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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(MARK ONE):
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number: 0-22175
EMCORE CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
NEW JERSEY 22-2746503
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
394 ELIZABETH AVENUE, SOMERSET, NJ 08873
(Address of principal executive offices) (zip code)
<TABLE>
<S> <C>
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 23, 1998 was approximately $100,427,286 (based on the
closing sale price of $18.25 per share).
The number of shares outstanding of the registrant's no par value common stock
as of December 23, 1998 was 9,385,618.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the 1999 Annual
Meeting of Shareholders held February 16, 1999 are incorporated by reference in
Part III of this Form 10-K/A.
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CAUTIONARY STATEMENT IDENTIFYING IMPORTANT FACTORS
THAT COULD CAUSE THE COMPANY'S ACTUAL RESULTS TO DIFFER
FROM THOSE PROJECTED IN FORWARD LOOKING STATEMENTS:
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, readers of this document are advised that it
contains both statements of historical facts and forward looking statements.
This report includes forward-looking statements that reflect current
expectations or beliefs of EMCORE Corporation concerning future results and
events. The words "expects," "intends," "believes," "anticipates," "likely,"
"will," and similar expressions identify forward-looking statements. These
forward-looking statements are subject to certain risks and uncertainties which
could cause actual results and events to differ materially from those
anticipated in the forward-looking statements. Factors that might cause such a
difference include, but are not limited to, statements about future financial
performance of the Company and the effect of the acquisition of MicroOptical
Devices, Inc. ("MODE") on the Company's business; the uncertainty of additional
funding; continued acceptance of the Company's MOCVD technologies, as well as
the market success of microlaser VCSEL technologies; the Company's ability to
achieve and implement the planned enhancements of products and services on a
timely and cost effective basis and customer acceptance of those product
introductions; product obsolescence due to advances in technology and shifts in
market demand; competition and resulting price pressures; business conditions;
economic and stock market conditions, particularly in the U.S., Europe and
Japan, and their impact on sales of the company's products and services; risks
associated with foreign operations, including currency and political risks; and
such other risk factors as may have been or may be included from time to time in
the Company's reports filed with the Securities and Exchange Commission.
PART I
ITEM 1. BUSINESS
COMPANY OVERVIEW
EMCORE designs, develops, and manufactures compound semiconductor materials
and is a leading developer and manufacturer of the tools and manufacturing
processes used to fabricate compound semiconductor wafers and devices. EMCORE's
products and technology enable its customers, both in the United States and
internationally, to manufacture commercial volumes of high-performance
electronic devices using compound semiconductors. EMCORE has recently
established a number of strategic relationships through joint ventures,
long-term supply agreements and an acquisition in order to facilitate the
development and manufacture of new products in targeted growth markets. EMCORE's
products are used for a wide variety of applications in the communications
(satellite, data, telecommunications and wireless), consumer and automotive
electronics, computers and peripherals, and lighting markets. EMCORE's customers
include AMP Incorporated, Hewlett Packard, General Motors, Hughes-Spectrolab,
Lucent Technologies, Inc., Siemens AG and 12 of the largest electronics
manufacturers in Japan.
INDUSTRY OVERVIEW
Recent advances in information technologies have created a growing need for
efficient, high-performance electronic systems that operate at very high
frequencies, have increased storage capacity and computational and display
capabilities, and can be produced cost-effectively in commercial volumes. In the
past, electronic systems manufacturers have relied on advances in silicon
semiconductor technology to meet many of these demands. However, the newest
generation of high-performance electronic and optoelectronic applications
require certain functions that are generally not achievable using silicon-based
components.
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Compound semiconductors have emerged as an enabling technology to meet the
complex requirements of today's advanced information systems. Many compound
semiconductor materials have unique physical properties that allow electrons to
move at least four times faster than through silicon-based devices. Advantages
of compound semiconductor devices over silicon devices include:
- operation at higher speeds;
- lower power consumption;
- less noise and distortion; and
- optoelectronic properties that enable these devices to emit and detect
light.
Compound semiconductor devices can be used to perform individual functions
as discrete devices, such as solar cells, HB LEDs, VCSELs, MR sensors and RF
materials. Compound semiconductor devices can also be combined into integrated
circuits, such as transmitters, receivers and alpha-numeric displays. Although
compound semiconductors are more expensive to manufacture than silicon-based
devices, electronics manufacturers are increasingly integrating compound
semiconductor devices into their products in order to achieve higher performance
in applications targeted for a wide variety of markets. These include satellite
communications, data communications, telecommunications, wireless
communications, consumer and automotive electronics, computers and peripherals,
and lighting.
The following factors have resulted in an increased demand for compound
semiconductor products and systems that enable electronic systems manufacturers
to reach the market faster with large volumes of high-performance products and
applications:
- rapid build-out of satellite communications systems;
- widespread deployment of fiber optic networks and the increasing use of
optical systems within these networks;
- launch of new wireless services and wireless high speed data systems;
- increasing use of infrared emitters and optical detectors in computer
systems;
- emergence of advanced consumer electronics applications, such as DVDs and
flat panel displays;
- increasing use of high-performance electronic devices in automobiles; and
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- the anticipated conversion to HB LEDs from incandescent, halogen and
compact fluorescent lighting.
The following chart summarizes the principal markets, examples of
applications for compound semiconductor devices, products incorporating these
devices and certain benefits and characteristics of these devices.
<TABLE>
<CAPTION>
REPRESENTATIVE
MARKET APPLICATIONS PRODUCTS BENEFITS/CHARACTERISTICS
<S> <C> <C> <C>
Satellite Power modules for Solar cells Radiation tolerance
communications satellites RF materials Conversion of more light
Satellite to ground to
communication power than silicon
Reduced launch costs
Increased bandwidth
- --------------------------------------------------------------------------------------------------------------------
Data communications High-speed fiber optic VCSEL components Increased network capacity
networks and and arrays Increased data
optical links HB LEDs transmission
(including Lasers speeds
Gigabit Ethernet, RF materials Increased bandwidth
asynchronous
transfer mode,
or ATM, and
FibreChannel networks)
- --------------------------------------------------------------------------------------------------------------------
Telecommunications High capacity fiber VCSEL components Increased data
optic trunk lines and arrays transmission
Lasers speeds
RF materials Increased bandwidth
- --------------------------------------------------------------------------------------------------------------------
Wireless Cellular telephones HB LEDs Improved display
communications Pagers RF materials visibility
PCS handsets Improved signal to noise
Direct broadcast systems performance
Lower power consumption
Increased network capacity
Reduced network congestion
Extended battery life
- --------------------------------------------------------------------------------------------------------------------
Consumer electronics DVDs HB LEDs Improved display
Radios VCSEL components visibility
Telephones and arrays High-speed data
Calculators Integrated circuits transmission
CD-Roms Lasers Low power
requirements
- --------------------------------------------------------------------------------------------------------------------
Automotive electronics Engine sensors MR sensors Reduced weight
Dashboard displays HB LEDs Lower power consumption
Indicator lights Lower emissions
Antilock brake systems
- --------------------------------------------------------------------------------------------------------------------
Computers and Local area networks VCSEL components Increased data
peripherals Chip-to-chip and and arrays transmission
board-to-board Transceivers speeds
optical links Increased bandwidth
- --------------------------------------------------------------------------------------------------------------------
Lighting Flat panel displays HB LEDs Lower power consumption
Solid state lighting Miniature lamps Longer life
Outdoor signage and
display
Digital readout signals
</TABLE>
COMPOUND SEMICONDUCTOR PROCESS TECHNOLOGY
Compound semiconductors are composed of two or more elements and usually
consist of a metal such as gallium, aluminum or indium and a non-metal such as
arsenic, phosphorous or nitrogen. The resulting compounds include gallium
arsenide, indium phosphide, gallium nitride, indium antimonide and indium
aluminum phosphide. The performance characteristics of compound semiconductors
are dependent on the composition of these compounds. Many of the unique
properties of compound semiconductor devices are
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achieved by the layering of different compound semiconductor materials in the
same device. This layered structure creates an optimal configuration to permit
the conversion of electricity into light.
Accordingly, the composition and properties of each layer and the control
of the layering process, or epitaxy, are fundamental to the performance of
advanced electronic and optoelectronic compound semiconductor devices. The
variation of thickness and composition of layers determines the intensity and
color of the light emitted or detected and the efficiency of power conversion.
The ability to vary the intensity, color and efficiency of light generation and
detection enables compound semiconductor devices to be used in a broad range of
advanced information systems.
Compound semiconductor device manufacturers predominantly use four methods
to deposit compound materials: molecular beam epitaxy, vapor phase epitaxy,
liquid phase epitaxy and metal organic chemical vapor deposition (MOCVD). The
use of molecular beam epitaxy technology can yield wafers having high thickness
uniformity. Compound semiconductor materials fabricated using liquid phase
epitaxy or vapor phase epitaxy technologies often have high electronic and
optical properties. However, due to the nature of the underlying processes,
these methods are not easily scaled up to high volume production, which is
necessary for the commercial viability of compound semiconductor devices. All of
the methods used to manufacture compound semiconductor devices pose technical,
training and safety challenges that are not present in the manufacture of
silicon devices. These production systems typically require expensive reactant
materials, the use of certain toxic chemicals, and tight control over numerous
manufacturing parameters. The key differences between MOCVD and the three other
methods is that compound semiconductor wafers fabricated using MOCVD generally
possess a better combination of uniformity and optical and electronic properties
and are easier to produce in high volumes than wafers manufactured by the three
more traditional methods. Currently, MOCVD technology is being used to
manufacture a broad range of compound semiconductor devices.
Historically, manufacturers who use compound semiconductor devices in their
products have met research, pilot production and capacity needs with in-house
systems and technologies. However, as the need for the production of commercial
volumes of high-performance compound semiconductor devices and the variety of
these devices grows, manufacturers are often unable to meet these requirements
using in-house solutions. In response to these growing demands for higher
volumes of a broad range of higher performance devices, manufacturers are
increasingly turning to outside vendors to meet their needs for compound
semiconductor wafers and devices.
THE EMCORE SOLUTION
EMCORE provides its customers with a broad range of compound semiconductor
products and services intended to meet its customers' diverse technology
requirements. EMCORE has developed extensive materials science expertise,
process technology and MOCVD production systems to address these needs and
believes that its proprietary TurboDisc deposition technology makes possible one
of the most cost-effective production processes for the commercial volume
manufacture of high-performance compound semiconductor wafers and devices. This
platform technology provides the basis for the production of various types of
compound semiconductor wafers and devices and enables EMCORE to address the
critical need of manufacturers to cost-effectively get to market faster with
high volumes of new and improved high-performance products. EMCORE's compound
semiconductor products and services include:
- materials and process development;
- design and development of devices;
- MOCVD production systems; and
- manufacture of wafers and devices in high volumes.
Customers can take advantage of EMCORE's vertically integrated approach by
purchasing custom-designed wafers and devices from EMCORE or manufacturing their
own devices in-house using a TurboDisc production system configured to their
specific needs.
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STRATEGY
EMCORE's objective is to capitalize on its position in MOCVD process
technology and production systems to become the leading supplier of compound
semiconductor wafers, devices and production systems. The key elements of
EMCORE's strategy include:
Apply Core Technology Across Multiple Applications. EMCORE continually
leverages its proprietary core technology to develop compound semiconductor
products for multiple applications in a variety of markets. These activities
include developing new products for targeted applications as well as expanding
existing products into new applications. For example, EMCORE's MR sensors,
currently used by General Motors as crank shaft sensors, also have other
potential product applications, including as sensors in brushless motors and
antilock brakes. Other existing products which EMCORE intends to introduce in
new applications include VCSELs for communications products and HB LEDs for
broader lighting applications.
Target High Growth Opportunities. EMCORE's strategy is to target high
growth opportunities where performance characteristics and high volume
production efficiencies can give compound semiconductors a competitive advantage
over other devices. Historically, while technologically superior, compound
semiconductors have not been widely deployed because they are more expensive to
manufacture than silicon-based semiconductors and other existing solutions.
EMCORE believes that as compound semiconductor production costs are reduced, new
customers will be compelled to use these solutions because of their higher
performance characteristics. For example, EMCORE has reduced the average cost of
compound semiconductor solar cells to the point that they are replacing
silicon-based solar cells because of the compound semiconductor solar cells'
higher overall efficiency and lower weight.
Partner with Key Industry Participants. EMCORE seeks to identify and
develop long-term relationships with leading companies in targeted industries.
EMCORE develops these relationships in a number of ways including through
long-term high-volume supply agreements, joint ventures, and distribution and
other arrangements. For example, EMCORE has agreed to enter into, subject to
certain conditions, a joint venture with General Electric Lighting for the
development and marketing of white light and colored HB LED products for
automotive, traffic, flat panel display and other lighting applications, and has
entered into a long term supply agreement with AMP Incorporated for VCSELs to be
used in its transceivers for Gigabit Ethernet and other applications. EMCORE
intends to actively seek similar strategic relationships with other key
customers and industry participants in order to further expand its technological
and production base.
Continue Investment to Maintain Technology Leadership. Through substantial
investment in research and development, EMCORE seeks to expand its leadership
position in compound semiconductor production systems, wafers and devices.
EMCORE works with its customers to identify specific performance criteria and
uses this information to enhance the performance of its production systems and
to further expand its process and materials science expertise, including the
development of new low cost, high-volume wafers and devices for its customers.
In addition, EMCORE's development efforts are focused on continually lowering
the production costs of its solutions. EMCORE's joint venture with Union Miniere
Inc. represents an initiative to explore means to use germanium to improve
product performance, identify new product applications and lower the cost and
complexity of production of EMCORE's wafers and devices.
PRODUCTS
PRODUCTION SYSTEMS
EMCORE is a leading supplier of MOCVD compound semiconductor production
systems, with more than 230 systems shipped as of March 31, 1999. According to
VLSI Research, Inc., in 1997 EMCORE's share of the MOCVD production systems
market was over 25%. EMCORE believes that its TurboDisc systems offer
significant ownership advantages over competing systems and that the high
throughput capabilities of its TurboDisc systems make possible superior
reproducibility of thickness, composition, electronic properties and layer
accuracy required for electronic and optoelectronic devices. Each system can be
customized for the customer's throughput, wafer size and process chemistry
requirements. EMCORE's
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production systems also achieve a high degree of reliability with an average
time available for production, based on customer data, of approximately 95%.
EMCORE believes its TurboDisc systems enable the lowest cost of ownership
for the manufacture of compound semiconductor materials. The major components of
the cost of ownership include yield, throughput, direct costs and capital costs.
Yield primarily relates to material uniformity, which is a function of the
precision of the physical and chemical processes by which atomic layers are
deposited. Throughput, the volume of wafers produced per unit of time, includes
both the time required for a process cycle and the handling time between process
steps. Direct costs include consumables used in manufacturing and processing and
the clean room space required for the equipment. Capital costs include the cost
of acquisition and installation of the process equipment.
EMCORE's proprietary TurboDisc technology utilizes a unique high speed
rotating disk in a stainless steel growth chamber with integrated
vacuum-compatible loading chambers. To produce a wafer, a bare substrate, such
as gallium arsenide, sapphire or germanium, is placed on a wafer carrier in the
TurboDisc growth chamber and subjected to high temperatures. Based on a
predetermined formula, metal organic gases are released into the growth chamber.
These gases decompose on the hot, rapidly spinning wafer. Semiconductor
materials are then deposited on the substrate in a highly uniform manner. The
resulting wafer thus carries one or more ultra-thin layers of compound
semiconductor material such as gallium arsenide, gallium nitride, or indium
aluminum phosphide. The TurboDisc technology not only produces uniformity of
deposition across the wafer, but also offers flexibility for diverse
applications with improved material results and increased production rates. The
unique precision control of reactant gas flow in the TurboDisc technology
platform allows users to scale easily from research to commercial volumes with
substantially reduced time and effort. Upon removal from the growth chamber, the
wafer is transferred to a device processing facility for various steps such as
photolithography, etching, masking, metallization and dicing. Upon completion of
these steps, the devices are then sent for packaging by the customer or other
third parties and inclusion in the customer's product.
EMCORE offers the following family of TurboDisc systems:
<TABLE>
<CAPTION>
MODEL LIST PRICE APPLICATION
<S> <C> <C>
Explorer $350,000 -- $450,000 Research
- -----------------------------------------------------------------------------------------
Discovery $600,000 -- $1,100,000 Development/Pilot Production
- -----------------------------------------------------------------------------------------
Enterprise $1,300,000 -- $2,500,000 Volume Production
</TABLE>
EMCORE's next generation of TurboDisc products is being designed to provide
a number of innovations including:
- new reactor design to improve efficiency;
- cassette-to-cassette wafer handling to increase automation;
- digital control system to reduce noise;
- real-time process control and data acquisition on WindowsNT platform;
- modular component design to ease outsourcing and upgrading; and
- improved temperature control.
WAFERS AND DEVICES
Since its inception, EMCORE has worked closely with its customers to design
and develop materials processes for use in production systems for its customers'
end-use applications. EMCORE has leveraged its process and materials science
knowledge base to manufacture a broad range of compound semiconductor wafers and
devices such as solar cells, HB LEDs, VCSELs, MR sensors and RF materials.
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Within most of these product lines, EMCORE has established strategic
relationships through joint ventures, long-term supply agreements and an
acquisition. A summary of these relationships is found below.
<TABLE>
<CAPTION>
PRODUCTS AND STRATEGIC RELATIONSHIPS
NATURE OF
PRODUCT LINE COMPANY RELATIONSHIP APPLICATION
<S> <C> <C> <C>
Solar Cells Space Systems/Loral Long-term supply Solar panels in
Lockheed Martin agreement communications
Missiles and Space Strategic partner satellite power
Union Miniere Inc. Long-term germanium systems.
sourcing agreement
from Union Miniere
HB LEDs General Electric GELcore joint Traffic lights
Lighting venture (pending)
for the development, Miniature lamps
marketing and
distribution of white Automotive lighting
light and colored HB
LED products Flat panel displays
Other lighting
applications
Uniroyal Technology Uniroyal
Corporation Optoelectronics Joint
venture for the
manufacture of HB
LED wafers and
package-ready devices
VCSELs AMP Incorporated Strategic alliance and Optical links
long-term supply (including Gigabit
agreement Ethernet ATM, and
FibreChannel
networks)
Micro Optical Acquisition
Devices, Inc.
MR sensors Optek Technology, Emtech joint venture Antilock brake
Inc. for packaging and systems
marketing of MR
sensors Brushless motors
Engine timing
sensors
General Motors Long-term supply Cam and crank shaft
agreement sensors
Germanium research and Union Miniere Inc. UMCore joint Exploring alternative
development venture uses for germanium
substrates
</TABLE>
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Solar Cells. Compound semiconductor solar cells are used to power
satellites because they are more resistant to radiation levels in space, convert
substantially more light to power and therefore weigh less per unit of power
than silicon-based solar cells. These characteristics increase satellite life,
increase payload capacity and reduce launch costs. EMCORE is currently involved
in four solar cell projects:
- In November 1998, EMCORE signed a four-year purchase agreement with Space
Systems/Loral, a wholly owned subsidiary of Loral Space & Communications.
Under this agreement, which is contingent upon our compliance with
Loral's product specification requirements, EMCORE will supply compound
semiconductor high efficiency gallium arsenide solar cells for Loral's
satellites. Subject to satisfactorily completing these product
qualification requirements, EMCORE has received an initial purchase order
from Space Systems/Loral.
- In August 1998, EMCORE and Union Miniere Inc., a mining and materials
company, entered into a long term supply agreement for germanium, which
EMCORE uses to fabricate solar cells. In addition to their solar cell
relationship, in November 1998, EMCORE formed UMCore, a joint venture
with Union Miniere to explore and develop alternate uses for germanium
using EMCORE's material science and production platform expertise and
Union Miniere's access to and experience with germanium. UMCore commenced
research and development operations in January 1999.
- In September 1998, EMCORE entered into an agreement with Lockheed Martin
Missiles and Space, a strategic business unit of Lockheed Martin
Corporation, to provide technical management and support of a Cooperative
Research and Development Agreement between Lockheed Martin and Sandia
National Laboratory for the advancement and commercialization of a new
compound semiconductor high efficiency solar cell. Pursuant to this
strategic agreement, (1) Lockheed Martin will grant EMCORE a sub-license
for all related intellectual property developed on behalf of or in
conjunction with Lockheed Martin, and (2) EMCORE and Lockheed Martin will
jointly qualify and validate the high efficiency solar cells for
operational satellite use.
- In the summer of 1998, EMCORE received a $2.2 million contract under the
U.S. Air Force's Broad Agency Announcement Program for the development of
high-efficiency advanced solar cells.
HB LEDs. High-brightness light-emitting diodes (HB LEDs) are solid state
compound semiconductor devices that emit light. The global demand for HB LEDs is
experiencing rapid growth because LEDs have a long useful life (approximately 10
years), consume approximately 10% of the power consumed by incandescent or
halogen lighting and improve display visibility. In February 1998, EMCORE and
Uniroyal Technology Corporation formed Uniroyal Optoelectronics, a joint venture
to manufacture, sell and distribute HB LED wafers and package-ready devices.
In January 1999, EMCORE signed a transaction agreement with General
Electric Lighting to form GELcore, a joint venture to develop and market HB LED
lighting products. General Electric Lighting and EMCORE have agreed that this
joint venture will be the exclusive vehicle for each party's participation in
solid state lighting. GELcore seeks to combine EMCORE's materials science
expertise, process technology and compound semiconductor production systems with
General Electric Lighting's brand name recognition and extensive marketing and
distribution capabilities. GELcore's long-term goal is to develop products to
replace traditional lighting.
VCSELs. VCSELs are semiconductor lasers that emit light in a cylindrical
beam. Leading electronic systems manufacturers are integrating VCSELs into a
broad array of end-market applications including Internet access, digital
cross-connect telecommunications switches, DVD, and fiber optic switching and
routing, such as Gigabit Ethernet. VCSELs offer significant advantages over
traditional laser diodes, including:
- greater control over beam size and wavelength;
- reduced manufacturing complexity and packaging costs;
- lower power consumption; and
- higher frequency performance.
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In December 1997, EMCORE acquired MODE, a development stage company,
primarily dedicated to the research and development of enabling VCSEL
technologies. In February 1998, EMCORE announced Gigalase, its first commercial
high speed VCSEL laser. In September 1998, EMCORE signed a four-year purchase
agreement with AMP Incorporated to provide VCSELs for a family of optical
transceivers for the Gigabit Ethernet, FibreChannel and ATM markets. In December
1998, EMCORE announced its second VCSEL product, Gigarray, a micro-optical laser
array.
MR Sensors. MR sensors are compound semiconductor devices that possess
sensing capabilities. MR sensors improve vehicle performance through more
accurate control of engine and crank shaft timing, which allows for improved
spark plug efficiency and reduced emissions. In January 1997, EMCORE initiated
shipments of compound semiconductor MR sensors using technology licensed to
EMCORE from General Motors. This license allows EMCORE to manufacture and sell
products using this technology to anyone. As of September 30, 1998, EMCORE has
delivered over five million devices to General Motors Powertrain for crank and
cam speed and position sensing applications for three engine builds.
In October 1998, EMCORE formed Emtech, a joint venture with Optek
Technology, Inc., a packager and distributor of optoelectronic devices, to
market an expanded line of MR sensors to the automotive and related industries.
This joint venture seeks to combine EMCORE's strength in producing devices with
Optek's strength in packaging and distributing devices to offer off-the-shelf
products and expand market penetration.
RF materials. Radio frequency materials are compound semiconductor
materials which transmit and receive communications. Compound semiconductor RF
materials have a broader bandwidth and superior performance at high frequencies
than silicon-based materials. EMCORE currently produces RF materials for use as
power amplifiers in cellular phone handsets. In addition, EMCORE is exploring
opportunities to market these materials for additional uses in fiber optics and
satellite communications. EMCORE believes that its ability to produce high
volumes of RF materials at a low cost will facilitate their adoption in new
applications and new products.
CUSTOMERS
EMCORE's customers include many of the largest semiconductor,
telecommunications, consumer goods and computer manufacturing companies in the
world. In fiscal 1998, sales to Hughes-Spectrolab accounted for 17.3% of
EMCORE's revenues, and sales to General Motors accounted for 12.8% of EMCORE's
revenues. A number of EMCORE's customers are listed below. In addition, EMCORE
has sold its products to 12 of the largest electronics manufacturers in Japan.
AMP Incorporated Motorola
The Boeing Company Northrop Grumman
General Motors Philips AG
Hewlett Packard Polaroid
Honeywell Rockwell International
Hughes-Spectrolab Samsung
Hyundai Electronics Sharp U.S.A.
IBM Siemens AG
LG Semiconductor Texas Instruments
L.M. Ericsson AB Thomson CSF
Lucent Technologies Westinghouse Electric
EMCORE has a comprehensive total quality management program with special
emphasis on total customer satisfaction. EMCORE seeks to encourage active
customer involvement with the design and operation of its production systems. To
accomplish this, EMCORE conducts user group meetings among its customers in
Asia, Europe and North America. At annual meetings, EMCORE's customers provide
valuable feedback on key operations, process oriented services, problems and
recommendations to improve EMCORE products. This direct customer feedback has
enabled EMCORE to constantly update and improve the design of its systems and
processes. Changes that affect the reliability and capabilities of EMCORE's
systems are embodied in new designs to enable current and future customers to
utilize systems which EMCORE believes are high quality and cost-efficient.
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MARKETING AND SALES
EMCORE markets and sells its wafers, devices and systems through its direct
sales force in Europe, North America and Taiwan and through representatives and
distributors elsewhere in Asia. To market and service its products in China,
Japan and Singapore, EMCORE relies on a single marketing, distribution and
service provider, Hakuto. EMCORE's agreements with Hakuto have a term of 10
years, expiring March 2008. Hakuto has exclusive distribution rights for certain
of EMCORE's products in Japan. Hakuto has marketed and serviced EMCORE's
products since 1988, is a minority shareholder in EMCORE, and the President of
Hakuto is a member of EMCORE's board of directors. EMCORE recently opened sales
offices in Taiwan and California in order to be closer to its customers.
EMCORE's sales and marketing staff, senior management and technical staff
work closely with existing and potential customers to provide compound
semiconductor solutions for its customers' needs. The sales process begins by
understanding the customer's requirements and then attempting to match these
requirements with the optimal solution. EMCORE seeks to match the customer's
requirements to an existing design or a modification of a standard design, such
as a change in platform or process design. When necessary, EMCORE will work with
the customer to develop the appropriate design process and to configure and
manufacture the production system to meet the customer's needs. Also, EMCORE
will produce samples to demonstrate conformance to the customer's
specifications. For production systems, the amount of time from the initial
contact with the customer to the customer's placement of an order is typically
two to nine months or longer. EMCORE's sales cycle for wafers and devices
usually runs three to nine months, during which time EMCORE develops the formula
of materials necessary to meet the customer's specifications and qualifies the
materials, which may also require the delivery of samples. EMCORE believes that
the high level of marketing, management and engineering support involved in this
process is beneficial in developing competitive differentiation and long-term
relationships with its customers.
The following chart contains a breakdown of EMCORE's worldwide revenues and
percentages by geographic region. Historically, EMCORE has received all payments
for products and services in U.S. dollars.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SEPTEMBER 30,
-----------------------------------------------
1996 ($/%) 1997 ($/%) 1998 ($/%)
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REGION ($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
United States................ $16.0 57.6% $27.7 57.9% $26.7 61.0%
Asia......................... 8.2 29.5 14.6 30.6 15.5 35.4
Europe....................... 3.6 12.9 5.5 11.5 1.6 3.6
----- ----- ----- ----- ----- -----
Total...................... $27.8 100.0% $47.8 100.0% $43.8 100.0%
===== ===== ===== ===== ===== =====
</TABLE>
SERVICE AND SUPPORT
EMCORE maintains a worldwide service and support network responsible for
on-site maintenance and process monitoring on either a contractual or
time-and-materials basis. Customers may purchase annual service contracts under
which EMCORE is required to maintain an inventory of replacement parts and to
service the equipment upon the request of the customer. EMCORE also sells
replacement parts from inventory for customer needs. EMCORE pursues a program of
system upgrades for customers to increase the performance of older systems.
EMCORE generally does not offer extended payment terms to its customers and
generally adheres to a warranty policy of one year. Consistent with industry
practice, EMCORE maintains an inventory of components for servicing systems in
the field and it believes that its inventory is sufficient to satisfy
foreseeable short-term customer requirements. EMCORE recently opened a warehouse
depot in Taiwan to provide improved service to its Asian customers.
RESEARCH AND DEVELOPMENT
To maintain and improve its competitive position, EMCORE's research and
development efforts are focused on designing new proprietary processes and
products, improving the performance of existing systems, wafers and devices and
reducing costs in the product manufacturing process. EMCORE has dedicated 16
TurboDisc systems for both research and production which are capable of
processing virtually all compound
-11-
<PAGE> 12
semiconductor materials. The research and development staff utilizes x-ray,
optical and electrical characterization equipment which provide instant data
allowing for shortened development cycles and rapid customer response. EMCORE's
recurring research and development expenses were approximately, $16.5 million in
fiscal 1998, $9.0 million in fiscal 1997 and $5.4 million in fiscal 1996. EMCORE
also incurred a one-time, non-cash research and development expense in fiscal
1998 in the amount of $19.5 million in connection with the acquisition of MODE.
EMCORE expects that it will continue to expend substantial resources on research
and development.
EMCORE also competes for research and development funds. In view of the
high cost of development, EMCORE solicits research contracts that provide
opportunities to enhance its core technology base or promote the
commercialization of targeted products. EMCORE presently has three contracts
under the Small Business Innovative Research programs or similar government
sponsored programs. From inception until September 30, 1998, government and
other external research contracts have provided approximately $13.2 million to
support EMCORE's research and development efforts. EMCORE is also positioned to
market technology and process development expertise directly to customers who
require it for their own product development efforts.
INTELLECTUAL PROPERTY AND LICENSING
EMCORE's success and competitive position both for production systems and
wafers and devices depend significantly on its ability to maintain trade secrets
and other intellectual property protections. Our strategy is to rely more on
trade secrets than patents. A "trade secret" is information that has value to
the extent it is not generally known, not readily ascertainable by others
through legitimate means, and protected in a way that maintains its secrecy.
Reliance on trade secrets is only an effective business practice insofar as
trade secrets remain undisclosed and a proprietary product or process is not
reverse engineered or independently developed. In order to protect its trade
secrets, EMCORE takes certain measures to ensure their secrecy, such as
executing non-disclosure agreements with its employees, joint venture partners,
customers and suppliers.
To date, EMCORE has been issued 11 U.S. patents and others are either
pending or under review. These U.S. patents will expire between 2005 and 2013.
None of these U.S. patents claim any material aspect of the current or planned
commercial versions of EMCORE's systems, wafers or devices. EMCORE relies on
trade secrets rather than patents to protect its intellectual property because
it believes publishing patents would make it easier for others to reverse
engineer EMCORE's proprietary processes.
EMCORE is a licensee of certain VCSEL technology and associated patent
rights owned by Sandia Corporation. The Sandia license grants EMCORE:
- exclusive rights (subject to certain rights granted to Department of
Energy and AT&T Corporation) to develop, manufacture and sell products
containing Sandia VCSEL technologies for barcode scanning and plastic
optical fiber communications applications under five U.S. patents that
expire between 2007 and 2015;
- nonexclusive rights with respect to all other applications of these
patents; and
- nonexclusive rights to employ a proprietary oxidation fabrication method
in the manufacture of VCSEL products under a sixth U.S. patent that
expires in 2014. Our exclusivity with respect to the barcode scanning and
plastic optical fiber communications applications expires in 2003 or such
earlier time as we fail to meet certain development and marketing
criteria. EMCORE's success and competitive position as a producer of
VCSEL products depends on the continuation of its rights under the Sandia
license, the scope and duration of those rights and the ability of Sandia
to protect its proprietary interests in the underlying technology and
patents.
In 1992, we received a royalty-bearing, non-exclusive license under a
patent held by Rockwell International Corporation which relates to an aspect of
the manufacturing process used by our TurboDisc systems. In October 1996, we
initiated discussions with Rockwell to receive additional licenses to permit us
to use this technology to manufacture and sell compound semiconductor wafers and
devices. In November 1996, we suspended these negotiations because of litigation
surrounding the validity of the Rockwell patent. We also ceased making royalty
payments to Rockwell under the license during the pendency of the litigation. In
-12-
<PAGE> 13
January 1999, the case was settled and a judgment was entered in favor of
Rockwell. As a result, we may be required to pay royalties to Rockwell for
certain of our past sales of wafers and devices to our customers who did not
hold licenses directly from Rockwell. If we are required to pay significant
royalties in connection with these sales our business, financial condition and
results of operations may be materially and adversely affected. In addition,
until the patent expires in January 2000, we may require additional licenses
from Rockwell under the Rockwell patent in order to continue to manufacture and
sell wafers and devices. The failure to obtain or maintain licenses to
manufacture these wafers and devices on commercially reasonable terms may
materially and adversely affect our business, financial condition and results of
operations.
ENVIRONMENTAL REGULATIONS
EMCORE is subject to federal, state and local laws and regulations
concerning the use, storage, handling, generation, treatment, emission, release,
discharge and disposal of certain materials used in its research and development
and production operations, as well as laws and regulations concerning
environmental remediation and employee health and safety. The production of
wafers and devices involves the use of certain hazardous raw materials,
including, but not limited to, ammonia, phosphine and arsene. If EMCORE's
control systems are unsuccessful in preventing release of these or other
hazardous materials, EMCORE could experience a substantial interruption of
operations. EMCORE has retained an environmental consultant to advise it in
complying with applicable environmental and health and safety laws and
regulations, and believes that it is currently, and in the past has been, in
substantial compliance with all such laws and regulations.
BACKLOG
As of September 30 1998, EMCORE had an order backlog of $22.6 million
compared to backlog of $24.4 million as of September 30, 1997. EMCORE includes
in backlog only customer purchase orders that have been accepted by EMCORE and
for which shipment dates have been assigned within the 12 months to follow and
research contracts that are in process or awarded. Wafer and device agreements
extending longer than one year in duration are included in backlog only for the
ensuing 12 months. EMCORE receives partial advance payments or irrevocable
letters of credit on most production system orders. EMCORE recognizes revenue
from the sale of its systems and materials upon shipment. For research contracts
with the U.S. government and commercial enterprises with durations greater than
six months, EMCORE recognizes revenue to the extent of costs incurred plus a
portion of estimated gross profit, as stipulated in such contracts, based on
contract performance.
MANUFACTURING
EMCORE's manufacturing operations are located at EMCORE's headquarters in
Somerset, New Jersey and in Albuquerque, New Mexico and include systems
engineering and production, wafer fabrication, and design and production of
devices. Many of EMCORE's manufacturing operations are computer monitored or
controlled to enhance reliability and yield. EMCORE manufactures its own systems
and outsources some components and sub-assemblies, but performs all final system
integration, assembly and testing. EMCORE fabricates wafers and devices at its
facilities in Somerset, New Jersey and Albuquerque, New Mexico and has a
combined clean room area totaling approximately 12,000 square feet. EMCORE's
joint venture with Uniroyal Technology Corporation expects to begin
manufacturing HB LED wafers and package-ready devices at its Tampa, Florida
manufacturing facility by summer of 1999. In May 1998, EMCORE received ISO 9001
and QS 9002 quality certification for its Somerset, New Jersey facility. EMCORE
is pursuing ISO 9001 quality certification for its Albuquerque, New Mexico
facilities.
Outside contractors and suppliers are used to supply raw materials and
standard components and to assemble portions of end systems from EMCORE
specifications. EMCORE depends on sole, or a limited number of, suppliers of
components and raw materials. EMCORE generally purchases these single or limited
source products through standard purchase orders. EMCORE also seeks to maintain
ongoing communications with its suppliers to guard against interruptions in
supply and has, to date, generally been able to obtain sufficient supplies in a
timely manner and maintains inventories it believes are sufficient to meet its
near term needs. EMCORE implemented a vendor program through which it inspects
quality and reviews suppliers and prices in order to standardize purchasing
efficiencies and design requirements to maintain as low a cost of sales
-13-
<PAGE> 14
as possible. However, operating results could be materially and adversely
affected by a stoppage or delay of supply, receipt of defective parts or
contaminated materials, and increase in the pricing of such parts or EMCORE's
inability to obtain reduced pricing from its suppliers in response to
competitive pressures.
COMPETITION
The markets in which EMCORE competes are highly competitive. EMCORE
competes with several companies for sales of MOCVD systems including Aixtron
GmbH, Nippon-Sanso K.K. and Thomas Swann Ltd. The primary competitors for
EMCORE's wafer foundry include Epitaxial Products Inc., Kopin Corporation and
Quantum Epitaxial Designs, Inc. EMCORE's principal competitors for sales of
VCSEL-related products include Honeywell, Inc. and Mitel Corporation. The
principal competitors for MR sensors are Honeywell, Inc., Matshushita Electric
Industrial Co. Ltd., Siemens AG and Asahi. The principal competitors for HB LEDs
and EMCORE's joint venture with Uniroyal Technology Corporation and the pending
joint venture with General Electric Lighting include the Phillips Electronics
and Hewlett Packard Company joint venture, Siemens AG's Osram GmbH subsidiary,
Nichia Chemical Industries and Toshiba Corporation. EMCORE also faces
competition from manufacturers that implement in-house systems for their own
use. In addition, EMCORE competes with many research institutions and
universities for research contract funding. EMCORE also sells its products to
current competitors and companies with the capability of becoming competitors.
As the markets for EMCORE's products grow, new competitors are likely to emerge,
and present competitors may increase their market share.
EMCORE believes that the primary competitive factors in the markets in
which EMCORE's products compete are yield, throughput, performance, breadth of
product line, customer satisfaction, customer commitment to competing
technologies and, in the case of production systems, capital and directs costs
and size of installed base. Competitors may develop enhancements to or future
generations of competitive products that offer superior price and performance
factors. EMCORE believes that in order to remain competitive, it must invest
significant financial resources in developing new product features and
enhancements and in maintaining customer satisfaction worldwide.
EMPLOYEES
At September 30, 1998, EMCORE had 308 full-time employees. None of EMCORE's
employees are covered by a collective bargaining agreement. EMCORE considers its
relationship with its employees to be good.
-14-
<PAGE> 15
ITEM 2. PROPERTIES
The following chart contains certain information regarding each of EMCORE's
principal facilities. Each of these facilities contains office space, marketing
and sales, and research and development space. EMCORE also leases office space
in Hsinchu, Taiwan and Santa Clara, California. In addition to EMCORE's
facilities, Uniroyal Optoelectronics, a joint venture between EMCORE and
Uniroyal Technology Corporation, leases a 75,000 square foot office and
manufacturing facility in Tampa, Florida.
<TABLE>
<CAPTION>
LOCATION PURPOSE SQUARE FEET TERMS
<S> <C> <C> <C>
Somerset, New Jersey Headquarters, 75,900 Lease expires in 2000(1)
manufacturing of
systems, wafers and
MR sensors
- --------------------------------------------------------------------------------------------
Albuquerque, New Mexico Manufacturing of 50,000(2) Owned
solar cells
- --------------------------------------------------------------------------------------------
Albuquerque, New Mexico Manufacturing of 27,500 Leases expire in 1999(1)
VCSELs and 2001(1)
</TABLE>
- -------------------------
(1) These leases all have options to renew by EMCORE, subject to cost of living
adjustments.
(2) EMCORE plans a three-phase construction project to expand the facility from
an initial 50,000 square feet in October 1998 to 70,000 square feet by 2002.
ITEM 3. LEGAL PROCEEDINGS
EMCORE is not aware of any pending or threatened litigation against it that
could have a material adverse effect on its business, financial condition and
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II.
ITEM 5.
MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
The Company's Common Stock is quoted on the NASDAQ National Market
under the symbol "EMKR". The following table sets forth the quarterly high and
low sales prices for the Company's Common Stock since its initial public
offering in March 6, 1997.
FISCAL 1997
Second Quarter................................... $12 3/4 $ 9 1/4
Third Quarter.................................... $19 1/2 $11
-15-
<PAGE> 16
Fourth Quarter................................... $25 1/4 $16
FISCAL 1998
First Quarter.................................... $23 3/8 $15 1/2
Second Quarter................................... $19 5/8 $11
Third Quarter ................................... $16 3/4 $ 9
Fourth Quarter .................................. $13 1/2 $ 6
FISCAL 1999
First Quarter (through December 23, 1998)........ $18 1/4 $ 7 1/4
As of December 23, 1998 date there were 1,595 shareholders of record.
The Company has never declared or paid dividends on its Common Stock
since its formation. The Company currently does not intend to pay dividends on
its Common Stock in the foreseeable future so that it may reinvest its earnings
in the development of its business. The payment of dividends, if any, in the
future will be at the discretion of the Board of Directors.
RECENT SALES OF UNREGISTERED SECURITIES
On November 30, 1998, the Company sold an aggregate of 1,550,000 shares
of Series I Preferred Stock (the "Private Placement") to Hakuto, UMI and UTC for
an aggregate consideration of $21.7 million before deducting costs and expenses
of the offering of approximately $500,000. The shares of Series I Preferred
Stock are convertible, at any time, at the option of the holders thereof, unless
previously redeemed, into shares of Common Stock at an initial conversion price
of $14.00 per share of Common Stock, subject to adjustment in certain cases. The
Series I Preferred Stock is redeemable, in whole or in part, at the option of
the Company at any time the Company's stock has traded at or above $28.00 per
share for 30 consecutive trading days, at a price of $14.00 per share, plus
accrued and unpaid dividends, if any, to the redemption date. In addition, the
Series I Preferred Stock is subject to mandatory redemption by the Company on
November 17, 2003. The Company believes the sale of the shares of Series I
Preferred Stock is exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act").
On June 22, 1998 the Company issued 227,747 warrants to purchase common
stock of the Company to Thomas Russell, Chairman of the Board of Directors of
the Company and 56,937 warrants to purchase common stock of the Company to
Reuben Richards, President, Chief Executive Officer and a director of the
Company. The warrants are exercisable at a price of $11.375 and expire on May
1, 2001. These warrants are callable at the Company's option at $.85 per
warrant at such time as the Company's Common Stock has traded at or above 150%
of the exercise price for a period of 30 days. These warrants were granted in
exchange for the guarantee by these executives of the 1998 Agreement entered
into by the Company on June 22, 1998 with the Bank. The credit facility is
being used to finance general corporate purposes, including, but not limited
to, the construction of a facility in Albuquerque, New Mexico. The term of the
credit facility is 18 months and the interest rate is at LIBOR plus 0.75%. The
Company received a fairness opinion from its investment bank, Hempstead &
Company, that this transaction was fair from a financial point of view to the
Company's non-participating shareholders. The Company believes the issuance of
the warrants is exempt from registration pursuant to Section 4(2) of the
Securities Act.
On December 5, 1997, the Company issued 1,461,866 shares of Common
Stock, 200,966 common stock purchase options and 47,118 common stock purchase
warrants in exchange for all of the outstanding capital stock of MODE. The
purchase price was approximately $32.8 million and was recorded under the
purchase method of accounting. The Company believes the issuance of Common
Stock, options and warrants in connection with the acquisition of MODE is
exempt from registration pursuant to Section 4(2) of the Securities Act.
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<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data for the five fiscal
years ended September 30, 1998 of EMCORE is qualified by reference to and should
be read in conjunction with the Financial Statements and the Notes thereto, and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this prospectus. The Statement of Operations
Data set forth below with respect to fiscal 1996, 1997 and 1998 and the Balance
Sheet Data as of September 30, 1997 and 1998 are derived from EMCORE's audited
financial statements included elsewhere in this Form 10-K/A. The Statement of
Operations Data for fiscal 1994 and 1995 and the Balance Sheet Data as of
September 30, 1994, 1995 and 1996 are derived from audited financial statements
not included herein.
On December 5, 1997, the Company acquired MODE in a stock transaction
accounted for under the purchase method of accounting for a purchase price of
$32.8 million. In connection with this transaction, the Company recorded a
non-recurring, non-cash charge of $19.5 million for acquired in-process research
and development, which affects the comparability of the Company's operating
results and financial condition.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SEPTEMBER 30,
-----------------------------------------------
1994 1995 1996 1997 1998(*)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
RESTATED
STATEMENT OF OPERATIONS DATA:
Revenues................................................. $9,038 $18,137 $27,779 $47,753 $ 43,760
Cost of sales............................................ 5,213 9,927 18,607 30,094 24,675
------ ------- ------- ------- --------
Gross profit............................................. 3,825 8,210 9,172 17,659 19,085
Operating expenses:
Selling, general, and administrative................... 2,645 4,452 6,524 9,347 14,082
Goodwill amortization.................................. -- -- -- -- 3,638
Research and development:
Recurring............................................ 1,064 1,852 5,401 9,001 16,495
One-time acquired in-process......................... -- -- -- -- 19,516
------ ------- ------- ------- --------
Total operating expenses.......................... 3,709 6,304 11,925 18,348 53,731
------ ------- ------- ------- --------
Operating income (loss).................................... 116 1,906 (2,753) (689) (34,646)
Stated interest expense, net............................. 286 255 297 519 974
Imputed warrant interest expense, non-cash............... -- -- 126 3,988 601
Equity in net loss of unconsolidated affiliate........... -- -- -- -- 198
Other expense............................................ -- 10 -- -- --
------ ------- ------- ------- --------
Total other expense........................................ 286 265 423 4,507 1,773
(Loss) income before income taxes.......................... (170) 1,641 (3,176) (5,196) (36,419)
Provision for income taxes................................. -- 125 -- 137 --
------ ------- ------- ------- --------
(Loss) income before extraordinary item.................... (170) 1,516 (3,176) (5,333) (36,419)
Extraordinary loss......................................... -- -- -- 286 --
------ ------- ------- ------- --------
Net (loss) income.......................................... $ (170) $ 1,516 $(3,176) $(5,619) $(36,419)
====== ======= ======= ======= ========
PER SHARE DATA:
Weighted average shares used in calculating basic and
diluted per share data................................... 58 1,701 2,994 4,669 8,775
Net (loss) income per basic and diluted shares before
extraordinary item....................................... $(2.93) $ 0.89 $ (1.06) $ (1.14) $ (4.15)
====== ======= ======= ======= ========
Net (loss) income per basic and diluted shares............. $(2.93) $ 0.89 $ (1.06) $ (1.20) $ (4.15)
====== ======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
-----------------------------------------------
1994 1995 1996 1997 1998(*)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficiency)......... $ 1,041 $ 2,208 $ 1,151 $12,156 $(2,017)
Total assets......................... 5,415 10,143 20,434 39,463 73,220
Long-term liabilities................ 3,000 3,000 8,947 7,577 26,514
Redeemable preferred stock........... 16,274 -- -- -- --
Shareholders' (deficit) equity....... (96) 1,509 522 21,831 19,580
</TABLE>
(*) as restated - See Note 20
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<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
Subsequent to the issuance of the Company's Annual Report on Form 10-K for
the year ended September 30, 1998, the Company's management revised the amount
of the purchase price which was allocated to in-process research and development
in accounting for the acquisition of MicroOptical Devices, Inc. ("MODE") in
December 1997. The revised allocation is based upon methods prescribed in a
letter from the Securities and Exchange Commission ("SEC") sent to the American
Institute of Certified Public Accountants. The letter sets forth the SEC's views
regarding the valuation methodology to be used in allocating a portion of the
purchase price to acquired in-process research and development ("IPR&D") at the
date of acquisition.
The revised valuation is based on management's estimates of the net cash
flows associated with expected operations of MODE and gives explicit
consideration to the SEC's views on acquired IPR&D as set forth in its letter to
the American Institute of Certified Public Accountants.
As a result of the revised allocation, the Company's financial statements
for the year ended September 30, 1998 have been restated from amounts
previously reported to reduce the amount of the acquired in-process research and
development expensed by $9.8 million and to increase goodwill by $9.8 million.
The amount allocated to goodwill includes approximately $0.5 million related to
the value of MODE's workforce. The change had no impact on net cash flows used
by operations.
The Securities and Exchange Commission ("SEC") issued new guidance on its
views regarding the methodologies used to determine the allocation of purchase
price in a purchase business combination, involving amounts allocated to
in-process research and development ("IPRD"). Generally accepted accounting
principles require that amounts allocated to IPRD be expensed upon consummation
of an acquisition accounted for as a purchase. As a result of this new guidance
the Company has modified the methods used to value IPRD acquired related to
MODE. The revised valuation is based on management's best estimates at the date
of acquisition of the net cash flows associated with expected operations of MODE
and gives explicit consideration to the SEC's views on acquired IPRD as set
forth in its letter to the American Institute of Certified Public Accountants.
The information included in Item 6, "Selected Financial Data," and in the
discussion following reflect the effects of this restatement.
OVERVIEW
EMCORE designs, develops and manufactures compound semiconductor materials
and is a leading developer and manufacturer of the tools and manufacturing
processes used to fabricate compound semiconductor wafers and devices. Prior to
fiscal 1997, EMCORE's revenues consisted primarily of the sales of compound
semiconductor production systems. In fiscal 1997, EMCORE expanded its product
offerings to include the design and high-volume production of compound
semiconductor wafers and package-ready devices. EMCORE's vertically-integrated
product offering allows it to provide a complete compound semiconductor solution
to its customers. EMCORE assists its customers with device design, process
development and optimal configuration of TurboDisc production systems.
Systems-related revenues include sales of EMCORE's TurboDisc production
systems as well as spare parts and services. The book-to-ship time period on
systems is approximately four to six months, and the average selling price is in
excess of $1.0 million. Materials revenues include wafers, devices and process
development technology. The materials sales cycle is generally shorter than for
systems and average selling prices vary significantly based on the products and
services provided. Generally, EMCORE achieves a higher gross profit on its
materials related products.
EMCORE recognizes revenue upon shipment. For systems, EMCORE incurs certain
installation and warranty costs subsequent to shipment which are estimated and
accrued at the time the sale is recognized. EMCORE reserves for estimated
returns and allowances at the time of shipment. For research contracts with the
U.S. government and commercial enterprises with durations greater than six
months, EMCORE recognizes revenue to the extent of costs incurred plus a pro
rata portion of estimated gross profit as stipulated in these contracts, based
on contract performance. EMCORE's research contracts require the development or
evaluation of new materials applications and have a duration of six to 36
months. Contracts with a duration of six months or less are accounted for on the
completed contract method. A contract is considered complete when all costs have
been incurred and the research reporting requirements to the customer have been
met.
EMCORE has recently established a number of strategic relationships through
joint ventures, long-term supply agreements and an acquisition as summarized
below.
- In January 1999, EMCORE signed an agreement with General Electric
Lighting to form GELcore, a joint venture to develop and market white
light and colored HB LEDs lighting products. GELcore's long-term goal is
to develop HB LED products to replace traditional lighting. We anticipate
investing approximately $7.8 million in GELcore upon formation of the
joint venture and will second various personnel to the joint venture to
assist in the development and marketing of its products. These personnel
and the related costs will be charged to the joint venture. In addition,
GELcore will hire its own administrative and management personnel. As
such, the impact on EMCORE's operations will be limited to the seconded
employees who will continue to be managed by EMCORE personnel.
- In November 1998, EMCORE signed a long term purchase agreement with Space
Systems/Loral, a wholly owned subsidiary of Loral Space & Communications.
Under this agreement, which is contingent upon EMCORE's compliance with
Loral's product specification requirements, EMCORE will supply compound
semiconductor high-efficiency gallium arsenide solar cells for Loral's
satellites. EMCORE anticipates completing this qualification in June
1999. Subject to the product qualification, EMCORE received an initial
purchase order for $5.25 million of solar cells. EMCORE expects to
service this agreement through our newly completed facility in
Albuquerque, New Mexico. This facility presently employs approximately 40
people, including sales, marketing, administrative and manufacturing
personnel.
- In November 1998, EMCORE formed UMCore, a joint venture with Union
Miniere Inc., a mining and materials company, to explore and develop
alternate uses for germanium using EMCORE's materials science and
production platform expertise and Union Miniere's access to and
experience with germanium. EMCORE has invested $600,000 in UMCore which,
together with an equal amount funded by Union Miniere, is expected to
fund the operations of UMCore through fiscal 1999.
-18-
<PAGE> 19
EMCORE will second various personnel to the joint venture to assist in
the development of products. Thereafter, any additional funding will be
contributed equally.
- In October 1998, EMCORE formed Emtech, a joint venture with Optek
Technology, Inc., a packager and distributor of optoelectronic devices,
to market an expanded line of magneto resistive sensors to the automotive
and related industries. This joint venture combines EMCORE's expertise in
the manufacture of magneto resistive die and Optek's expertise in
packaging these die. This combination will allow us to offer customers
off-the-shelf products. No additional personnel are anticipated to meet
the obligations to the joint venture.
- In September 1998, EMCORE entered into an agreement with Lockheed Martin
to provide technical management and support for the commercialization of
a new high-efficiency solar cell. It is anticipated that we will provide
high efficiency solar cells to Lockheed Martin upon completion of the
research and development agreement. EMCORE's new facility in Albuquerque,
New Mexico, will provide the support necessary to meet our obligations
under this agreement.
- EMCORE also signed a four-year purchase agreement with AMP Incorporated
to provide high speed VCSELs, for use in transceivers for high speed
networks that link computers. The contract requires AMP to purchase a
minimum of 80% of their VCSEL needs from EMCORE. EMCORE's MODE facility
in Albuquerque, New Mexico, will produce the devices under this contract.
- In February 1998, EMCORE and Uniroyal Technology Corporation formed
Uniroyal Optoelectronics, a joint venture to manufacture, sell and
distribute HB LED wafers and package-ready devices. This joint venture
commenced operations in July 1998. EMCORE has invested $5.5 million in
Uniroyal Optoelectronics. Uniroyal Optoelectronics is hiring its own
administrative and management personnel. The impact on EMCORE's
operations will be limited to a few seconded employees who will continue
to be managed by EMCORE personnel.
- To expand its technology base into the data communications and
telecommunications markets, on December 5, 1997, EMCORE acquired MODE in
a stock transaction accounted for under the purchase method of accounting
for a purchase price of $32.8 million. These operations are located in
Albuquerque, New Mexico and currently employ approximately 40 people
including sales, marketing, administrative and manufacturing personnel.
Because we do not have a controlling economic and voting interest in the
Uniroyal, Union Miniere, Optek and General Electric Lighting joint ventures,
EMCORE will account for these joint ventures under the equity method of
accounting and, as such, our share of profits and losses will be included below
the operating income line in our statement of operations.
EMCORE sells its products and has generated a significant portion of its
sales to customers outside the United States. In fiscal 1996, 1997 and 1998,
international sales constituted 42.5%, 42.0% and 39.1%, respectively, of
revenues. In fiscal 1998, a majority of EMCORE's international sales were made
to customers in Asia, particularly in Japan. EMCORE's sales revenues from Europe
have fluctuated because most of our sales of TurboDisc systems are to a limited
number of customers, who do not purchase these systems regularly. EMCORE
anticipates that international sales will continue to account for a significant
portion of revenues. Historically, we have received all payments for products
and services in U.S. dollars. We do not anticipate that Europe's Euro-currency
conversion will have a material effect on our financial condition or results of
operations.
The information below summarizes EMCORE's export sales by geographic area.
EMCORE's export sales to the Far East and Europe are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, ASIA EUROPE TOTAL
- ------------------------ ---- ------ -----
<S> <C> <C> <C>
1996..................................................... $ 8,209,309 $3,588,066 $11,797,375
1997..................................................... 14,583,981 5,478,186 20,062,167
1998..................................................... 15,527,169 1,584,851 17,112,020
</TABLE>
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<PAGE> 20
RESULTS OF OPERATIONS:
The following table sets forth the Statement of Income Data of the
Company expressed as a percentage of total revenues for the fiscal years ended
September 30, 1996, 1997 and 1998.
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------------------
1996 1997 1998(*)
-------- -------- --------
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Cost of Sales 67.0 63.0 56.4
-------- -------- --------
Gross profit 33.0 37.0 43.6
Operating expenses:
Selling, general and administrative 23.5 19.6 32.2
Goodwill 8.3
Research and development 19.4 18.8
One-time acquired in-process 37.7
Recurring 44.6
-------- -------- --------
Operating loss (9.9) (1.4) (79.2)
Stated interest expense, net 1.1 1.1 2.2
Imputed warrant interest expense, non-cash 0.4 8.4 1.4
Equity in net loss of associated companies -- -- 0.4
-------- -------- --------
Loss before income taxes and extraordinary item (11.4) (10.9) (83.2)
Provision for income taxes -- 0.3 --
-------- -------- --------
Net loss before extraordinary item (11.4) (11.2) (83.2)
Extraordinary item -- (0.6) --
-------- -------- --------
Net loss before extraordinary item (11.4)% (11.8)% (83.2)%
======== ======== ========
</TABLE>
- --------------------
(*) as restated, see Note 20 to the consolidated financial statements.
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30, 1997 AND 1998
REVENUES
Revenues. EMCORE's revenues decreased 8.4% from $47.8 million for the
fiscal year ended September 30, 1997 to $43.8 million for the fiscal year ended
September 30, 1998. The revenue decrease represented a shift in product mix
during the year. Equipment related revenues decreased approximately 22.3% while
materials related revenues increased approximately 26.5%. The decrease in
equipment revenues was primarily attributable to the financial issues in the
Asian economies as well as a general slowdown in the semiconductor equipment
market overall. While materials related revenues did experience a 26.5%
increase, the General Motors three month strike adversely affected revenue, as
shipments to General Motors were halted during the strike. Revenues relating to
-20-
<PAGE> 21
TurboDisc systems were $34.1 million for the fiscal year ended September 30,
1997 and $26.5 million for the fiscal year ended September 30, 1998. Revenues
relating to wafers and devices were $13.7 million for the fiscal year ended
September 30, 1997 and $17.3 million for the fiscal year ended September 30,
1998. As a percentage of revenues, TurboDisc systems accounted for 71.4% for the
fiscal year ended September 30, 1997 and 60.5% for the fiscal year ended
September 30, 1998. As a percentage of revenues, wafers and devices accounted
for 28.6% for the fiscal year ended September 30, 1997 and 39.5% for the fiscal
year ended September 30, 1998. International sales accounted for approximately
42.0% and 39.1% of revenues for the fiscal years ended September 30, 1997 and
1998, respectively.
Cost Of Sales/Gross Profit. Cost of sales includes direct material and
labor costs, allocated manufacturing and service overhead, and installation and
warranty costs. Gross profit increased from 37.0% of revenue to 43.6% of revenue
for the fiscal years ended September 30, 1997 and 1998, respectively. The gross
profit percentage increase was attributable to a shift in product mix towards
higher gross margin materials related revenues.
Selling, General and Administrative. Selling, general and administrative
expenses increased by 50.7% from $9.3 million for the year ended September 30,
1997, to $14.1 million for the year ended September 30, 1998. The increase was
largely due to sales personnel headcount increases to support both domestic and
foreign markets and general headcount additions to sustain the internal
administrative support necessary for EMCORE's expanded product lines and new
locations. During fiscal 1998, EMCORE wrote-off a $1.0 million receivable due
from an Asian customer which was deemed to be uncollectible. As a percentage of
revenue, selling, general and administrative expenses increased from 19.6% of
revenue during fiscal 1997 to 32.2% of revenue for fiscal 1998. EMCORE believes
that selling, general and administrative expenses will decrease as a percentage
of revenues in fiscal 1999 as revenues increase.
Goodwill Amortization. In connection with the purchase of MODE, EMCORE
recorded goodwill of $13.2 million which is being amortized over 36 months.
Goodwill amortization expense amounted to $3.6 million for the year ended
September 30, 1998. Net goodwill at September 30, 1998 was $9.5 million.
Research and Development. Recurring research and development expenses
increased by 83.3% from $9.0 million for the year ended September 30, 1997, to
$16.5 million for the year ended September 30, 1998. The increase was primarily
attributable to EMCORE's acquisition of MODE and increased staffing and
equipment costs necessary to enhance current products and develop new product
offerings. Products introduced or under development include HB LEDs, high
efficiency solar cells, new generation TurboDisc production systems, VCSELs and
other optoelectronic devices. For the year ended September 30, 1998, EMCORE
incurred $1.1 million of research and development costs associated with MODE's
in-process (at the date of acquisition) research and development projects. As a
percentage of revenue, research and development expenses increased from 18.8% of
revenue during fiscal 1997 to 37.7% of revenue for fiscal 1998. To maintain
growth and market leadership in epitaxial technology, EMCORE expects to continue
to invest a significant amount of its resources in research and development.
In connection with the MODE acquisition, EMCORE incurred a one-time charge
for the write-off of acquired in-process research and development amounting to
$19.5 million.
The acquisition of MODE, a development stage company, constituted a
significant and strategic investment for EMCORE. The principal investment
consideration was to acquire and gain access to MODE's micro-optical technology,
which was under development at the time. EMCORE plans to use MODE's micro-
optical laser technology in new products for data communications and
telecommunications applications. As of
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<PAGE> 22
the date of acquisition, MODE was engaged in the following six significant VCSEL
research and development projects:
- Gigalase -- a high speed (modulation), near-infrared single optical
laser component for serial selica fiber optic applications.
- Visilase -- a visible, red light, single optical laser component to be
used for fiber optic links and optical storage and identification.
- Gigarray -- an array of optical lasers to be used in transmission in
parallel optical interconnects.
- Microscan -- an integrated near-infrared optical laser, visible laser
and focusing element.
- Optical Laser Source Module (OLSM) -- incorporates optical lasers and
fast detector specialized circuitry and electronics.
- Optical Laser Array Source Module (OLASM) -- incorporates optical
lasers, array detection and specialized circuitry and electronics.
The value assigned to each project and the estimated time and cost to reach
technological feasibility was as follows (in $000's):
<TABLE>
<CAPTION>
GIGALASE VISILASE GIGARRAY MICROSCAN OLSM OLASM
---------- ---------- ---------- --------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Value Assigned $6,509 $2,004 $7,214 $2,691 $ 934 $ 639
Original estimated 1.5 man 3 man 1 man 3.5 man 8 man 4 man
time to years years year years years years
complete
Original estimated $124 $249 $83 $290 $663 $332
cost to complete
Revised estimated Completed Completed Completed 3.5 man 8 man 4 man
time to 2/98 5/98 12/98 years years years
complete in not in in
production production production
Revised cost to Completed Completed Completed $314 $717 $358
complete
</TABLE>
The fair value assumptions relating to pricing, product margins and expense
levels were based upon management's experience with its own operations and the
compound semiconductor industry as a whole. In developing EMCORE's future
estimated revenues and costs, new product introductions were expected to
commence in calendar 1998 and net cash flows were expected to commence in
calendar 1999 and 2000. In determining fair value of the acquired projects, a
risk-adjusted discount rate of 20% was utilized. The Company has capitalized
approximately $0.5 million for MODE's workforce, which is included in Goodwill.
If all of MODE's in-process projects are not successfully completed and if
management's estimated product pricing and growth rates are not achieved, EMCORE
may not realize the product, market and financial benefits expected from the
MODE acquisition.
Operating Loss. During fiscal 1998, operating loss increased from a loss
of $0.7 million for the fiscal year ended September 30, 1997, to a loss of $34.6
million for the year ended September 30, 1998. The change in operating loss was
primarily due to the $19.5 million one-time charge for in-process research and
development written off in connection with the purchase of MODE. Additionally,
recurring research and development expense increased by $7.5 million from the
prior year, as a result of increased research and development activities at MODE
and in our core business. In addition, the General Motors three month strike
adversely affected operating performance as shipments to General Motors were
halted during the strike. General Motors is among EMCORE's largest customers.
EMCORE was unable to furlough or reduce their workforce during the strike and
thereby incurred charges without the benefit of related revenues.
Other Expense. Other expenses decreased, particularly due to the reduced
imputed warrant interest expense associated with EMCORE's subordinated debt and
debt issuance guarantee cost. During fiscal 1996, EMCORE issued detachable
warrants along with subordinated notes to certain of its existing shareholders.
In fiscal year 1997, EMCORE also issued detachable warrants in return for a
$10.0 million demand note facility guarantee by the Chairman of the Board of
EMCORE, who provided collateral for the facility. EMCORE subsequently assigned a
value to these detachable warrants issued using the Black-Scholes option pricing
model. EMCORE recorded the subordinated notes at a carrying value that is
subject to periodic accretions,
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<PAGE> 23
using the interest method, and reflected the facility's detachable warrant value
as debt issuance cost which was written off in its entirety in fiscal 1997. The
consequent expense of these subordinated note accretion amounts and the now
terminated facility's debt issuance cost is charged to "imputed warrant
interest, non-cash," and amounted to approximately $4.0 million and $370,000 for
the fiscal years ended September 30, 1997 and 1998, respectively. In June 1998,
EMCORE issued 284,684 warrants to its Chairman and its Chief Executive Officer
for providing a guarantee in connection with the 1998 Agreement, an $8.0 million
18 month credit facility with First Union National Bank. EMCORE assigned a value
to these warrants using the Black-Scholes option pricing model. As a result,
EMCORE will record imputed warrant interest, non-cash of approximately $1.3
million over the life of the credit facility.
Income Taxes. EMCORE's effective income tax rate was 0.0% in fiscal 1998,
2.5% in fiscal 1997 and 0.0% in fiscal 1996. The lower effective rate in fiscal
1998 and 1996, relative to fiscal 1997, was attributable to a federal income tax
benefit offset by net operating loss and expenses not utilized or deductible for
tax purposes.
As of September 30, 1998, EMCORE has net operating loss carryforwards for
regular tax purposes of approximately $22.0 million which expire in the years
2003 through 2013. EMCORE believes that the consummation of certain equity
transactions and a significant change in the ownership during fiscal year 1995
has constituted a change in control under Section 382 of the Internal Revenue
Code. Due to the change in control, EMCORE's ability to use its federal net
operating loss carryovers and federal research credit carryovers to offset
future income and income taxes, respectively, are subject to annual limitations
under Internal Revenue Code Section 382 and 383.
EMCORE believes that the acquisition of MODE and the consummation of
certain other equity transactions has constituted a change in control in fiscal
1998 under Section 382 of the Internal Revenue Code. As such, federal net
operating loss carryovers and research credit carryovers incurred subsequent to
EMCORE's fiscal 1995 change in control (as described above) will also be subject
to annual limitations under Internal Revenue Code Sections 382 and 383.
Extraordinary Item. In the fiscal year ended September 30, 1997, EMCORE
repaid $2.0 million of its outstanding subordinated notes due May 1, 2001. In
connection with this discharge of EMCORE's subordinated notes, an extraordinary
loss of $286,000 was recognized in fiscal 1997 relating to such early
extinguishment of debt.
Net Loss. Net loss increased from $5.6 million for the fiscal year ended
September 30, 1997, to $36.4 million for the fiscal year ended September 30,
1998. This increase was primarily attributable to the aforementioned acquisition
of MODE and subsequent write-off of in-process research and development of $19.5
million as well as an increase in recurring research and development expense of
approximately $7.5 million. In addition, the General Motors three month
prolonged strike adversely affected operating performance.
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30, 1996 AND 1997
Revenues. EMCORE's revenues for fiscal 1997 increased 71.9% from $27.8
million to $47.8 million for the fiscal year ended September 30, 1997. The
revenue increase was primarily attributable to increased demand for compound
semiconductor production systems and package-ready devices, as well as the
introduction of compound semiconductor wafer products. Revenues relating to
TurboDisc systems were $23.8 million for the fiscal year ended September 30,
1996 and $34.1 million for the fiscal year ended September 30, 1997. Revenues
relating to wafers and devices were $4.0 million for the fiscal year ended
September 30, 1996 and $14.7 million for the fiscal year ended September 30,
1997. As a percentage of revenues, TurboDisc systems accounted for 85.6% for the
fiscal year ended September 30, 1996 and 71.4% for the fiscal year ended
September 30, 1997. As a percentage of revenues, wafers and devices accounted
for 14.4% for the fiscal year ended September 30, 1996 and 28.6% for the fiscal
year ended September 30, 1997. International sales accounted for approximately
42.5% and 42.0% of revenues for the fiscal years ended September 30, 1996 and
1997, respectively.
Cost Of Sales/Gross Profit. Cost of sales includes direct material and
labor costs, allocated manufacturing and service overhead, and installation and
warranty costs. Gross profit increased from 33.0% of revenue to
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<PAGE> 24
37.0% of revenue for the fiscal years ended September 30, 1996 and 1997,
respectively. The gross profit percentage increase was attributable to higher
margins on wafer, device and licensing revenues.
Selling, General And Administrative. Selling, general and administrative
expenses increased by 43.3% from $6.5 million for the year ended September 30,
1996, to $9.3 million for the year ended September 30, 1997. The increase was
largely due to increases in sales personnel headcount to support both domestic
and foreign markets and general headcount additions to sustain the internal
administrative support necessary for EMCORE's increased business as well as
higher expenses attributable to increased revenues. As a percentage of revenue,
selling, general and administrative expenses decreased from 23.5% of revenue
during fiscal 1996 to 19.6% of revenue for fiscal 1997.
Research And Development. Research and development expenses increased by
66.6% from $5.4 million for the year ended September 30, 1996, to $9.0 million
for the year ended September 30, 1997. The increase was primarily attributable
to increased staffing and equipment costs necessary to enhance current products
and research and development activities related to wafers and package-ready
devices. As a percentage of revenue, research and development expenses decreased
from 19.4% of revenue during fiscal 1996 to 18.8% of revenue for fiscal 1997. To
maintain growth and market leadership in epitaxial technology, EMCORE expects to
continue to invest a significant amount of its resources in research and
development.
Operating Loss. During fiscal 1997, operating loss decreased $2.1 million
from a loss of $2.8 million for the fiscal year ended September 30, 1996, to a
loss of $0.7 million for the year ended September 30, 1997. The change in
operating loss was primarily due to higher revenues generating greater overall
gross profit.
Other Expense. During fiscal 1996, EMCORE issued detachable warrants along
with subordinated notes to certain of its existing shareholders. In the first
quarter of fiscal year 1997, EMCORE also issued detachable warrants in return
for the $10.0 million facility guarantee by the Chairman of the Board of EMCORE,
who provided collateral for the Facility. EMCORE subsequently assigned a value
to these detachable warrants issued using the Black-Scholes option pricing
model. EMCORE recorded the subordinated notes at a carrying value that is
subject to periodic accretions, using the interest method, and reflected the
facility's detachable warrant value as debt issuance cost. The consequent
expense of these subordinated note accretion amounts and the now terminated
facility's debt issuance cost is charged to "Imputed warrant interest,
non-cash," related to the warrant issuances in connection with the $10.0 million
facility, and amounted to approximately $126,000 and $4.0 million for the fiscal
years ended September 30, 1996 and 1997, respectively.
Borrowings totaling $8.0 million under the facility were utilized to fund
capital expenditures in connection with the build-out of EMCORE's manufacturing
facility during the six months ended March 31, 1997. The resultant interest
expense was the primary reason for the increase in "Stated interest expense" for
the year ended September 30, 1997. The outstanding $8.0 million under this
demand note facility was repaid in March 1997.
Extraordinary Item. EMCORE repaid $10.0 million of its outstanding debt
with proceeds from its initial public offering. The entire $8.0 million
outstanding of its Facility was repaid and $2.0 million was used to repay a
portion of EMCORE's outstanding subordinated notes due May l, 2001. In
connection with this discharge of EMCORE's subordinated notes, an extraordinary
loss of $286,000 was recognized in fiscal 1997 relating to such early
extinguishment of debt.
Net Loss. Net loss increased $2.4 million from $3.2 million for the fiscal
year ended September 30, 1996, to $5.6 million for the fiscal year ended
September 30, 1997. This increase was primarily attributable to the
aforementioned $4.0 million of non-cash imputed warrant interest associated with
certain financing transactions.
-24-
<PAGE> 25
OTHER SELECTED SEPTEMBER 30, 1998 INFORMATION
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by approximately $800,000 from $3.7
million at September 30, 1997, to $4.5 million at September 30, 1998. For the
year ended September 30, 1998, net cash used by operations amounted to $1.6
million, primarily due to the Company's net losses excluding the acquired
in-process research and development non-cash charge and increase in inventories
which was partially offset by the Company's non-cash depreciation and
amortization charges, its increase in accounts payable and advanced billings,
and its decrease in accounts receivable.
For the year ended September 30, 1998, net cash used in investment
activities amounted to $22.2 million primarily due to the purchase and
manufacture of new equipment for the Company's wafer and package ready device
product lines and clean room modifications and enhancements, as well as its
purchase of land and construction of a facility in Albuquerque, New Mexico to
be used for the manufacture of wafers and package ready devices.
On March 31, 1997, the Company entered into the 1997 Agreement, a $10.0
million revolving loan which bears interest at the rate of prime plus 50 basis
points (8.75% at September 30, 1998). As a result of the net loss for the
quarters ended June 30, 1998 and September 30, 1998, the Company was not in
compliance with the 1997 Agreement fixed charge coverage ratio covenant. The
Company received a waiver from the bank regarding this non-compliance. The
Company and the Bank amended the 1997 Agreement as of November 30, 1998 to,
among other things, extend the expiration until October 1, 1999 and modify
certain financial covenants. In addition, pursuant to the amendment of the 1997
Agreement, Thomas Russell, the Chairman of the Board of the Company became the
guarantor of this debt as the Company did not meet certain financial covenants
by May 15, 1999. On June 22, 1998, the Company entered into the 1998 Agreement,
an $8.0 million loan agreement with the Bank, which expires December 31, 1999.
The 1998 Agreement bears interest at a rate equal to one-month LIBOR plus
three-quarters of one percent per annum (6.4% at September 30, 1998). As of
September 30, 1998, the Company had borrowed approximately $10.0 million under
the 1997 Agreement and $8.0 million under the 1998 Agreement.
On September 17, 1998, the Company borrowed $7.0 million from its
Chairman, Thomas J. Russell. The loan bears interest at the prime rate plus
200 basis points (10.25% as of September 30, 1998) per annum. In addition, on
October 23, 1998 the Company borrowed an additional $1.5 million from its
Chairman on identical terms. The entire $8.5 million, borrowed from Thomas J.
Russell was repaid from the proceeds of the Private Placement. The Company
received a waiver from the Bank regarding the repayment of this debt.
Net cash provided by financing activities for the year ended September
30, 1998 amounted to approximately $24.6 million, primarily due to the
Company's proceeds of approximately $18.0 million from borrowings under the
1997 and 1998 Agreements and the $7.0 million note to the Company's Chairman.
The Company's operations are subject to a number of risks, including but
not limited to a history of net losses from operations, future capital needs,
dependence on key personnel, competition and risk of technological obsolescence,
governmental regulations and approvals, research and development results,
continued development of its compound semiconductor manufacturing and marketing
capabilities and a concentration of international sales in Asia. The Company's
operations for the year ended September 30, 1998, were primarily funded through
borrowings under existing credit facilities and short-term advances from the
Company's Chairman - aggregating $7.0 million as of September 30, 1998. The
Company's Chairman has from time to time provided credit enhancements in the
form of debt guarantees and has loaned the Company funds to support its
expansion and capital equipment requirements. The Company's Chief Executive
Officer has also provided credit enhancements in the form of debt guarantees for
the Company. Subsequent to September 30, 1998, the Company completed the Private
Placement, resulting in proceeds of $21.2 million. The Company repaid its
Chairman $8.5 million (including $1.5 million advanced to the Company subsequent
to September 30, 1998), invested approximately $5.6 million in two
unconsolidated ventures, reduced bank debt by $2 million and the balance of
approximately $5.0 million will be used for general working capital purposes. In
addition, the Company's $10.0 million credit facility was extended to October 1,
1999.
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<PAGE> 26
On February 1, 1999, EMCORE entered into a $5.0 million short-term note
with First Union. The note is due and payable in May 1999. The note bears
interest at a rate equal to one-month LIBOR plus three-quarters of one percent
per annum. On January 27, 1999, EMCORE borrowed $3.0 million from its Chairman,
Thomas J. Russell. The loan bears interest at 8% per annum. The loan was repaid
from borrowings under the First Union $5.0 million note. EMCORE's Chairman has
committed to provide up to $30.0 million of long-term financing to EMCORE
through July 1, 2000. This financing commitment terminates if the Company
completes a secondary offering of approximately $40 million.
On April 29, 1999, EMCORE borrowed $2.5 million from its Chairman of an
interest rate of prime plus two percent per annum. On May 7, EMCORE repaid this
loan from borrowings under the $19.0 million short-term note, described below.
On April 29, 1999, EMCORE entered into a $19.0 million short-term loan
agreement with First Union. This agreement represented a consolidation of the
$8.0 million loan agreement dated June 22, 1998 and the $5.0 million loan
agreement dated February 1, 1999 plus an additional $6.0 million of
availability. This agreement is due and payable October 1, 1999 and bears
interest at a rate equal to one-month LIBOR plus three quarters of one percent
per annum (5.75% at May 13, 1999). On May 7, 1999, EMCORE used borrowings under
the agreement to repay the $2.5 million borrowed from EMCORE's chairman.
EMCORE's planned capital expenditures are expected to total approximately
$26 million during fiscal 1999, including approximately $13.4 million in
expenditures related to investments in joint ventures. Capital spending in 1999
also is expected to include upgrading manufacturing facilities, continued
investment in analytical and diagnostic of research and development equipment,
upgrading and purchasing computer equipment and the manufacture of TurboDisc
systems for in-house use. As of September 30, 1998, we had approximately $2
million of commitments for capital expenditures. These commitments were received
and paid for during the quarter ended December 31, 1998.
The Company's operating plans include, among other things attempting to
improve (i) operating cash flow through increased sales of compound
semiconductor systems, wafers and package-ready devices and (ii) managing its
cost structure in relation to its anticipated level of revenues. The Company
believes that its current liquidity, together with available credit facilities,
the proceeds from the Private Placement and the Chairman's commitment, should be
sufficient to meet its cash needs for working capital through fiscal 1999.
However, if the proceeds from the Private Placement, cash generated from
operations, the Chairman's commitment and cash on hand are not sufficient to
satisfy the Company's liquidity requirements, the Company will seek to obtain
additional equity or debt financing. Additional funding may not be available
when needed or on terms acceptable to the Company. If the Company is required to
raise additional financing and if adequate funds are not available or are not
available on acceptable terms, the ability to continue to fund expansion,
develop and enhance products and services, or otherwise respond to competitive
pressures would be severely limited. Such a limitation could have a material
adverse effect on the Company's business, financial condition or operations.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept or recognize only two digit entries in the date code field. These
systems and software products will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and/or software used by many companies and governmental agencies may
need to be upgraded to comply with such Year 2000 requirements or risk system
failure or miscalculations causing disruptions of normal business activities.
-26-
<PAGE> 27
State Of Readiness. EMCORE has made a preliminary assessment of the Year
2000 readiness of its operating financial and administrative systems, including
the hardware and software that support such systems. EMCORE's assessment plan
consists of
(1) quality assurance testing of its internally developed proprietary
software;
(2) contacting third-party vendors and licensors of material hardware,
software and services that are both directly and indirectly
related to EMCORE's business;
(3) contacting vendors of third-party systems;
(4) assessing repair or replacement requirements;
(5) implementing repair or replacement; and
(6) creating contingency plans in the event of Year 2000 failures.
Our compound semiconductor wafers and devices are date insensitive and,
therefore, do not have any Year 2000 issues associated with them. Our TurboDisc
production systems have several components that could give rise to Year 2000
compliance concerns. We have preliminarily assessed the Year 2000 issues
associated with these components and have found that they have either been
certified by the vendor to be compliant or are date insensitive.
Our principal concern has been the status of our operating, financial and
administrative systems. These systems include accounting and production control
software at our New Jersey, MODE and EmcoreWest facilities. All software has
been certified as Year 2000 compliant by the vendors, except our New Jersey
office's accounting software. However, the software's manufacturer has a new
version of the software that is Year 2000 compliant. We are planning this
upgrade. The upgrade will be installed and tested by June 1999.There are other
information technology systems and non-information technology systems that could
give rise to Year 2000 concerns. These include scientific and engineering
applications, desktop applications (such as Microsoft Word and Excel) and
facilities controls such as HVAC and security. A review of these systems leads
us to believe that the systems are Year 2000 compliant, are not critical to
business operations, are used on a limited basis or are date insensitive.
We are continuing the evaluation of the Year 2000 compliance of all our
systems and have developed an enterprise-wide database that we will use to
document these Year 2000 issues. EMCORE plans to complete its evaluation by
September 30, 1999 including Year 2000 simulation on its systems during the
second and third quarter of calendar 1999 to test systems readiness.
Costs. To date, EMCORE has not incurred any material expenditures in
connection with identifying, evaluating or addressing Year 2000 compliance
issues. Most of EMCORE expenses have related to, and are expected to continue to
relate to, the operating costs associated with time spent by employees in the
evaluation process and Year 2000 compliance matters generally.
The exact costs related to Year 2000 compliance are difficult to determine.
Several known costs relating to our information technology systems are:
- Updating New Jersey's accounting system, 2 man-weeks or $4,000, and
- Reviewing software and completing Year 2000 database, 1 man-month or
$8,000.
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<PAGE> 28
We will be able to make a reasonable determination of the remediation costs
for Year 2000 compliance after we have completed our Year 2000 evaluation. At
present EMCORE believes that the costs for bringing our in-house information
technology systems into compliance should not exceed $200,000.
EMCORE does not anticipate that remediation expenses will be material. If the
remediation expenses are higher than anticipated EMCORE's business, financial
condition and results of operations could be materially and adversely affected.
Risks. EMCORE is not currently aware of any Year 2000 compliance problems
relating to its systems that would have a material adverse effect on EMCORE's
business, results of operations and financial condition. There can be no
assurance that, upon completion of its evaluation, EMCORE will not discover Year
2000 compliance problems in its systems that will require substantial revision.
In addition, there can be no assurance that third-party software, hardware or
services incorporated into EMCORE's material systems will not need to be revised
or replaced, all of which could be time-consuming and expensive. The failure of
EMCORE to fix or replace its internally developed proprietary software or
third-party software, hardware or services on a timely basis could result in
lost revenues, increased operating costs, the loss of customers and other
business interruptions, any of which could have a material adverse effect on
EMCORE's business, result of operations and financial condition. Moreover, the
failure to adequately address Year 2000 compliance issues in its internally
developed proprietary software could result in claims of mismanagement,
misrepresentation or breach of contract and related litigation, which could be
costly and time-consuming to defend. In addition, the failure of governmental
agencies, utility companies, third-party service providers and others outside of
EMCORE's control to be Year 2000 compliant could result in systemic failure
beyond EMCORE's control such as a telecommunications or electrical failure,
which could have a material adverse effect on EMCORE's business, results of
operations and financial condition.
Contingency Plan. As discussed above, EMCORE is engaged in an ongoing Year
2000 assessment and has not yet developed any contingency plans. The results of
EMCORE's Year 2000 simulation testing and the responses received from
third-party vendors and service providers will be taken into account in
determining the nature and extent of any contingency plans.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS No. 131"), which
establishes standards for reporting information about operating segments in
annual financial statements. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS No. 131 is effective for fiscal years beginning after December 15, 1997.
EMCORE will be required to adopt this standard in its fiscal year ending
September 30, 1999. The adoption of SFAS No. 131 is not expected to have an
impact on EMCORE's results of operations, financial position or cash flows.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-l, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
is effective for financial statements for years beginning after December 14,
1998. SOP 98-l provides guidance over accounting for computer software developed
or obtained for internal use including the requirement to capitalize specified
costs and amortization of such costs. EMCORE does not expect the adoption of
this standard to have a material effect on results of operations, financial
position or cash flows.
In June of 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and requires recognition of all
derivatives as assets or liabilities in the statement of financial position and
measurement of these instruments at fair value. The statement is effective for
fiscal years beginning after June 15, 1999. Management believes that adopting
this statement will not have a material impact on the financial position,
results of operations, or cash flows of the Company.
-28-
<PAGE> 29
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on
the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5, which is effective for
fiscal years beginning after December 15, 1998, provides guidance on the
financial reporting of start-up costs and organization costs. It requires costs
of start-up activities and organization costs to be expensed as incurred. As
EMCORE has expensed these costs historically, the adoption of this standard is
not expected to have a significant impact on EMCORE's results of operations,
financial position or cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During fiscal 1998, the Company was not a party to any derivative
contracts, hedging or other market risk transactions.
-29-
<PAGE> 30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
EMCORE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
---------------------------
1997 1998
(AS RESTATED
SEE NOTE 20)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 3,653,145 $ 4,455,836
Restricted cash........................................... 312,500 62,500
Accounts receivable, net of allowance for doubtful
accounts of approximately $697,000 and $611,000 at
September 30, 1997 and September 30, 1998,
respectively............................................ 8,439,704 7,437,822
Accounts receivable -- related parties.................... 2,500,000 500,000
Inventories, net.......................................... 7,185,626 12,445,326
Costs in excess of billings on uncompleted contracts...... -- 77,531
Prepaid expenses and other current assets................. 120,393 130,075
------------ ------------
Total current assets.................................... 22,211,368 25,109,090
Property, plant and equipment, net.......................... 16,797,833 36,209,831
Goodwill, net............................................... -- 9,519,000
Investments in unconsolidated affiliates.................... 291,504
Other assets, net........................................... 453,608 2,090,219
------------ ------------
Total assets............................................ $ 39,462,809 $ 73,219,644
============ ============
Current liabilities:
Note payable -- related party............................. $ -- $ 7,000,000
Accounts payable.......................................... 4,050,216 12,022,628
Accrued expenses.......................................... 3,867,589 4,197,405
Advanced billings......................................... 1,998,183 3,180,370
Capitalized lease obligation -- current................... 15,030 673,036
Other current liabilities................................. 124,279 52,778
------------ ------------
Total current liabilities............................... 10,055,297 27,126,217
Long-term debt:
Bank loans................................................ -- 17,950,000
Subordinated notes, net................................... 7,499,070 7,808,772
Capitalized lease obligation, net of current portion...... 77,870 754,517
Other liabilities......................................... -- --
------------ ------------
Total liabilities....................................... 17,632,237 53,639,506
------------ ------------
Shareholders' equity:
Preferred stock, $.0001 par value, 5,882,353 shares
authorized, no shares outstanding in both periods......... -- --
Common stock, no par value, 23,529,411 shares authorized,
6,000,391 and 9,375,952 issued and outstanding September
30, 1997 and September 30, 1998, respectively............. 45,816,774 87,443,237
Accumulated deficit......................................... (23,777,658) (60,196,454)
Notes receivable from warrant issuances and stock sales..... (208,544) (7,666,645)
------------ ------------
Total shareholders' equity.............................. 21,830,572 19,580,138
------------ ------------
Total liabilities and shareholders' equity................ $ 39,462,809 $ 73,219,644
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-30-
<PAGE> 31
EMCORE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
----------------------------------------
1996 1997 1998
(AS RESTATED
SEE NOTE 20)
<S> <C> <C> <C>
Revenues:
Systems and materials..................................... $24,066,506 $46,591,662 $ 42,820,791
Services.................................................. 3,712,379 1,160,910 939,192
----------- ----------- ------------
Total revenues.......................................... 27,778,885 47,752,572 43,759,983
Cost of sales:
Systems and materials..................................... 16,121,938 29,309,898 24,148,783
Services.................................................. 2,484,482 784,117 526,706
----------- ----------- ------------
Total cost of sales..................................... 18,606,420 30,094,015 24,675,489
----------- ----------- ------------
Gross profit............................................ 9,172,465 17,658,557 19,084,494
----------- ----------- ------------
Operating expenses:
Selling, general and administrative....................... 6,524,482 9,346,329 14,082,438
Goodwill amortization..................................... 3,637,941
Research and development -- recurring..................... 5,401,413 9,001,188 16,494,888
Research and development -- one-time acquired in-process,
non-cash................................................ -- -- 19,516,000
----------- ----------- ------------
Total operating expenses............................ 11,925,895 18,347,517 53,731,267
----------- ----------- ------------
Operating loss.......................................... (2,753,430) (688,960) (34,646,773)
----------- ----------- ------------
Other expenses:
Stated interest, net of interest income of $71,000,
$237,000, and $448,000 for the years ended September 30,
1996, 1997 and 1998, respectively....................... 297,093 519,422 972,992
Imputed warrant interest expense, non-cash................ 125,791 3,988,390 600,536
Equity in net loss of unconsolidated affiliate............ -- -- 198,495
----------- ----------- ------------
Loss before income taxes and extraordinary item......... (3,176,314) (5,196,772) (36,418,796)
Provision for income taxes.................................. -- 137,000 --
----------- ----------- ------------
Net loss before extraordinary item...................... (3,176,314) (5,333,772) (36,418,796)
Extraordinary item -- loss on early extinguishment of
debt...................................................... -- 285,595 --
----------- ----------- ------------
Net loss................................................ $(3,176,314) $(5,619,367) $(36,418,796)
=========== =========== ============
Per share data:
Weighted average basic and diluted shares used in per
share data calculations................................. 2,994,466 4,668,822 8,775,270
Net loss per basic and diluted share before extraordinary
item...................................................... $ (1.06) $ (1.14) $ (4.15)
=========== =========== ============
Net loss per basic and diluted share........................ $ (1.06) $ (1.20) $ (4.15)
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-31-
<PAGE> 32
EMCORE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997, 1998
<TABLE>
<CAPTION>
COMMON STOCK SHAREHOLDERS' TOTAL
------------------------ ACCUMULATED NOTES SHAREHOLDERS'
SHARES AMOUNT DEFICIT RECEIVABLE EQUITY
---------- ----------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1995....................... 2,994,461 $16,637,566 $(14,981,977) $ (146,107) $ 1,509,482
Issuance of common stock purchase warrants.......... -- 2,340,000 2,340,000
Notes receivable due from shareholders in connection
with issuance of detachable warrants.............. (151,579) (151,579)
Net loss............................................ (3,176,314) (3,176,314)
---------- ----------- ------------ ----------- ------------
BALANCE AT SEPTEMBER 30, 1996....................... 2,994,461 18,977,566 (18,158,291) (297,686) 521,589
Issuance of common stock purchase warrants.......... 3,601,455 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 22,764,655
Issuance of common stock on exercise of warrants.... 94,124 384,027 384,027
Issuance of common stock on exercise of stock
options........................................... 34,965 53,640 53,640
Redemptions of notes receivable from shareholders... 31,842 31,842
Forgiveness of notes receivable from shareholder.... 57,300 57,300
Compensatory stock issuances........................ 1,841 35,431 35,431
Net loss............................................ (5,619,367) (5,619,367)
---------- ----------- ------------ ----------- ------------
BALANCE AT SEPTEMBER 30, 1997....................... 6,000,391 45,816,774 (23,777,658) (208,544) 21,830,572
Issuance of common stock purchase warrants.......... 1,309,546 1,309,546
Issuance of common stock on exercise of warrants in
exchange for notes receivable..................... 1,827,966 7,458,101 (7,458,101) --
Issuance of common stock and common stock purchase
options and warrants in connection with the
acquisition of MODE............................... 1,461,866 32,329,000 32,329,000
Stock option exercise............................... 35,809 83,486 83,486
Stock purchase warrant exercise..................... 5,660 23,092 23,092
Issuance of common stock on exercise of warrants in
exchange for subordinated notes................... 17,605 71,841 71,841
Compensatory stock issuances........................ 26,655 351,397 351,397
Net loss (as restated).............................. (36,418,796) (36,418,796)
---------- ----------- ------------ ----------- ------------
BALANCE AT SEPTEMBER 30, 1998 (as restated)......... 9,375,952 87,443,237 (60,196,454) (7,666,645) 19,580,138
========== =========== ============ =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-32-
<PAGE> 33
EMCORE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------------------
1996 1997 1998
(AS RESTATED
SEE NOTE 20)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $ (3,176,314) $ (5,619,367) $(36,418,796)
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities:
Acquired in-process research and development, non-cash.... -- -- 19,516,000
Depreciation and amortization............................. 1,871,016 3,187,755 8,767,105
Provision for doubtful accounts........................... 146,418 515,000 1,118,000
Provision for inventory valuation......................... 105,000 120,000 120,000
Detachable warrant accretion and debt issuance cost
amortization............................................ 125,792 3,988,390 600,536
Extraordinary loss on early extinguishment of debt........ -- 285,595 --
Equity in net loss of an unconsolidated affiliate......... -- -- 198,495
Compensatory stock issuances.............................. -- 35,431 351,397
Write-off note receivable due from shareholder............ -- 57,300
----
Change in assets and liabilities:
Accounts receivable -- trade.............................. (1,041,956) (5,929,533) 1,882
Accounts receivable -- related party...................... -- (2,500,000) 2,000,000
Inventories............................................... (4,410,566) 339,414 (5,243,187)
Costs in excess of billings on uncompleted contracts...... (2,882) 19,322 (77,531)
Prepaid expenses and other current assets................. (26,784) (60,458) 12,632
Other assets.............................................. (468,565) 27,568 (623,775)
Accounts payable.......................................... 3,398,078 (2,029,154) 7,949,760
Accrued expenses.......................................... 777,899 1,880,943 (970,148)
Advanced billings......................................... 1,122,667 (1,308,279) 1,182,187
Billings in excess of costs on uncompleted contracts...... (306,359) -- --
Unearned service revenue.................................. 12,315 111,964 (71,501)
------------ ------------ ------------
Total adjustments........................................... 1,302,073 (1,258,742) 34,831,852
------------ ------------ ------------
Net cash and cash equivalents used for operating
activities................................................ (1,874,241) (6,878,109) (1,586,944)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant, and equipment................ (7,090,869) (11,631,642) (22,132,071)
Acquisition, cash acquired................................ -- -- 192,799
Investments in unconsolidated affiliates.................. -- -- (490,000)
(Funding) payments of restricted cash..................... -- (312,500) 250,000
------------ ------------ ------------
Net cash and cash equivalents used for investing
activities................................................ (7,090,869) (11,944,142) (22,179,272)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering, net of issuance
cost of $3,110,345...................................... -- 22,764,655 --
Proceeds (payments) under bank loans...................... -- 8,000,000 17,950,000
Proceeds (payments) from notes payable, related party,
net..................................................... -- -- 7,000,000
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......... -- 85,121 23,092
Proceeds from exercise of stock options................... -- 53,640 83,486
Payments on capital lease obligations..................... (3,000,000) (5,723) (487,671)
Reduction in notes receivable from shareholders........... -- 210,317 --
------------ ------------ ------------
Net cash and cash equivalents provided by financing
activities................................................ 8,009,600 21,108,010 24,568,907
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents........ (955,510) 2,285,759 802,691
Cash and cash equivalents at beginning of period............ 2,322,896 1,367,386 3,653,145
------------ ------------ ------------
Cash and cash equivalents at end of period.................. $ 1,367,386 $ 3,653,145 $ 4,455,836
============ ============ ============
</TABLE>
-33-
<PAGE> 34
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------------------
1996 1997 1998
(AS RESTATED
SEE NOTE 20)
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest...................................... $ 276,000 $ 600,000 $ 1,347,000
Cash paid for income taxes.................................. 55,000 -- --
NONCASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued on the exercise of warrants in exchange
for subordinated notes.................................... -- -- $ 71,841
Issuance of common stock on the exercise of warrants in
exchange for notes receivable............................. -- -- $ 7,458,101
Issuance of common stock, and common stock purchase options
and warrants in connection with the acquisition of
MicroOptical Devices, Inc................................. -- -- $ 32,329,003
</TABLE>
Reference is made to Note 8 -- Debt Facilities -- for disclosure relating to
certain non-cash warrant issuance.
The accompanying notes are an integral part of these consolidated financial
statements.
-34-
<PAGE> 35
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS
EMCORE is a designer and developer of compound semiconductor materials and
process technology and a manufacturer of production systems used to fabricate
compound semiconductor wafers. Compound semiconductors are used in a broad range
of applications in wireless communications, telecommunications, computers, and
consumer and automotive electronics. The Company has recently capitalized on its
technology base by expanding into the design and production of compound
semiconductor wafers and package-ready devices and under specific arrangements
has licensed certain process technologies. During fiscal 1998, the Company
completed the acquisition of a development stage company focused on the research
and development of optical laser technologies (see Note 3). The Company offers
its customers a complete, vertically-integrated solution for the design,
development and production of compound semiconductor wafers and devices.
Basis of Presentation and Liquidity. The accompanying financial statements
have been prepared on a going concern basis. The Company for the year ended
September 30, 1998, experienced an 8% decline in revenue of approximately $4.0
million and a substantial operating loss amounting to approximately $34.6
million (approximately $15.1 million excluding the effect of acquired in-process
research and development) and had a working capital deficiency of $2.0 million.
The Company's operations are subject to a number of risks, including but
not limited to a history of net losses from operations, future capital needs,
dependence on key personnel, competition and risk of technological obsolescence,
governmental regulations and approvals, technology research and development
results, continued development of its compound semiconductor manufacturing and
marketing capabilities and a concentration of international sales in Asia. The
Company's operations for the year ended September 30, 1998 were primarily funded
through borrowings under existing credit facilities and short-term advances from
the Company's Chairman -- aggregating $7.0 million as of September 30, 1998. The
Company's Chairman has from time to time provided credit enhancements in the
form of debt guarantees and has loaned the Company funds to support its
expansion and capital equipment requirements. The Company's Chief Executive
Officer has also provided credit enhancement in the form of debt guarantees for
the Company. On November 30, 1998, the Company completed a preferred stock
private placement (the "Private Placement" see Note 17), resulting in net
proceeds of $21.2 million. The Company repaid its Chairman $8.5 million
(including $1.5 million advanced to the Company subsequent to September 30,
1998), invested approximately $5.6 million in two unconsolidated ventures, used
$2 million to repay debt and the balance is being used for general working
capital purposes. In addition, the Company's $10.0 million credit facility was
extended to October 1, 1999. The Company's Chairman has committed to provide the
Company with $30 million of long-term financing through July 1, 2000. The
Chairman's financing commitment terminates if the Company completes a secondary
offering of approximately $40.0 million. The Company's operating plans include,
among other things attempting to improve (i) operating cash flow through
increased sales of compound semiconductor systems, wafers and package-ready
devices and (ii) managing its cost structure in relation to its anticipated
level of revenues. The Company believes that its current liquidity, together
with available credit facilities and the proceeds from the Private Placement,
should be sufficient to meet its cash needs for working capital through fiscal
1999. If the working capital generated from the Private Placement and cash
generated from operations is not sufficient to satisfy the Company's liquidity
requirements, the Company will seek to obtain additional equity or debt
financing. Additional funding may not be available when needed or on terms
acceptable to the Company. If the Company is required to raise additional
financing and if adequate funds are not available or are not available on
acceptable terms, the ability to continue to fund expansion, develop and enhance
products and services, or otherwise respond to competitive pressures would be
severely limited. Such a limitation could have a material adverse effect on the
Company's business, financial condition or operations and the financial
statements do not include any adjustment that could result therefrom.
-35-
<PAGE> 36
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiary. The equity method
of accounting is used for unconsolidated affiliates in which the Company's
equity is at least 20% and not more than 50%. All significant intercompany
transactions are eliminated upon consolidation.
Cash and Cash Equivalents. The Company considers all highly liquid
short-term investments purchased with an original maturity of three months or
less to be cash equivalents. The Company had approximately $2.3 million and $3.0
million in cash equivalents at September 30, 1997 and 1998, respectively. As of
September 30, 1998, the Company had restricted cash in the amount of $62,500 due
to a contractual obligation.
Inventories. Inventories are stated at the lower of FIFO (first-in,
first-out) cost or market. Reserves are established for slow moving or obsolete
inventory based upon historical and anticipated usage.
Property and Equipment. Property and equipment are stated at cost.
Significant renewals and betterments are capitalized. Maintenance and repairs
which do not extend the useful lives of the respective assets are expensed.
Depreciation is recorded using the straight-line method over the estimated
useful lives of the applicable assets, which range from three to five years.
Leasehold improvements are amortized using the straight-line method over the
term of the related leases or the estimated useful lives of the improvements,
whichever is less. Depreciation expense includes the amortization of capital
lease assets. When assets are retired or otherwise disposed of, the assets and
related accumulated depreciation accounts are adjusted accordingly, and any
resulting gain or loss is recorded in current operations.
Long-Lived Assets. The carrying amount of assets is reviewed on a regular
basis for the existence of facts or circumstances, both internally and
externally, that suggest impairment. To date no such impairment has been
indicated. The Company determines if the carrying amount of a long-lived asset
is impaired based on anticipated undiscounted cash flows before interest. In the
event of an impairment, a loss is recognized based on the amount by which the
carrying amount exceeds fair value of the asset. Fair value is determined
primarily using the anticipated cash flows before interest, discounted at a rate
commensurate with the risk involved.
Deferred Costs. Included in other assets are deferred costs related to
obtaining product patents and debt issuance costs and an investment in an
unconsolidated affiliate. Total amortization expense amounted to approximately
$128,000, $40,000 and $79,000 for the years ended September 30, 1996, 1997 and
1998, respectively. During the year ended September 30, 1998, the Company issued
284,684 common stock purchase warrants in exchange for the guaranteeing of a
credit facility by the Company's Chairman and Chief Executive Officer. The
warrants were assigned a value of $1,310,000 which is being amortized over the
eighteen month term of the facility. The warrants were valued by the Company
based upon its application of the Black Scholes Option Pricing Model ("Black
Scholes"). Amortization expense related to such warrant issuance amounted to
approximately $219,000 for fiscal 1998.
Goodwill. Goodwill is amortized using the straight-line method over three
years. The Company, as applicable, evaluates whether there has been a permanent
impairment in the value of goodwill. Any impairment would be recognized when the
sum of expected undiscounted cash flows derived from the acquired business is
less than its carrying value.
Income Taxes. The Company recognizes deferred taxes by the asset and
liability method of accounting for income taxes. Under the asset and liability
method, deferred income taxes are recognized for differences between the
financial statement and tax bases of assets and liabilities at enacted statutory
tax rates in effect for the years in which the differences are expected to
reverse. The effect on deferred taxes of a change in tax rates is recognized in
income in the period that includes the enactment date. In addition, valuation
allowances are
-36-
<PAGE> 37
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
established when necessary to reduce deferred tax assets to the amounts expected
to be realized. The primary sources of temporary differences are depreciation
and amortization of intangible assets.
Revenue and Cost Recognition -- Systems, Components and Service
Revenues. Revenue from systems sales is recognized upon shipment, when title
passes to the customer. Subsequent to product shipment, the Company incurs
certain installation costs at the customer's facility and warranty costs which
are estimated and accrued at the time the sale is recognized. Component sales
and service revenues are recognized when goods are shipped or services are
rendered to the customer. Service revenue under contracts with specified service
terms is recognized as earned over the service period in accordance with the
terms of the applicable contract. Costs in connection with the procurement of
the contracts are charged to expense as incurred.
Revenue and Cost Recognition -- Contract Revenue. The Company's research
contracts require the development or evaluation of new materials applications
and have a duration of six to thirty-six months. For research contracts with the
U.S. Government and commercial enterprises with durations greater than six
months, the Company recognizes revenue to the extent of costs incurred plus the
estimated gross profit as stipulated in such contracts, based upon contract
performance. Contracts with a duration of six months or less are accounted for
on the completed contract method. A contract is considered complete when all
costs, except insignificant items, have been incurred, and the research
reporting requirements to the customer have been met. Contract costs include all
direct material and labor costs and those indirect costs related to contract
performance, such as indirect labor, supplies, tools, repairs and depreciation
costs, as well as coverage of certain general and administrative costs.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined. Revenues from contracts amounted to
approximately $3,295,000, $614,000 and $438,000 for the years ended September
30, 1996, 1997 and 1998, respectively.
Research and Development. Research and development costs related to the
development of both present and future products and Company-sponsored materials
application research are charged to expense as incurred. In connection with the
acquisition of MicroOptical Devices, Inc. ("MODE"), the Company recorded a
charge of $19,516,000 for acquired in-process research and development.
Fair Value of Financial Instruments. The Company estimates the fair value
of its financial instruments based upon discounted cash flow analyses using the
Company's incremental borrowing rate on similar instruments as the discount
rate. As of September 30, 1998, the fair value of the Company's subordinated
notes exceeded the carrying value of such instruments by approximately $830,000.
As of September 30, 1998, the carrying values of the Company's cash and cash
equivalents, receivables, accounts payable and variable rate based debt as
reflected on the Company's accompanying balance sheet approximates fair value.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements. Estimates also affect the reported amounts of revenues
and expenses during the reporting period. Actual results may differ from those
estimates. The Company's most significant estimates relate to acquired
in-process research and development, accounts receivable and inventory valuation
reserves, warranty and installation accruals, estimates of cost and related
gross profits on certain research contracts and the valuation of long-lived
assets.
Net Loss Per Share. The Company accounts for earnings per share under the
provisions of Statement of Financial Accounting Standards No. 128 "Earnings per
Share" ("SFAS No. 128"). Basic and diluted earnings per share calculated
pursuant to SFAS No. 128 have been restated for all periods presented to give
effect to the Securities and Exchange Commission's Staff Accounting Bulletin No.
98 which eliminated certain computational requirements of Staff Accounting
Bulletin No. 64.
-37-
<PAGE> 38
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Basic earnings per common share was calculated by dividing net loss by the
weighted average number of common stock shares outstanding during the period.
Diluted earnings per share was calculated by dividing net loss by the sum of the
weighted average number of common shares outstanding plus all additional common
shares that would have been outstanding if potentially dilutive common shares
had been issued. The following table reconciles the number of shares utilized in
the Company's earnings per share calculations.
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
----------------------------------------
1996 1997 1998
<S> <C> <C> <C>
Net loss.................................................... $(3,176,314) $(5,619,367) $(36,418,796)
----------- ----------- ------------
Loss per common share -- basic.............................. $ (1.06) $ (1.20) $ (4.15)
=========== =========== ============
Loss per common share -- diluted............................ $ (1.06) $ (1.20) $ (4.15)
=========== =========== ============
Common shares -- basic...................................... 2,994,466 4,668,822 8,775,270
Effect of dilutive securities:
Stock options and warrants.................................. -- -- --
Common shares -- diluted.................................... 2,994,466 4,668,822 8,775,270
</TABLE>
- -------------------------
The effect of outstanding common stock purchase options and warrants have been
excluded from the Company's earnings per share calculation since the effect of
such securities is anti-dilutive.
Reclassifications. Prior period balances have been reclassified to conform
with the current period financial statement presentation.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131 "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS No. 131"), which
establishes standards for reporting information about operating segments in
annual financial statements. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The Company will be required to adopt this standard in its fiscal year ended
September 30, 1999. The adoption of SFAS No. 131 will not have an impact on the
Company's results of operations, financial position or cash flows.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
is effective for financial statements for years beginning after December 15,
1998. SOP 98-1 provides guidance over accounting for computer software developed
or obtained for internal use, including the requirement to capitalize specified
costs and amortization of such costs. The Company does not expect the adoption
of this standard to have a material effect on its results of operations,
financial position or cash flows.
In April 1998, AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities" ("SOP 98-5"). SOP 98-5, which is effective for fiscal years
beginning after December 15, 1998, provides guidance on the financial reporting
of start-up costs and organization costs. It requires costs of start up
activities and organization costs to be expenses as incurred. The adoption of
this standard is not expected to have a significant impact on its results of
operations, financial position or cash flows.
In June of 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and requires recognition of all
derivatives as assets or liabilities in the statement of financial position and
measurement of these instruments at fair value. The statement is effective for
fiscal years beginning after June 15, 1999. Management believes that adopting
this statement will not have a material impact on the financial position,
results of operations, or cash flows of the Company.
-38-
<PAGE> 39
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. ACQUISITION
On December 5, 1997, the Company acquired all of the outstanding capital
stock of MODE in exchange for 1,461,866 shares of EMCORE common stock, 200,966
common stock purchase options (exercise prices ranging from $0.43 to $0.59), and
47,118 common stock purchase warrants (exercise prices ranging from $4.32 to
$5.92). The purchase price was approximately $32,829,000 including direct
acquisition costs of approximately $500,000. The acquisition of MODE was
recorded using the purchase method of accounting. Accordingly, the results of
operations of the acquired business and the fair values of the acquired tangible
and intangible assets and assumed liabilities have been included in the
Company's financial statements as of December 5, 1997. The allocation of the
fair value of the net assets acquired is as follows:
<TABLE>
<S> <C>
Net tangible assets......................................... $ 156,000
Goodwill.................................................... 13,157,000
Acquired in process research and development................ 19,516,000
-----------
Total purchase price...................................... $32,829,000
===========
</TABLE>
The common stock issued in connection with the MODE acquisition was valued
based upon the average closing price of the Company's common stock for the five
days before and after the announcement date of the acquisition. The assumed MODE
options and warrants were valued using Black-Scholes and such values amounted to
approximately $3,761,000 and $793,000, respectively.
The MODE options have a term of 10 years from the date of grant, with such
options expiring at various dates through July 2007. The options vest, with
continued service, over a four-year period; 25% in year one and 75% equally over
the remaining 36 months. The warrants have a term of 10 years from the date of
grant, were exercisable upon grant, and expire at various dates through May
2007.
MODE was a development stage company (incorporated in August 1995) and had
18 employees at the date of acquisition. MODE's activities were substantially
dedicated towards the research and development of optical laser devices at the
date of acquisition.
Management is responsible for estimating the fair value of the acquired
in-process research and development. As of the date of acquisition, MODE had six
primary micro-optical laser research and development projects in-process, which
had not reached technological feasibility. MODE's in-process research and
development related to new technologies, the fair value assumptions relating to
pricing, product margins and expense levels were based upon management's
experience with its own operations and the compound semiconductor industry as a
whole.
The Company allocated $475,000 of the purchase price to the acquired
workforce of MODE which is included in the approximately $13.2 million of
goodwill discussed above. The amount allocated to goodwill is being amortized
over a period of three years.
-39-
<PAGE> 40
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following unaudited pro forma basis financial information reflects the
combined results of operations of the Company and MODE, as if MODE had been
acquired as of October 1, 1996 and October 1, 1997, respectively, but does not
reflect the non-recurring write-off of the acquired in-process research and
development. The summary includes the impact of certain adjustments, such as
goodwill amortization and the number of shares outstanding.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------
1997 1998
(UNAUDITED)
<S> <C> <C>
Revenue..................................................... $ 48,313,000 $ 43,860,000
Net loss before extraordinary item.......................... (12,219,000) (18,344,000)
Net loss.................................................... (12,505,000) (18,344,000)
Net loss basic and diluted per share........................ $(2.04) $(2.09)
</TABLE>
The unaudited pro forma results of operations are not necessarily
indicative of what actually would have occurred if the acquisition had occurred
on October 1, 1996. In addition, the unaudited pro forma results of operations
are not intended to be a projection of future results that might be achieved
from the combined entity. The foregoing pro forma results of operations does not
reflect the non-recurring write-off of acquired in-process research and
development.
NOTE 4. CONCENTRATION OF CREDIT RISK
The Company sells its compound semiconductor products domestically and
internationally. The Company's international sales are generally made under
letter of credit arrangements.
For the years ended September 30, 1996, 1997 and 1998, the Company sold
42.5%, 42.0% and 39.1% of its products to foreign customers, respectively.
The Company's world-wide sales to major customers were as follows:
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
---------------------------------------
1996 1997 1998
<S> <C> <C> <C>
Customer A......................................... $ 6,558,930 $ 4,872,540 $ 7,563,137
Customer B......................................... 1,773,864 7,158,619 5,602,120
Customer C......................................... -- 2,500,000 2,501,500
Customer D......................................... 1,530,000 3,085,000 178,856
Customer E......................................... 2,075,722 -- --
----------- ----------- -----------
Total............................................ $11,938,516 $17,616,159 $15,845,613
=========== =========== ===========
</TABLE>
The Company performs material application research under contract with the
U.S. Government or as a subcontractor of U.S. Government funded projects.
The Company performs ongoing credit evaluations of its customers' financial
condition and collateral is not requested. The Company maintains reserves for
potential credit losses based upon the credit risk of specified customers,
historical trends and other information. To reduce credit risk and to fund
manufacturing costs, the Company requires periodic prepayments or irrevocable
letters of credit on most production system orders. During the quarter ended
June 30, 1998, the Company wrote off outstanding receivables of approximately
$1.0 million which was due from an Asian customer. Prior to this event, the
Company's credit losses generally had not exceeded its expectations.
-40-
<PAGE> 41
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company has maintained cash balances with certain financial
institutions in excess of the $100,000 insured limit of the Federal Deposit
Insurance Corporation.
NOTE 5. INVENTORIES
The components of inventories consisted of the following:
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
------------------------
1997 1998
<S> <C> <C>
Raw materials............................................... $6,513,379 $11,346,487
Work-in-process............................................. 672,247 1,091,971
Finished goods.............................................. -- 6,868
---------- -----------
Total..................................................... $7,185,626 $12,445,326
========== ===========
</TABLE>
NOTE 6. PROPERTY, PLANT AND EQUIPMENT
Major classes of property and equipment are summarized below:
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
---------------------------
1997 1998
<S> <C> <C>
Land........................................................ $ -- $ 1,028,902
Building.................................................... -- 7,493,385
Equipment................................................... 19,190,770 28,367,324
Furniture and fixtures...................................... 2,300,146 3,255,680
Leasehold improvements...................................... 6,085,256 9,948,121
Fixed assets under capital leases........................... 98,623 2,042,728
------------ ------------
27,674,795 52,136,140
Less: accumulated depreciation and amortization............. (10,876,962) (15,926,309)
------------ ------------
Total..................................................... $ 16,797,833 $ 36,209,831
============ ============
</TABLE>
At September 30, 1998, minimum future lease payments due under the capital
leases are as follows:
<TABLE>
<CAPTION>
PERIOD ENDING SEPTEMBER 30,
<S> <C>
1999...................................................... $ 796,648
2000...................................................... 741,345
2001...................................................... 62,478
2002...................................................... 25,336
2003 and thereafter....................................... --
----------
Total minimum lease payments................................ 1,625,807
Less: amount representing interest (average rate of 9.8%)... (198,254)
----------
Net minimum lease payments.................................. 1,427,553
Less: current portion....................................... (673,036)
----------
Long-term portion........................................... $ 754,517
==========
</TABLE>
The provisions for depreciation and amortization expense on owned property
and equipment amounted to approximately $1,743,000, $3,148,000 and $4,683,000
for the years ended September 30, 1996, 1997 and 1998,
-41-
<PAGE> 42
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
respectively. Accumulated amortization on assets accounted for as capital lease
amounted to approximately $366,000 as of September 30, 1998.
Included in equipment above are ten systems and twenty systems with a
combined net book value of approximately $5.1 million and $9.8 million at
September 30, 1997 and 1998, respectively. Such systems are utilized for the
production of compound semiconductor wafers and package-ready devices for sale
to third parties, systems demonstration purposes, system sales support, in-house
materials applications, internal research and contract research funded by third
parties.
NOTE 7. ACCRUED EXPENSES
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
-----------------------
1997 1998
<S> <C> <C>
Accrued payroll, vacation and other employee expenses....... $1,659,428 $2,113,765
Installation and warranty costs............................. 1,411,120 704,114
Interest.................................................... 272,445 346,250
Other....................................................... 524,596 1,033,276
---------- ----------
Total..................................................... $3,867,589 $4,197,405
========== ==========
</TABLE>
NOTE 8. DEBT FACILITIES
1998 Agreement:
On June 22, 1998, the Company entered into an $8.0 million loan agreement
with First Union National Bank (the "1998 Agreement"), which expires December
31, 1999. The 1998 Agreement bears interest at a rate equal to one-month LIBOR
plus three-quarters of one percent per annum (or 6.4%) at September 30, 1998. As
of September 30, 1998, $8.0 million was outstanding under the 1998 Agreement and
is due and payable on December 31, 1999. The 1998 Agreement is guaranteed by
both the Company's Chairman and Chief Executive Officer. In exchange for
guaranteeing the facility, the Chairman and the Chief Executive Officer were
granted an aggregate of 284,684 common stock purchase warrants exercisable at
$11.375 per share until May 1, 2001. These warrants are callable at the
Company's option at $0.85 per warrant at such time as the Company's Common Stock
has traded at or above 150% of the exercise price for a period of thirty days.
The Company assigned a value of $1,310,000 to the warrants issued to the
guarantors. This valuation was based upon the Company's application of Black
Scholes. This value is accounted for as debt issuance cost and will be amortized
over the eighteen month life of the 1998 Agreement.
1997 Agreement:
On March 31, 1997, the Company entered into a $10.0 million loan agreement
(the "1997 Agreement"). The Agreement bears interest at the rate of Prime plus
50 basis points (8.75% and 9.0% at September 30, 1998 and 1997, respectively).
As of September 30, 1998 the Company had $9,950,000 outstanding under this
facility. As of September 30, 1997, there were no amounts outstanding under this
facility.
As a result of the net loss for the quarters ended June 30, 1998 and
September 30, 1998, the Company was not in compliance with the 1997 Agreement
fixed charged coverage ratio covenant. The Company received a waiver from the
bank regarding this non-compliance. The Company's 1997 Agreement was
subsequently further extended through October 1, 1999. The 1997 Agreement's
financial covenants were modified under the second amendment, and management
believes that the Company will be able to comply
-42-
<PAGE> 43
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
with such requirements throughout fiscal 1999. In addition, the Company's
Chairman has guaranteed such debt in the event the Company does not meet certain
financial covenants.
Subordinated Notes:
On May 1, 1996, the Company issued subordinated notes (the "Subordinated
Notes") in the amount of $9,500,000 to its existing shareholders, $1,000,000 of
which were exchanged for notes receivable from officers and certain employees
with identical payment and interest provisions. The Subordinated Notes are
scheduled to mature on May 1, 2001, and have a stated interest rate of 6.0%
which is payable semi-annually on May 1 and November 1. In addition, the
noteholders were issued 2,328,432 common stock purchase warrants with an
exercise price of $4.08 per share which expire on May 1, 2001. The warrants are
exercisable after November 1, 1996, and are callable at the Company's option,
after May 1, 1997, at $0.85 per warrant. The Company has the legal right of
offset with respect to the notes receivable from officers and certain key
employees, and it is their full intention to offset the corresponding notes
receivable and payable upon maturity. As such, the Company reflected $848,000 of
the officers' and employees' notes receivable as a contra liability, reducing
the Company's Subordinated Notes balance. The remaining $152,000 note receivable
has been reflected as a contra equity note receivable balance, representing the
portion of the employee note receivable associated with common stock purchase
warrants issued to such employees. The Company received cash proceeds of
$8,500,000 in connection with this Subordinated Notes issuance.
On September 1, 1996, the Company issued a subordinated note in the amount
of $2,500,000 to the Company's then majority shareholder with terms identical to
the Subordinated Notes issued on May 1, 1996. In addition, under the terms of
this issuance, 245,098 common stock purchase warrants were issued to purchase
common stock at $10.20 per share and which expire September 1, 2001. These
warrants are exercisable after March 1, 1997, and are callable at the Company's
option after September 1, 1997, at $0.85 per warrant.
The Company assigned a value of $1,440,000 to the May 1, 1996 detachable
warrants and $900,000 to the September 1, 1996 detachable warrants. These
valuations were based upon the Company's application of Black Scholes and the
Company's assessment of the underlying valuation factors, as well as an
assessment of the terms of the Subordinated Notes. The carrying value of the
Subordinated Notes will be subject to periodic accretions, using the interest
method, in order for the carrying amount to equal the Company's obligation upon
maturity. As a result, the May 1, 1996 and September 1, 1996 Subordinated Notes
have an effective interest rate of approximately 9.3% and 15.0%, respectively.
For the years ended September 30, 1998, 1997 and 1996, imputed warrant interest
related to the Subordinated Notes amounted to $370,000, $388,000 and $126,000,
respectively.
Demand Note Facilities:
On September 17, 1998, the Company borrowed $7.0 million from its Chairman.
The loan bears interest at the rate of Prime plus 200 basis points (10.25% as of
September 30, 1998), per annum. In addition, on October 23, 1998 the Company
borrowed an additional $1.5 million from its Chairman on identical terms. The
entire sum of $8.5 million borrowed plus interest was repaid from the proceeds
of the Private Placement (see Note 17).
On October 25, 1996, the Company entered into a $10.0 million demand note
facility (the "Facility"). The Facility bore interest at the rate of LIBOR plus
75 basis points, had a term of one year and was due and payable on demand. The
Facility was guaranteed by the Chairman of the Company's Board of Directors who
provided collateral for the Facility. In December 1996, in return for
guaranteeing the facility, the Company granted the Chairman 980,392 common stock
purchase warrants at $10.20 per share which expire September 1, 2001. These
warrants are exercisable after July 1, 1997, and are callable at the Company's
option after December 1, 1997 at $0.85 per warrant. The Facility was terminated
in conjunction with the Company's initial public offering.
-43-
<PAGE> 44
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company assigned a value of $3,600,000 to the warrants issued to the
guarantor. This valuation was based upon the Company's application of Black
Scholes. This value was accounted for as debt issuance cost and was amortized
over the expected period that the facility was to be in place (four months).
The Company utilized a portion of the proceeds from its initial public
offering to pay down or discharge certain of its debts. The Company repaid the
entire $8.0 million outstanding under its October 1996 Facility and $2.0 million
was used to repay a portion of the Company's outstanding subordinated notes, due
May 1, 2001. In connection with the discharge of the Company's subordinated
notes, an extraordinary loss of $286,000 was recognized.
NOTE 9. COMMITMENTS AND CONTINGENCIES
On November 16, 1992, the Company entered into a three-year lease agreement
with a bank for 34,000 square feet of space in the building the Company
presently occupies. On March 31, 1995, the agreement was renewed for 5 years for
49,000 square feet. In November 1996, the Company signed an agreement to occupy
the remaining 26,000 square feet that it previously had not occupied.
The Company leases certain equipment under non-cancelable operating leases.
Facility and equipment rent expense under such leases amounted to
approximately $350,000, $548,000 and $637,000 for the years ended September 30,
1996, 1997 and 1998, respectively.
Future minimum rental payments under the Company's non-cancelable operating
leases with an initial or remaining term of one year or more as of September 30,
1998 are as follows:
<TABLE>
<CAPTION>
PERIOD ENDING SEPTEMBER 30,
<S> <C>
1999...................................................... $ 712,000
2000...................................................... 359,000
2001...................................................... 74,000
2002...................................................... 13,000
2003...................................................... 8,000
----------
Total minimum lease payments.............................. $1,166,000
==========
</TABLE>
The Company is from time to time involved in litigation incidental to the
conduct of its business. Management and its counsel believe that such pending
litigation will not have a material adverse effect on the Company's results of
operations, cash flows or financial condition.
-44-
<PAGE> 45
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10. INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------
1996 1997 1998
<S> <C> <C> <C>
Current:
Federal................................................... $ -- $113,000 $ --
State..................................................... -- 24,000 --
----- -------- -----
-- 137,000 --
Deferred:
Federal................................................... -- -- --
State..................................................... -- -- --
----- -------- -----
Total.................................................. $ -- $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,
--------------------------
1996 1997 1998
<S> <C> <C> <C>
US statutory income tax (benefit) expense rate.............. (34.0)% (34.0)% (34.0)%
State rate, net of federal benefit.......................... (5.9) (5.9) (5.9)
Acquired in-process research and development................ 18.2
Change in valuation allowance............................... 38.3 37.7 19.8
Non-deductible amortization................................. -- -- 3.4
Other....................................................... 1.6 4.7 (1.5)
------ ------ ------
Effective tax rate.......................................... 0.0% 2.5% 0.0%
====== ====== ======
</TABLE>
-45-
<PAGE> 46
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The components of the Company's net deferred taxes were as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------
1997 1998
<S> <C> <C>
Deferred tax assets:
Federal net operating loss carryforwards.................. $3,502,348 $7,943,877
Research credit carryforwards (state and federal)......... 718,644 1,479,221
Inventory reserves........................................ 207,732 247,521
Accounts receivable reserves.............................. 243,996 239,701
Interest.................................................. 1,461,389 1,657,337
Accrued installation reserve.............................. 362,379 163,778
Accrued warranty reserve.................................. 158,202 75,621
State net operating loss carryforwards.................... 461,821 1,494,064
Other..................................................... 144,586 238,318
Valuation reserve -- federal.............................. (5,583,217) (9,438,122)
Valuation reserve -- state................................ (1,334,975) (3,751,314)
---------- ----------
Total deferred tax assets.............................. 342,905 350,002
Deferred tax liabilities:
Fixed assets and intangibles.............................. (342,905) (350,002)
---------- ----------
Total deferred tax liabilities......................... (342,905) (350,002)
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, 1998, the Company has net operating loss carryforwards
for regular tax purposes of approximately $22.0 million which expire in the
years 2003 through 2013. The Company believes that the consummation of certain
equity transactions and a significant change in the ownership during fiscal
years 1995 and 1998 have constituted a change in control under Section 382 of
the Internal Revenue Code ("IRC"). Due to the change in control, the Company's
ability to use its federal net operating loss carryovers and federal research
credit carryovers to offset future income and income taxes, respectively, are
subject to annual limitations under IRC Section 382 and 383.
The Company believes that the acquisition of MODE and the consummation of
certain other equity transactions has constituted a change in control in fiscal
1998 under Section 382 of the IRC. As such, Federal net operating loss
carryovers and research credit carryovers incurred subsequent to the Company's
fiscal 1995 change in control (as described above) will also be subject to
annual limitations under IRC Section 382 and 383.
NOTE 11. STOCKHOLDERS' EQUITY
Reverse Stock Split. On February 3, 1997, the Board of Directors approved
a 3.4:1 reverse stock split of its common stock and approved a decrease in the
number of shares of common stock authorized. All references in the accompanying
financial statements to the number of common stock and per-share amounts have
been restated to reflect the reverse split.
Common Stock Offering. In March 1997, the Company completed an initial
public offering of 2,500,000 shares of common stock at a price of $9.00 per
share (the "Offering"), and upon the exercise of the Underwriter's overallotment
option, 375,000 additional shares of common stock were also sold at $9.00 per
share. The proceeds, net of commissions and certain expenses, to the Company
from the offering were
-46-
<PAGE> 47
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
approximately $22.8 million. Prior to the Offering, there was no public market
for the Company's common stock.
Warrant Exercise. On December 3, 1997, the holders of 1.8 million common
stock purchase warrants (with an exercise price of $4.08) exercised such
warrants with the Company taking full recourse notes amounting to approximately
$7.5 million in exchange for the issued common stock. The notes receivable
mature and are payable in full on May 1, 2001 and bear interest at a rate of 6%,
compounding semi-annually. In addition, the holders are required to provide
collateral at a 2:1 coverage ratio. This collateral is presently held by the
Company.
Preferred Stock. The Company's certificate of incorporation authorizes the
Board of Directors to issue up to 5,882,353 shares of preferred stock of the
Company upon such terms and conditions having such rights, privileges and
preferences as the Board of Directors may determine.
NOTE 12. STOCK OPTIONS AND WARRANTS
Stock Option Plan. In November 1994, the Company's Incentive Stock Option
Plan, initiated in 1987, was eliminated. On June 5, 1995, the Company adopted
the 1995 Incentive and Non-Statutory Stock Option Plan (the "Option Plan").
Under the terms of the Option Plan, options to acquire 323,529 shares of common
stock may be granted to eligible employees, as defined, at no less than 100
percent of the fair market value on the date of grant. In March 1996, options to
acquire an additional 323,530 shares of common stock were approved. In February
1997, options to acquire an additional 725,000 shares of common stock were
approved. As of September 30, 1998, 1,372,059 stock options were available for
issuance under the Company's Option Plan.
Certain options under the Option Plan are intended to qualify as incentive
stock options pursuant to Section 422A of the Internal Revenue Code.
During fiscal 1998, options with respect to 816,284 shares were granted
pursuant to the Company's option plan or issued in connection with the MODE
acquisition at exercise prices ranging from $0.44 to $20.00 per share.
Stock options granted generally vest over three to five years and are
exercisable over a ten year period. As of September 30, 1996, 1997 and 1998,
options with respect to 162,764, 199,368 and 481,863 shares were exercisable,
respectively.
-47-
<PAGE> 48
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the activity under the plan:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
<S> <C> <C>
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
Granted................................................... 615,318 13.34
Exercised................................................. (19,919) 3.78
Canceled.................................................. (35,457) 12.34
--------- ------
Outstanding as of September 30, 1998........................ 1,035,414 $10.40
========= ======
</TABLE>
As of September 30, 1998, stock options outstanding, excluding those
assumed in connection with the acquisition of MODE, were as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
REMAINING
OPTIONS CONTRACTUAL LIFE EXERCISABLE
EXERCISE PRICES OUTSTANDING (YEARS) OPTIONS
--------------- ----------- ---------------- -----------
<S> <C> <C> <C>
$0.00 more than x less than $5.00.................................. 242,219 7.96 242,219
$5.00 more than x less than $10.00................................. 22,500 9.88 --
$10.00 more than x less than $15.00................................ 661,975 9.17 178,873
$15.00 more than x less than $20.00................................ 74,720 9.19 767
$20.00 more than x less than $25.00................................ 34,000 8.94 6,800
</TABLE>
In connection with the Company's acquisition of MODE, it assumed 200,966
common stock purchase options with exercise prices ranging from $0.43 to $0.59.
The MODE options have a term of 10 years from the date of grant, with such
options expiring at various dates through July 31, 2007. The options vest, with
continued service, over a four-year period; 25% in year one and 75% equally over
the remaining 36 months. As of September 30, 1998, there are 177,312 options
outstanding at a weighted average exercise price of $0.50.
The following table summarizes the activity of options assumed in the MODE
acquisition.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Outstanding as of September 30, 1997........................ -- --
Options assumed at the date of acquisition.................. 200,966 $0.50
Exercised................................................... (15,890) 0.51
Cancelled................................................... (7,764) 0.56
--------- -----
Outstanding as of September 30, 1998........................ 177,312 0.50
========= =====
</TABLE>
-48-
<PAGE> 49
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock Based Compensation" ("SFAS 123"). SFAS 123
establishes financial and reporting standards for stock based compensation
plans. The Company has adopted the disclosure only provisions of this standard
and has elected to continue to apply the provision of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees". Had the
Company elected to recognize compensation expense for stock options based on the
fair value at the grant dates of awards, net loss and net loss per share would
have been as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------
1997 1998
<S> <C> <C>
Net loss before extraordinary item
As reported............................................... $5,333,772 $36,418,796
Pro forma................................................. $5,441,274 $37,037,847
Net loss per basic and diluted share before extraordinary
item
As reported............................................... $ (1.14) $ (4.15)
Pro forma................................................. $ (1.17) $ (4.22)
Net loss
As reported............................................... $5,619,367 $36,418,796
Pro forma................................................. $5,726,869 $37,037,847
Net loss per basic and diluted share
As reported............................................... $ (1.20) $ (4.15)
Pro forma................................................. $ (1.23) $ (4.22)
</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 and 1998: no dividend yield; expected volatility
of 0% prior to the Company's initial public offering and 60% thereafter; a
risk-free interest rate of 6.04% and 5.57% for fiscal years 1997 and 1998,
respectively; and expected lives of 5 years. The weighted average fair value of
options granted during the years ended September 30, 1997 and 1998 is $3.82 and
$7.50 per share, respectively. Stock options granted by the Company prior to its
initial public offering were valued using the minimum value method under FASB
No. 123.
Warrants. Set forth below is a summary of the Company's outstanding
warrants at September 30, 1998:
<TABLE>
<CAPTION>
EXERCISE EXPIRATION
SECURITY PRICE WARRANTS DATE
<S> <C> <C> <C>
Common Stock(1).................................... $ 4.08 385,428 May 1, 2001
Common Stock(2).................................... $ 4.33 36,990 August 21, 2006
Common Stock(2).................................... $ 5.92 10,128 May 16, 2007
Common Stock(3).................................... $10.20 1,225,490 September 1, 2001
Common Stock(4).................................... $11.38 284,684 May 1, 2001
</TABLE>
- -------------------------
(1) Issued in connection with the Company's May 1996 subordinated note issuance.
(2) Issued in connection with the MODE acquisition.
(3) Issued in connection with the Company's September 1996 subordinated debt
issuance and October 1996 debt guarantee.
(4) Issued in connection with the 1998 Agreement guarantee.
NOTE 13. RELATED PARTIES
In May 1995, 52% of the Company's outstanding shares of Common Stock were
purchased by Jesup & Lamont Merchant Partners, L.L.C. ("JLMP"). Prior to May 12,
1997, a majority of the Company's then six directors were members of JLMP. On
May 12, 1997, JLMP distributed all of its shares of the Company to the
-49-
<PAGE> 50
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
individual members of JLMP. In May 1995, the Company entered into a consulting
agreement (the "Agreement") with Jesup & Lamont Capital Markets, Inc. ("Jesup &
Lamont") pursuant to which Jesup & Lamont agreed to provide financial advisory
and employee services for the Company for one year. Total fees paid to Jesup &
Lamont amounted to approximately $241,697 for the fiscal year ended September
30, 1996. No fees were paid to Jesup & Lamont during the fiscal years ended
September 30, 1998 and 1997.
In December 1996, the Company's chairman and chief executive officer
retired. The Company entered into a consulting agreement with him for a term of
two years and will provide compensation of $250,000 per annum. In addition, the
Company has also forgiven $115,300 of his indebtedness to the Company and had
agreed to extend the period for the exercise of his vested stock options through
March 1997 and accordingly he exercised all 26,471 vested shares.
In fiscal 1997, the Company entered into a non-exclusive and non-refundable
technology licensing and royalty agreement with Uniroyal Technology Corporation
("UTC") for the process technology to develop and manufacture high brightness
light emitting diodes ("LEDs"). During fiscal 1998 and 1997, revenue associated
with the UTC licensing agreement amounted to $2.5 million and $2.5 million,
respectively. At the time the transaction was originally entered into, UTC's
Chairman and CEO was a member of EMCORE's Board of Directors and EMCORE's
Chairman was on the Board of Directors of UTC. All related party accounts
receivable for fiscal 1997 have been paid in full. As of September 30, 1998, the
Company had an outstanding related party receivable of $500,000.
In July 1998, the Company and a wholly-owned subsidiary of UTC formed
Uniroyal Optoelectronics, a venture (the "UTC Venture") to produce and market
compound semiconductor products. The Company has a 49% non-controlling minority
interest. The Company's rights under the venture agreement are protective and as
such, the Company accounts for its interest in the venture under the equity
method of accounting. In July 1998, the Company invested $490,000 in the UTC
Venture which was classified as a component of other long-term assets. For the
year ended September 30, 1998, the Company recognized a loss of $198,000 related
to the UTC Venture, which has been recorded as a component of other income and
expense. In November 1998, the Company invested an additional $5.0 million into
the UTC Venture.
The President of Hakuto Co. Ltd. ("Hakuto"), the Company's Asian
distributor, is a member of the Company's Board of Directors and Hakuto is a
minority shareholder of the Company. During the year ended September 30, 1998,
sales made through Hakuto approximated $9.2 million.
On June 22, 1998, the Company entered into the 1998 Agreement. The 1998
Agreement was guaranteed by the Chairman and the Chief Executive Officer of the
Company (see Note 8). In return for guaranteeing the facility, the Company
granted the Chairman and the Chief Executive Officer an aggregate of 284,684
common stock purchase warrants at $11.375 per share which expire May 1, 2001.
These warrants are callable at the Company's option at $0.85 per warrant at such
time as the Company's common stock has traded at or above 150% of the exercise
price for a period of 30 days.
On September 17, 1998, the Company borrowed $7.0 million from its Chairman,
Thomas J. Russell. The loan bears interest at 9.75% per annum. In addition, on
October 23, 1998 the Company borrowed an additional $1.5 million from its
Chairman on identical terms. The entire $8.5 million, borrowed from Mr. Russell
was repaid from the proceeds of a private placement (See Note 8).
-50-
<PAGE> 51
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14. EXPORT SALES
The information below summarizes the Company's export sales by geographic
area. The Company's export sales to the Far East and Europe are as follows:
<TABLE>
<CAPTION>
ASIA EUROPE TOTAL
----------- ---------- -----------
<S> <C> <C> <C>
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
Year ended September 30, 1998....................... $15,527,169 $1,584,851 $17,112,020
</TABLE>
NOTE 15. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
NET
OPERATING NET INCOME (LOSS)
REVENUES INCOME (LOSS) INCOME (LOSS) PER SHARE
-------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Fiscal Year Ended September 30, 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
Fiscal Year Ended September 30, 1998:
December 31, 1997 (as previously
reported)................................ $12,357 $(29,223)* $(29,389)* $(4.15)*
December 31, 1997 (as restated)............. 12,357 (19,717)* (19,883)* (2.81)*
March 31, 1998 (as previously reported)..... 13,808 200 37 0.00
March 31, 1998 (as restated)................ 13,808 (615) (778) (0.08)
June 30, 1998 (as previously reported)...... 9,074 (7,141) (7,446) (0.80)
June 30, 1998 (as restated)................. 9,074 (7,956) (8,260) (0.88)
September 30, 1998 (as previously
reported)................................ 8,521 (5,544) (6,683) (0.71)
September 30, 1998 (as restated)............ 8,521 (6,359) (7,498) (0.80)
</TABLE>
- -------------------------
See Note 20, "Restatement".
* includes a one-time charge to acquired in-process research and
development, non-cash.
NOTE 16. EMPLOYEE SAVINGS PLAN
The Company has a savings plan (the "Savings Plan") that qualifies as a
deferred salary arrangement under Section 401(k) of the Internal Revenue Code.
Under the Savings Plan, participating employees may defer a portion of their
pretax earnings, up to the Internal Revenue Service annual contribution limit.
Effective August 1, 1997, the Company began contributing to the Savings Plan.
All employer contributions are made in the Company's common stock. For the year
ended September 30, 1998, the Company contributed approximately $252,000 to the
Savings Plan.
NOTE 17. SUBSEQUENT EVENT -- REDEEMABLE PREFERRED STOCK PRIVATE PLACEMENT
On November 30, 1998, the Company sold an aggregate of 1,550,000 shares of
Series I Redeemable Convertible Preferred Stock (the "Series I Preferred Stock")
to related parties (Hakuto Company, Ltd., Uniroyal Technology Corporation, and
Union Miniere, Inc.) for aggregate consideration of $21.7 million before
deducting costs and expenses which amounted to approximately $500,000. The
Series I Preferred Stock was recorded net of issuance costs. The excess of the
preference amount over the carrying value of the Series I Preferred Stock will
be accreted by periodic charges to accumulated deficit in the absence of
additional paid in
-51-
<PAGE> 52
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
capital. The shares of Series I Preferred Stock are convertible, at any time, at
the option of the holders thereof, unless previously redeemed, into shares of
common stock at an initial conversion price of $14.00 per share of common stock,
subject to adjustment in certain cases. The market price of the Company's common
stock was $12.875 on the date the Series I Preferred Stock was issued. The
Series I Preferred Stock is redeemable, in whole or in part, at the option of
the Company at any time the Company's stock has traded at or above $28.00 per
share for 30 consecutive trading days, at a price of $14.00 per share, plus
accrued and unpaid dividends, if any, to the redemption date. The Series I
Preferred stock carries a dividend of 2% per annum. Dividends are being charged
to accumulated deficit in the absence of additional paid in capital. In
addition, the Series I Preferred Stock is subject to mandatory redemption by the
Company at $14.00 per share plus accrued and unpaid dividends, if any, on
November 17, 2003.
NOTE 18. SUBSEQUENT EVENTS -- JOINT VENTURES
In November 1998, the Company entered into a joint venture with Union
Miniere Inc. to undertake research and development aimed at new material
application of germanium substrates. The Company has a 50% non-controlling
interest in the venture. The Company will account for its interest in the
venture under the equity method of accounting. In November 1998, the Company
invested $600,000 in the venture. The Company is obligated to fund the venture's
capital requirements in proportion to its equity interest.
In November 1998, the Company also formed a venture with Optek Technology,
Inc. to produce, market and distribute packaged electronic semiconductor
components. The Company has a 50% non-controlling interest in the venture. The
Company will account for its interest in the venture under the equity method of
accounting. The Company is obligated to fund the venture's capital requirements
in proportion to its equity interest.
On January 21, 1999, GE Lighting and the Company agreed, subject to certain
conditions, to form a new joint venture to develop and market "white light"
light-emitting diodes. The new company, GELcore, LLC (the "GELcore Venture"),
will develop and market LEDs as replacements for miniature automotive, compact
fluorescent, halogen and traditional incandescent lighting. Under terms of the
joint venture agreement, the Company will have a 49% non-controlling interest in
the GELcore Venture.
In connection with the GELcore venture, General Electric will loan the
Company $7.8 million at 4.75% per annum. The proceeds will be used to fund part
of the Company's initial capital contribution in GELcore. This subordinated
debenture (the "Debenture") will mature seven years from the date of issuance
and is convertible into common stock of the Company at a conversion price of
$22.875 or 340,984 shares. The Debenture is convertible at any time at the
option of GE Lighting and may be called by the Company after three years, if the
price of the Company's common stock has traded at or above $34 for at least
thirty days. The Debenture's interest rate will be subject to adjustment in the
event the Company does not complete a public offering by June 30, 1999.
General Electric will also receive between 282,010 warrants to purchase
common stock at $22.875 per share. The warrants will be exercisable at any time
and will expire in seven years from the date of issuance.
On April 27, 1999, the Company contributed an additional $500,000 as a
capital investment in their joint venture with Uniroyal Technologies
Corporation.
NOTE 19. SUBSEQUENT EVENTS -- OTHER
Short Term Borrowings
On February 1, 1999, the Company entered into a $5 million short-term note
(the "Note") with First Union. The Note is due and payable in May 1999. The Note
bears interest at a rate equal to one-month LIBOR plus three-quarters of one
percent per annum.
On April 29, 1999, the Company entered into a $19.0 million short-term note
(the "Amended Note") with First Union. The Amended Note consolidated the $8.0
million loan agreement dated June 22, 1998 and the $5 million Note plus an
additional $6.0 million. The Amended Note is due and payable October 1, 1999 and
bears interest at a rate equal to one-month LIBOR plus three-quarters of one
percent per annum.
-52-
<PAGE> 53
EMCORE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1997 Agreement. In January 1999, the Company borrowed the remaining
balance of $2,050,000 available under the 1997 Agreement.
Related Party Transactions
On January 27, 1999, the Company borrowed $3.0 million from its Chairman.
The loan bears interest at 8% per annum. This loan was repaid from borrowings
under the Note.
On January 29, 1999, the Company's Chairman committed to provide $30
million of long-term financing of the Company through July 1, 2000. The
Chairman's financing commitment terminates if the Company completes a secondary
offering of approximately $40.0 million.
On April 29, 1999, the Company borrowed $2.5 million from its Chairman at
an interest rate of prime plus two percent. On May 7, 1999, this loan was repaid
from borrowing under the Amended Note with First Union.
20. RESTATEMENT
Subsequent to the issuance of the Company's Annual Report on Form 10-K for
the year ended September 30, 1998, the Company's management revised the amount
of the purchase price which was allocated to in-process research and development
in accounting for the acquisition of MicroOptical Devices, Inc. ("MODE") in
December 1997. The revised allocation is based upon methods prescribed in a
letter from the Securities and Exchange Commission ("SEC") sent to the American
Institute of Certified Public Accountants. The letter sets forth the SEC's views
regarding the valuation methodology to be used in allocating a portion of the
purchase price to acquired in-process research and development ("IPR&D") at the
date of acquisition.
The revised valuation is based on management's estimates of the net cash
flows associated with expected operations of MODE and gives explicit
consideration to the SEC's views on acquired IPR&D as set forth in its letter to
the American Institute of Certified Public Accountants.
As a result of the revised allocation, the Company's financial statements
for the year ended September 30, 1998 have been restated from amounts
previously reported to reduce the amount of the acquired in-process research and
development expensed by $9.8 million and to increase goodwill by $9.8 million.
The amount allocated to goodwill includes approximately $0.5 million related to
the value of MODE's workforce. The change had no impact on net cash flows used
by operations.
A summary of the significant effects of the restatement is as follows:
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, 1998
-----------------------------
AS PREVIOUSLY
REPORTED AS RESTATED
------------- ------------
<S> <C> <C>
BALANCE SHEET DATA:
Goodwill, net.............................................. $ 2,457,000 $ 9,519,000
Accumulated deficit........................................ (67,258,454) (60,196,454)
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
SEPTEMBER 30, 1998
-----------------------------
AS PREVIOUSLY
REPORTED AS RESTATED
------------- ------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Goodwill amortization...................................... $ 921,941 $ 3,637,941
Research and development - one-time required in-process,
non-cash................................................. 29,294,000 19,516,000
Net loss................................................... (43,480,796) (36,418,796)
Net loss per common share -- Basic and Diluted............. $(4.95) $(4.15)
</TABLE>
-53-
<PAGE> 54
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Shareholders of EMCORE Corporation
Somerset, New Jersey
We have audited the accompanying consolidated balance sheet of EMCORE
Corporation, (the "Company") as of September 30, 1998, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the year then ended. Our audit also included the financial statement schedule
listed in the Index at Item 14(a)(2) for the year ended September 30, 1998.
These financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedule based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1998 consolidated financial statements present fairly,
in all material respects, the financial position of the Company as of September
30, 1998, and the results of their operations and their cash flows for the year
then ended in conformity with generally accepted accounting principles. Also, in
our opinion, such financial statement schedule for the year ended September 30,
1998, when considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly in all material respects the information set
forth therein.
As discussed in Note 20 the accompanying 1998 consolidated financial
statements have been restated.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
May 14, 1999
-54-
<PAGE> 55
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of EMCORE Corporation
We have audited the accompanying balance sheet of EMCORE Corporation (the
"Company") as of September 30, 1997, the related statements of operations,
shareholders' (deficit) equity and cash flows for each of the two years in the
period ended September 30, 1997. We have also audited the financial statement
schedule listed in Item 14(a)(2) for each of the two years in the period ended
September 30, 1997. These financial statements and the financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and the financial
statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of EMCORE Corporation as of
September 30, 1997, and the results of its operations and its cash flows for
each of the two years in the period ended September 30, 1997, in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
Coopers & Lybrand L.L.P.
Parsippany, New Jersey
November 3, 1997, except for
note 15, as to which the date
is December 5, 1997
-55-
<PAGE> 56
STATEMENT OF MANAGEMENT RESPONSIBILITY FOR FINANCIAL STATEMENTS
To the Shareholders of
EMCORE Corporation:
Management has prepared and is responsible for the consolidated
financial statements and related information in the Annual Report. The financial
statements, which include amounts based on judgment, have been prepared in
conformity with generally accepted accounting principles consistently applied.
Management has developed, and in 1998 continued to strengthen, a system
of internal accounting and other controls for the Company. Management believes
these controls provide reasonable assurance that assets are safeguarded from
loss or unauthorized use and that the Company's financial records are a reliable
basis for preparing the financial statements. Underlying the concept of
reasonable assurance is the premise that the cost of control should not exceed
the benefit derived.
The Board of Directors, through its audit committee, is responsible for
reviewing and monitoring the Company's financial reporting and accounting
practices. The audit committee meets regularly with management and independent
accountants - both separately and together. The independent accountants have
free access to the audit committee to review the results of their audits, the
adequacy of internal accounting controls and the quality of financial reporting.
-56-
<PAGE> 57
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
PricewaterhouseCoopers LLP ("PwC") and one of its predecessors, Coopers
& Lybrand L.L.P., have served as the Company's independent public accountants
since 1986. On May 13, 1999 the staff of the Securities and Exchange Commission
(the "SEC") advised EMCORE that, in its view, because several current and
former Price Waterhouse LLP partners owned shares of the Company's common stock,
PwC had violated the independence standards promulgated by the SEC. The SEC
staff is requiring the Company to change auditors and to have a new accounting
firm reaudit its fiscal 1998 financial statements as a result of such
violations by PwC.
In connection with the foregoing, on May 13, 1999, the Company engaged
Deloitte & Touche LLP as its independent public accountants to reaudit the
Company's financial statements for fiscal year 1998 and dismissed PwC as the
Company's independent public accountant for fiscal year 1998. Both of these
decisions were approved by the audit committee of the Company's Board of
Directors.
PwC's report on the Company's financial statements for the two most
recent fiscal years (1997 and 1996) did not contain an adverse opinion or a
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope, or accounting principles. In addition, during the Company's two
most recent fiscal years and through May 13, 1999, there were no disagreements
with PwC on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements, if
not resolved to the satisfaction of PwC, would have caused PwC to make reference
to the subject matter of the disagreement in connection with its report,
During the Company's two most recent fiscal years and through May 13,
1999, there have been no reportable events, as defined in Regulation S-K Item
304(a)(1)(v).
Prior to formally being appointed as auditors on May 13, 1999, Deloitte
& Touche LLP performed certain audit-related work at the request of the Company
as a precaution in the event the SEC staff required the Company to change
accountants.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated herein by
reference to the Company's 1999 Proxy Statement which will be filed on or before
January 28, 1999.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by
reference to the Company's 1999 Proxy Statement which will be filed on or before
January 28, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by
reference to the Company's 1999 Proxy Statement which will be filed on or before
January 28, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this term is incorporated herein by
reference to the Company's 1999 Proxy Statement which will be filed on or before
January 28, 1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
14(A)(1) FINANCIAL STATEMENTS:
<TABLE>
<CAPTION>
Page
Reference
---------
<S> <C> <C>
Included in Part II, Item 8 of this report:
Consolidated Balance sheets as of September 30, 1997 and 1998 (as restated) 30
Consolidated Statements of operations for the years ended September 30, 1996, 1997
and 1998 (as restated) 31
Consolidated Statements of shareholders' equity for the years ended September 30, 1996, 1997
and 1998 (as restated) 32
Consolidated Statements of cash flows for the years ended September 30, 1996, 1997 and 1998
(as restated) 33
Notes to financial statements 35-53
Report of independent accountants 54-55
14(A)(2) Financial Statement Schedule:
Included in Part IV of this report:
Schedule II - Valuation and qualifying accounts and reserves 61
Other schedules have been omitted since they are either not required or not applicable.
</TABLE>
-57-
<PAGE> 58
14(A)(3) EXHIBITS
EXHIBIT NO. DESCRIPTION
- ---------- ------------
3.1 Restated Certificate of Incorporation, amended February 3, 1997
(incorporated by reference to Exhibit 3.1 to Amendment No. 1 to
the Registration Statement on Form S-1 (File No. 333-18565) filed
with the Commission on February 6, 1997 (the "1997 S-1")).*
3.2 Amended By-Laws, as amended January 11, 1989 (incorporated by
reference to Exhibit 3.2 to Amendment No. 1 to the 1997 S-1).*
3.3 Certificate of Amendment to the Certificate of Incorporation,
dated November 19, 1998.*
4.1 Specimen certificate for shares of Common Stock (incorporated by
reference to Exhibit 4.1 to Amendment No. 3 to the 1997 S-1).*
4.2 Form of $11.375 Warrant.*
10.1 1995 Incentive and Non-Statutory Stock Option Plan (incorporated
by reference to Exhibit 10.1 to Amendment No. 1 to the 1997
S-1).*
10.2 1996 Amendment to Option Plan (incorporated by reference to
Exhibit 10.2 to Amendment No. 1 to the 1997 S-1).*
10.3 Specimen Incentive Stock Option Agreement (incorporated by
reference to Exhibit 10.3 to Amendment No. 1 to the 1997 S-1).*
10.4 Second Amended and Restated Distributorship Agreement dated as of
March 31, 1998 between the Company and Hakuto. Confidential
treatment has been requested by the Company for portions of this
document. Such portions are indicated by "[*]".
10.5 Amendment to Lease for premises at 394 Elizabeth Avenue,
Somerset, New Jersey 08873 (incorporated by reference to Exhibit
10.5 to Amendment No. 1 to the 1997 S-1).*
10.6 Registration Rights Agreement relating to September 1996 warrant
issuance (incorporated by reference to Exhibit 10.6 to Amendment
No. 1 to the 1997 S-1).*
10.7 Registration Rights Agreement relating to December 1996 warrant
issuance (incorporated by reference to Exhibit 10.7 to Amendment
No. 1 to the 1997 S-1).*
10.8 Form of 6% Subordinated Note Due May 1, 2001 (incorporated by
reference to Exhibit 10.8 to Amendment No. 1 to the 1997 S-1).*
10.9 Form of 6% Subordinated Note Due September 1, 2001 (incorporated
by reference to Exhibit 10.9 to Amendment No. 1 to the 1997
S-1).*
10.10 Form of $4.08 Warrant (incorporated by reference to Exhibit 10.10
to Amendment No. 1 to the 1997 S-1).*
-58-
<PAGE> 59
EXHIBIT INDEX - (CONTINUED)
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.11 Form of $10.20 Warrant (incorporated by reference to Exhibit
10.12 to Amendment No. 1 to the 1997 S-1).*
10.12 Consulting Agreement dated December 6, 1996 between the Company
and Norman E. Schumaker (incorporated by reference to Exhibit
10.14 to Amendment No. 1 to the 1997 S-1).*
10.13 Purchase Order issued to the Company by General Motors
Corporation on November 17, 1996. (incorporated by reference to
Exhibit 10.15 to Amendment No. 1 to the 1997 S-1).* Confidential
treatment has been requested by the Company with respect to
portions of this document. Such portions are indicated by "[*]".
10.14 Acquisition Agreement, dated as of December 5, 1997, between the
Company and MicroOptical Devices, Inc. (incorporated by
reference to Exhibit 2 to the Company's filing on Form 8-K,
dated December 22, 1997).*
10.15 Purchase Agreement, dated November 30, 1998, by and between the
Company, Hakuto UMI and UTC.*
10.16 Registration Rights Agreement, dated November 30, 1998 by and
between the Company, Hakuto, UMI and UTC.*
10.17 Long Term Purchase Agreement dated November 24, 1998 by and
between the Company and Space Systems/Loral, Inc. Confidential
treatment has been requested by the Company with respect to
portions of this document. Such portions are indicated by "[*]."
10.18 Promissory Note, dated June 22, 1998 by the Company in favor of
First Union National Bank.*
10.19 Second Amendment to Revolving Loan and Security Agreement, dated
as of November 30, 1998 between the Company and First Union
National Bank.*
21 Subsidiaries of the registrant.*
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule.
- ----------
* Filed previously with or incorporated by reference in Form 10-K filed on
December 29, 1998.
14(B) Reports on Form 8-K:
The Company filed a current report on Form 8-K dated August 6,
1998 which set forth information under Item 5.
-59-
<PAGE> 60
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Township of Somerset, State of
New Jersey, on May 17, 1999.
EMCORE CORPORATION
By /s/ REUBEN F. RICHARDS, JR.
--------------------------------------------
Name: Reuben F. Richards, Jr.
TITLE: PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report on Form 10-K has been signed below by the following persons on
behalf of EMCORE Corporation in the capacities indicated, on May 17, 1999.
SIGNATURE TITLE
--------- -----
/s/ THOMAS J. RUSSELL Chairman of the Board and Director
- --------------------------------------
Thomas J. Russell
/s/ REUBEN F. RICHARDS, JR. President, Chief Executive Officer and
- -------------------------------------- Director (Principal Executive Officer)
Reuben F. Richards, Jr.
/s/ THOMAS G. WERTHAN Vice President, Chief Financial Officer,
- -------------------------------------- Secretary and Director (Principal
Thomas G. Werthan Accounting and Financial Officer)
/s/ RICHARD A. STALL Director
- --------------------------------------
Richard A. Stall
/s/ ROBERT LOUIS-DREYFUS Director
- --------------------------------------
Robert Louis-Dreyfus
/s/ HUGH H. FENWICK Director
- --------------------------------------
Hugh H. Fenwick
/s/ SHIGEO TAKAYAMA Director
- --------------------------------------
Shigeo Takayama
/s/ CHARLES T. SCOTT Director
- ---------------------------------------
Charles T. Scott
/s/ JOHN HOGAN Director
- ---------------------------------------
John Hogan
-60-
<PAGE> 61
Schedule II
EMCORE CORPORATION
Valuation and Qualifying Accounts and Reserves
For the years ended September 30, 1996, 1997 and 1998
<TABLE>
<CAPTION>
Additions
Balance at Charged to Balance at
Beginning Costs and Write-offs End of
of Period Expenses (Deductions) Period
---------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Year Ended September 30, 1996 $164,000 $ 183,000 $ (37,000) $310,000
Year Ended September 30, 1997 310,000 515,000 (128,000) 697,000
Year Ended September 30, 1998 697,000 1,117,000 (1,203,000) 611,000
RESERVES FOR INVENTORY OBSOLESCENCE
Year Ended September 30, 1996 $115,000 $ 105,000 -- $220,000
Year Ended September 30, 1997 220,000 120,000 -- 340,000
Year Ended September 30, 1998 340,000 120,000 -- 460,000
</TABLE>
-61-
<PAGE> 1
EXHIBIT 10.4
SECOND AMENDED AND RESTATED
DISTRIBUTORSHIP AGREEMENT
THIS SECOND AMENDED AND RESTATED DISTRIBUTORSHIP AGREEMENT, effective
as of March 31, 1998 (as amended, modified or supplemented from time to time,
the "Agreement"), by and between EMCORE CORPORATION, a corporation duly
organized and existing under the laws of New Jersey, having its principal place
of business at 394 Elizabeth Avenue, Somerset, New Jersey 08873 ("Emcore"), and
HAKUTO CO. LTD., a corporation duly organized and existing under the laws of
Japan, having its principal place of business at 1-13, Shinjuku, 1-chome,
Shinjuku-ku, Tokyo 160, Japan ("Hakuto"), amends, restates, replaces and
supersedes that certain Amended and Restated Distributorship Agreement, dated as
of January 20, 1998, retroactively effective as of July 12, 1995, by and between
Emcore and Hakuto (the "Amended Distributorship Agreement").
W I T N E S S E T H:
WHEREAS, Emcore is engaged in the business of manufacturing technical
and industrial products; and
WHEREAS, Hakuto is engaged in the business of, among other things,
marketing and selling products throughout the world; and
WHEREAS, the parties heretofore entered into the Amended and Restated
Distributorship Agreement pursuant to which Hakuto distributed certain Emcore
products in defined markets, and the parties desire to revise the terms of the
Amended and Restated Distributorship Agreement in accordance with which revised
terms Hakuto will continue to serve as Emcore's distributor.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, Emcore and Hakuto do hereby agree as follows:
1. DEFINITIONS. As used in this Agreement, the following terms shall have
the following meanings:
"CHANGE OF CONTROL" means: (1) the acquisition by any party,
or any group acting in concert (other than a group consisting exclusively of
current directors and/or officers of
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Emcore), of 50% or more of the issued and outstanding capital stock of Emcore;
or (2) the sale by Emcore of assets that significantly reduces Emcore's ability
to produce Mode Items, Pegasus Items or E2M Items.
"EQUIPMENT" means any or all items listed in Part 1 of Exhibit
A attached hereto and made a part hereof, including all Modifications and
Improvements thereto.
"E2M ITEMS" means any or all items listed in Part 2 of Exhibit
A attached hereto and made a part hereof, including all Modifications and
Improvements thereto.
"MODE ITEMS" means any or all items listed in Part 3 of
Exhibit A attached hereto and made a part hereof, including all Modifications
and Improvements thereto.
"MODIFICATION" AND "IMPROVEMENT" means any and all
alterations, whether patentable or not, or copyrightable or not, to the Products
or the name or designation thereof, or of the method of manufacture, design,
construction, installation, maintenance or sale of products.
"NEW CONTROL PARTY" means any party that acquires 50% or more
of the outstanding capital stock of Emcore in a Change of Control, or any party
that acquires assets of Emcore in a Change of Control.
"NON-JAPAN AGREEMENTS" means, collectively, the Amended and
Restated Distributorship Agreement, dated as of March 31, 1998, by and between
Emcore and S&T Enterprises Ltd., a Hong Kong company, and the Amended and
Restated Distributorship Agreement, dated as of January 20, 1998, by and between
Emcore and S&T Enterprises (Singapore) Pte. Ltd., a Singapore company.
"PEGASUS ITEMS" means any or all items listed in Part 4 of
Exhibit A attached hereto and made a part hereof, including all Modifications
and Improvements thereto.
2
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[*] CONFIDENTIAL INFORMATION OMITTED
AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.
ASTERICKS DENOTE SUCH OMISSIONS.
"PRODUCTS" means, collectively, Equipment, Mode Items, Pegasus
Items and E2M Items.
[*]
"TERRITORY" means the country of Japan, provided, however, if
Hakuto develops a business prospect or prospective customer in the Philippines,
Hakuto shall advise Emcore forthwith of such business prospect and request that
the Philippines be made a part of Hakuto's exclusive territory. Upon receipt of
such request, Emcore shall give first priority to Hakuto to act as Emcore's
exclusive distributor in the Philippines, and the Philippines shall thereupon be
added to this Agreement as part of the Territory.
2. EXCLUSIVE DISTRIBUTORSHIP.
2.1 APPOINTMENT AND ACCEPTANCE. Emcore hereby appoints Hakuto as the
sole and exclusive distributor of the Products in the Territory and Hakuto
accepts such appointment, all in accordance with the terms and conditions set
forth in this Agreement. Without limiting the foregoing, Emcore shall refer to
Hakuto: (1) all inquiries concerning the Products from parties in the Territory
or parties outside the Territory who may deliver, or cause to be delivered,
Products in the Territory; and (2) orders for Products from customers or
potential customers in the Territory, or orders originating outside the
Territory that may require intermediate or ultimate delivery or use of Products
in the Territory. During the term of this Agreement, Emcore shall not appoint or
designate, directly or indirectly, any distributor of the Products in the
Territory other than Hakuto and shall not itself, directly or indirectly, sell
any of the Products in the Territory.
2.2 COMPENSATION TO HAKUTO. As indicated in SECTION 2.7 of this
Agreement, the relationship between Emcore and Hakuto is that of seller and
purchaser, respectively, and Hakuto
3
<PAGE> 4
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[*] CONFIDENTIAL INFORMATION OMITTED
AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.
ASTERICKS DENOTE SUCH OMISSIONS.
shall be compensated for Hakuto's ultimate sale of the Products to Hakuto's
customers through [*]; provided, however, that, given the global market and
expected competitive pressures on the prices of the Products in the Territory,
from time to time Hakuto and Emcore shall consult regarding the pricing of the
Products, and, to the extent that Hakuto cannot be compensated to Hakuto's
satisfaction by the [*], Hakuto shall receive, for all sales of Mode Items, E2M
Items and Pegasus Items in the Territory, at least [*] of the total amount
invoiced to Hakuto's customer in connection with any such sale. Without limiting
the foregoing, Emcore shall pay to Hakuto [*] of the total invoice amount in
connection with all sales outside the Territory of Mode Items, Pegasus Items and
E2M Items that are designed in the Territory but produced or further designed
outside the Territory and the territories specified in the Non-Japan Agreements.
2.3 LICENSE ROYALTY FEES. Emcore shall promptly pay to Hakuto [*] of
all license royalties, fees and other compensation accruing, directly or
indirectly, to or received by Emcore in connection with Emcore's technology
sharing arrangements (including, but not limited to, licensing and leasing) of
Mode Items: (1) in the Territory or (2) to any customer procured by Hakuto but
relating to arrangements outside of the Territory and the territories specified
in the Non-Japan Agreements (the "Licensing Royalty Fee").
2.4 REVIEW OF COMPENSATION AND LICENSING ROYALTY FEE. Hakuto and Emcore
shall: (1) review compensation and Licensing Royalty Fee on the second
anniversary of the effective date of this Agreement and on every other
anniversary date thereafter; and (2) alter such compensation and Licensing
Royalty Fee, if agreed to by both Hakuto and Emcore.
2.5 FEES PAYABLE TO EMCORE. In consideration of the distribution rights
granted by Emcore to Hakuto in this Agreement and in the Non-Japan Agreements,
Hakuto shall pay to Emcore [*] as follows: (1) [*] upon execution of this
Agreement; and (2) an additional [*] will be due in four equal installments,
such installments equaling [*] for each [*] in sales orders (for
4
<PAGE> 5
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------------------------------------
which Hakuto and any of its affiliates under the Non-Japan Agreements is
compensated hereunder) for Mode Items, Pegasus Items and E2M Items generated in
the Territory or in the territories specified in the Non-Japan Agreements.
2.6 BEST EFFORTS. Hakuto shall exert its best efforts to sell the
Products in the Territory. Specifically, and not in limitation hereof, if
Emcore, based on its independent market research, believes that certain of the
Products should be targeted to specific customers in the Territory, Emcore shall
convey its findings to Hakuto forthwith, whereupon Hakuto shall promptly exert
its full and best efforts to address these markets and Hakuto will confer with
Emcore regarding the best marketing strategies to promote sales of the Products,
and Hakuto will otherwise fully coordinate its sales efforts with Emcore. Hakuto
shall not market, distribute, sell or advertise for sale within the Territory
any products that are competitive with the Products.
2.7 NO AGENCY. The relationship between Emcore and Hakuto shall not be
that of a principal and agent, but shall be that of a seller and purchaser, each
acting as an independent contractor. Neither Hakuto nor Emcore shall have the
right or authority to incur, assume or create, in writing or otherwise, any
warranty, liability or obligation of any kind, express or implied, in the name
of or on behalf of the other party.
2.8 SUBDISTRIBUTORS. Hakuto shall not appoint any subdistributor or
subagent to perform any of its obligations under this Agreement without the
prior written consent of Emcore. Nothing herein, however, shall prohibit Hakuto
from assigning certain parts of the Territory, or certain customers in the
Territory, to its subsidiaries and affiliates. If Hakuto makes any such
assignment to a subsidiary or affiliate, Hakuto and Emcore shall nevertheless be
responsible for the obligations created hereunder.
2.9 MARKETING. Notwithstanding the exclusive sales rights granted to
Hakuto, Emcore may at its own expense and from time to time dispatch to the
Territory its personnel to engage in market research, Product promotion, and
other marketing activities, provided that all such activities shall at all times
be coordinated with Hakuto, conducted with full disclosure to and knowledge of
Hakuto, and provided further that any potential sale of any Products resulting
from
5
<PAGE> 6
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------------------------------------
[*] CONFIDENTIAL INFORMATION OMITTED
AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.
ASTERICKS DENOTE SUCH OMISSIONS.
such activities of Emcore shall be referred to and channeled exclusively through
Hakuto, pursuant to the terms of this Agreement.
2.10 PRODUCT MODIFICATION, IMPROVEMENT AND DISCONTINUANCE. Emcore shall
have the right to make Modifications and Improvements, and to discontinue
production of any or all of the Products in its sole discretion, provided, that:
(1) Emcore shall give Hakuto not less than ninety (90) days' notice prior to the
discontinuance, Modification or Improvement of any Product; and (2) any
Modification or Improvement by Emcore of any Product shall be deemed to be added
to Exhibit A hereto by reference.
3. ORDERS AND PRICE TERMS.
3.1 PRODUCTS. Hakuto may submit to Emcore from time to time requests
for quotations with respect to any Products. Each such request for a quotation
shall identify Hakuto's prospective customer and shall set forth detailed
specifications for the Products required, including all optional features.
Emcore may respond to any such request by submitting a quotation on Emcore's
standard form setting forth the sales price to Hakuto for such Products.
3.2 EQUIPMENT; AND EQUIPMENT SPARE PARTS. At Hakuto's specific request,
Emcore will include in its quotations for Equipment: (1) a firm price for
Emcore's installation or assistance in installing the Equipment; and/or (2) a
firm price for Emcore's assistance in the start-up of the Equipment and a
demonstration of basic material specifications, provided that, in each case,
such request contains sufficiently detailed information regarding the nature of
the installation or assistance required or the material specifications to be
demonstrated. Hakuto may submit to Emcore from time to time purchase orders with
respect to spare parts or components included as Equipment under this Agreement
("Spare Parts"), setting forth the quantity and desired delivery date of such
Spare Parts. The price for any Spare Part shall be [*]. Emcore reserves the
right to
6
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------------------------------------
[*] CONFIDENTIAL INFORMATION OMITTED
AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.
ASTERICKS DENOTE SUCH OMISSIONS.
change its Spare Parts price list from time to time upon not less than ninety
(90) days' prior written notice to Hakuto.
3.3 OTHER TERMS. The terms and conditions on purchase orders issued by
Hakuto and quotations issued by Emcore shall be deemed to be a part of this
Agreement as a supplement hereto, provided that any provision in such purchase
order or quotation which is inconsistent with or contrary to the provisions of
this Agreement shall be deemed to be deleted from the purchase order or
quotation and of no force or effect unless the parties shall have specifically
agreed in writing that said provision in the purchase order or provision is
intended to supersede the inconsistent provision of this Agreement, in which
case the provisions of the purchase order or quotation shall prevail solely with
respect to such purchase order. All prices quoted by Emcore shall be F.O.B.
Emcore's plant in Somerset, New Jersey or, in the case of Mode Items, F.O.B.
Emcore's plant in Albuquerque, New Mexico. The quotations issued by Emcore for
Products shall be valid for not less than ninety (90) days (unless otherwise
specified in writing by Emcore). To be effective, all purchase orders must be
accepted in writing by Emcore at its plant in Somerset, New Jersey.
4. PAYMENT TERMS.
4.1 EQUIPMENT. Hakuto shall pay for Equipment purchased under this
Agreement as follows: [*] either (a) not later than one hundred eighty (180)
days prior to the scheduled delivery date of the Equipment, or (b) within thirty
(30) days after issuance of Hakuto's purchase order or Hakuto's letter of intent
if delivery of the Equipment is scheduled thereafter sooner than one hundred
eighty (180) days after the date of the purchase order or letter of intent. Any
payment accompanying a letter of intent shall be refundable to Hakuto in the
event that the anticipated purchase order is not issued by reason of the
customer's change of plans or the
7
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------------------------------------
[*] CONFIDENTIAL INFORMATION OMITTED
AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.
ASTERICKS DENOTE SUCH OMISSIONS.
customer's other business decision; and (2) [*] after shipment of the Equipment
by Emcore and delivery of a bill of a lading evidencing such shipment.
4.2 SPARE PARTS. Hakuto shall remit payment in full to Emcore for all
Spare Parts purchased under this Agreement within thirty (30) days after
shipment by Hakuto to Hakuto's customer.
4.3 MODE ITEMS; PEGASUS ITEMS; E2M ITEMS. Hakuto shall remit payment in
full to Emcore for all Mode Items, Pegasus Items and E2M Items purchased under
this Agreement within sixty (60) days after delivery to Hakuto.
4.4 NO ADJUSTMENTS OR DEDUCTIONS. All payments for Products shall be in
U.S. dollars without adjustment for any currency exchange or conversion rate
changes and without deduction for any taxes at any time levied by any
governmental authority.
5. SHIPMENT.
5.1 TAXES AND COSTS. All Products shall be shipped via carrier
designated in the purchase order, F.O.B. Emcore's plant in Somerset, New Jersey
or, in the case of Mode Items, F.O.B. Emcore's plant in Albuquerque, New Mexico.
Hakuto shall bear and pay for all taxes of any nature (except for taxes assessed
upon or due in connection with Emcore's income) imposed by any taxing authority
after delivery to the carrier at the F.O.B. point. Hakuto shall also bear and
pay for all charges for freight, shipping, consular fees, customs duties, and
all costs and expenses incurred after delivery of the Products to the carrier at
the F.O.B. point. Hakuto shall bear all risk of loss or damage to the Products
after delivery to the carrier at the F.O.B. point.
8
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5.2 SHIPPING DATES. Shipping dates, even though accepted by Emcore,
shall be understood only as best estimates. Emcore shall attempt to respect all
shipping dates, but, except as set provided in SECTION 7.5, shall not be liable
to Hakuto for damages arising from any delay in shipment or delivery, however
caused, except as otherwise expressly agreed by Emcore in writing on a
case-by-case basis. If Emcore experiences shipping or production delays, Emcore
shall not allocate Products to parties other than Hakuto, unless Hakuto is
allocated Products on a pro-rata basis with such other parties.
5.3 SHORTAGE OR DEFECT. Except as provided in SECTION 7.5, Emcore shall
not be liable for any obvious shortage of Products or for any patently obvious
defect in Products discoverable by visual inspection with respect to any
shipment received by Hakuto, unless Hakuto notifies Emcore in writing of such
obvious shortage or patently obvious defect, prior to the earlier to occur of:
(1) the expiration of sixty (60) days after receipt of such shipment by Hakuto;
or (2) the expiration of twenty (20) days after Hakuto ships such Products to
Hakuto's customer. Upon receipt of such notice, together with evidence that such
obvious shortage or patently obvious defect exists, and subject to the
provisions of SECTION 7.5, Emcore reserves the right, at its election, to
replace Products found to be defective or short in quantity, to issue a credit
to Hakuto for the prorated invoice amount relating to such shortage or defect,
or to repair Products found to be defective, all such remedial action to be
taken by Emcore promptly without material adverse effect upon Hakuto or its
customer.
6. EQUIPMENT INSTALLATION AND SERVICE.
6.1 GENERAL. Except as set forth below with respect to warranty
service, and except as provided in SECTION 7.5 and otherwise expressly provided
in quotations for Equipment issued by Emcore, Hakuto shall be responsible at its
own expense for the installation and service of all Equipment purchased under
this Agreement. Hakuto shall maintain trained personnel and shall purchase and
maintain an inventory of Spare Parts sufficient in volume and assortment to
promptly and efficiently perform necessary installation and service functions
for all Equipment in the Territory. Hakuto shall give due consideration to
Emcore's suggested minimum inventories for various Spare Parts.
9
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------------------------------------
[*] CONFIDENTIAL INFORMATION OMITTED
AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.
ASTERICKS DENOTE SUCH OMISSIONS.
6.2 INITIAL AND POST-INSTALLATION SERVICE FEES. Emcore shall make
certain personnel available to assist Hakuto in the initial installation of
Equipment at the customer's facility as well as in servicing Equipment after
installation until such time as Hakuto personnel are fully trained and are
capable, in Emcore's reasonable judgment, to perform such functions. The costs
of initial installation shall be borne by Emcore (i.e., included in the sale
price of the Equipment) unless other fee arrangements are agreed between Emcore
and Hakuto on a specific transaction. Hakuto shall pay Emcore for
post-installation servicing at the rate of [*] per person per day for field
service engineers and [*] per person per day for material process engineers,
plus travel and living expenses. Said reimbursement rates are based on the U.S.
Consumer Price Index in effect on the effective date of this Agreement and shall
be subject to adjustment on an annual basis to conform to any increase or
decrease in said U.S. Consumer Price Index as of each anniversary date of this
Agreement.
7. WARRANTY, INSURANCE AND INDEMNIFICATION.
7.1 WARRANTIES RELATING TO EQUIPMENT.
7.1.1 MATERIAL AND QUALITY. Subject to the disclaimers,
limitations and exclusions set forth below, and subject to the
provisions of SECTIONS 7.5 and 10.5, Emcore warrants to Hakuto and to
the end user customer of the Equipment that the Equipment shall be free
from defects in design, materials and quality. This warranty shall
become effective upon delivery of the Equipment to the end user
customer of Hakuto, and shall extend for a period of one (1) year from
the date of acceptance of the Equipment by the end user customer.
Hakuto shall notify Emcore from time to time of the installation
completion and customer acceptance date of Equipment. With respect to
any non-conforming Products as to which Emcore shall have received
notification of such non-
10
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------------------------------------
conformance within twenty (20) days after discovery of same, Emcore
shall, subject to the provisions of SECTIONS 7.5 and 10.5, at its
election repair the same or provide a replacement Product at no cost to
Hakuto or the end user. Subject to SECTIONS 7.5 and 10.5, Emcore shall
not be liable for the cost of any labor or transportation charges
incurred in the repair or replacement of any non-conforming Products,
other than: (1) labor costs incurred by Emcore for Product repairs
performed in the United States; (2) cost of transportation incurred by
Emcore in the United States; and (3) upon Emcore's express written
instructions only, costs of transportation by Hakuto to Emcore of
Products to be repaired by Emcore in the United States.
7.1.2 WARRANTY AS TO SPECIFICATIONS. Emcore warrants that all
Products shall conform to the published specifications of Emcore or the
specifications of an end user customer approved and accepted by Emcore.
With respect to any non-conforming Product under this warranty, Emcore
shall perform all necessary re-engineering, rework or other procedures
necessary to conform the Product to the agreed specifications.
Specifically, Emcore shall be responsible for labor, travel and living
costs of Emcore personnel whether incurred in the United States or in
Japan.
7.1.3 EXCLUSIONS AND DISCLAIMER. Emcore's warranties set forth
in SECTIONS 7.1.1 and 7.1.2 do not apply to expendable items, including
those items listed in Exhibit B attached hereto. Also excluded from
Emcore's foregoing warranties are any components identified by Emcore
to Hakuto as being the subject of manufacturer's or licensor's
warranties, which warranties shall be deemed assigned to Hakuto at the
time title to the goods passes to Hakuto. With respect to all such
components, subject to the provisions of SECTIONS 7.5 and 10.5,
Hakuto's remedy shall be limited to the warranty and remedy provided by
the manufacturer or the licensor of said components, and Emcore's
liability obligation shall be limited to the exercise of its best
efforts to assist Hakuto in obtaining the benefit of such
manufacturer's or licensor's warranties. The foregoing limitation with
respect to components shall not apply to Emcore manufactured or
designed components.
11
<PAGE> 12
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-----------------------------------
THE FOREGOING IS IN LIEU OF AND EXCLUDES ALL OTHER WARRANTIES,
EXPRESSED OR IMPLIED, INCLUDING ANY IMPLIED WARRANTY OF MERCHANTABILITY
OR FITNESS FOR A PARTICULAR PURPOSE AND, SUBJECT TO THE PROVISIONS OF
SECTIONS 7.5 AND 10.5, SHALL CONSTITUTE THE SOLE REMEDY OF HAKUTO AND
LIABILITY OF EMCORE WITH RESPECT TO ANY PRODUCTS DELIVERED PURSUANT TO
THIS AGREEMENT. EXCEPT AS PROVIDED IN SECTIONS 7.5 AND 10.5, IN NO
EVENT SHALL EMCORE BE LIABLE FOR DAMAGES OF ANY KIND OR NATURE
RESULTING FROM IMPROPER OR NEGLIGENT USE OR OPERATION OF PRODUCTS,
IMPROPER PREVENTATIVE MAINTENANCE, MODIFICATIONS FROM THE ORIGINAL
SYSTEM CONFIGURATION OR REPAIR BY PERSONNEL OTHER THAN THOSE IN THE
EMPLOY OF EMCORE, OR THOSE IN THE EMPLOY OF HAKUTO WHO HAVE BEEN
TRAINED AND APPROVED BY EMCORE. EXCEPT AS PROVIDED IN SECTIONS 7.5 AND
10.5, IN NO EVENT SHALL EMCORE BE LIABLE FOR CONSEQUENTIAL DAMAGES,
ANTICIPATED OR LOST PROFITS, INCIDENTAL DAMAGES OR LOSS OF TIME OR
OTHER LOSSES OR EXPENSES INCURRED BY HAKUTO OR ANY END USER CUSTOMER,
DIRECTLY OR INDIRECTLY, IN CONNECTION WITH THE SALE, HANDLING OR USE OF
THE PRODUCTS COVERED BY EMCORE'S WARRANTY.
7.2 WARRANTIES RELATING TO MODE ITEMS, PEGASUS ITEMS AND E2M
ITEMS.
7.2.1 MATERIAL, QUALITY AND SPECIFICATIONS. Subject to the
provisions of SECTIONS 7.5 and 10.5, Emcore warrants to Hakuto and to
the end user customer that for a period beginning upon delivery of the
Applied Products to Hakuto or to the end user customer and continuing
until the date one (1) year from the date of acceptance by the end user
customer that any Applied Products delivered to Hakuto or the end user
customer shall be free from defects in material, workmanship and
quality and shall meet the specifications set forth in its
specifications sheets or specifications as agreed formally with
12
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------------------------------------
the end user customer or as mutually agreed by Emcore and Hakuto from
time to time hereafter.
7.2.2 EXCLUSIONS AND DISCLAIMER. THE EXPRESS WARRANTY GRANTED
ABOVE SHALL EXTEND DIRECTLY TO AUTHORIZED DISTRIBUTORS AND, EXCEPT AS
PROVIDED IN SECTIONS 7.5 AND 10.5, IS IN LIEU OF ALL OTHER WARRANTIES,
WHETHER EXPRESS OR IMPLIED, INCLUDING THE WARRANTIES OF MERCHANTABILITY
AND FITNESS FOR PARTICULAR PURPOSE. Except as provided in SECTION 7.5
and 10.5, Emcore will be liable under this warranty only for
replacement of the defective Product or, at the option of Hakuto or the
customer, credit of the Customer Price of the defective Product.
7.3 SPARE PARTS CONSIGNMENT INVENTORY. Emcore shall be responsible for
supplying all Spare Parts necessary to satisfy Emcore's obligations under the
foregoing warranties, and Hakuto shall be responsible for supplying all
installation or service relating to the warranty program except as otherwise
provided in SECTIONS 7.1.1 and 7.1.2 with respect to specification
non-conformance. Emcore agrees to maintain with Hakuto, at such location in the
Territory as Hakuto may designate, a consignment inventory of Spare Parts
("Consignment Inventory") determined by Emcore to be reasonably necessary for
the prompt and efficient delivery of warranty service. Hakuto agrees to provide
to Emcore periodic reports setting forth: (1) with respect to all warranty
claims made during such month, the identity of the end user, the nature of the
claim, the service provided and the Spare Parts used, if any, in providing such
service; and (2) the current levels of all Spare Parts comprising the
Consignment Inventory.
7.4 INSURANCE. Emcore shall maintain in force during the term of this
Agreement, and for a period of five (5) years thereafter, product liability
insurance based on an occurrence basis rather than a claims made basis, with
respect to the Products, in an amount not less than Two Million Dollars
($2,000,000) per person and Two Million Dollars ($2,000,000) per occurrence.
Such insurance policies shall name Hakuto as an additional insured, or shall
contain coverage protecting Hakuto as a vendor of the Products. Emcore shall
furnish Hakuto with properly executed Certificates of Insurance. Such insurance
policies shall include the obligation of the
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insurer to notify Hakuto, not less than thirty (30) days in advance, of any
reduction, non-renewal or cancellation of the foregoing insurance. In the event
that Emcore fails to purchase or maintain in force the above insurance, Hakuto
may purchase such insurance on Emcore's account, and at Emcore's expense, and
nothing herein shall waive Emcore's obligation to purchase and maintain such
insurance.
7.5 INDEMNIFICATION. Emcore shall indemnify and, at its own expense and
with diligence, defend and hold Hakuto, its subsidiaries and affiliates, and
their respective customers, free and harmless from and against any and all
claims, losses, damages, suits, causes of action, obligations and/or liabilities
(and against all associated costs and expenses, including, without limitation,
reasonable attorneys' fees and costs of litigation) whenever and wherever they
may occur, arising directly or indirectly from the sale or use of the Products,
provided, however, Emcore's obligation to indemnify Hakuto under this paragraph
shall not extend to any claims, losses, damages, suits, causes of action,
obligations and/or liabilities arising out of the gross negligence or
intentional wrongful conduct of the claimant.
8. OBLIGATIONS OF HAKUTO.
8.1 GENERAL OBLIGATIONS. In addition to and not in limitation of any
other obligations of Hakuto under this Agreement, Hakuto shall, at its own
expense unless otherwise expressly provided herein:
8.1.1 exert its best efforts to vigorously promote the sale
of the Products in the Territory and to develop a
market demand for the Products in the Territory;
8.1.2 advertise the Products throughout the Territory in
appropriate advertising media and in a manner
insuring proper and adequate publicity for the
Products, provided that Emcore shall be given the
opportunity to review and approve all advertising
prior to release by Hakuto;
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8.1.3 prepare for Emcore's review and approval, and update
not less than quarterly, a detailed marketing plan
for the sale of the Products in the Territory;
8.1.4 establish and maintain within the Territory adequate
business locations, including suitable facilities for
the display, care and storage of the Products and
provide adequate insurance against loss;
8.1.5 maintain within the Territory an inventory of Spare
Parts (in addition to the Consignment Inventory)
sufficient to meet expected demands for service and
upgrading of the Equipment in the Territory;
8.1.6 maintain a trained technical sales force and
sufficient other personnel qualified to promote,
install and service the Equipment in the Territory
and send appropriate personnel to Emcore for one week
training on an annual basis;
8.1.7 offer the Products for sale (including all
advertising and promotional activities) under the
Emcore trademark as manufacturer and Hakuto's
trademark as distributor;
8.1.8 assume full responsibility for the installation of
the Equipment, and the warranty and post-warranty
service and maintenance of the Equipment, in the
Territory;
8.1.9 translate and prepare promotional and technical
literature for use in the Territory;
8.1.10 obtain all import and regulatory approvals necessary
for the promotion and sale of the Products in the
Territory, supply Emcore with necessary customer
import certificates, and otherwise advise and assist
Emcore in
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complying with U.S. regulations and with regulations
and customs applicable in the Territory;
8.1.11 provide Emcore with periodic reports (but not less
often than quarterly) in form and substance
reasonably satisfactory to Emcore, setting forth
detailed information for such period regarding sales,
quotations, promotional efforts made, advertising,
resale prices, competitors, activities in the
Territory, installation and service activities
performed, customer complaints, business trends and
any other information likely to assist Emcore in
evaluating the performance of Hakuto in the
Territory;
8.1.12 establish and maintain complete and accurate records
of all sales and service of the Products in the
Territory;
8.1.13 refrain, without Emcore's prior written consent, from
seeking customers outside the Territory or from
promoting the sale of the Products outside the
Territory;
8.1.14 refrain from purchasing or soliciting orders for
goods which directly compete in any way with the
Products; and
8.1.15 (1) immediately assign a full time sales manager; (2)
within 60 days of the date of this Agreement, appoint
an additional sales person to specialize in the
distribution of Mode Items, Pegasus Items and E2M
Items; and (3) within one year of the date of this
Agreement, form a group to specialize in the
distribution of Mode Items, Pegasus Items and E2M
Items.
8.2 EQUIPMENT MINIMUM PURCHASE OBLIGATION. With respect to Equipment,
Hakuto shall have a minimum purchase obligation during each year of the term of
this Agreement
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[*] CONFIDENTIAL INFORMATION OMITTED
AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.
ASTERICKS DENOTE SUCH OMISSIONS.
("Contract Year"). Hakuto will submit to Emcore purchase orders during each of
the [*]. For each succeeding Contract Year of the Agreement, Hakuto and Emcore
shall mutually agree on a minimum purchase order amount for each such year prior
to commencement of such Contract Year. In computing the value of the minimum
purchase amount for each Contract Year, there shall be included the value of all
Equipment shipped during said Contract Year, the value of orders placed by
Hakuto though not shipped by Emcore during the Contract Year, and the value of
orders procured by Hakuto but canceled by Hakuto's customer by reason of
Emcore's inability to perfect delivery of the Equipment within six (6) months
from date of the order. The value of all of the foregoing orders which exceeds
the minimum purchase commitment for any Contract Year shall be credited to
Hakuto's minimum purchase order commitment for the subsequent Contract Year.
"Contract Year" means the twelve (12) month period commencing on the date of
this Agreement and each twelve (12) month period thereafter during the term of
this Agreement or any renewal term thereafter.
9. OBLIGATIONS OF EMCORE. In addition to and not in limitation of any other
obligations of Emcore under this Agreement, Emcore shall, at its own expense,
provide Hakuto with periodic reports (but not less often than quarterly) in form
and substance satisfactory to Hakuto, setting forth detailed information for
such period regarding production costs and margins with respect to the Products
and any other information likely to assist Hakuto in evaluating pricing options.
10. TRADEMARK AND PATENT RIGHTS.
10.1 LICENSE GRANT. Exhibit C attached hereto and made a part hereof
identifies all registered, recorded or issued material intellectual property,
including registered copyrights and trademarks, issued patents and applications
for any of the foregoing, which have been, or, with respect to applications, may
be issued to or registered by Emcore in the Territory (which listed items,
together with other intellectual property in which Emcore claims a proprietary
interest in
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the Territory such as, inter alia, know-how and common law trademarks shall
hereafter be referred to as "Intellectual Property"). Hakuto is hereby granted a
license and privilege to use all of the Intellectual Property, including any
improvements, modifications or functional equivalents, during the term of this
Agreement in furtherance of the objectives of this Agreement. Hakuto shall not
have the right to sublicense (except to Hakuto's subsidiaries and affiliates)
the Intellectual Property or otherwise permit its use by third parties without
Emcore's prior written consent. If Hakuto is required by law to register its
licenses in Japan or, in its sole discretion, determines that registration
hereof should be effected in order to protect the rights and interests of Hakuto
hereunder, then Emcore shall cooperate with Hakuto to effect the same.
10.2 HAKUTO COOPERATION. Hakuto shall advise Emcore from time to time
of any additional filings, registrations or other actions that may be necessary
or desirable for the protection of Emcore's Intellectual Property in the
Territory. Upon Emcore's request, Hakuto shall assist Emcore in connection with
the issuance or registration of any new Emcore patents, copyrights, trademarks
or other Intellectual Property in the Territory.
10.3 INFRINGEMENT. Hakuto shall at all times respect and protect
Emcore's rights of total ownership of the Intellectual Property in the
Territory. Hakuto shall promptly notify Emcore of any infringements of such
rights of which Hakuto has notice and shall assist Emcore in taking such action
against such infringement as Emcore may elect.
10.4 TERMINATION OF LICENSE. Upon termination of this Agreement for any
reason, Hakuto shall promptly relinquish to Emcore any rights to the use of the
Intellectual Property and shall thereafter refrain from using the same.
10.5 INFRINGEMENT INDEMNIFICATION. If Hakuto or its customers are
served notice of alleged infringement of any patents, designs, copyrights and/or
trademarks arising from the sale or use of any of the Products, Emcore shall, at
its own expense and with diligence, defend and hold Hakuto and its customers
free and harmless from and against any and all claims, loss, damage, suits,
causes of action and/or liability (and against all associated costs and
expenses, including, without limitation, reasonable attorneys' fees and costs of
litigation) whenever and wherever they
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may occur, on account of said alleged infringement; provided, however, that
Emcore shall have no obligation to indemnify Hakuto or its customers to the
extent the alleged infringement is due solely to: (a) a Product modification by
Hakuto or the customer; (b) use of a Product in combination with any other
device or thing; or (c) failure to use the Product in accordance with its
customary use or in conformity with Emcore's instructions and operating
guidelines. If Emcore shall fail or refuse to do so, Hakuto and its customers
may take such action as Hakuto or its customer, or jointly, may deem necessary,
and all costs, attorneys' fees, losses or damages as may be incurred by Hakuto
or its customers shall be the obligation of Emcore to be recovered by Hakuto or
its customers by suit or otherwise.
10.6 QUALITY CONTROL. In connection with any use hereunder by Hakuto of
any registered or unregistered trademark owned by Emcore, Emcore shall have the
right at all times to: (a) establish and require Hakuto's adherence to quality
control standards governing the repair, sale and quality of the Products; and
(b) establish and require Hakuto's adherence to standards governing the manner
of display of any Emcore trademark in promotional, technical and informational
materials. Emcore shall have the right to request, at reasonable intervals,
inspection by Emcore or its designee of Hakuto's operations and of any materials
used or created by Hakuto displaying any Emcore trademark, so that Emcore can
verify to its satisfaction that the Products, services and display of trademarks
conform to the appropriate standard of quality.
11. CONFIDENTIALITY. Each party hereto when receiving information from the other
party (in such case, a "Receiving Party") agrees to use its best efforts to hold
in strict confidence and not to disclose to others or use, for a period of three
years after termination hereof, any technical or business information,
manufacturing technique, process, experimental work, trade secret or other
confidential matter relating to the business of the party in possession of such
information (such party, a "Disclosing Party") or relating to the Products, in
the case of Hakuto, or the other party's business ("Confidential Information"),
except to the extent necessary to further the objectives of this Agreement. This
SECTION 11 shall not apply to: (1) information known to the Receiving Party
prior to disclosure by the Disclosing Party of Confidential Information; (2)
Confidential Information which is, or becomes through no fault of the Receiving
Party, generally known or available to the public; (3) Confidential Information
which is received by the Receiving Party from
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third parties who are not bound by confidentiality obligations; (4) Confidential
Information which the Disclosing Party discloses to a third party who is not
bound by confidentiality obligations, unless such third party is a subsidiary or
affiliate of the Disclosing Party; and (5) information independently developed
by the Receiving Party. The Receiving Party shall, upon request (and upon
termination of this Agreement without request), deliver to the Receiving Party
any and all drawings, notes, documents and materials received from the Receiving
Party.
12. ASSIGNMENT. Neither party shall assign, transfer or otherwise dispose of
this Agreement or any of its rights or obligations hereunder in whole or in part
to any individual, firm or corporation without the prior written consent of the
other party, and any attempted assignment in violation of this provision shall
be null and void.
13. TERM AND TERMINATION.
13.1 TERM. This Agreement shall take effect on the effective date set
forth on the first page hereof and shall remain in effect for a period of ten
(10) years thereafter unless earlier terminated in accordance with the terms
hereof. This Agreement may be terminated by either Party upon the expiration of
the ten (10) year period by giving six (6) months' prior written notice to the
other party of its intent not to extend the Agreement for further periods.
Unless such notice of intent to terminate is given, this Agreement shall
continue to remain in effect after the initial ten (10) year period for further
consecutive periods of one (1) year each, subject, however, to the right of
either party to terminate the Agreement during each such extended one-year
period by giving six (6) months' prior written notice to the other party of its
intent to terminate.
13.2 TERMINATION. In addition to the provisions of SECTION 13.1
above, either party may terminate this Agreement as follows:
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13.2.2 immediately and without prior written notice if
proceedings in bankruptcy or insolvency are
instituted by or against the other party, a receiver
is appointed or any substantial part of the assets of
the other party is the subject of attachment,
sequestration or other similar proceeding, and such
proceeding is not vacated, terminated or stayed
within sixty (60) days after its commencement or
institution; or
13.2.3 immediately upon the occurrence of a default by the
other party in the performance of its obligations
under this Agreement, which default is not cured
within thirty (30) days after receipt by such party
of written notice of the default; or
13.2.4 immediately if either party is unable to obtain or
renew any material permit, license, or other
governmental approval necessary to such party's
performance under this Agreement.
14. CONSEQUENCES UPON TERMINATION. Upon expiration or termination of this
Agreement for any reason:
14.1 REPURCHASE OF SPARE PARTS. Emcore shall repurchase Hakuto's
inventory of new and unused Spare Parts at Emcore's then effective list price
for such Spare Parts or Hakuto's cost therefor, whichever is lower. Hakuto shall
deliver such Spare Parts, together with the Consignment Inventory, at Emcore's
expense, to Emcore at such location, in such manner and at such time as Emcore
may direct.
14.2 RETURN OF MATERIALS. Hakuto shall return to Emcore all proprietary
information and all sales and technical literature relating to the Products, and
Hakuto shall deliver to Emcore Hakuto's list of all customers and prospective
customers for the Products in the Territory, including names, addresses,
telephone numbers and contact persons.
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[*] CONFIDENTIAL INFORMATION OMITTED
AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.
ASTERICKS DENOTE SUCH OMISSIONS.
14.3 NON-COMPETITION; CESSATION OF MARKETING AND USE OF EMCORE NAME.
For a period of [*] after the date of termination of this Agreement, Hakuto
shall not engage in the marketing, sales or distribution of any products which
may be directly competitive with the Products, provided, however, nothing herein
shall prohibit Hakuto from liquidating by sale or otherwise any Products
remaining in Hakuto's inventory on the date of termination and not repurchased
by Emcore. Hakuto shall cease marketing the Products and using Emcore's name and
trademarks in the Territory, provided that all orders for Products accepted by
Emcore prior to expiration or termination of this Agreement shall be completed
in accordance with their terms. Hakuto shall thereafter, for such [*] period,
refer to Emcore any and all inquiries, orders, correspondence and the like,
whether in written or oral form, pertaining to Products in the Territory.
14.4 ASSUMPTION OF WARRANTY OBLIGATIONS. Emcore shall assume,
commencing immediately upon termination of this Agreement, full responsibility
for providing warranty service and post-warranty servicing of the Equipment to
all customers theretofore serviced by Hakuto, and Emcore shall hold Hakuto free
and harmless from all such obligations.
14.5 COMMISSIONS. Emcore shall pay to Hakuto a commission as follows:
(1) with respect to Equipment, a commission equal to [*] purchase price of any
Equipment sold by Emcore (i.e., orders received and approved by Emcore) or with
respect to compensation or fees received by Emcore in connection with technology
sharing arrangements in or for use in the Territory within twelve (12) months
after expiration or termination of this Agreement; (2) with respect to Mode
Items, [*]; (3) with respect to Pegasus Items, [*]; and (4) with respect to E2M
Items, [*].
14.6 LIABILITY FOR TERMINATION. Provided that termination of this
Agreement did not result by reason of the breach of or default under this
Agreement by either party, and except as
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------------------------------------
[*] CONFIDENTIAL INFORMATION OMITTED
AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.
ASTERICKS DENOTE SUCH OMISSIONS.
provided in SECTION 15, neither party to this Agreement shall claim from the
other party any indemnity, reimbursement, compensation or damages for alleged
loss of clientele, good will, profits or anticipated sales or on account of
expenditures, investments, leases or other commitments arising from the
expiration or termination of this Agreement, each party acknowledging that it
has made all decisions and investments in full awareness of the possibility of
losses or damages arising from the expiration or termination of this Agreement.
15. CHANGE OF CONTROL. If, during the term of this Agreement, a Change of
Control occurs, then Emcore shall either: (1) pay [*] to Hakuto; or (2) provide
Hakuto with reasonable assurance that the New Control Party will assume the
obligations of this Agreement and that the New Control Party will, or will cause
Emcore to, manufacture and sell, in the Territory and pursuant to the terms of
this Agreement, Mode Items, Pegasus Items and E2M Items at a level satisfactory
to Hakuto.
16. MISCELLANEOUS.
16.1 NOTICES. All notices and other communications in connection with
this Agreement shall be in writing, shall be sent to the respective parties at
the following addresses, or to such other addresses as may be designated by the
parties in writing from time to time, by registered or certified mail, telecopy
or recognized overnight delivery service, and shall be effective upon receipt:
To Emcore: Emcore Corporation
394 Elizabeth Avenue
Somerset, New Jersey 08873
Attention: William J. Kroll
Telephone: 908-271-9090
Fax: 908-271-9686
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------------------------------------
To Hakuto: Hakuto Co. Ltd.
1-13 Shinjuku
1-chome, Shinjuku-ku
Tokyo 160, Japan
Attention: A. Nakazawa
Telephone: 3-3225-8910
Fax: 3-3225-9007
With Copy To: Masuda, Funai, Eifert & Mitchell, Ltd.
One East Wacker Drive, Suite 3200
Chicago, Illinois 60601-1802
Attention: Thomas P. McMenamin
Telephone: 312-245-7500
Fax: 312-245-7467
16.2 NO WAIVER. Any failure by any party hereto to enforce at any time
any term or condition under this Agreement shall not be considered a waiver of
that party's right thereafter to enforce each and every term and condition of
this Agreement.
16.3 GOVERNING LAW; ARBITRATION. This Agreement is made and shall be
construed according to the laws of the State of New Jersey, USA. All disputes,
controversies, or differences which may arise between the parties, out of or in
relation to or in connection with this contract, or the breach thereof, shall be
finally settled by arbitration pursuant to the Japan-American Trade Arbitration
Agreement, of September 16, 1952, by which each party hereto is bound. The
arbitration proceeding shall be held in Somerset County, New Jersey, if Hakuto
seeks arbitration and in Tokyo, Japan, if Emcore institutes such proceeding.
Each party shall bear its own costs incurred in such arbitration proceeding.
16.4 MODIFICATION. This Agreement may be modified, amended or revised
only by a written instrument duly executed by the parties hereto.
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16.5 COMPLIANCE WITH LAWS. In the conduct of its business under this
Agreement, Hakuto shall comply with the applicable laws, regulations, orders and
the like prevailing in the Territory.
16.6 ENTIRE AGREEMENT. This Agreement, the exhibits and duly executed
addenda thereto, all approved purchase orders issued pursuant hereto, shall
contain the entire and only agreement between the parties relating to the
subject matter hereof, and any representations, terms or conditions relating
thereto but not incorporated herein shall not be binding upon either party. This
Agreement cancels, voids and supersedes any agreement heretofore entered into
between the parties with respect to the subject matter hereof, except as
otherwise expressly provided herein.
16.7 SEVERABILITY. Any provision of this Agreement which is prohibited
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions or affecting the validity or
enforceability of any provision in any other jurisdiction.
16.8 SUCCESSORS AND ASSIGNS. Subject to SECTION 12 hereof, all terms
and provisions of this Agreement shall be binding upon and inure to the benefit
of the parties and their respective permitted transferees, successors and
assigns.
16.9 COUNTERPARTS. This Agreement may be executed by duly authorized
representatives of the respective parties hereto in any number of counterparts,
each of which, when fully executed, shall be deemed an original. This Agreement
may be translated into any other language and such translation may be initialed,
but only this Agreement in the English language shall be deemed the original. If
any conflict exists between the English language and any translation thereof,
the English language version shall control.
<PAGE> 26
CONFORMED COPY OF EXECUTION ORIGINAL
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
EMCORE CORPORATION
By: /s/ WILLIAM J. KROLL
---------------------------------
Name: William J. Kroll
Title: Executive Vice President
HAKUTO CO. LTD.
By: /s/ SHIGEO TAKAYAMA
---------------------------------
Title: President & CEO
<PAGE> 27
EXHIBIT A
CONFORMED COPY OF EXECUTION ORIGINAL
PART 1: EQUIPMENT
Equipment shall mean the following, including all Modifications and
Improvements and all functional equivalents thereof:
Explorer Reactor with glove box (no load lock) and limited options
Discovery 75
Discovery 125
Discovery 180
Enterprise 200
Enterprise 300
Enterprise 400
Advanced Oxide CVD System Standard
Standard accessory Tools for above Systems
PART 2: E2M ITEMS
All Epitaxial Wafers and all other products of Emcore's Electronic Materials
Division, including all products not yet in existence that are designed,
developed, manufactured or sold by Emcore and that are similar or related to
the above-listed products.
PART 3: MODE ITEMS
All Vertical Cavity Surface Emitting Lasers and all other products of Emcore's
MODE Division, including all products not yet in existence that are designed,
developed, manufactured or sold by Emcore and that are similar or related to
the above-listed products.
PART 4: PEGASUS ITEMS
All MR Sensors and all other products of Emcore's Pegasus Division, including
all products not yet in existence that are designed, developed, manufactured or
sold by Emcore and that are similar or related to the above-listed products.
<PAGE> 28
EXHIBIT B
CONFORMED COPY OF EXECUTION ORIGINAL
EXPENDABLE ITEMS
NOT COVERED UNDER WARRANTY
1. Pump Fluids - (krytox, mechanical pump fluid)
2. Oil Coalescing Filter Element
3. Oil Backstreaming Filter Element
4. Oil Recirculation Filter Element
5. Graphite Heater Filament
6. Loadlock Heater Bulbs
7. Copper Gaskets
8. Nickel Gaskets
9. Viton-rings VCR Filter Gaskets
10. PD Cell Membrane
11. Reactor Parts:
a. Moly Electrodes
b. Moly Standoff Nuts
c. Moly Screws
d. Vented Screws
e. Diffusion Plate Screen
12. TGA (Activated Carbon)
13. MDA Tape
14. MDA Thermal Print Paper
15. Motor Drive Belt
16. Needle Valve Belt
17. Computer Disks
18. Fuses
19. Loadlock Operation Fluid
20. Stainless Steel Filter Medium
21. Fluorescent Light Bulbs
22. Clean Air Filters
23. Miscellaneous Hardware
<PAGE> 29
EXHIBIT C
CONFORMED COPY OF EXECUTION ORIGINAL
PATENTS AND TRADEMARKS
<TABLE>
<CAPTION>
APPLICATION DATE REGISTRATION
CATEGORY ITEM COUNTRY NUMBER ISSUED NO.
- -------- ---- ------- ----------- ------ ------------
<S> <C> <C> <C> <C> <C>
Patents Modular Gas Handling Apparatus
Gas Treatment Apparatus and
Method Gas Dispersion Device
- --------------------------------------------------------------------------------------------------------------
Trade Mark Emcore
- --------------------------------------------------------------------------------------------------------------
Copyrights
- --------------------------------------------------------------------------------------------------------------
Other Intellectual
- --------------------------------------------------------------------------------------------------------------
Property Rights
- --------------------------------------------------------------------------------------------------------------
Applications
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 1
Exhibit 10.17
S-622773-JSS
Long-Term Purchase Agreement
IN CONSIDERATION OF THE PROMISES HEREINAFTER SET FORTH, THE PARTIES AGREE AS
FOLLOWS:
SCHEDULE
This Long-Term Purchase Agreement Number S-622773-JSS, hereinafter referred to
as the "Agreement", is entered into between SPACE SYSTEMS/LORAL, INC.,
(hereinafter referred to as "Buyer" or "SS/L"), a corporation organized and
existing under the laws of the State of Delaware, and having its principal
offices and place of business at 3825 Fabian Way, Palo Alto, California, 94303,
and EMCORE CORPORATION, (hereinafter referred to as "Subcontractor" or
"EMCORE"), with offices located at 10420 Research Road SE, Albuquerque, NM
87123.
This Agreement is contemplated by the following:
1. Buyer's AUTHORIZATION TO PROCEED (ATP) NO. S-622735-JSS, dated September 3,
1998.
2. The MEMORANDUM OF UNDERSTANDING (MOU) between the parties, dated October 6,
1998.
This Agreement supersedes the ATP and the MOU in their entirety and therefore
constitutes the entire agreement between the parties. Any action taken pursuant
to the ATP and the MOU shall be considered as action taken and costs incurred in
the performance of this Agreement.
This Agreement is entered into on November 16, 1998, and shall expire on
December 31, 2002, unless extended by mutual agreement of the parties.
This Agreement consists of the SCHEDULE, the TERMS AND CONDITIONS, and the
SIGNATURE PAGE.
<PAGE> 2
ARTICLE I - SCOPE OF WORK
This Agreement provides for the procurement of COMPOUND SEMICONDUCTOR
MULTI-JUNCTION HIGH-EFFICIENCY SOLAR CELLS (with by-pass diode), hereinafter
also referred to as Hardware, and Subcontractor agrees to provide the personnel,
services, materials, equipment, and facilities necessary for the accomplishment
of the tasks specified in the Exhibits cited below and any other requirements
identified elsewhere in this Agreement.
The following Exhibits are listed in their order of precedence. In the event of
a conflict or inconsistency between an Exhibit and an Article of this Agreement,
the Article shall take precedence.
Exhibit A SS/L Document No. E177493, entitled HIGH EFFICIENCY,
DUAL-JUNCTION SOLAR CELL STATEMENT OF WORK (PRELIMINARY), redlined
dated September 2, 1998.
Exhibit B SS/L Document No. E177495, entitled MULTI-JUNCTION SOLAR CELL
SOURCE CONTROL DRAWING (PRELIMINARY).
Exhibit C SS/L Document No. E177492, entitled HIGH EFFICIENCY,
DUAL-JUNCTION, SOLAR CELL PERFORMANCE SPECIFICATION.
(PRELIMINARY), redlined September 2, 1998.
Exhibit D SS/L Document No. E032894, entitled SUBCONTRACTOR PRODUCT
ASSURANCE REQUIREMENTS, Revision A, Amendment No. 1, release date
March 28, 1996.
Exhibit E SS/L Document No. SH-E023988, entitled DATA REQUIREMENTS
INSTRUCTIONS (DRI) FOR SPACECRAFT SUBCONTRACTORS, release date
October 4, 1993.
Exhibit F SS/L Document No. E060042, entitled ENVIRONMENTAL REQUIREMENTS
SPECIFICATION, release date March 27, 1995.
Exhibit G SS/L Document No. LG-E080742, DIRECT BROADCAST SATELLITES (DBS)
(FOR APSTAR, MABUHAY AND TELSTAR) PROGRAM AUTHORIZED PARTS LIST
(PAPL), Revision N/C, release date May 26, 1995.
Exhibit H SS/L Document No. LG-E076310, TELSTAR PROGRAM AUTHORIZED
MATERIALS LIST (PAML), Revision N/C, release date June 1, 1995.
Exhibit I SS/L Document No. LG-E076311, TELSTAR Program Authorized Process
List (PAPRL), Revision N/C, release date June 1, 1995.
ARTICLE II - PROVISIONS AND INFORMATION APPLICABLE TO PURCHASE RELEASES
Qualification and procurement of Hardware by Buyer pursuant to this Agreement
shall be accomplished by the issuance of Purchase Releases to the extent
sanctioned by the initial publication of this Agreement and amendments to same.
Subcontractor shall qualify, fabricate, test, and deliver Hardware in accordance
with Exhibit A through Exhibit I of Article I (SCOPE OF WORK).
-2-
<PAGE> 3
Buyer may issue Purchase Releases for work, services and/or Hardware at any time
during the effective term of this Agreement and Subcontractor shall fulfill all
requirements of such orders accordingly.
As a minimum, each Purchase Release for Hardware shall set forth the following:
1. Long-Term Purchase Agreement (LTPA) Number.
2. Purchase Release Number.
3. Description of work, services and/or quantity of Hardware ordered.
4. Program/Project Name, if applicable, associated with the Hardware.
5. Configuration, applicable documentation, part numbers and description.
6. Firm Fixed Prices in accordance with Article IV (OPTIONS).
7. Delivery of Hardware in accordance with Article IV (OPTIONS).
8. Payment stipulations pursuant to Article IV (OPTIONS).
9. Related specific and miscellaneous instructions.
ARTICLE III - PURCHASE RELEASES
PURCHASE RELEASE NO. 1
This initial Purchase Release is issued to record and definitize Buyer's
Authorization to Proceed (ATP) to Subcontractor No. S-622735-JSS, dated
September 3, 1998, for the Development and Qualification effort associated with
the High-Efficiency Solar Cell- reference JSS-EMC/98-001, September 3, 1998.
Unless otherwise indicated herein this Agreement, Subcontractor's successful
completion of the Qualification program imposes no obligation upon Buyer to
procure Hardware from Subcontractor.
This initial Purchase Release is issued by Buyer under authority of the
Agreement and sanctions Subcontractor for the QUALIFICATION OF THE
HIGH-EFFICIENCY SOLAR CELL (HESC). Pursuant to the provisions of this Purchase
Release, Subcontractor shall undertake and complete all requirements of the
qualification program in accordance with Exhibit A through Exhibit I, and any
other work herein described, as follows:
-3-
<PAGE> 4
[*] Confidential information omitted and filed
separately with the Securities and Exchange
Commission. Asterisks denote such
omissions.
A. PRICE
Subcontractor shall provide all personnel, material and resources
necessary for the proper accomplishment of the Qualification Program
tasks for the FIRM FIXED PRICE OF [*].
B. PERFORMANCE AND DELIVERY
Subcontractor shall commence the qualification effort on or about
September 2, 1998 and complete all work and tasks in accordance with
the following schedule:
<TABLE>
<CAPTION>
ITEM NO. DESCRIPTION COMPLETION DATE
-------- ----------- ---------------
<S> <C> <C>
1 Develop process and tooling of High-Efficiency Solar Cell [*]
process
2 Demonstrate High-Efficiency Solar Cell Meet specifications [*]
3 Deliver [*] Solar Cells processed at RTI to Buyer for [*]
Radiation Space Qualification
4 Deliver [*] Subcontractor processed Solar Cells for Space [*]
Qualification Coupon
5 Critical Design Review (CDR) [*]
6 Deliver [*] Subcontractor processed Solar Cells for further [*]
space qualification
7 Material Readiness Review (MRR) / Final Design Review (FRR) [*]
8 Publication of Final Qualification Program Report March 30, 1999
</TABLE>
C. PAYMENT
This Purchase Release provides for Milestone Payments as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1 Develop process and tooling of High-Efficiency Solar September 15, 1998 [*]
Cell. Deliver Mask Data.
2 a) Deliver [*] Solar Cells processed at RTI for
radiation space qualification
</TABLE>
-4-
<PAGE> 5
[*] Confidential information omitted and filed
separately with the Securities and Exchange
Commission. Asterisks denote such
omissions.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
b) Deliver [*] Solar Cells processed at December 21, 1998 [*]
Subcontractor's facility for space
qualification coupon
c) Closure of Subcontractor CDR Action Items December 31, 1998 [*]
3 a) Deliver [*] Solar Cells processed at
Subcontractor's facility for further space
qualification.
b) Closure of Subcontractor MRR/FDR Action Items. March 30, 1999 [*]
4 Buyer Approval of Subcontractor Final Qualification April 7, 1999
Program Report [*]
-------------
Total Milestone Payments [*]
=============
</TABLE>
1. All material and work covered by Milestone Payments shall become the
sole property of Buyer.
2. Upon completion of a Milestone, Subcontractor may submit an
invoice for the amounts specified provided, however, Buyer
reserves the right to inspect or otherwise verify
Subcontractor's progress to determine that performance
relative to each payment has been satisfactorily completed.
3. Subcontractor shall submit an original and one copy of
invoices to:
Space Systems/Loral, Inc. Attention: Accounts Payable
P.O. Box 10825 M/S AC-1
Palo Alto, California 94303-4697
Each invoice shall cite the LTPA Number, the Purchase Release
number, and the number and description of the milestone.
4. Payment terms shall be net 30 days after receipt of invoice,
actual milestone completion date or scheduled milestone
completion date, whichever is later.
D. ADDITIONAL UNDERSTANDINGS AND REQUIREMENTS
1. Subcontractor shall demonstrate successful qualification of
the High-Efficiency Solar Cell at the Manufacturing Readiness
Review (MRR), currently scheduled for March 15, 1999.
-5-
<PAGE> 6
[*] Confidential information omitted and filed
separately with the Securities and Exchange
Commission. Asterisks denote such
omissions.
2. Successful qualification of the laydown of the High-Efficiency
Solar Cell on a substrate furnished by Buyer is a requirement
of this process.
The qualification of the laydown will be done by a supplier to
be named by Buyer.
Qualification of the laydown of the HESC will be demonstrated
at a joint MRR between the substrate supplier and
Subcontractor.
3. Upon Subcontractor's demonstration that it has met the
requirements of this Qualification Program to the satisfaction
of Buyer, Buyer will issue and activate Purchase Release No. 2
by written notice to Subcontractor in accordance with the
stipulations of Article IV (OPTIONS). Pending Buyer's
documented ratification, Buyer assumes no liability or
obligation to Subcontractor with respect to Purchase Release
No. 2.
In the event Subcontractor is unsuccessful in achieving the
requirements of the Qualification Program, Buyer has no
obligation to procure hardware from Subcontractor.
E. EXCLUSIVITY
All information and data developed under this Qualification program
shall be deemed proprietary to Buyer and therefore shall be provided to
Buyer on an exclusive basis. Subcontractor shall have the right to use
this proprietary information and data for its own purposes.
Subcontractor shall not disclose information proprietary to Buyer to a
third party absent the written consent of Buyer.
PURCHASE RELEASE NO. 2
PURCHASE RELEASE NO. 2 IS HEREIN DOCUMENTED BY THE INITIAL PUBLICATION OF THE
AGREEMENT SOLELY FOR THE PURPOSE OF RECORDING BUYER'S INTENT TO PROCURE HARDWARE
AS DEPICTED BELOW. AT THIS WRITING, PURCHASE RELEASE NO. 2 IS NOT A CONFIRMATION
OF PURCHASE AS BUYER'S VALIDATION OF THE RELEASE IS SUBJECT TO THE CONTINGENCY
AND ANY ASSOCIATED CONDITIONS STIPULATED IN PURCHASE RELEASE NO. 1, PARAGRAPH
D.3.
Pursuant to the provisions of this Purchase Release, Subcontractor shall
fabricate, test and deliver Hardware and perform related work and services in
accordance with the requirements of Exhibit A through Exhibit I and the
stipulations of this Release.
A. PRICE
Subcontractor shall provide all Hardware, services and documentation
specified in this Purchase Release for the Firm Fixed Price of
$5,250,000, as follows:
-6-
<PAGE> 7
[*] Confidential information omitted and filed
separately with the Securities and Exchange
Commission. Asterisks denote such
omissions.
<TABLE>
<CAPTION>
Solar Cell Solar Cell Total Quantity Unit Total
P/n Description Efficiency Rating Solar Cells Price Price
---------- ----------- ----------------- -------------- ----- ------
<S> <C> <C> <C> <C> <C>
TBD Compound Semiconductor [*] % [*] [*] [*]
Multi-Junction HESC
</TABLE>
B. DELIVERY
Subcontractor shall deliver Hardware and complete any work or services
procured by this Release in accordance with the following:
<TABLE>
<CAPTION>
P/n Quantity Date Destination
--- -------- ---- -----------
<S> <C> <C> <C>
TBD [*] 1 Month ABNQ(1) TBD
TBD [*] 2 Months ABNQ TBD
TBD [*] 3 Months ABNQ TBD
TBD [*] 4 Months ABNQ TBD
</TABLE>
(1) ABNQ = After Buyer Notification of Qualification
ARTICLE IV - OPTIONS
All Hardware procured under Article III (PURCHASE RELEASES) shall be deemed to
be ordered as Options. Accordingly, in consideration of the award of this
Agreement, Subcontractor grants to Buyer unilateral and irrevocable Options to
purchase Hardware throughout the effective term of this Agreement. Any order for
optional Hardware shall be accomplished by an authorized Purchase Release
conveyed and confirmed by an amendment to this Agreement.
Except as expressly provided for, nothing in this Agreement shall be construed
as a commitment that Buyer shall purchase Hardware.
A. PRICE
The Firm Fixed Option Prices, by Calendar Year and Solar Cell
Efficiency Rating, and associated conditions applicable to Hardware
ordered under this Agreement is as follows:
<TABLE>
<CAPTION>
Solar Cell Solar Cell Unit
Calendar Year Efficiency Rating Quantity Range Price
------------- ----------------- -------------- -----
<S> <C> <C> <C>
1999 [*] % [*] [*]
[*] [*]
[*] [*]
[*] [*]
</TABLE>
-7-
<PAGE> 8
[*] Confidential information omitted and filed
separately with the Securities and Exchange
Commission. Asterisks denote such
omissions.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
2000 [*] % [*] [*]
[*] [*]
[*] [*]
[*] [*]
2001 [*] % [*] [*]
[*] [*]
[*] [*]
[*] [*]
2002 [*] % [*] [*]
[*] [*]
[*] [*]
[*] [*]
</TABLE>
1. The foregoing Hardware unit prices are:
a. [*]
b. [*]
2. ADJUSTMENTS TO PURCHASE RELEASE UNIT PRICES
Modifications to Unit Prices shall be made on the basis of the
following:
a. If in a Calendar Year, and within a three-month period, Buyer
places a Purchase Release(s) which, when added to a previous
Purchase Release(s), in the aggregate increases the quantity
of Hardware purchased such that a higher Solar Cell Quantity
Range is achieved, the Unit Price(s) for all effected Releases
will be modified to reflect the cumulative quantity of
Hardware so purchased under these conditions.
b. If in a Calendar Year, for a incremental Purchase Release(s)
which does not fall within the three-month stipulation of
Subparagraph a., above, no adjustment will be made to the Unit
Price of the prior Purchase Release; the Unit Price applicable
to the incremental Purchase Release will, however, be adjusted
provided that (1) in the aggregate a higher Solar Cell
Quantity Range is achieved, and (2) continuity of monthly
Subcontractor delivery is maintained.
c. In the event Hardware with a higher Solar Cell Efficiency
Rating is not available during a Calendar Year as identified
in this provision, Buyer may purchase available rated Hardware
in accordance with the stipulations of Subparagraph a. and b.,
above. Under such conditions, any Hardware aggregate
limitation imposed by the definition of a Calendar Year is
waived.
Examples applicable to these subparagraphs can be found in APPENDIX I
to this Agreement.
-8-
<PAGE> 9
[*] Confidential information omitted and filed
separately with the Securities and Exchange
Commission. Asterisks denote such
omissions.
Any Purchase Release and associated conditions effected by Unit Price
adjustments will be modified accordingly.
B. [*]
C. DELIVERY / SUBCONTRACTOR CAPACITY
1. Subcontractor shall provide for the allocation of resources to
ensure Buyer the capacity to fabricate and deliver Hardware
not-to-exceed the following:
Calendar Solar Cells
Year Per Month
-------- ----------
1999 [*]
2000 [*]
2001 [*]
2002(1) [*]
(1) Through completion of orders
2. Subcontractor is not required to commence delivery of Hardware
earlier than April 1999.
D. MINIMUM ORDER QUANTITY
Except as otherwise indicated in this Agreement, each purchase release
will consist of no less than [*] Solar Cells.
E. HARDWARE REQUIREMENTS COVENANT
In consideration of the accords recorded in this Agreement, Buyer
shall, during the effective term of this Agreement, procure from
Subcontractor its requirements for Compound Semiconductor GaAs
Multi-Junction High-Efficiency Solar Cells as expressly defined by the
technical documentation cataloged in Article I (SCOPE OF WORK) of this
Agreement, provided that Subcontractor (1) perform satisfactorily in
the manufacture, test and delivery of the Hardware purchased by Buyer,
(2) sustain a level of technical and product quality competence equal
to or greater than acceptable industry standards, and (3) preserve the
guarantee declared in Paragraph B, above. In the event Subcontractor
fails to satisfy the foregoing or any other stipulation of this
Agreement, Buyer has the right to terminate this Agreement in
accordance with the terms and conditions of same.
-9-
<PAGE> 10
F. DOCUMENTATION
Documentation shall be delivered in accordance with the schedule
appearing in the Subcontract Data Requirements List (SDRL) of Exhibit A
to the delivery point identified in Article VIII (DELIVERABLE REPORTS
AND DOCUMENTATION).
If a SDRL requirement has been submitted and approved by Buyer in
conjunction with a prior Purchase Release issued under this Agreement,
Subcontractor shall submit complete reference information from the from
each submission for review and confirmation by Buyer. If a prior SDRL
submittal has been approved by Buyer, yet subsequently updated or
modified by Subcontractor in any manner whatsoever, such SDRL submittal
shall be conveyed in its entirety for review and approval by Buyer.
SUBCONTRACTOR IS RESPONSIBLE FOR CONFIRMING THAT ANY DOCUMENTATION
REQUIRING THE APPROVAL OF BUYER IS RECEIVED BY BUYER.
ARTICLE V - PAYMENT
All payment due for Hardware ordered by this Agreement shall be made in
accordance with the following:
A. Subcontractor may submit invoices on a monthly basis in accordance with
the completion of the monthly delivery stipulations of a Purchase
Release.
B. PROPERTY RIGHTS
All Hardware, work and services covered by invoice payments shall
become the sole property of Buyer or Buyer's Customer. This provision
shall not be construed as relieving Subcontractor from the sole
responsibility of all Hardware upon which payments have been made or
the restoration of any defective work in accordance with the Warranty
provisions of this Agreement, or as waiving the right of Buyer to
require fulfillment of all terms of this Agreement.
C. INVOICES
Subcontractor may, upon completion of monthly delivery requirements,
submit invoices for the amounts specified, provided however that Buyer
reserves the right to inspect or otherwise verify that Hardware for
which payment is requested complies with the requirements of this
Agreement. Payment for Hardware delivered does not relieve
Subcontractor of any obligation hereunder.
Subcontractor shall submit an original and one copy of invoices to:
SPACE SYSTEMS/LORAL, INC.
3825 Fabian Way
Palo Alto, California 94303-4604
Attention: Accounts Payable M/S AC-1
-10-
<PAGE> 11
D. PAYMENT TERMS
Payment terms are Net 30 days after receipt of invoice, scheduled
delivery date, or completion of actual delivery requirements.
E. The California Resale Registration Number for Space Systems/Loral
applicable to this transaction is SY GH 24-91636.
ARTICLE VI - INSPECTION AND ACCEPTANCE
A. The inspection of the work to be performed under this Agreement shall
be in accordance with the requirements of Exhibit A through Exhibit I
and Clause No. 19 (INSPECTION AND ACCEPTANCE) of the Terms and
Conditions. The inspection period shall culminate at such time that
Buyer provides written notice of Final Acceptance of the work
performed.
B. Authorization to make delivery of the hardware hereunder shall occur at
Subcontractor's plant upon successful completion of inspections and
testing in accordance with the requirements of Exhibit A through
Exhibit I. Subcontractor shall have demonstrated, by properly
documented inspection and test results, full compliance with the
performance requirements herein including correction by the
Subcontractor of all deficiencies and all discrepancies pertaining to
such inspections and testing and including completion of further
retesting as may be necessary to demonstrate same. The hardware
hereunder shall have been inspected by Buyer and determined to be in
full compliance with the requirements of the Agreement including
correction by Subcontractor of all deficiencies and discrepancies
pertaining to such inspection. Satisfying the requirements of Exhibit A
through Exhibit I shall not constitute waiver or release the
Subcontractor from the responsibility of meeting all of the provisions
herein.
Any waiver of a requirement granted by Buyer or acceptance of an
out-of-spec condition applies only to the specific unit(s) identified.
Said waiver or acceptance of an out-of-spec condition does not
constitute a change to or waiver of any requirement of this Agreement.
C. Final acceptance of documentation hereunder shall occur at Space
Systems/Loral, Palo Alto, California, after review and determination of
its compliance with requirements of this Agreement, including
correction by the Subcontractor of all deficiencies and discrepancies
pertaining to such items.
D. Buyer and Buyer's Customer accompanied by Buyer shall have access to
Subcontractor's facilities, drawings, specifications and descriptions
of standards or production processes for hardware or software to be
delivered hereunder to the extent necessary to ensure compliant
performance. Notice of visit by Buyer and/or Buyer's customer(s) will
be provided within 48 hours of the anticipated visit to Subcontractor's
facility and such visit will be on a non-interference basis to
Subcontractor's operations.
E. The work to be performed under this Agreement is subject to the
on-going technical monitoring and pre-shipment inspection of Buyer and
Buyer's Customer accompanied by
-11-
<PAGE> 12
Buyer on a non-interference basis. Any review, concurrence or approval
by Buyer of activities performed by Subcontractor including, but not
limited to, any SDRL item submittals in connection with the work shall
not relieve Subcontractor from fulfilling its obligations in meeting
the requirements of this Agreement.
ARTICLE VII - TERMS OF HARDWARE DELIVERY AND SHIPMENT
All shipment of Hardware shall be in accordance with the following:
A. Buyer's Purchase Release(s) shall identify the quantity and destination
of Hardware items procured under this Agreement.
B. The Initial and Final destination of all Hardware items to be delivered
hereunder is as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
- Initial Destination Point - International Freight Services (for Space
Systems/Loral)
1610 Rollins Road
Burlingame, CA 94010
Attention: Mr. Achim Biller
Phone: 650 259-5106
- Final Destination Point - TOSHIBA
Toshiba Corporation Attention: Mr. Isao Takahashi,
Komukai Works Space Products Manufacturing
1, Komukai, Toshiba-Cho, 210 Department: Parts Acceptance Center
Saiwai-Ku, Kawasaki, 210 Japan Building No. 7-1, 1ST Floor
- Final Destination Point - MELCO
Mitsubishi Electric Corporation Attention: Mr. Hideo Uemura,
Kamakura Works Space Systems Section
325 Kamimachiya, Kamakura Planning & Marketing Department
Kanagawa 247, Japan
- Final Destination Point - SS/L
Space Systems/Loral, Inc. Attention: Mr. Naresh Makhijami,
Receiving/Distribution Center Mail Stop G-44
1145 Hamilton Court
Menlo Park, California 94025
Mark With: LTPA S-612773-JSS
</TABLE>
C. The FOB and Delivery Point is Carrier, as designated by Buyer, at
Subcontractor's dock,
-12-
<PAGE> 13
Albuquerque, New Mexico. Subcontractor shall be responsible for all
costs associated with transportation and insurance of Hardware to the
Delivery Point.
D. Buyer shall be responsible for all arrangements and costs associated
with the transportation and insurance of Hardware- including the
preparation and execution of any and all documentation, obtaining all
necessary permits, licenses and clearances required by either the
United States Government or the Government of Japan, the payment of
Duties, Taxes and Fees, or other such charges which may be levied by
these governments- from the Delivery Point set forth in Paragraph C,
above, to the Destination Points noted in Paragraph B, above, or to any
other delivery point within Japan required by Buyer.
E. If, by law or regulation, Buyer is required to obtain any permit,
license or clearance in its capacity as Buyer under this Agreement,
Buyer shall undertake all reasonable efforts to do so. If Buyer is
either (1) unsuccessful in obtaining any regulatory mandated sanctions,
or (2) the pursuit of same is delayed to the extent such as to endanger
the intent and purpose of this Agreement, Buyer may terminate this
Agreement.
Under such circumstances, Buyer's liability and obligation with respect
to this Agreement shall not exceed the aggregate amount of Purchase
Releases authorized by Buyer at that time.
In the event of a conflict between this paragraph and any other
stipulation appearing in this Agreement, the former shall prevail.
F. Confirmation of all shipment of Hardware, including a copy of the
packing list, shall be faxed to Buyer immediately after delivery to the
Carrier. The Carrier's delivery receipt, executed and dated by Carrier,
shall be considered as evidence of the satisfaction of delivery
requirements. This notice shall be directed to Buyer's cognizant
Subcontract Administrator as designated in Article XIV, WITH AN
INFORMATION COPY TO BUYER'S TRAFFIC DEPARTMENT FAX NO. (415) 852-6440.
G. Title to Hardware deliverable hereunder and risk of loss associated
therewith shall be assumed by Buyer when said Hardware is placed into
the hands of the Carrier at the Delivery Point noted herein and
confirmed in accordance with the requirements of Paragraph F, above.
ARTICLE VIII - DELIVERABLE REPORTS AND DOCUMENTATION
Subcontractor agrees to prepare and submit all technical and other
documentation, including documentation as required in the Subcontract Data
Requirement List (SDRL) of Article I, Exhibit A, as follows:
A. Unless otherwise directed by a Purchase Release, all documentation
required by this Agreement shall be delivered FOB Buyer's Facility,
Palo Alto, California, addressed as follows:
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<PAGE> 14
SPACE SYSTEMS/LORAL, INC. Attention: Data Bank
3825 Fabian Way Mail Stop: V-86
Palo Alto, CA 94303
The transmittal letter with each item of deliverable documentation
shall reference the Agreement Number, Statement of Work Number,
Document Title, and SDRL Item Number.
B. This Agreement requires submittal of documentation, including but not
limited to design, analysis, drawings, materials and parts lists and
processes which require Buyer approval. Buyer approval, however, does
not in any manner constitute relief of the Subcontractor's
responsibility for either determining the adequacy of said items for
their intended use or Subcontractor's responsibility for satisfying all
requirements of this Agreement.
C. Subcontractor shall deliver with "unlimited" rights all technical data
and software which Subcontractor provides to Buyer in accordance with
the Subcontractor Data Requirements List set for in Article I, Exhibit
A.
D. SDRL items which require Fax submittal shall be sent to the attention
of Buyer's Data Bank at Fax (650) 852-4788, and Buyer's cognizant
Subcontract Administrator in accordance with Article XIV.
E. Subcontractor shall submit SS/L Form 1266 (FINAL RELEASE, COMPLETION
AND ROYALTY CERTIFICATION) with the final invoice submitted under this
Agreement.
ARTICLE IX - NON-DISCLOSURE OF INFORMATION
A. Neither Party, nor their employees, will disclose to any third person
any information it has acquired under, or as a result of this Agreement
or negotiations leading to it concerning a Party's plans, business
objectives, customers, personnel, products, processes, work or services
without the prior written consent of the other Party, unless such
information becomes generally known without fault of the disclosing
Party, or is obtainable from other sources; nor shall either Party
disclose or release for public dissemination any information concerning
this Agreement in advertising without prior written approval of the
other Party.
B. Subcontractor agrees to make no use of drawings, specifications and
technical information or data
(1) furnished by Buyer, or (2) prepared by Subcontractor or its
employees and agents during the course of performance of work under
this Agreement, except as required to perform hereunder.
C. Neither Party shall disclose any funding, authorization, price and
schedule details of this Agreement to anyone other than Loral Space and
Communications, Inc., or its customers, without the written consent of
the other Party, or as might be directed by a court of law.
-14-
<PAGE> 15
ARTICLE X - TECHNICAL ASSISTANCE
With the exception of the requirements of Purchase Release No. 1, Buyer makes no
implication of intent nor any representation by this Agreement that it will
provide any technical assistance to Subcontractor in order for Subcontractor to
satisfy the requirements of this Agreement.
ARTICLE XI - ADVANCE TECHNOLOGY SUPPORT
Subcontractor will provide Buyer, free of charge, a mutually agreeable and
reasonable level of engineering support in the event Buyer elects to pursue any
advance technology associated with the hardware identified in this Agreement.
ARTICLE XII - PERIODIC REVIEW OF AGREEMENT
In the interest of maintaining a good-faith, long-term relationship between
Buyer and Subcontractor as contemplated by this Agreement, Buyer and
Subcontractor shall convene no less than an annual review each calendar year to
discuss the agenda items suggested below:
1. Subcontractor's and Buyer's past performance.
2. Buyer's business projections.
3. Possible opportunities for cost savings to both parties.
4. Potential for the extension of the Agreement.
5. Other matters as deemed applicable and appropriate by the parties.
ARTICLE XIII - KEY SUBCONTRACTOR PERSONNEL CLAUSE
With respect to this Agreement and any effort leading to same, Buyer has relied
upon Subcontractor's representation that Dr. Hong Hou is designated
Subcontractor's primary technical representative for the work and tasks required
by this Agreement.
Accordingly, in the event that the above named individual becomes unavailable to
further participate in the work and tasks required by this Agreement,
Subcontractor shall replace this individual with another of a comparable level
of experience, qualifications and ability, and Subcontractor shall obtain
Buyer's written approval prior to the replacement of the individual herein
named.
ARTICLE XIV - AMENDMENTS AND NOTICES
Sole authority to make changes in or amendments to this Agreement, and to effect
waivers or deviations from the work herein specified is hereby vested in Buyer's
authorized Subcontract Department representative. Except as otherwise
specifically provided for herein, any notices to be furnished by Subcontractor
to Buyer, or by Buyer to Subcontractor, shall be sent by mail or fax addressed
respectively, as follows:
-15-
<PAGE> 16
<TABLE>
<CAPTION>
<S> <C> <C>
SPACE SYSTEMS/LORAL, INC. Attention: Joseph S. Szander Phone No. (650) 852-6506
3825 Fabian Way Fax No. (650) 852-7969
Palo Alto, California 94303 Mail Station: Z53
EMCORE CORPORATION Attention: Karen L. Schneider Phone No. (505) 332-5008
10420 Research Road, SE Fax No. (505) 332-5038
Albuquerque, NM 87123
</TABLE>
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<PAGE> 17
TERMS AND CONDITIONS
In addition to the provisions set forth in the SCHEDULE of this Agreement, Fixed
Price Procurement Order Terms and Conditions SS/L P-10S Rev. 7/98 are applicable
and are incorporated herein. In the event of a conflict between these
stipulations and the provisions of the SCHEDULE, the latter shall prevail.
-17-
<PAGE> 18
SIGNATURE PAGE
IN WITNESS WHEREOF, the parties hereto have entered into this Agreement as of
the day and year first written below:
SPACE SYSTEMS/LORAL, INC.
By: /s/ JOSEPH S. SZANDER
-----------------------------------------
Joseph S. Szander
Title: Subcontract Administrator
Date: November 24, 1998
---------------------------------------
EMCORE CORPORATION
By: /s/ KAREN L. SCHNEIDER
-----------------------------------------
Karen L. Schneider
Title: Director of Business & Administration
Date: NOVEMBER 25, 1998
---------------------------------------
-18-
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
333-27507, 333-36445, 333-39547 and 333-45827 of EMCORE Corporation on Forms S-8
of our report dated May 14, 1999 appearing in this Annual Report on Form 10-K/A
of EMCORE Corporation for the year ended September 30, 1998.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
May 17, 1999
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EXHIBIT 23.2
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, 333-39547 and
333-45827) 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 1996, and for the three years ended September 30, 1997, which report is
included in this Annual Report on Form 10-K/A.
PricewaterhouseCoopers LLP
Florham Park, New Jersey
May 17, 1999
