UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one):
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from___________to___________
Commission File Number: 0-22175
EMCORE Corporation
(Exact name of Registrant as specified in its charter)
NEW JERSEY
(State or other jurisdiction of incorporation or organization)
22-2746503
(IRS Employer Identification No.)
394 Elizabeth Avenue
Somerset, NJ 08873
(Address of principal executive offices) (zip code)
(732) 271-9090
(Registrant's telephone number, including area code)
NO CHANGE
(Former name or former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes:[X] No:[ ]
As of May 7, 1998 there were 9,345,350 shares of the registrant's no par
value common stock outstanding.
This quarterly report of Form 10-Q contains 18 pages, of which this is page
1.
<PAGE>
Part I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
EMCORE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
1998 1997 1998 1997
-------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Revenue.................................................... $13,808 $12,929 $26,165 $21,520
Cost of sales.............................................. 7,534 8,855 13,910 15,579
-------------------------------- -------------------------------
Gross profit............................................... $6,274 $4,074 $12,255 $5,941
-------------------------------- -------------------------------
Operating expenses:
Selling, general, and administrative.................... $2,901 $1,940 $5,708 $4,142
Goodwill amortization................................... 284 355
Research and development:
One-time acquired in-process....................... 29,294
Recurring.......................................... 2,889 1,987 5,921 4,237
-------------------------------- -------------------------------
Total operating expenses................................... $6,074 $3,927 $41,278 $8,379
-------------------------------- -------------------------------
Operating income (loss).................................... $200 $147 ($29,023) ($2,438)
-------------------------------- -------------------------------
Other expense:
Stated interest expense, net............................. $47 $249 $117 $445
Imputed warrant interest expense, non-cash............... 96 2,792 192
Provision for income taxes............................... 20 20 3,809
-------------------------------- -------------------------------
Total other expense........................................ $163 $3,041 $329 $4,254
-------------------------------- -------------------------------
Income (loss) before extraordinary item.................... $37 ($2,894) ($29,352) ($6,692)
Extraordinary loss......................................... - 256 256
-------------------------------- -------------------------------
Net income (loss).......................................... $37 ($3,150) ($29,352) ($6,948)
================================ ===============================
Per share data:
Income (loss) before extraordinary item.................... $0.00 ($0.76) ($3.58) ($1.62)
Extraordinary loss......................................... - (0.06) - (0.06)
-------------------------------- -------------------------------
Net income (loss) per share................................ $0.00 ($0.82) ($3.58) ($1.68)
================================ ===============================
Shares used in per share data calculations................. 10,548 3,825 8,189 4,127
================================ ===============================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
EMCORE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(In Thousands)
<TABLE>
<CAPTION>
At March 31, At September 30,
1998 1997
------------ ----------------
ASSETS (unaudited)
<S> <C> <C>
Cash and cash equivalents................................................ $2,592 $3,653
Restricted cash.......................................................... 188 313
Accounts receivable, net of allowance for doubtful accounts
of $616 and $697 at March 31, 1998 and
September 30, 1997, respectively............................... 11,197 8,439
Accounts receivable, related party....................................... 2,500 2,500
Inventories, net......................................................... 9,899 7,186
Other current assets..................................................... 421 120
---------------------- ---------------------
Total current assets.................................................... $26,797 $22,211.
Property and equipment, net................................................ 21,223 16,798
Goodwill................................................................... 3,025
Other assets............................................................... 877 454
---------------------- ---------------------
Total assets............................................................ $51,922 $39,463
====================== =====================
LIABILITIES & SHAREHOLDERS' EQUITY
Accounts payable....................................................... $5,501 $4,050
Accrued expenses....................................................... 3,897 3,868
Short-term debt........................................................ 7,950
Advanced billings...................................................... 86 1,998
Capital lease obligations, current portion............................. 624 15
Other current liabilities.............................................. 30 124
---------------------- ---------------------
Total current liabilities............................................. $18,088 $10,055
Subordinated debt.......................................................... 7,619 7,499
Capital lease obligation, net of current portion..... ..................... 1,105 78
---------------------- ---------------------
Total liabilities..................................................... $26,812 $17,632
---------------------- ---------------------
Shareholders' Equity:
Common stock, no par value, 23,529,411 shares authorized,
9,336,498 shares issued and outstanding March 31, 1998,
6,000,391 shares issued and outstanding September 30, 1997........ $85,907 $45,817
Accumulated deficit.................................................... (53,130) (23,777)
Notes receivable from warrant issuances and stock sales................ (7,667) (209)
---------------------- ---------------------
Total shareholders' equity............................................. $25,110 $21,831
---------------------- ---------------------
Total liabilities and shareholders' equity........................... $51,922 $39,463
====================== =====================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
EMCORE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
March 31,
--------------------------------------
1998 1997
----------------- ------------------
<S> <C> <C>
Operating activities:
Net loss........................................................................ ($29,352) ($6,948)
----------------- ------------------
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization................................................ 3,000 1,996
Acquired in-process research and development, non-cash....................... 29,294
Compensatory stock issuances................................................. 170
Provision for doubtful accounts.............................................. (80) 70
Detachable warrant accretion and valuation................................... 193 3,809
Extraordinary loss on early debt extinguishment.............................. 256
Provision for inventory valuation............................................ 60 60
Change in assets and liabilities:
Accounts receivable................................................. (2,561) (3,540)
Inventories......................................................... (2,637) (2,320)
Other current assets................................................ (278) (90)
Other assets........................................................ (168) 141
Accounts payable.................................................... 1,413 3,069
Accrued expenses.................................................... (1,255) 868
Advanced billings................................................... (1,912) 1,087
Other current liabilities........................................... (94) 31
----------------- ------------------
Total adjustments............................................................... $25,145 $5,437
----------------- ------------------
Net cash used in operating activities....................................... ($4,207) ($1,511)
----------------- ------------------
Investing activities:
Purchase of property, plant, and equipment...................................... (4,996) (6,935)
Acquisition, cash acquired...................................................... 193
Payments (Funding) of restricted cash........................................... 125 (438)
----------------- ------------------
Net cash used in investing activities....................................... ($4,678) ($7,373)
----------------- ------------------
Financing activities:
Proceeds from short-term debt borrowings........................................ 7,950 8,000
Payments on subordinated notes and short-term debt.............................. (10,000)
Net proceeds from public offering............................................... 22,765
Payments on capital lease obligations........................................... (187)
Reduction in subordinated debt and related notes
receivable from shareholders............................................ 210
Net proceeds from stock options exercise........................................ 42
Proceeds from exercise of stock warrants........................................ 19
----------------- ------------------
Net cash provided by financing activities................................... $7,824 $20,975
----------------- ------------------
Net (decrease) increase in cash and cash equivalents............................ ($1,061) $12,091
Cash and cash equivalents, beginning............................................ 3,653 1,367
----------------- ------------------
Cash and cash equivalents, ending............................................... $2,592 $13,458
================= ==================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
EMCORE CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
from September 30, 1996, through March 31, 1998
(Amounts In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Shareholders' Total
Common Stock Accumulated Notes Shareholders'
Shares Amount Deficit Receivable Equity
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1995.......................... 2,994 $16,638 ($14,982) ($146) $1,510
Issuance of common stock purchase warrants............. 2,340 2,340
Notes receivable due from shareholders in
connection with issuance of detachable warrants...... (152) (152)
Net loss............................................... (3,176) (3,176)
- ------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1996.......................... 2,994 $18,978 ($18,158) ($298) $522
Issuance of common stock purchase warrants............. 3,601 3,601
Issuance of common stock from initial public
offering, net of issuance costs of $3,110............ 2,875 22,765 22,765
Warrant exercise by conversion of sub-debt............. 94 384 384
Stock option exercise.................................. 35 54 54
Redemption of notes receivable from shareholders....... 32 32
Forgiveness of note receivable from shareholder........ 57 57
Compensatory stock issuances........................... 2 35 35
Net loss............................................... (5,620) (5,620)
- ------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1997.......................... 6,000 $45,817 ($23,778) ($209) $21,830
Warrant exercise by conversion of sub-debt............. 22 91 91
Warrant exercise in exchange for note receivable....... 1,828 7,458 ($7,458) -
Issuance of common stock in connection with
the acquisition of MODE........................... 1,462 32,329 32,329
Compensatory stock issuances........................... 11 170 170
Stock option exercise.................................. 13 42 42
Net loss............................................... (29,352) (29,352)
- -----------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1998 (unaudited) 9,336 $85,907 ($53,130) ($7,667) $25,110
=============================================================================================================================
</TABLE>
<PAGE>
EMCORE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. INTERIM FINANCIAL INFORMATION
The accompanying unaudited condensed consolidated financial statements of EMCORE
Corporation (the "Company") reflect all adjustments considered necessary by
management to present fairly the Company's consolidated financial position as of
March 31, 1998 and March 31, 1997, and the consolidated results of operations
and the consolidated cash flows for the periods ended March 31, 1998, and March
31, 1997. All adjustments reflected in the accompanying unaudited condensed
consolidated financial statements are of a normal recurring nature unless
otherwise noted. The results of operations for the three months ended March 31,
1998, are not necessarily indicative of the results for the fiscal year ending
September 30, 1998, or any future interim period.
NOTE 2. 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 47,188 common stock purchase warrants
(exercise prices ranging from $4.32 to $5.92). The purchase price was
approximately $32,829,000 including direct acquisition costs of approximately
$500,000. The acquisition of MODE was recorded using the purchase method of
accounting. Accordingly, the results of operations of the acquired business and
the fair values of the acquired tangible and intangible assets and assumed
liabilities are included in the Company financial statements as of the effective
date. The allocation of the fair value of the net assets acquired is as follows:
Net tangible assets $ 707,000
Goodwill 2,828,000
Acquired in-process research and development 29,294,000
------------
Total purchase price $32,829,000
============
The amount allocated to acquired in-process research and development was
determined through an independent valuation. Amounts allocated to acquired
in-process research and development were immediately written off in the period
of acquisition. Goodwill is being 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 (in thousands), as if
MODE had been acquired as of October 1, 1996 and October 1, 1997. The summary
includes the impact of certain adjustments, such as goodwill amortization and
the number of shares outstanding.
(Unaudited) (Unaudited)
Year ended Six months ended
September 30, 1997 March 31, 1998
------------------ ----------------
Revenue $48,313 $26,265
Net loss before extraordinary item 8,769 954
Net loss 9,055 954
Net loss, per share $1.35 $0.12
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 or October 1, 1997. In addition, the unaudited pro forma results of
operations are not intended to be a projection of future results that might be
achieved from the combined entity. The foregoing pro forma results of operations
does not reflect the non-recurring write-off of acquired in-process research and
development.
NOTE 3. 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, subject to periodic quarterly decreases, and has a
revolving loan maturity date and expires on September 30, 1998. As of March 31,
1998, the Company had borrowed approximately $8.0 million at an interest rate of
8.25% under the Agreement.
NOTE 4. INVENTORIES
The components of inventories consisted of the following (in thousands):
As of As of
March 31, 1998 September 30, 1997
-------------- ------------------
Raw materials......................... $9,413 $6,514
Work-in-process....................... 486 672
Total................................. $9,899 $7,186
NOTE 5. EARNINGS PER SHARE
Basic earnings per common share was calculated by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share was calculated by dividing net income by the sum of the
weighted average number of common shares outstanding plus all additional common
shares that would have been outstanding if potentially dilutive common shares
had been issued. The following table reconciles the number of shares utilized in
the earnings per share calculations for the three-month and six-month period
ending March 31, 1998 and 1997, respectively.
<TABLE>
<CAPTION>
Three Months Six Months
Ended March 31, Ended March 31,
--------------------- ------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss)............................ $37 ($3,150) ($29,352) ($6,948)
======= ======== ========= ========
Earnings per common share - basic............ $0.00 ($0.82) ($3.58) ($2.04)
======= ======== ========= ========
Earnings per common share - diluted.......... $0.00 ($0.82) ($3.58) ($1.68)
======= ======== ========= ========
Common Share - basic ........................ 9,328 3,825 8,189 3,405
Effect of dilutive securities:
Stock options and warrants................... 1,220 - - -
Other........................................ - - - 722
------- -------- --------- --------
Common shares - diluted ..................... 10,548 3,825 8,189 4,127
======= ======== ========= ========
</TABLE>
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 initial public offering
(the "IPO") 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 a basis consistent with FAS
128, which states "EPS shall not assume conversion exercise or contingent
issuance of securities that would have an anti-dilutive effect on earnings per
share."
NOTE 6. RELATED PARTIES
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 of high brightness
light emitting diodes ("LEDs"). Effective January 1998, UTC's Chairman/CEO and
his son resigned from the Company's Board of Directors.
During the quarter ended March 31, 1998, the Company executed a Memorandum of
Understanding (the "Memorandum") to enter into an amended and restated
distribution agreement with Hakuto Co., Ltd. ("Hakuto"), with respect to the
distribution of certain EMCORE products in Japan and other Asian countries. The
Memorandum sets forth the conditions for fees, commissions, and territories
(both exclusive and non-exclusive) and contemplates the establishment of a
product pricing strategy. Hakuto, whose CEO is a member of the Company's Board
of Directors, has distributed the Company's Turbo-Disc products since 1988.
<PAGE>
ITEM 2.
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. 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 has expanded its product offerings to include
the design, development and production of compound semiconductor wafers and
package-ready devices.
On December 5, 1997, the Company purchased 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 vertical cavity surface emitting
laser ("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 GigalaseTM and GigarrayTM
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.
RESULTS OF OPERATIONS:
REVENUES The Company's second quarter revenue increased 7.0% from $12.9 million
for the quarter ended March 31, 1997, to $13.8 million for the quarter ended
March 31, 1998. The revenue increase in the three month period was attributable
to the increased revenue from the Company's materials-related product lines.
Revenues relating to systems and materials-related products accounted for 55.8%
and 44.2% for the three months ended March 31, 1998 and 80.0% and 20.0% for the
three months ended March 31, 1997. Revenues relating to systems and
materials-related products accounted for 55.2% and 44.8% for the six months
ended March 31, 1998 and 86.0% and 14.0% for the six months ended March 31,
1997. Systems revenue includes production systems, service and components.
Materials revenues include wafers, devices and payments for product development
technology under licensing. International sales accounted for approximately
42.4% and 35.3% of revenues for the three months ended March 31, 1998 and 1997,
respectively, and approximately 43.5% and 46.9% of revenues for the six months
ended March 31, 1998 and 1997, respectively.
During Fiscal 1997, the Company expanded its product offerings to include
epitaxial wafers and devices. Prior to this, most of the Company's revenues were
derived from sales of its Turbo-DiscTM ("T-D") MOCVD equipment. With the
economic downturn in the Asian markets, bookings of the Company's T-D equipment
have decreased. Accordingly, revenues from equipment sales are expected to
decrease during the next two quarters.
The Company believes that in the future, its systems and material-related
revenues and, consequentially, its results of operations on a quarterly basis
could be impacted by the timing of customer development projects and related
purchase orders for the Company's varied products, new product announcements and
releases by the Company, and global economic conditions, generally, and 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 31.5% of revenue for the quarter
ended March 31, 1997, to 45.4% of revenue for the quarter ended March 31, 1998.
The gross profit percentage increase was primarily attributable to higher
margins on materials related revenues.
SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses
increased by 49.5% from $1.9 million for the quarter ended March 31, 1997, to
$2.9 million in the quarter ended March 31, 1998. The increase was largely due
to increases in sales personnel headcount to support both domestic and foreign
markets and general headcount additions to sustain the internal administrative
support necessary for the Company's increased business, as well as higher
variable expenses attributable to increased revenues. As a percentage of
revenue, selling, general and administrative expenses increased from 15.0% for
the second quarter of the prior year to 21.0% for the second quarter of the
current year.
GOODWILL AMORTIZATION The Company recognized approximately $284,000 of goodwill
amortization for the quarter ended March 31, 1998 in connection with the
acquisition of MODE on December 5, 1997. The Company has approximately $3.0
million of Goodwill which will be fully amortized by October 31, 2000.
RESEARCH AND DEVELOPMENT Research and development expenses increased 45% from
$2.0 million in the quarter ended March 31, 1997, to $2.9 million in the quarter
ended March 31, 1998. As a percentage of revenue, recurring research and
development expenses increased from 15.4% for the second quarter of the prior
year to 20.9% for the second quarter of the current year. For the six months
ended, March 31 1998, the $29.3 million one-time non-cash charge for acquired
in-process research and development pertained to the Company's December 5, 1997
purchase of MODE. To maintain growth and market leadership in materials science
technology, the Company expects to continue to invest a significant amount of
its resources in research and development.
OPERATING INCOME (LOSS) Operating income increased 36.1% from $147,000 for the
quarter ended March 31, 1997, to income of $200,000 for the quarter ended March
31, 1998. The change in operating income is primarily due to increased revenues
and higher materials-related gross margins.
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 a
director of the Company, affiliated with the Company's majority shareholder, who
provided collateral for the Facility. The Company subsequently assigned a value
to these detachable warrants 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
detachable option value as a debt issuance cost. The consequent expense of these
warrant accretion amounts and the now terminated Facility debt issuance cost is
charged to "Imputed warrant interest, non-cash," and amounted to approximately
$96,000 and $2.8 million for the quarters ended March 31, 1998 and March 31,
1997, respectively.
As of December 31, 1996, the Company had borrowed $6.0 million under the
Facility which was repaid on March 31, 1997. The interest expense under the
Facility resulted in higher stated interest expense for the quarter ended March
31, 1997. Additionally, the Company receives offsetting interest income from
notes secured by stock pledge agreements from shareholders who exercised
warrants in a cash-free transaction on December 2, 1997.
NET INCOME/LOSS Net income increased approximately $3.2 million from a net loss
of $3.2 million in the quarter ended March 31, 1997, to net income of $37,000
for the quarter ended March 31, 1998. The year-to-date loss increased $22.5
million from $6.9 million for the six months ended 1997 to $29.4 million for
1998. This year-to-date loss increase was attributable to the $29.3 million
write-off of acquired in-process research and development in connection with the
acquisition of MODE on December 5, 1997.
BACKLOG:
The Company's order backlog decreased 33.1% from $21.8 million as of March 31,
1997, to $14.6 million as of March 31, 1998. The reason for this backlog
downturn is the decrease in equipment orders, most of which appears to be a
result of the economic slump in the Asian economy. 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 12 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 with respect to wafers and 3 months with respect
to devices. Some of these agreements currently extend over 12 months. 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 for epitaxial wafers and devices, 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 decreased by $1.1 million from $3.7 million at
September 30, 1997, to $2.6 million at March 31, 1998. For the six months ended
March 31, 1998, net cash used by operations amounted to $4.2 million, primarily
due to the Company's increase in inventories and accounts receivable and
decrease in advanced billings and accrued expenses, which was partially offset
by the Company's net losses excluding one-time charges, non-cash depreciation
and amortization charges, and its increase in accounts payable. The increase in
accounts receivable at March 31, 1998, was due to the fact that most of the
Company's equipment orders for the quarter were not shipped until late March. In
April 1998, the Company's received approximately $8.4 million of these
receivables.
For the six months ended March 31, 1998, net cash used in investment activities
amounted to $4.7 million primarily due to purchase and manufacture of new
equipment for the facilitation of the Company's wafer and package ready device
product lines and clean room modifications and enhancements.
On March 31, 1997, the Company entered into a $10.0 million revolving loan (the
"Agreement"). The Agreement bears interest at the rate of Prime plus 50 basis
points, subject to periodic quarterly decreases, and has a revolving loan
maturity date and expires on September 30, 1998. Net cash provided by financing
activities for the six months ended March 31, 1998 amounted to $7.8 million, due
to the Company's proceeds from borrowings under this Agreement. These borrowings
bear interest at a rate of 8.25%.
The Company believes that its current liquidity, together with the Agreement,
should be sufficient to meet its cash needs for working capital through fiscal
1998. However, 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 if
possible. 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 business financial conditions or operations.
At March 31, 1998, the Company employed 310 full-time employees, up 35.4% from
229 as of March 31, 1997 and up 123.0% from the 139 employees at March 31, 1996.
The increase in the number of employees since 1996 is a direct result of the
Company's increased manufacturing needs to meet the demand for its compound
semiconductor materials and, to a lesser extent, production systems. 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:
Historically the Company has generated significant revenues from its TurboDiscTM
("T-D") product line from Asian customers. Continued economic and
currency-related uncertainty in the region has impacted the Company's T-D sales
in this market. Accordingly, T-D backlog has decreased significantly from the
backlog at March 31, 1997. Shipments of T-D systems will continue to trend lower
for the next two quarters versus 1997.
On December 5, 1997, the Company purchased 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 GigalaseTM and
GigarrayTM 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. The
Company believes that with the acquisition of MODE, it 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.
The Company believes it possess 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 Discussion and Analysis of Financial Condition and Results of
Operations includes 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>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits:
10 - Memorandum of Understanding dated as of March 31, 1998 between the
Company and Hakuto & Co., Ltd. Confidential treatment has been
requested by the Company for portions of this document. Such
portions are indicated by "[*]".
11 - Statement of Computation of Per Share Amounts
27 - Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended March 31, 1998
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EMCORE CORPORATION
Date: May 12, 1998 By:/s/ Reuben F. Richards, Jr.
---------------------------------------
Reuben F. Richards, Jr.
President and Chief Executive Officer
Date: May 12, 1998 By:/s/ Thomas G. Werthan
---------------------------------------
Thomas G. Werthan
Vice President, Finance and Administration
<PAGE>
EXHIBIT INDEX
Exhibit Description
- ------- -----------
10 Memorandum of Understanding dated as of March 31, 1998, between
the Company and Hakuto & Co., Ltd. Confidential treatment has
been requested by the Company for portions of this document.
Such portions are indicated by "[*]".
11 Statement of computation of per share amounts for the
three and six months ended March 31, 1998.
27 Financial Data Schedule
Exhibit 10
Confidential treatment has been requested with respect to portions of this
document. Such portions are indicated by "[*]".
MEMORANDUM OF UNDERSTANDING
THIS MEMORANDUM OF UNDERSTANDING, dated March 31, 1998 (this "Memorandum"),
sets forth certain understandings of Hakuto Co. Ltd., a Japanese corporation
(together with its controlled subsidiaries, "Hakuto") and Emcore Corporation, a
New Jersey corporation ("Emcore").
WHEREAS, Hakuto and Emcore have entered into various distributorship
agreements, as listed on Exhibit A hereto, with respect to the distribution of
products of Emcore in Japan and other Asian countries (collectively, the
"Distributorship Agreements"); and
WHEREAS, Hakuto and Emcore have agreed to amend and restate the existing
Distributorship Agreements to cover the distribution by Hakuto of the Emcore
products listed on Exhibit B hereto (collectively, the "Products") in certain
defined markets (such amended and restated agreements, collectively, the
"Definitive Restated Agreements").
NOW, THEREFORE, this Memorandum sets forth the understandings of Hakuto and
Emcore with respect thereto.
1. Products in Japan. Under the Definitive Restated Agreements:
(a) Exclusive Distribution Rights. Hakuto would have exclusive distribution
rights for the Products in Japan.
(b) Term. Hakuto would have such exclusive distribution rights for the
Products in Japan for 10 years from the date of this Memorandum.
(c) MODE Commissions. The commissions that would be received by Hakuto for
sales of MODE Items in Japan would be a minimum of 12% of the total amount
invoiced to any customer. (As used herein, the term "MODE Items" has the meaning
given to such term in Exhibit B hereto.)
(d) Pegasus and E2M Commissions. The commissions that would be received by
Hakuto for sales of Pegasus and E2M Items in Japan will be determined. (As used
herein, the term "Pegasus and E2M Items" has the meaning given to such term in
Exhibit B hereto.)
(e) No Minimum Purchase Requirement. There would be no minimum purchase
requirement with respect to the Products in Japan.
2. Products in Territories Other Than Japan. Under the Definitive Restated
Agreements:
(a) Non-Exclusive Distribution Rights; Right of First Refusal. Hakuto would
have non-exclusive distribution rights for the Products in the territories,
other than Japan, specified in the Distributorship Agreements ( the "Non-Japan
Territories"). Hakuto would have a right of first refusal for exclusive
distribution rights for the Products in the Non-Japan Territories.
(b) Term. Hakuto would have the rights described in Paragraph 2(a) above
for a period of 10 years from the date of this Memorandum.
(c) Commissions. The commissions that would be receivable by Hakuto for
sales of the Products in the Non-Japan Territories will be determined.
(d) No Minimum Purchase Requirement. There would be no minimum purchase
requirement with respect to the Products in the Non-Japan Territories.
3. License Royalties. Under the Definitive Restated Agreements, Hakuto would be
entitled to 10% of license royalties for MODE Items which are designed in by any
parties in Japan or by any customers procured by Hakuto in the Non-Japan
Territories and later licensed to such party or customer.
4. Transfer of Production. Under the Definitive Restated Agreements, Emcore
would pay to Hakuto a commission of 10% of the total invoice amount of all sales
of Products that are designed in Japan by any party or in the Non-Japan
Territories by customers procured by Hakuto but produced or further designed
outside of Hakuto's Territory.
5. Review of Commissions. Under the Definitive Restated Agreements, Hakuto and
Emcore would: (1) review commissions and licensing royalties on the second
anniversary of the date of this Memorandum and on every other anniversary
thereafter; and (2) alter such commissions and licensing royalties, if agreed to
by both Hakuto and Emcore.
6. Extension of Distributorship Agreements. The term of the Japan
Distributorship Agreement is extended for a period of 10 years from the date of
this Memorandum.
7. Payment Terms. Hakuto will pay, and Emcore will earn, [*] in fees as follows:
(1) [*] upon execution of this Memorandum, such payment being a one-time,
non-refundable payment for the distribution rights to the Products and not
contingent upon any future performance by Emcore or delivery of any Products
under this Memorandum; and (2) an additional [*] will be due in four equal
installments, such installments equaling [*] for each $2,000,000 in sales orders
generated in Japan and in the Non-Japan territories.
8. Emcore Warranty. Under the Definitive Restated Agreements, Emcore would make
standard and customary representations and warranties for the type of
distributorship arrangement contemplated hereby, and the Products would be
covered by Emcore's standard warranty policy.
9. Hakuto's Organization. Upon the execution of this Memorandum, Hakuto would
assign a full time sales manager and, 60 days thereafter, Hakuto would appoint
an additional sales person to specialize in the distribution of the Products.
Within one year from the execution of this Memorandum, Hakuto would form a group
to specialize in the distribution of the Products.
10. Change of Ownership. If a "change of control" (as such term will be defined
in the Definitive Restated Agreements) occurs with respect to Emcore or its MODE
or Pegasus Divisions, then Emcore would have the option: (1) to refund on a
pre-determined proportionate basis (as specified in the Definitive Restated
Agreements) payments made by Hakuto as described in Paragraph 7 above or (2)
transfer and delegate the Definitive Restated Agreements and all obligations and
liabilities of Emcore thereunder to, and have such obligations and liabilities
assumed by, the party who is taking control of Emcore or its MODE or Pegasus
Division. For purposes of establishing such proportionate basis, the payments
would be allocated as follows: 50% to MODE Items, 25% to Pegasus Items and 25%
to E2M Items.
11. Definitive Restated Agreements. Hakuto and Emcore will finalize and enter
into the Definitive Restated Agreements by June 30, 1998 or sooner. The
Definitive Restated Agreements will be dated as of March 31, 1998.
12. Confidentiality. Except as legally required, neither Emcore nor Hakuto shall
make any public announcement relating to the transaction contemplated by this
Memorandum without the prior agreement thereto by the other. To the extent
permitted, Emcore shall cooperate with Hakuto with respect to any legally
required disclosure.
13. Exclusive Dealing. At least and until June 30, 1998, Emcore will not enter
into any agreement, discussion, or negotiation with, or provide information to,
any other corporation, firm or other person, or solicit, encourage, entertain or
consider any inquiries or proposals, with respect to distribution rights of the
Products in Japan or in the Non-Japan Territories.
14. Waiver of Right to Jury Trial. Each of the undersigned irrevocably,
willingly and voluntarily waives any right of trial by jury in any judicial
proceeding involving, directly or indirectly, any matter in any way arising out
of, related to or connected with the proposed transactions contemplated by this
Memorandum.
[Remainder of page left intentionally blank.]
<PAGE>
THIS MEMORANDUM OF UNDERSTANDING sets forth the understandings of the
undersigned with respect to the above mentioned Definitive Restated Agreements.
HAKUTO CO. LTD. EMCORE CORPORATION
By: /s/ Shigeo Takayama By: /s/ Thomas G. Werthan
Name: Mr. Shigeo Takayama Name: Thomas G. Werthan
Title: President Title: Vice President, Finance
and Administration
<PAGE>
Exhibit A
Current Distributorship Agreements
1. Amended and Restated Distributorship Agreement, dated January 20, 1998, by
and between Emcore and Hakuto (the "Japan Distributorship Agreement").
2. Agreement, dated as of January 20, 1998, by and between Emcore and S&T
Enterprises Ltd., a corporation of Hong Kong.
3. Agreement, dated as of January 20, 1998, by and between Emcore and S&T
Enterprises (Singapore) Pte. Ltd., a corporation of Singapore.
<PAGE>
Exhibit B
Emcore Products
1. The term "MODE Items" shall refer to all Vertical Cavity Surface Emitting
Lasers and all other Products of Emcore's MODE Division and all
Improvements thereon.
2. The term "Pegasus and E2M Items" shall refer to all MR Sensors and all
other Products of Emcore's Pegasus Division and all Epitaxial Wafers and
all other Products of the Emcore Electronic Materials Division and all
Improvements thereon.
3. As used above, the term "Improvements" means any and all alterations,
whether patentable or not, to the Products or of the method of manufacture,
design, construction, installation, maintenance or sale of the Products.
Exhibit 11
EMCORE CORPORATION
STATEMENT OF COMPUTATION OF PER SHARE AMOUNTS
(In Thousands, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended March 31, Ended March 31,
---------------------- -----------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income (loss) before extraordinary item................ $37 ($2,894) ($29,352) ($6,692)
Extraordinary loss..................................... (256) (256)
Net income (loss)...................................... $37 ($3,150) ($29,352) ($6,948)
Basic earnings per share calculation:
Weighted average shares outstanding:
Common stock.............................. 9,328 3,825 8,189 3,405
Common stock equivalents (1)..............
Basic weighted average
common shares and equivalents............. 9,328 3,825 8,189 3,405
Income (loss) before extraordinary item................ $0.00 ($0.76) ($3.58) ($1.97)
Extraordinary loss..................................... (0.06) (0.07)
Net income (loss) per share............................ $0.00 ($0.82) ($3.58) ($2.04)
Fully diluted earnings per share calculation:
Weighted average shares outstanding:
Common stock.............................. 9,328 3,825 8,189 3,405
Common stock equivalents (1).............. 1,220 722
Fully-diluted weighted average
common shares and equivalents............. 10,548 3,825 8,189 4,127
Income (loss) before extraordinary item................ $0.00 ($0.76) ($3.58) ($1.62)
Extraordinary loss..................................... (0.06) (0.06)
Net income (loss) per share............................ $0.00 ($0.82) ($3.58) ($1.68)
</TABLE>
_______________________
(1) 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 a basis consistent with FAS
128, which states "EPS shall not assume conversion exercise or contingent
issuance of securities that would have an anti-dilutive effect on earnings
per share."
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF EMCORE CORPORATION FOR THE QUARTERLY PERIOD
ENDED MARCH 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 2,780
<SECURITIES> 0
<RECEIVABLES> 14,313
<ALLOWANCES> (616)
<INVENTORY> 9,899
<CURRENT-ASSETS> 26,797
<PP&E> 34,707
<DEPRECIATION> (13,484)
<TOTAL-ASSETS> 51,922
<CURRENT-LIABILITIES> 18,088
<BONDS> 0
0
0
<COMMON> 85,907
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 51,922
<SALES> 13,808
<TOTAL-REVENUES> 13,808
<CGS> 7,534
<TOTAL-COSTS> 7,534
<OTHER-EXPENSES> 6,074
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 143
<INCOME-PRETAX> 57
<INCOME-TAX> 20
<INCOME-CONTINUING> 37
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
