1995 $68,101 $128,630 $(33,200)<F1> $163,531
Year Ended September 30, 1997 309,949 515,000 (128,314)<F1> 696,635
Year Ended September 30, 1996 163,531 183,000 (36,582)<F1> 309,949
RESERVES FOR INVENTORY OBSOLESCENCE
- ---------------------------------------------------
Year Ended September 30, 1995 $99,621 $15,379 - $115,000
Year Ended September 30, 1997 220,000 120,000 - 340,000
Year Ended September 30, 1996 115,000 105,000 - 220,000
<FN>
<F1> Uncollectible accounts written off.
</FN>
</TABLE>
Exhibit 11.1
<TABLE>
EMCORE CORPORATION
STATEMENT OF COMPUTATION OF PER SHARE AMOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
(Unaudited)
(in thousands, except per share amounts)
<CAPTION>
TWELVE MONTHS
ENDED SEPTEMBER 30,
---------------------------------------------------
1995 1996 1997
---------------- ----------------- ----------------
<S> <C> <C> <C>
Income (loss) before extraordinary item....................... $1,516 $(3,176) $(5,333)
Extraordinary loss............................................ (286)
---------------- ----------------- ----------------
Net income (loss)............................................. $1,516 $(3,176) $(5,619)
================ ================= ================
Primary earnings per share calculation:
Weighted average shares outstanding:
Common stock............................................. 1,619 2,994 4,669
Common stock equivalent(1)............................... 1,526 1,444 361
---------------- ----------------- ----------------
Primary weighted average common shares and equivalents........ 3,145 4,438 5,030
================ ================= ================
Income (loss) before extraordinary item....................... $0.48 $(0.72) $(1.06)
Extraordinary loss............................................ (0.06)
---------------- ----------------- ----------------
Net income (loss) per share................................... $0.48 $(0.72) $(1.12)
================ ================= ================
Fully diluted earnings per share calculation: (2)
Weighted average shares outstanding:
Common stock............................................. 1,619 2,994 4,669
Common stock equivalent(1)............................... 1,526 1,444 361
Fully diluted weighted average common shares and equivalents.. 3,145 4,438 5,030
================ ================= ================
Income (loss) before extraordinary item....................... $0.48 $(0.72) $(1.06)
Extraordinary loss............................................ (0.06)
---------------- ----------------- ----------------
Net income (loss) per share................................... $0.48 $(0.72) $(1.12)
================ ================= ================
<FN>
<F1> Under the provisions of Securities and Exchange Commission Staff Bulletin
No. 64 ("SAB" No. 64), common stock and common stock equivalents issued by
the company within one year or in contemplation of the Company's offering
are treated as if they were outstanding for all periods presented prior to
the Company's IPO. After the IPO is effective, the determination of common
stock and equivalents has been determined on basis consistent with APB
Opinion No. 15, which states "outstanding options and warrants should be
included in the EPS computation only if they have a dilutive effect."
<F2> This calculation is submitted in accordance with Securities Exchange Act of
1934 Release No. 9083 although not required by footnote 2 of paragraph 14
of APB Opinion No. 15 because it results in dilution of less than 3%.
</FN>
</TABLE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration
Statements of EMCORE Corporation on Form S-8 (File Nos. 333-27507, 333-36445,
and 333-39547) of our report dated November 3, 1997, except for Note 15, as to
which the date is December 5, 1997, on our audits of the financial statements
and financial statement schedule of EMCORE Corporation as of September 30, 1997,
and for the three years ended September 30, 1997, which report is included in
this Annual Report on Form 10-K.
COOPERS & LYBRAND L. L. P.
Parsippany, New Jersey
December 29, 1997
